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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 01-11779
Electronic Data Systems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 75-2548221
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5400 Legacy Drive, Plano, Texas 75024-3199
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(Address of principal executive offices)
(Zip Code)
(972) 604-6000
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(Registrant's telephone number, including area code)
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 October 31, 1999, there were outstanding 470,781,539 shares of
the registrant's Common Stock, $.01 par value per share.
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<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
--------
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations......... 3
Unaudited Condensed Consolidated Balance Sheets................... 4
Unaudited Condensed Consolidated Statements of Cash Flows......... 5
Notes to Unaudited Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures................................................................. 19
Exhibit 27 Financial Data Schedule (for SEC information only)
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PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $4,714.8 $4,352.7 $13,656.8 $12,480.8
-------- -------- --------- ---------
Costs and expenses
Cost of revenues 3,854.4 3,555.2 11,264.8 10,236.6
Selling, general and administrative 451.5 475.1 1,353.0 1,325.2
Restructuring and other charges 236.3 -- 616.1 70.3
-------- -------- --------- ---------
Total costs and expenses 4,542.2 4,030.3 13,233.9 11,632.1
-------- -------- --------- ---------
Operating income 172.6 322.4 422.9 848.7
-------- -------- --------- ---------
Other income (expense):
Gain on sale of stock of subsidiary -- -- -- 49.6
Interest expense and other, net 74.6 (17.5) 168.1 13.2
-------- -------- --------- ---------
Total other income (expense) 74.6 (17.5) 168.1 62.8
-------- -------- --------- ---------
Income before income taxes 247.2 304.9 591.0 911.5
Provision for income taxes 89.0 109.8 212.8 310.3
-------- -------- --------- ---------
Net income $ 158.2 $ 195.1 $ 378.2 $ 601.2
======== ======== ========== ==========
Earnings per share
Basic $0.32 $0.40 $0.77 $1.22
===== ===== ===== =====
Diluted $0.31 $0.39 $0.75 $1.22
===== ===== ===== =====
Cash dividends per share $0.15 $0.15 $0.45 $0.45
===== ===== ===== =====
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
3
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<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions except share and per share amounts)
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 630.1 $ 1,038.8
Marketable securities 181.5 272.9
Accounts receivable, net 4,518.3 3,835.0
Prepaids and other 553.8 486.6
--------- ---------
Total current assets 5,883.7 5,633.3
--------- ---------
Property and equipment, net 2,591.9 2,708.1
--------- ---------
Operating and other assets
Investments and other assets 1,171.6 1,717.6
Software, goodwill, and other intangibles, net 2,794.5 1,467.1
--------- ---------
Total operating and other assets 3,966.1 3,184.7
--------- ---------
Total Assets $12,441.7 $11,526.1
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 359.6 $ 329.8
Accrued liabilities 2,916.7 2,511.1
Deferred revenue 653.2 593.3
Income taxes 19.0 174.9
Current portion of long-term debt 393.2 47.7
--------- ---------
Total current liabilities 4,341.7 3,656.8
--------- ---------
Deferred income taxes 266.5 362.6
Long-term debt, less current portion 2,286.9 1,184.3
Redeemable preferred stock of subsidiaries and minority
interests 410.1 405.9
Stockholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares, none issued -- --
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 493,405,401 shares issued at
September 30, 1999, and 493,138,564 shares
issued at December 31, 1998 4.9 4.9
Additional paid-in capital 948.5 958.3
Retained earnings 5,206.4 5,049.7
Accumulated other comprehensive income (251.2) (96.2)
Treasury stock, at cost, 13,610,638 shares at
September 30, 1999, and 7,160 shares at
December 31, 1998 (772.1) (0.2)
--------- ---------
Total stockholders' equity 5,136.5 5,916.5
--------- ---------
Total Liabilities and Stockholders' Equity $12,441.7 $11,526.1
========= =========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine Months Ended
September 30,
------------
1999 1998
------ ------
<S> <C> <C>
Net cash provided by operating activities $ 1,160.1 $ 1,221.9
---------- ----------
Cash Flows from Investing Activities
Proceeds from sale of marketable securities 107.6 85.8
Proceeds from investments and other assets 542.9 249.0
Proceeds from divestitures 9.0 371.5
Payments for purchases of property and equipment (505.3) (613.8)
Payments for investments and other assets (182.0) (347.9)
Payments related to acquisitions, net of cash acquired (1,708.7) (108.1)
Payments for purchases of software and other intangibles (78.3) (75.1)
Payments for purchases of marketable securities (33.4) (91.7)
Other 117.3 52.7
---------- ----------
Net cash used in investing activities (1,730.9) (477.6)
---------- ----------
Cash Flows from Financing Activities
Proceeds from long-term debt 16,437.7 6,863.1
Payments on long-term debt (15,049.8) (7,332.8)
Proceeds from sale of stock of subsidiaries -- 65.1
Purchase of treasury stock (1,011.8) (93.3)
Employee stock transactions and related tax benefits 104.5 53.8
Dividends paid (221.5) (221.4)
---------- ----------
Net cash provided by (used in) financing activities 259.1 (665.5)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (97.0) 5.9
---------- ----------
Net increase (decrease) in cash and cash equivalents (408.7) 84.7
Cash and cash equivalents at beginning of period 1,038.8 677.4
---------- ----------
Cash and cash equivalents at end of period $ 630.1 $ 762.1
========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Electronic Data Systems Corporation ("EDS" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments, which are
of a normal recurring nature and necessary for a fair presentation, have been
included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1998 unaudited condensed
consolidated financial statements to conform to the 1999 presentation.
