ACS Announces Third Quarter Fiscal Year 2006 Results

DALLAS, April 27 /PRNewswire-FirstCall/ -- Affiliated Computer Services, Inc., , a premier provider of business process outsourcing and information technology solutions, announced third quarter fiscal year 2006 revenues of $1.31 billion, an increase of 24% compared to the third quarter of the prior year. The Company's internal revenue growth rate was 6% for the quarter. Third quarter fiscal year 2006 reported diluted earnings per share was $0.62, and included certain restructuring charges and other items.

The Company signed $190 million of annual recurring revenue during the quarter. This represents an increase of 52% when compared to the adjusted prior year quarter. Despite continued strong new business signings, the pipeline increased over 10% sequentially and represents a company record.

"We continue to make excellent progress on the initiatives we have set for the company," said Mark King, ACS' President and Chief Executive Officer. "Business momentum remains very strong as evidenced by another healthy quarter of new business signings. I am also pleased to report that, even though our year-to-date new business signings have increased 32% over the prior year period, our pipelines have expanded to over $1.5 billion, the highest in our history. Our initiatives to improve overall client satisfaction are paying off as well, with year-to-date renewal rates of approximately 95%. As a result, I am very confident that internal growth will accelerate given the tremendous increase in new business awards over the last several quarters, coupled with our outstanding renewal rate and increasing sales opportunities. The ACS management team will continue to focus on delivering outstanding service to our clients and providing great opportunities for our employees. And, with this focus we expect to deliver long-term value to our shareholders."

Key highlights from the third quarter of fiscal year 2006 include: * Commercial segment revenue grew 47% and accounted for 60% of revenues this quarter. Commercial internal revenue growth was 11%. Government segment revenue accounted for 40% of revenues this quarter. Excluding prior year revenue from the Government Welfare to Workforce Services business ("WWS"), substantially all of which was sold in the second quarter of 2006 ("WWS Divestiture"), Government total revenue increased 10% over the prior year, all of which was acquisition related. * Diluted earnings per share was $0.62 for the third quarter of fiscal year 2006. Reported results include $0.11 per diluted share related to results of operations from two underperforming multi-scope HR contracts, $0.03 per diluted share related to restructuring activities and incremental transaction expenses related to the Mellon HR business, $0.03 per diluted share related to debt issue costs from our previous credit facility and legal expenses associated with the activities of our Special Committee of the Board of Directors, a $0.01 per diluted share write-down of accounts receivable retained from the fiscal year 2004 divestiture of a majority of our Federal government business, and a $0.01 residual gain associated with the WWS Divestiture. * Annualized recurring new business sold was $190 million during the quarter. Trailing twelve month annual recurring new business increased 28% over the prior trailing twelve month period, excluding new business signings from the WWS Divestiture. * Cash flow from operations during the third quarter was approximately $113 million, or 8.6% of revenues, and free cash flow was negative $8 million. Cash flow from operations and free cash flow were both adversely impacted by final settlement payments of $86 million related to the Mellon transition services agreement and Mellon pre-acquisition bonus payments of $26 million. Capital expenditures and additions to intangible assets were approximately $120 million, or 9.2% of revenues. Key year-to-date highlights for fiscal year 2006 include: * Revenues for the nine months ended March 31, 2006 were $3.97 billion, an increase of 30% compared to the first nine months of the prior year, adjusted for the WWS Divestiture. Internal revenue growth for the first nine months of fiscal year 2006 was 7% and the remaining growth was due to acquisitions. * Cash flow from operations for the first nine months was $468 million, or 11.8% of revenue, and free cash flow was $150 million, or 3.8% of revenue. Cash flow from operations and free cash flow were adversely impacted by final settlement payments of $86 million related to the Mellon transition services agreement, of which $76 million benefited our fourth quarter fiscal year 2005 results, and Mellon pre- acquisition bonus payments of $26 million. Capital expenditures and additions to intangibles were $318 million, or 8.0% of revenues. * Diluted earnings per share related to nine months ended March 31, 2006 was $2.17. Reported results included $0.11 per diluted share results from two underperforming multi-scope HR contracts, $0.09 per diluted share related to restructuring activities and incremental transaction expenses related to the Mellon HR business, $0.05 per diluted share related to debt issue costs of our previous credit facility and legal expenses associated with the activities of our Special Committee of the Board of Directors and other legal expenses, a $0.01 per diluted share write-down of accounts receivable retained from the fiscal year 2004 divestiture of the majority of our Federal government business, a benefit of approximately $0.14 per diluted share for the WWS Divestiture, a $0.03 per diluted share charge for compensation expense related to the departure of the former Chief Executive Officer and a $0.02 per diluted share charge for an assessment of risk related to the bankruptcies of certain airline clients. The adoption of SFAS No. 123(R) impacted diluted earnings per share by $0.13 during the first nine months of fiscal year 2006. ACS initial guidance for fiscal year 2007, is as follows: * Revenue growth -- Total revenue growth is expected to be at least 10%, after taking into consideration the WWS Divestiture which occurred in the second quarter of fiscal year 2006. * Diluted earnings per share growth is expected to be at least 10%, assuming no further share repurchases.

