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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: March 31, 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 April 30, 1999, there were 492,228,001 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
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.......................................... 8
Part II -- Other Information
Item 1. Legal Proceedings............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures.................................................................. 14
Exhibit 27 Financial Data Schedule (for SEC information only)
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues $4,326.3 $3,942.0
------- -------
Costs and expenses
Cost of revenues 3,608.7 3,228.2
Selling, general and administrative 443.9 410.6
Restructuring and other charges 379.8 42.5
------- -------
Total costs and expenses 4,432.4 3,681.3
------- -------
Operating income (loss) (106.1) 260.7
Interest expense and other, net 73.9 27.0
------- -------
Income (loss) before income taxes (32.2) 287.7
Provision (benefit) for income taxes (11.6) 103.5
------- -------
Net income (loss) $ (20.6) $ 184.2
======= =======
Earnings (loss) per share
Basic $ (0.04) $ 0.37
======= =======
Diluted $ (0.04) $ 0.37
======= =======
Cash dividends per share $ 0.15 $ 0.15
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,245.6 $ 1,038.8
Marketable securities 225.1 272.9
Accounts receivable, net 3,901.2 3,835.0
Prepaids and other 455.7 486.6
-------- --------
Total current assets 5,827.6 5,633.3
-------- --------
Property and equipment, net 2,597.3 2,708.1
-------- --------
Operating and other assets
Investments and other assets 1,493.6 1,717.6
Software, goodwill, and other intangibles, net 1,401.6 1,467.1
-------- --------
Total operating and other assets 2,895.2 3,184.7
-------- --------
Total Assets $11,320.1 $11,526.1
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 322.6 $ 329.8
Accrued liabilities 2,719.4 2,511.1
Deferred revenue 617.0 593.3
Income taxes 72.2 174.9
Current portion of long-term debt 44.5 47.7
-------- --------
Total current liabilities 3,775.7 3,656.8
-------- --------
Deferred income taxes 342.7 362.6
Long-term debt, less current portion 1,188.5 1,184.3
Redeemable preferred stock of subsidiaries and
minority interests 403.2 405.9
Shareholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares, none issued -- --
Common stock, $.01 par value; 2,000,000,000
shares authorized; 492,123,815 shares issued
at March 31, 1999, and 493,131,404 shares
issued at December 31, 1998 4.9 4.9
Additional paid-in capital 898.1 958.3
Retained earnings 4,955.5 5,049.7
Accumulated other comprehensive income (186.0) (96.2)
Treasury stock, at cost, 1,338,081 shares at
March 31, 1999, and 7,160 shares at
December 31, 1998 (62.5) (0.2)
-------- --------
Total shareholders' equity 5,610.0 5,916.5
-------- --------
Total Liabilities and Shareholders' Equity $11,320.1 $11,526.1
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
4
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<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 369.0 $ 623.6
------- -------
Cash Flows from Investing Activities
Proceeds from sale of marketable securities 69.2 54.3
Proceeds from investments and other assets 270.7 125.9
Payments for purchases of property and equipment (148.5) (189.9)
Payments for investments and other assets (53.5) (110.1)
Payments related to acquisitions, net of cash acquired (12.1) (89.7)
Payments for purchases of software and other intangibles (30.0) (37.2)
Payments for purchases of marketable securities (25.1) (37.1)
Other 32.4 22.1
------- -------
Net cash provided by (used in) investing activities 103.1 (261.7)
------- -------
Cash Flows from Financing Activities
Proceeds from long-term debt 19.0 1,278.8
Payments on long-term debt (23.0) (1,424.3)
Purchase of treasury stock (144.9) (77.0)
Employee stock transactions and related tax benefits (3.0) 29.2
Dividends paid (73.6) (73.8)
------- -------
Net cash used in financing activities (225.5) (267.1)
------- -------
Effect of exchange rate changes on cash and cash equivalents (39.8) (3.2)
------- -------
Net increase in cash and cash equivalents 206.8 91.6
Cash and cash equivalents at beginning of period 1,038.8 677.4
------- -------
Cash and cash equivalents at end of period $1,245.6 $ 769.0
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
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 (consisting
of only normal recurring items) which are 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.