Note 2. Earnings per Share
The weighted-average number of shares outstanding used to compute basic and
diluted earnings per share are as follows (in millions):
1999 1998
---- ----
For the three months ended September 30:
Basic earnings per share 490.8 492.4
Diluted earnings per share 503.7 494.1
For the nine months ended September 30:
Basic earnings per share 491.8 491.9
Diluted earnings per share 503.2 494.6
Securities which were outstanding but were not included in the computation of
diluted earnings per share because their effect was antidilutive include options
to purchase 0.9 million shares for the three and nine months ended September 30,
1999, options to purchase 26.3 million shares and 8.8 million shares,
respectively, for the three and nine months ended September 30, 1998, and
restricted stock units of 10.0 million shares and 0.4 million shares,
respectively, for the three and nine months ended September 30, 1998.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $4.44
billion and $4.23 billion at September 30, 1999 and December 31, 1998,
respectively. Additionally, software, goodwill, and other intangibles are stated
net of accumulated amortization of $1.58 billion and $1.32 billion at September
30, 1999 and December 31, 1998, respectively. Depreciation and amortization
expense for the three and nine months ended September 30, 1999 was $382.2
million and $1.07 billion, respectively. Depreciation and amortization expense
for the three and nine months ended September 30, 1998 was $326.1 million and
$1.01 billion, respectively.
Note 4. Restructuring Activities and Other Charges
Beginning in the first quarter of 1999, the Company began the implementation of
initiatives designed to reduce costs, streamline its organizational structure,
and exit certain operating activities. As a result of
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these initiatives, the Company recorded restructuring charges and related asset
writedowns totaling $236.3 million and $379.8 million in the quarters ended
September 30, 1999 and March 31, 1999, respectively. These initiatives will
continue through the fourth quarter of 1999 and are expected to result in an
additional restructuring charge of a similar nature and size as the charge
recorded in the first quarter of 1999. Amounts recorded for restructuring
activities during the first and third quarters of 1999 were provided to account
for planned workforce reductions of approximately 8,900 employees, consisting of
approximately 3,000 employees who accepted the Company's early retirement offer
and the involuntary termination of approximately 5,900 individuals employed
throughout the Company in managerial, professional, clerical, consulting and
technical positions. Total involuntary termination and early retirement offer
charges amounted to $490.0 million, $164.2 million of which pertains to special
termination benefits related to the early retirement offer, including amounts
under the Company's defined benefit pension plan. In addition, these initiatives
have resulted in the exit of certain business activities, the consolidation of
facilities, and the writedown of certain assets to net realizable value. Charges
associated with these actions include $73.5 million relating to business exit
and facilities consolidation costs, and asset writedowns of $52.6 million. The
accrual for business exit activities and consolidation of operations includes
estimated costs of $14.1 million to terminate a software license agreement,
$23.7 million to terminate certain leases, $14.3 million to terminate certain
customer contracts, and $21.4 million for other costs. These costs are
associated with the exit of several lines of business, primarily within systems
and technology services. Asset writedowns related to the restructuring
activities consist of $29.3 million to write-off software, goodwill, and other
intangibles, and $23.3 million for writedowns of computer-related equipment and
other assets. Such asset writedowns, which predominantly related to businesses
that the Company has decided to exit in the consulting, business process
management, and systems and technology lines of business, were primarily
determined based on the present value of anticipated future cash flows.
As of September 30, 1999, approximately 4,400 employees have left the Company
through involuntary termination as a result of the 1999 initiatives, and
approximately $205.3 million of termination benefits have been charged to the
accrual. In addition, approximately $18.7 million has been paid in connection
with the exit activities described above. The Company expects that cash
expenditures relating to the first and third quarter charges will be incurred
primarily in the remainder of 1999.
Restructuring activities in 1996 and 1997 have resulted in the involuntary
termination of approximately 4,750 employees and the acceptance by approximately
1,750 employees of early retirement offers. These restructuring activities have
resulted in cash expenditures of $275.8 million since the beginning of the
second quarter of 1996. The restructuring actions contemplated under the 1996
and 1997 plans are essentially complete as of September 30, 1999 with remaining
restructuring reserves comprised primarily of future severance-related payments
to terminated employees, future lease payments for exited facilities, and
accruals for other restructuring activities.