ACS will discuss these results on a conference call and webcast on http://www.acs-inc.com/ at 3:30 p.m. CDT today. During the conference call, management will refer to a presentation provided on the Investor Relations page of ACS' website which will contain certain non-generally accepted accounting principles ("GAAP") financial measures, some of which are included herein as well as reconciliations to the most directly comparable GAAP financial measures.

ACS, a FORTUNE 500 company with more than 55,000 people supporting client operations in nearly 100 countries, provides business process outsourcing and information technology solutions to world-class commercial and government clients. The Company's Class A common stock trades on the New York Stock Exchange under the symbol "ACS". ACS makes technology work. Visit ACS on the Internet at http://www.acs-inc.com/ .

All statements in this news release that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). While management has based any forward-looking statements contained herein on its current expectations, the information on which such expectations were based may change. These forward- looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties, and other factors, many of which are outside of our control, that could cause actual results to materially differ from such statements. Such risks, uncertainties, and other factors include, but are not necessarily limited to, those set forth in the Company's prior filings with the Securities and Exchange Commission, including those set forth under the caption "Risks Related to Our Business" in the most recent quarterly report on Form 10-Q filed on February 9, 2006. In addition, we operate in a highly competitive and rapidly changing environment, and new risks may arise. Accordingly, investors should not place any reliance on forward-looking statements as a prediction of actual results. We disclaim any intention to, and undertake no obligation to, update or revise any forward- looking statement.