These statements should be read in conjunction with the consolidated financial
statements and notes thereto incorporated by reference 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 for the three months ended March 31, 1999 was
492.2 million. Had the Company reported income from continuing operations for
the three months ended March 31, 1999, diluted earnings per share would have
been computed using 501.9 million shares. The weighted-average number of shares
outstanding used to compute basic and diluted earnings per share for the three
months ended March 31, 1998 were 491.5 million and 496.2 million, respectively.
Securities which were outstanding but were not included in the
computation of diluted earnings per share because their effect was antidilutive
include restricted stock units of 16.2 million shares and 0.5 million shares and
options to purchase 40.9 million shares and 5.8 million shares for the three
months ended March 31, 1999 and 1998, respectively. Had the Company reported
income from continuing operations for the three months ended March 31, 1999,
securities outstanding that would not have been included in the computation of
diluted earnings per share because their effect would have been antidilutive
included restricted stock units of 0.2 million shares and options to purchase
1.3 million shares.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of
$4.19 billion and $4.23 billion at March 31, 1999 and December 31, 1998,
respectively. Additionally, software, goodwill, and other intangibles are stated
net of accumulated amortization of $1.44 billion and $1.32 billion at March 31,
1999 and December 31, 1998, respectively. Depreciation and amortization expense
for the three months ended March 31, 1999 and 1998 was $312.0 million and $321.3
million, respectively.
Note 4. Restructuring Activities and Other Charges
In the first quarter of 1999, the Company began implementation of an
initiative to reduce its costs, streamline its organizational structure, and
exit certain operating activities. As a result of this initiative, the Company
recorded restructuring charges and related asset writedowns totaling $379.8
million in the quarter ended March 31, 1999. This initiative involves the
involuntary termination of approximately 5,200 individuals employed throughout
the Company in managerial, professional, clerical, consulting and technical
positions, the exit of certain business activities and the consolidation of
facilities, and the writedown of certain assets to net realizable value. Charges
associated with this action include $285.0 million relating to severance costs
associated with involuntary terminations, $52.0 million relating to business
exit and facilities consolidation costs, and asset writedowns of $42.8 million.
The accrual for business exit activities and consolidation of operations
includes estimated costs of $14.1 million to terminate a software license
agreement, $11.9 million to terminate certain leases, $13.6 million to terminate
certain customer contracts, and $12.4 million for other costs. These costs are
associated with the exit of
6
<PAGE>
several lines of business, primarily within systems and technology services.
Asset writedowns related to the restructuring activities consist of $23.7
million to write-off software, goodwill, and other intangibles, $17.4 million
for computer-related equipment, and other writedowns of $1.7 million. 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 March 31, 1999, approximately 150 employees have left the Company
and termination benefits of $2.8 million have been charged to the accrual. The
Company expects that cash expenditures relating to this charge will be incurred
primarily in the remainder of 1999.
As of March 31, 1999, the 1996 and 1997 restructuring activities have
resulted in approximately 4,750 employees involuntarily terminated and
approximately 1,750 employees accepting early retirement offers. The
restructuring activities have resulted in cash expenditures of $269.8 million
since the second quarter of 1996. The restructuring actions contemplated under
the 1996 and 1997 plans are essentially complete as of March 31, 1999. The
remaining restructuring reserve of $22.1 million is primarily comprised of
severance-related payments to terminated employees, lease payments for exited
facilities, and reserves for other restructuring activities.
The following table depicts restructuring reserve activity for the quarter ended
March 31, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance 285.0
Accrual for business exit activities and
consolidation of operations 52.0
Cash payments (5.1)
-----
Balance at March 31, 1999 $365.7
=====
Note 5. Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31, 1999
and 1998 was $(110.4) million and $226.1 million, respectively. The primary
difference between comprehensive loss and net loss for the three months ended
March 31, 1999 was related to foreign currency translation adjustments. The
primary differences between comprehensive income and net income for the three
months ended March 31, 1998 was related to net unrealized holding gains on
certain investments.