The following table depicts activity in the restructuring accruals for the nine
months ended September 30, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance, excluding
early retirement offer of $149.5
included in pension obligations and
acceleration of stock incentive plan
costs of $41.9 298.6
Accrual for business exit activities and
consolidation of operations 73.5
Payments (229.5)
------
Balance at September 30, 1999 $176.4
======
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Note 5. Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 1999 was
$136.6 million and $223.2 million, respectively. Comprehensive income for the
three and nine months ended September 30, 1998 was $216.2 million and $657.7
million, respectively. For the three months ended September 30, 1999, the
primary difference between comprehensive income and net income was related to
the realization of previously unrecognized gains on certain of the Company's
investments, partially offset by unrealized holding gains on certain other
investments. For the nine months ended September 30, 1999, the difference
between comprehensive income and net income was related to foreign currency
translation adjustments and the realization of previously unrecognized gains on
certain of the Company's investments, partially offset by unrealized holding
gains on certain other investments. For the three and nine months ended
September 30, 1998, the primary difference between comprehensive income and net
income was related to unrealized holding gains on certain of the Company's
investments.
Note 6. Segment Information
The following is a summary of certain financial information by reportable
segment (in millions):
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999 1998
---------------------------------------- ---- ----
Gross Gross
Revenue Profit Revenue Profit
------- ------ ------- ------
<S> <C> <C> <C> <C>
Systems and technology services $3,667.4 $714.5 $3,218.1 $607.0
Business process management 771.3 126.9 783.2 148.8
Management consulting 271.1 53.2 246.5 38.3
All other 5.0 (34.2) 104.9 3.4
-------- ------ -------- ------
Total $4,714.8 $860.4 $4,352.7 $797.5
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 1998
-------------------------------------- ---- ----
Gross Gross
Revenue Profit Revenue Profit
------- ------ ------- ------
<S> <C> <C> <C> <C>
Systems and technology services $10,263.1 $1,957.5 $ 9,098.6 $1,717.0
Business process management 2,334.4 374.7 2,291.2 394.3
Management consulting 807.5 125.9 741.6 123.2
All other 251.8 (66.1) 349.4 9.7
--------- -------- --------- --------
Total $13,656.8 $2,392.0 $12,480.8 $2,244.2
========= ======== ========= ========
</TABLE>
For the three and nine months ended September 30, 1999, the results of
operations of Systemhouse from the date of acquisition (see Note 7 "Purchase of
MCI Systemhouse") are included in "systems and technology services" pending
potential allocation to other applicable service lines. "All other" includes
certain items that are not allocated to the individual segments for management
reporting purposes. At September 30, 1999, total assets for "systems and
technology services", including the total assets of Systemhouse, were $7.3
billion. At September 30, 1999, total assets for "business process management",
"management consulting", and "all other" were $1.6 billion, $0.9 billion, and
$2.6 billion, respectively.
The following reconciles segment gross profit to the Company's consolidated
operating income (in millions):
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For the Three Months Ended September 30, 1999 1998
---------------------------------------- ---- ----
Total gross profit for reportable segments $ 860.4 $ 797.5
Selling, general, and administrative 451.5 475.1
Restructuring and other charges 236.3 --
-------- --------
Consolidated operating income $ 172.6 $ 322.4
======== ========
For the Nine Months Ended September 30, 1999 1998
--------------------------------------- ---- ----
Total gross profit for reportable segments $2,392.0 $2,244.2
Selling, general, and administrative 1,353.0 1,325.2
Restructuring and other charges 616.1 70.3
-------- --------
Consolidated operating income $ 422.9 $ 848.7
======== ========
Note 7. Purchase of MCI Systemhouse
On April 22, 1999, the Company acquired MCI WorldCom's information technology
services unit, MCI Systemhouse ("Systemhouse"), for approximately $1.6 billion
in a transaction accounted for as a purchase. The excess purchase price over the
fair values of net tangible assets acquired, pending final determination of
certain acquired balances, was $1.4 billion and is being amortized to expense
over periods ranging from 5 to 25 years.
The accompanying consolidated financial statements include the operations of
Systemhouse since the date of acquisition. The following table is prepared on a
pro forma basis as though Systemhouse had been acquired as of January 1, 1998,
after including the estimated impact of adjustments such as amortization of
goodwill and other intangible assets, interest expense, elimination of certain
MCI WorldCom intercompany charges and related tax effects (in millions, except
per share amounts):
For the Nine Months Ended September 30, 1999 1998
--------------------------------------- ---- ----
Revenues $14,300 $13,800
Net income 340 560
Earnings per share - basic 0.70 1.14
Earnings per share - diluted 0.68 1.14
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combining the operations.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a professional services firm which offers our clients a
portfolio of related services worldwide within the broad categories of
information technology (IT) outsourcing, business process management, management
consulting, and electronic business. Effective as of October 1, 1999, we
commenced the realignment of our business organization on a global basis along
those four lines of business, with IT outsourcing served by our Information
Solutions unit, business process management served by our Business Process
Management unit, management consulting served by our A.T. Kearney subsidiary,
and electronic business served by our E.solutions unit. This discussion refers
to Electronic Data Systems Corporation and its consolidated subsidiaries and
should be read in conjunction with the discussion incorporated by reference in
our 1998 Annual Report on Form 10-K.