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Income Dollars in thousands, except per share amounts (Unaudited) Three months ended Proforma three March 31, months ended 2006 (A) 2005 (D) March 31, 2005 (D,E) Revenues $1,314,455 $1,063,299 $1,063,299 Cost of revenues: Wages and benefits 643,651 452,794 461,794 Services and supplies 272,990 251,825 251,825 Rent, lease and maintenance 156,489 124,047 124,047 Depreciation and amortization 72,891 57,801 57,801 Other expenses 20,303 4,893 4,893 Total cost of revenues 1,166,324 891,360 900,360 Gain on sale of business (2,717) --- --- Other operating expenses 12,430 6,127 6,127 Total operating expenses 1,176,037 897,487 906,487 Operating income 138,418 165,812 156,812 Interest expense 14,967 3,688 3,688 Other non-operating (income) expense, net 589 (466) (466) Pretax profit 122,862 162,590 153,590 Income tax expense 44,986 47,924 44,683 Net income $77,876 $114,666 $108,907 Earnings per common share: Basic $0.63 $0.90 $0.85 Diluted $0.62 $0.88 $0.84 Shares used in computing earnings per common share: Basic 124,347 127,568 127,568 Diluted 126,319 130,229 129,479 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Income Dollars in thousands, except per share amounts (Unaudited) Nine months ended Proforma March 31, Nine months ended 2006 (A,B,C) 2005 (D) March 31, 2005 (D,E) Revenues $3,972,959 $3,136,767 $ 3,136,767 Cost of revenues: Wages and benefits 1,904,659 1,320,612 1,347,263 Services and supplies 869,651 777,893 777,893 Rent, lease and maintenance 475,202 364,164 364,164 Depreciation and amortization 211,415 167,706 167,706 Other expenses 32,061 13,038 13,038 Total cost of revenues 3,492,988 2,643,413 2,670,064 Gain on sale of business (32,482) --- --- Other operating expenses 43,278 17,577 17,577 Total operating expenses 3,503,784 2,660,990 2,687,641 Operating income 469,175 475,777 449,126 Interest expense 40,428 10,512 10,512 Other non-operating (income) expense, net (5,786) (1,808) (1,808) Pretax profit 434,533 467,073 440,422 Income tax expense 159,337 162,105 152,528 Net income $275,196 $304,968 $287,894 Earnings per common share: Basic $2.20 $2.38 $2.25 Diluted $2.17 $2.33 $2.21 Shares used in computing earnings per common share: Basic 124,879 128,048 128,048 Diluted 126,806 131,081 130,403 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (A) During the third quarter of fiscal year 2006, the Company recorded the following: * Total activity during the quarter related to two underperforming multi-scope HR contracts included revenue of $11.9 million and a net pretax loss of $22.1 million ($14.0 million after tax), or $0.11 per diluted share. * Restructuring charges and related asset impairments of $4.3 million ($2.7 million after tax), or $0.02 per diluted share. * Incremental transaction expenses related to the Mellon HR business of $2.9 million ($1.8 million after tax), or $0.01 per diluted share. * Charges for debt issue costs related to our previous credit facility of $4.1 million ($2.6 million after tax), or $0.02 per diluted share. * Legal fees of $1.3 million ($0.8 million after tax), or $0.01 per diluted share, related to activities of the Special Committee of the Board of Directors. * A retained Federal accounts receivable write-down of $2.4 million ($1.5 million after tax), or $0.01 per diluted share. * A residual WWS Divestiture gain of $2.8 million ($1.7 million after tax), or $0.01 per diluted share. (B) During the second quarter of fiscal year 2006, the Company recorded the following: * A net benefit before tax of $26.5 million ($15.8 million after tax), or $0.12 per diluted share, for the gain and charges related to the WWS Divestiture. * Restructuring charges and related asset impairments totaling $10.4 million ($6.6 million after tax), or $0.05 per diluted share. * Charges for legal settlements and related legal fees, and for legal fees associated with the unsolicited offer regarding a potential sale of the Company and the possible recapitalization of the Class B shares totaling $5.9 million ($3.7 million after tax), $0.03 per diluted share. (C) During the first quarter of fiscal year 2006, the Company recorded the following: * A $5.4 million charge ($3.4 million after tax), or $0.03 per diluted share, for the departure of the former Chief Executive Officer. * A $3.0 million charge ($1.9 million after tax), or $0.02 per diluted share, for the assessment of risk related to the bankruptcies of certain airline clients. (D) During the third quarter of fiscal year 2005, the Company recognized an income tax benefit related to the 2004 divestiture of the majority of our federal business, resulting in a benefit to net income of approximately $9.4 million, or $0.07 per diluted share. (E) The prior year proforma results reflect the impact of Statement of Financial Accounting Standards No. 123(R), which requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation costs in its financial statements. The Company adopted SFAS 123(R) on a prospective basis on July 1, 2005 and, as a result, we have presented proforma results of operations for the prior year periods for comparative purposes. ($ in thousands) Pro Forma Pro Forma Stock Stock As Compensation As Compensation Reported Expense Pro Forma Reported Expense Pro Forma Revenues $1,063,299 $--- $1,063,299 $3,136,767 $--- $3,136,767 Cost of revenues: Wages and benefits 452,794 9,000 461,794 1,320,612 26,651 1,347,263 Services and supplies 251,825 --- 251,825 777,893 --- 777,893 Rent, lease and maintenance 124,047 --- 124,047 364,164 --- 364,164 Depreciation and amortization 57,801 --- 57,801 167,706 --- 167,706 Other expenses 4,893 --- 4,893 13,038 --- 13,038 Total costs of revenues 891,360 9,000 900,360 2,643,413 26,651 2,670,064 Other operating expenses 6,127 --- 6,127 17,577 --- 17,577 Total operating expenses 897,487 9,000 906,487 2,660,990 26,651 2,687,641 Operating income 165,812 (9,000) 156,812 475,777 (26,651) 449,126 Interest expense 3,688 --- 3,688 10,512 --- 10,512 Other non- operating (income) expense, net (466) --- (466) (1,808) --- (1,808) Pretax profit 162,590 (9,000) 153,590 467,073 (26,651) 440,422 Income tax expense 47,924 (3,241) 44,683 162,105 (9,577) 152,528 Net income $ 114,666 $(5,759) $108,907 $ 304,968 $(17,074) $287,894 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets Dollars in Thousands March 31, June 30, 2006 2005 (Unaudited) (Audited) ASSETS: Cash and cash equivalents $174,877 $62,685 Accounts receivable, net 1,167,374 1,061,590 Other current assets 180,914 119,822 Total current assets 1,523,165 1,244,097 Property, equipment and software, net 818,247 677,241 Goodwill, net 2,395,320 2,334,655 Other intangible assets, net 465,757 466,312 Other long-term assets 185,254 128,533 TOTAL ASSETS $5,387,743 $4,850,838 LIABILITIES: Accounts payable $102,969 $62,788 Accrued compensation 158,390 175,782 Other accrued liabilities 445,449 471,577 Income taxes payable 5,267 2,310 Deferred taxes 25,552 34,996 Current portion of long-term debt 22,285 6,192 Current portion of unearned revenue 106,697 84,469 Total current liabilities 866,609 838,114 Long-term debt 1,365,308 750,355 Long-term deferred taxes 299,800 240,210 Other long-term liabilities 203,700 183,731 TOTAL LIABILITIES 2,735,417 2,012,410 TOTAL STOCKHOLDERS' EQUITY 2,652,326 2,838,428 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,387,743 $4,850,838 Frequently Used Terms