Forward-Looking Statements
This discussion contains statements that do not directly or exclusively
relate to historical facts. These types of statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. You can typically identify forward-looking statements by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan" and
"forecast." These statements include statements regarding our Year 2000
exposure, total values for new contracts, future revenues and gross margins, the
content and amount of a fourth quarter restructuring charge, future cost
savings, and other forward-looking financial information. In addition, we have
made in the past and may make in the future other written or oral
forward-looking statements, including statements regarding future operating
performance, the Company's views regarding market earnings per share
expectations, short- and long-term revenue and earnings growth, the value of new
contract signings, future cost savings and industry growth rates and our
performance relative thereto. Any forward-looking statement may rely on a number
of assumptions concerning future events and be subject to a number of risks,
uncertainties and other factors, many of which are outside our control, that
could cause actual results to differ materially from such statements. These
include, but are not limited to: competition in our lines of business and the
effect of competition on pricing, revenues, and margins; the financial
performance of current and future client contracts; with respect to client
contracts accounted for under the percentage-of-completion method of accounting,
the performance of such contracts in accordance with our cost estimates; our
ability to improve productivity and achieve synergies from acquired businesses;
the degree to which third parties continue to outsource information technology
and business processes; the cost of attracting and retaining highly skilled
personnel; the successful implementation of the recent realignment of our
business organization; and, with respect to Year 2000 exposure, the successful
remediation of our internal systems and the interpretation of information
technology contracts with clients. We are not obligated to update or revise any
forward-looking statements whether as a result of new information, future
events, or otherwise.
Recent Developments
On February 11, 1999, EDS announced the principal terms of a framework
agreement with MCI WorldCom. In connection with this framework agreement, EDS
acquired MCI WorldCom's information technology services unit, MCI Systemhouse
("Systemhouse"), on April 22, 1999 for approximately $1.6 billion in cash. On
October 22, 1999, EDS finalized the terms of the IT and network outsourcing
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agreements contemplated in the framework agreement. Under these agreements, MCI
WorldCom will outsource major portions of its IT operations to EDS, and EDS will
become MCI WorldCom's preferred provider of IT services. In addition, EDS will
outsource the bulk of its global network to MCI WorldCom, which will handle
end-to-end management of voice and data communications services on a preferred
basis for EDS and its clients.
New Accounting Standards
In June 1999, Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 was issued. Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of this statement are now
effective for financial statements for fiscal years beginning after June 15,
2000, although early adoption is allowed. We have not determined the financial
impact of adopting this statement nor whether we will adopt the provisions of
this statement prior to its effective date.
Year 2000
For EDS, the Year 2000, or Y2K, issue encompasses the cost required to
make our internal systems and, where we are obligated to do so, our clients'
systems Y2K compliant, as well as a revenue opportunity.
Status of Remediation. For internal and external reporting purposes,
we have divided the Y2K remediation process into the following four stages:
assessment and planning; renovation; testing; and implementation.
With respect to our internal systems, we have identified projects which
we deem to be mission critical on both a corporate and business unit level. We
deem a project to be mission critical if the failure to timely complete the Y2K
remediation for that project would cause substantial disruption in, or cessation
of, our business. We completed the planned assessment, renovation, testing and
implementation of all identified corporate and unit mission critical projects
prior to June 30, 1999.
We have also identified over 450 projects, on both a corporate and unit
basis, which we deem to be non-mission critical. These projects include non-IT
systems such as those which may be used in the operation of elevators, machinery
and equipment and HVAC, lighting and building security systems, as well as IT
systems the general function of which is to enhance efficiency or productivity
but the failure of which would not materially impact our business. We have
determined that many of the non-mission critical projects identified to date
will not be remediated for Y2K compliance for one or more reasons, including the
retirement of the system, redundancy with other systems, the ability to leverage
common systems and because the expense of remediation may be greater than the
benefits obtained from the system. Of the non-mission critical projects
identified for remediation, all but two had completed the assessment,
renovation, testing and implementation stages as of October 31, 1999, with the
remediation of the remaining two expected to be complete by the end of November
1999.
The foregoing analysis of the remediation status of our internal
systems does not reflect the remediation of the internal systems of Systemhouse,
which was acquired by EDS on April 22, 1999. We expect the remediation of
Systemhouse's mission critical projects to be completed by the end of November
1999.
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Third Party Compliance. Our business is substantially dependent on the
ability to transmit our data and the data of our clients and their customers on
a worldwide basis through data, voice and video networks. These networks include
EDSNET(R), our proprietary network which integrates multiple third party network
owners with EDS controlled and managed components, as well as the "extended"
networks (i.e., networks outside of EDSNET(R)) of third party international,
national and local telecommunications providers which are used to transmit data
by EDS as well as thousands of other organizations. We have agreed to sell
substantially all of the assets comprising EDSNET(R) to MCI WorldCom effective
as of December 31, 1999.
Although the Y2K remediation of EDSNET(R), which is a corporate mission
critical project, has been completed, there is a significant likelihood that
non-EDS related Y2K problems will cause interruptions of the "extended" networks
utilized by EDS and other third parties. The interruptions on these third party
networks may result from the Y2K related failure of some of these non-EDS
networks, as well as the increased volume on the remaining networks due to the
rejection of data transmitted by third parties containing Y2K related errors. We
have prepared contingency plans for such potential network failures. Personnel
at all relevant data centers and client locations will closely monitor the
"traffic" on networks we utilize and will be prepared to shut down segments of
networks and use alternative networks where necessary and possible. In addition,
we have put in place contingency plans for all other corporate and unit mission
critical systems, which plans will be reviewed and revised as necessary.
We have commenced the operation of Millennium Management Centers (MMCs)
to facilitate the collection and distribution of Y2K information on a global
basis. These include eight regional MMCs located throughout the world and one
corporate MMC located at our headquarters in Plano, Texas. Acting as an
information clearing house and issues management center, the MMCs will
coordinate the prioritization and/or escalation of enterprise-wide issues,
collect and disseminate statistics and trending to auxiliary MMCs and ensure
timely content for consistent communications to internal and external
constituencies. The MMCs are expected to remain in operation through March 31,
2000.
As do most other organizations, we rely on the continued performance of
public utilities for the operation of our business. Due to the reliance of our
data centers around the world on a continuous source of electric power, we
already have in place at substantially all EDS-owned data centers extensive
contingency plans in the event of the disruption of electric service. These
contingency plans include the availability of backup generators to supply power
for a period of time following the power disruption and the ability to transfer
operations to an alternative center. Data centers operated at client locations
are dependent on the contingency plans put in place by those clients. We believe
that our existing contingency plans are adequate for any reasonably likely Y2K
related disruption of electric or other utility services to EDS-owned data
centers. However, a lengthy disruption in utility services or lack of Y2K
readiness by financial institutions, governmental agencies and other providers
of general infrastructure could materially adversely impact our ability to
conduct normal business in the areas so affected.
Estimated Costs. We currently estimate that we will incur a total of
approximately $80 million in costs related to the remediation of our internal
systems, of which approximately $15 million is attributable to the operation of
our Y2K Program Office. Of the approximately $65 million estimated cost for
remediation projects, through September 30, 1999 we had incurred or committed to
incur approximately $61 million, including approximately $12 million for the
accelerated replacement of non-compliant equipment and software which will be
recognized as depreciation, amortization, or lease expense after January 1,
2000. Because our hardware and software is generally refreshed on an ongoing
12
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basis in accordance with normal business practices, the substantial majority of
the total estimated remediation costs represents labor expense. As of September
30, 1999, approximately $13 million had been incurred for the operation of the
Y2K Program Office. The foregoing estimates do not include the estimated $17
million remediation costs for Systemhouse's internal systems, of which
approximately $13 million had been incurred as of September 30, 1999.
Forward-Looking Statements. The forward-looking statements contained in
this Y2K discussion should be read in conjunction with the applicable risk
factors identified under the heading "Forward-Looking Statements" above.
Results of Operations
Revenues. Total revenues for the quarter ended September 30, 1999, rose
$362.1 million, or 8%, over the corresponding quarter in 1998 to $4.71 billion.
On May 28, 1999, Delphi Automotive Systems Corporation ("Delphi"), previously a
wholly owned subsidiary of GM, was spun off from GM. For comparative purposes in
the following discussion, revenues from contracts with Delphi in both the
current and historical periods have been classified as revenues from non-GM
clients. Revenues from non-GM clients for the quarter ended September 30, 1999,
rose $392.5 million, or 11.4%, to $3.85 billion from $3.45 billion for the same
period in 1998. The increase in non-GM revenues was primarily attributable to
revenues of $313.0 million from Systemhouse, and new contracts signed in 1999
and 1998. Revenues from non-GM clients for the three months ended September 30,
1998 include a gain of $69.0 million resulting from the sale of a portion of our
leasing portfolio. Revenues from GM decreased 3.4%, to $869.7 million, during
the three months ended September 30, 1999 compared with $900.1 million for the
corresponding period in 1998.
Revenues from non-GM clients for the nine months ended September 30,
1999 rose $1.19 billion, or 12.1%, to $11.01 billion from $9.82 billion in the
corresponding period of 1998 due primarily to revenues of $475.5 million from
Systemhouse, and new contracts signed in 1999 and 1998. Revenues from GM for the
nine months ended September 30, 1999 remained relatively constant at $2.65
billion, as compared with $2.66 billion in the comparable period in 1998. We
estimate that revenues from GM for the fourth quarter of 1999 will be lower than
in the corresponding period of 1998.