New business signings -- While there are no third party standards or requirements governing the calculation of new business signings, new business signings are defined as recurring revenue from new contracts, including the incremental portion of renewals, signed during the period and represent the estimated first twelve months of revenue to be recorded under that contract after full implementation. We use new business signings as a measure of estimated recurring revenues represented by contractual commitments, both to forecast prospective revenues and to estimate capital commitments. Revenues are measured under GAAP.

Trailing twelve month new business -- is the preceding twelve months of new business signings at a point in time expressed in annual revenue, not total contract value.

Supplemental Information

We have provided the impact on pre-tax profit, net income and diluted earnings per share of certain transactions and events included in our reported results of operations, which management believes enhances the understanding of our financial results and the impact of those events and transactions on our results. Management believes this information provides additional information related to factors impacting our reported financial performance which may be useful to investors. The amount of the transaction or event is presented on a basis determined in accordance with generally accepted accounting principles as reflected in our reported consolidated results of operations. All per share measures are calculated on the same diluted per share basis as our reported diluted earnings per share. The per share impacts are not intended to reflect a per share amount that accrues directly to an investor's benefit as a result of the particular transaction or event.

Use of Non-GAAP Financial Information

The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP"). However, management believes that certain non-GAAP financial measures and ratios, used in managing the Company's business, may provide users of this financial information with additional meaningful comparisons between current results and prior reported results. Certain of the information set forth herein and certain of the information presented by the Company from time to time including free cash flow and internal revenue growth may constitute non-GAAP financial measures within the meaning of Regulation G adopted by the Securities and Exchange Commission. We have presented herein and we will present in other information we publish that contains any of these non-GAAP financial measures a reconciliation of these measures to the most directly comparable GAAP financial measure. The presentation of this additional information is not meant to be considered in isolation or as a substitute for comparable amounts determined in accordance with GAAP in the United States.