The following table displays the percentage of total revenue by line of
business. "All other" includes certain items that are not allocated to the
individual lines of business for management reporting purposes.
For the Three Months Ended September 30, 1999 1998
---------------------------------------- ---- ----
Systems and technology services 78% 74%
Business process management 16 18
Management consulting 6 6
All other -- 2
--- ---
Total 100% 100%
=== ===
For the Nine Months Ended September 30, 1999 1998
--------------------------------------- ---- ----
Systems and technology services 75% 73%
Business process management 17 18
Management consulting 6 6
All other 2 3
--- ---
Total 100% 100%
=== ===
13
<PAGE>
Revenues from non-GM clients comprised 82% and 79% of total revenues
for the three months ended September 30, 1999 and 1998, respectively, and 81%
and 79% for the nine months ended September 30, 1999 and 1998, respectively. We
expect this trend to continue as revenues from non-GM clients are anticipated to
increase while revenues from GM are anticipated to decline.
Costs and Expenses. The gross margin [(revenues less cost of
revenues)/revenues] remained relatively constant at 18.2% for the three months
ended September 30, 1999, compared with 18.3% for the corresponding period in
1998. The gross margin decreased to 17.5% for the nine months ended September
30, 1999, compared to 18.0% in the comparable period in 1998, due to a decrease
in the gross margin during the first quarter of 1999 when compared with the
first quarter in 1998. This decrease reflected a decrease in the gross margin on
revenues generated by the Company's management consulting subsidiary, A. T.
Kearney, the divestiture during the third quarter of 1998 of leasing operations
reflected in revenues during the first half of 1998, and a decrease in the gross
margin on the Company's GM business. This decrease in gross margin in the first
quarter of 1999 was partially offset in the second and third quarters of 1999 by
the implementation of initiatives designed to improve operating margins. See
"Restructuring and Other Charges" below.
Selling, general and administrative expenses ("SG&A") as a percentage
of revenues decreased to 9.6% for the three months ended September 30, 1999
compared to 10.9% in the corresponding period in 1998. This decrease is
primarily due to a $36.7 million charge during the three months ended September
30, 1998 related to executive retirement, and the implementation beginning in
the first quarter of 1999 of plans designed to improve operating margins.
Although we anticipate these plans will continue to reduce SG&A expenses, some
of these savings are expected to be offset by incremental spending for marketing
and advertising. SG&A as a percentage of revenues decreased to 9.9% for the nine
months ended September 30, 1999 compared with 10.6% in the corresponding period
in 1998 due primarily to the reasons discussed above.
Restructuring and Other Charges
Beginning in the first quarter of 1999, we began implementation of
initiatives designed to reduce our costs, streamline our organizational
structure, and exit certain operating activities. As a result of these
initiatives, we recorded restructuring charges and related asset writedowns
totaling $236.3 million and $379.8 million in the quarters ended September 30,
1999 and March 31, 1999, respectively. These initiatives are expected to
continue through the fourth quarter of 1999. Amounts recorded for restructuring
activities during the first and third quarters of 1999 were provided to account
for planned workforce reductions of approximately 8,900 employees, consisting of
approximately 3,000 employees who accepted the Company's early retirement offer
and the involuntary termination of approximately 5,900 individuals employed
throughout the Company in managerial, professional, clerical, consulting and
technical positions. Total involuntary termination and early retirement offer
charges amounted to $490.0 million, $164.2 million of which pertains to special
termination benefits related to the early retirement offer, including amounts
under the Company's defined benefit pension plan. In addition, these initiatives
have resulted in the exit of certain business activities, the consolidation of
facilities, and the writedown of certain assets to net realizable value. Charges
associated with these actions include $73.5 million relating to business exit
and facilities consolidation costs, and asset writedowns of $52.6 million. The
accrual for business exit activities and consolidation of operations includes
estimated costs of $14.1 million to terminate a software license agreement,
$23.7 million to terminate certain leases, $14.3 million to terminate certain
customer contracts, and $21.4 million for other costs. These costs are
associated with the exit of several lines of business, primarily within systems
and technology services. Asset writedowns related to the restructuring
activities consist of $29.3 million to write-off software, goodwill, and other
intangibles, and $23.3 million for writedowns of computer-related equipment and
other assets. Such asset writedowns, which predominantly related to businesses
that we have decided to
15
<PAGE>
exit in the consulting, business process management, and systems and technology
lines of business, were primarily determined based on the present value of
anticipated future cash flows.
As of September 30, 1999, approximately 4,400 employees have left the
Company through involuntary terminations as a result of the 1999 initiatives,
and termination benefits of $205.3 million have been charged to the accrual. In
addition, approximately $18.7 million has been paid in connection with the exit
activities described above. We expect that cash expenditures relating to the
first and third quarter charges will be incurred primarily in the remainder of
1999.