Internal Revenue Growth

Internal revenue growth is measured as total revenue growth less acquired revenue from acquisitions and revenues from divested operations. At the date of acquisition, we identify the trailing twelve months of revenue of the acquired company as the "pre-acquisition revenue of acquired companies." Pre- acquisition revenue of the acquired companies is considered "acquired revenues" in our calculation, and revenues from the acquired company, either above or below that amount are components of "internal growth" in our calculation. We use the calculation of internal revenue growth to measure revenue growth excluding the impact of acquired revenues and the revenue associated with divested operations and we believe these adjustments to historical reported results are necessary to accurately reflect our internal revenue growth. Revenues from divested operations are excluded from the internal revenue growth calculation in the periods following the effective date of the divestiture. Our measure of internal revenue growth may not be comparable to similarly titled measures of other companies. (unaudited, $ in millions)

Three months ended March 31, (a) 2006 2005 Growth % Consolidated Total Revenues $1,314 $1,063 24% Less: Divested (3) (51) Adjusted $1,312 $1,012 30% Acquired Revenues* $ 257 $17 24% Internal Revenues 1,055 995 6% Total $1,312 $1,012 30% Commercial Total Revenues $ 790 $ 538 47% Less: Divested --- --- Adjusted $ 790 $ 538 47% Acquired Revenues* $ 211 $17 36% Internal Revenues 579 521 11% Total $ 790 $ 538 47% Government Total Revenues $ 524 $ 525 0% Less: Divested (3) (51) Adjusted $ 521 $ 474 10% Acquired Revenues* $46 $--- 10% Internal Revenues 475 474 0% Total $ 521 $ 474 10% * Acquired revenues are based on pre-acquisition normalized revenues of acquired companies. (a) Based on actual amounts, not rounded. Nine months ended March 31, (a) 2006 2005 Growth % Consolidated Total Revenues $3,973 $3,137 27% Less: Divested (104) (165) Adjusted $3,869 $2,972 30% Acquired Revenues* $ 711 $22 23% Internal Revenues 3,158 2,950 7% Total $3,869 $2,972 30% Commercial Total Revenues $2,341 $1,518 54% Less: Divested --- --- Adjusted $2,341 $1,518 54% Acquired Revenues* $ 645 $22 41% Internal Revenues 1,696 1,496 13% Total $2,341 $1,518 54% Government Total Revenues $1,632 $1,619 1% Less: Divested (104) (165) Adjusted $1,528 $1,454 5% Acquired Revenues* $66 $--- 4% Internal Revenues 1,462 1,454 1% Total $1,528 $1,454 5% * Acquired revenues are based on pre-acquisition normalized revenues of acquired companies. (a) Based on actual amounts, not rounded. Free Cash Flow

Free cash flow -- is measured as operating cash flow (net cash provided by operating activities, as reported in our consolidated statements of cash flows) less capital expenditures (purchases of property, equipment and software, net of sales, as reported in our consolidated statements of cash flows) less additions to other intangible assets (as reported in our consolidated statements of cash flows). We believe this free cash flow metric provides an additional measure of available cash flow after we have satisfied the capital expenditure requirements of our operations, and should not be taken in isolation to be a measure of cash flow available for us to satisfy all our obligations and execute our business strategies. We also rely on cash flows from investing and financing activities which, together with free cash flow, are expected to be sufficient for us to execute our business strategies. Our measure of free cash flow may not be comparable to similarly titled measures of other companies. (unaudited, $ in millions)

Three months ended Nine months ended March 31, March 31, 2006 2005 2006 2005 Free Cash Flow Net cash provided by operating activities $113 $173 $468 $472 Less: Purchases of property, equipment and software, net of sales (105) (64) (290) (170) Additions to other intangible assets (15) (5) (28) (29) Free Cash Flow $(8) $105 $150 $272 * Based on actual amounts, not rounded.