As a result of the current and anticipated 1999 initiatives, we have
established a goal to achieve at least $1 billion in annualized compensation and
other operating expense reductions. Although these cost reductions will be
partially offset by increased spending in strategic areas determined to be
important to our future growth, including advertising and employee development,
they are expected to enable us to achieve our goal of an annualized 10%
operating margin by the end of the year 2000.
Restructuring activities in 1996 and 1997 have resulted in the
involuntary termination of approximately 4,750 employees and the acceptance by
approximately 1,750 employees of early retirement offers. These restructuring
activities have resulted in cash expenditures of $275.8 million since the
beginning of the second quarter of 1996. The restructuring actions contemplated
under the 1996 and 1997 plans are essentially complete as of September 30, 1999
with remaining restructuring reserves comprised primarily of future
severance-related payments to terminated employees, future lease payments for
exited facilities, and accruals for other restructuring activities.
The following table depicts activity in the restructuring accruals
for the nine months ended September 30, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance, excluding
early retirement offer of $149.5
included in pension obligations and
acceleration of stock incentive plan
costs of $41.9 298.6
Accrual for business exit activities and
consolidation of operations 73.5
Payments (229.5)
------
Balance at September 30, 1999 $176.4
======
As we continue to explore opportunities for organizational improvements
and cost reductions in connection with our realignment, we expect to take
further actions that will result in an additional restructuring charge in the
fourth quarter of 1999. We estimate that this charge will be of a similar nature
and size as the charge taken in the first quarter of 1999.
In the first quarter of 1998, we recorded a pre-tax charge of $42.5
million for amounts allocated to acquired in-process research and development
activities associated with the acquisition of Intergraph Corporation's
Mechanical CAD/CAM business by our Unigraphics Solutions Inc. subsidiary. In the
second quarter of 1998, we recorded asset writedowns of $27.8 million primarily
relating to operating assets initially identified for sale in 1997.
Other Income (Expense). Other income (expense) increased $92.1 million
for the three months ended September 30, 1999, to $74.6 million, compared with
$(17.5) million in the corresponding period in 1998, due to an increase in
interest expense and other, net. Interest and other income for the three months
ended September 30, 1999 increased $96.3 million, to $109.9 million, compared
with $13.6 million in the comparable period in 1998, due primarily to a net gain
of $81.5 million resulting from the disposition of certain investments. Interest
expense for the three months ended September 30, 1999 increased $4.2 million, to
$35.3 million, compared with $31.1 million in the corresponding period in 1998,
due to an increased level of debt.
For the nine months ended September 30, 1999, other income (expense)
increased $105.3 million to $168.1 million compared with $62.8 million in the
comparable period in 1998. For the nine months ended September 30, 1999,
interest expense and other, net increased $154.9 million, to $168.1 million from
$13.2 million in the corresponding period of 1998. For the nine months ended
September 30, 1999, interest and other income increased $145.2 million, to
$264.6 million from $119.4 million in the corresponding period of 1998, due
primarily to incremental gains resulting from the sale of our limited
partnership portfolio and the disposition of certain investments. For the nine
months ended September 30, 1999, interest expense decreased $9.7 million, to
$96.5 million from $106.2 million in the corresponding period in 1998, due
primarily to a decreased level of debt in the first quarter of 1999 compared to
the first quarter of 1998.
Also included in other income during the nine months ended September
30, 1998 was the recognition of a non-taxable gain of $49.6 million resulting
from the sale of a minority interest in Unigraphics Solutions Inc., previously a
wholly owned subsidiary of EDS, in connection with an initial public offering.
Income Taxes. The effective tax rate remained constant at 36% for the
three months ended September 30, 1999 and 1998, and was also 36% for the nine
months ended September 30, 1999. The effective tax rate was 34% for the nine
months ended September 30, 1998, and was reduced from historical levels by the
tax-free gain on the sale of stock by Unigraphics Solutions Inc. discussed
above.
Net Income. For the three-month period ended September 30, 1999, net
income decreased $36.9 million to $158.2 million compared to net income of
$195.1 million during the corresponding period of the prior year. For the nine
months ended September 30, 1999, net income decreased $223.0 million to $378.2
million from $601.2 million in the comparable period in 1998. For the three
months ended September 30, 1999 basic and diluted earnings per share decreased
to $0.32 and $0.31, respectively, compared with $0.40 and $0.39, respectively,
in the corresponding period of 1998. For the nine months ended September 30,
1999, basic and diluted earnings per share decreased to $0.77 and $0.75,
respectively, compared with basic and diluted earnings per share of $1.22 in the
comparable period in 1998.
As discussed above, during the three and nine months ended September
30, 1999, we recorded net non-operating pre-tax gains of $81.5 million and
$171.5 million, respectively, resulting from the disposition of certain
investments, and pre-tax restructuring charges of $236.3 million and $616.1
million, respectively. Excluding these gains and charges, net income for the
three months ended September 30, 1999 would have been $257.3 million, and basic
and diluted earnings per share would have been $0.52 and $0.51, respectively.
Net income for the nine months ended September 30, 1999 would have been $662.8
million, and basic and diluted earnings per share would have been $1.35 and
$1.32, respectively. During 1998, we recorded incremental revenues of $69.0
million resulting from the sale of a portion of our leasing portfolio in the
third quarter, a non-taxable gain of $49.6 million related to the sale of stock
of Unigraphics Solutions Inc. during the second quarter, and the following
pre-tax charges: $36.7 million related to executive retirement in the third
quarter, $27.8 million for asset writedowns in the second quarter, and $42.5
million for amounts allocated to acquired in-process research and development
during the first quarter. Excluding these items, net income for the three
16
<PAGE>
months ended September 30, 1998 would have been $174.5 million, and both basic
and diluted earnings per share would have been $0.35. Net income for the nine
months ended September 30, 1998 would have been $575.9 million, and diluted
earnings per share would have been $1.17 and $1.16.
Return on stockholders' equity was 9.5% for the twelve-month period
ended September 30, 1999, compared to 16.3% for the comparable period ended
September 30, 1998. This decrease was due primarily to a decrease in net income
for the twelve months ended September 30, 1999 as a result of restructuring and
other charges.
Liquidity and Capital Resources
At September 30, 1999, we held cash and cash equivalents of $630.1
million, had working capital of $1.54 billion, and had a current ratio of
1.4-to-1. This compares to cash and cash equivalents of $1.04 billion, $1.98
billion in working capital, and a current ratio of 1.5-to-1 at December 31,
1998.
Our capitalization at September 30, 1999, consisted of $2.29 billion in
long-term debt, excluding the current portion, and $5.14 billion in
stockholders' equity. Total debt (which includes redeemable preferred stock of
subsidiaries) was $2.87 billion at September 30, 1999, compared with total debt
of $1.41 billion at December 31, 1998. The total debt-to-capital ratio (which
includes current portion of long-term debt and redeemable preferred stock of
subsidiaries as components of debt and capital) was 35.9% at September 30, 1999,
and 19.3% at December 31, 1998. The ratio of long-term debt to capital was 32.5%
at September 30, 1999 and 18.7% at December 31, 1998. At September 30, 1999, and
December 31, 1998, we had unused committed lines of credit of approximately
$1.25 billion and $2.5 billion, respectively, which serve as a backup facility
for commercial paper borrowings. The purchase of Systemhouse for approximately
$1.6 billion was financed approximately 50% with cash and 50% with commercial
paper borrowings. On September 7, 1999, we announced that our Board of Directors
had authorized the repurchase of up to 27 million shares of our common stock, of
which 14 million shares had been repurchased as of September 30, 1999 at a cost
of $776 million. This repurchase is intended to serve as a hedge against our
long-term exposure with respect to outstanding options and restricted stock
units. To fund this repurchase, we completed the sale, on October 12, 1999, of
$500 million in principal amount of our 6.850% Notes due 2004, $700 million in
principal amount of our 7.125% Notes due 2009, and $300 million in principal
amount of our 7.450% Notes due 2029. The repurchases were originally funded with
commercial paper borrowings which have been subsequently repaid with proceeds
from the notes.
Cash flows provided by operating activities decreased $61.8 million
during the nine months ended September 30, 1999 to $1.16 billion from $1.22
million in the comparable period in the prior year. This decrease was primarily
due to the decrease in earnings resulting from the restructuring and other
charges, partially offset by increases from working capital items. Cash used in
investing activities during the nine months ended September 30, 1999 increased
$1.25 billion to $1.73 billion, from $477.6 million in the corresponding period
in the prior year, primarily due to payments related to the acquisition of
Systemhouse and a decrease in proceeds from divestitures. This increase was
partially offset by incremental proceeds from the sale of marketable securities,
investments and other assets, and a decrease in payments for purchases of
property and equipment, investments and other assets. Cash flows provided by
financing activities increased $924.6 million to $259.1 million during the nine
months ended September 30, 1999, compared to a use of $665.5 million during the
same period of 1998, due primarily to proceeds from long term debt, partially
offset by repurchases of common stock. For the nine-month periods ended
September 30, 1999 and 1998, we paid cash dividends totaling $221.5 million and
$221.4 million, respectively.
17
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
During the quarter ended September 30, 1999, EDS filed the following
Current Report on Form 8-K:
(i) Current Report on Form 8-K dated September 7, 1999 reporting a
press release under Item 5 - Other Events and Item 7 - Exhibits.
18
<PAGE>
SIGNATURES
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 hereunto duly authorized.
ELECTRONIC DATA SYSTEMS CORPORATION
(Registrant)
Dated: November 12, 1999 By: /s/ James E. Daley
---------------------------------
James E. Daley
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 12, 1999 By: /s/ John Adams
---------------------------------
John Adams
Vice President and Controller
(Principal Accounting Officer)
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