Note 6. Segment Information
The following is a summary of certain financial information by reportable
segment (in millions):
For the three months ended March 31, 1999 1998
---- ----
Gross Gross
Revenue Profit Revenue Profit
------- ------ ------- ------
Systems and technology services $3,135.3 $586.7 $2,814.5 $517.5
Business process management 770.4 122.0 735.8 113.5
Management consulting 262.7 21.2 237.7 45.1
All other 157.9 (12.3) 154.0 37.7
------- ----- ------- -----
Total $4,326.3 $717.6 $3,942.0 $713.8
======= ===== ======= =====
7
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The following reconciles segment gross profit to the Company's consolidated
operating income (in millions):
For the three months ended March 31, 1999 1998
---- ----
Total gross profit for reportable segments $ 717.6 $713.8
Selling, general, and administrative (443.9) (410.6)
Restructuring and other charges (379.8) (42.5)
----- -----
Consolidated operating income (loss) $(106.1) $260.7
===== =====
Note 7. Acquisition of Systemhouse
On April 22, 1999, the Company acquired MCI WorldCom's information
technology services unit, MCI Systemhouse, for $1.65 billion in cash. The
acquisition will be accounted for as a purchase in the second quarter of 1999.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Electronic Data Systems Corporation is a professional services firm
which offers its clients a portfolio of related services worldwide within the
broad categories of systems and technology services, business process
management, management consulting, and electronic business. Services include the
management of computers, networks, information systems, information processing
facilities, business operations, and related personnel. On May 3, 1999, EDS
announced the formation of its E-Business Solutions unit, which combines
operations and capabilities from across EDS, including elements of the recently
acquired Systemhouse business referred to below (see "Recent Developments").
This discussion refers to Electronic Data Systems Corporation, its predecessor,
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
The statements in this discussion which are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements regarding Year 2000 exposure and opportunity, total contract values
for new business, future revenues and gross margins, 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 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 the industries
in which we conduct business and the impact 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; and, with respect to Year
2000 exposure and opportunity, our ability to capitalize on new business
opportunities 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.
8
<PAGE>
Recent Developments
On April 22, 1999, EDS acquired MCI Systemhouse ("Systemhouse") from
MCI Worldcom for $1.65 billion in cash. Systemhouse had 1998 revenues of
approximately $1.7 billion. This acquisition is the first of four elements of a
global framework agreement to be completed between EDS and MCI Worldcom. The
framework includes two 10-year outsourcing contracts and a marketing
relationship to explore opportunities in electronic business and networking
solutions. Under this agreement, MCI WorldCom will outsource major portions of
its information technology ("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 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement 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
effective for financial statements for fiscal years beginning after June 15,
1999, although early adoption is allowed. We plan to adopt this statement on
January 1, 2000. We have not determined the financial impact of adopting this
statement.
Year 2000
For EDS, the Year 2000 ("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. For purposes
of the following completion percentages, testing is not deemed to be complete
until completion of all planned integration testing of that project with certain
other systems with which it interacts. Although unit and systems testing and
implementation for the project may already be complete, post implementation
testing is also performed and may continue through the remainder of the year. As
a result, the following testing completion percentages, especially of corporate
mission critical systems with many interfaces, may lag implementation completion
percentages. In addition, any system changes or enhancements will be Y2K tested
through the remainder of the year.
As of April 23, 1999, we had identified approximately 33 corporate
mission critical projects. Through March 31, 1999, we had completed assessment
of approximately 97% of such projects, renovation of approximately 94% of such
projects, testing of approximately 58% of such projects (see discussion in
preceding paragraph) and implementation of approximately 73% of such projects.
We expect to complete the Y2K remediation for such projects by the end of the
second quarter of 1999.
As of April 23, 1999, we had identified approximately 34 unit mission
critical projects. Through March 31, 1999, we had completed assessment of
approximately 91% of such projects, renovation of approximately 74% of such
projects, testing of approximately 65% of such projects and implementation of
approximately 56% of such projects. We expect to complete the Y2K remediation
for such projects by the end of the second quarter of 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 those non-mission critical projects
identified for remediation at April 23, 1999, approximately 78% and 82% of the
corporate and unit projects, respectively, had completed the assessment stage,
approximately 69% and 48% had completed the renovation stage, approximately 49%
and 35% had completed the testing stage and approximately 37% and 28% had
completed the implementation stage as of
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March 31, 1999. The remediation process for all non-mission critical projects
identified for remediation is scheduled to be substantially completed by the end
of the third quarter of 1999, although the implementation stage for certain
projects may extend into the fourth quarter.
Although we currently expect that the remedial actions described above
will be completed on a timely basis, the failure to complete certain critical
projects could have a material adverse effect on our business, results of
operations or financial condition.
The foregoing analysis of the remediation status of our internal
systems as of March 31, 1999 does not reflect the remediation of the internal
systems of Systemhouse, which was acquired by EDS on April 22, 1999. We expect
the process of integrating Systemhouse's Y2K reporting with the EDS Y2K
Program Office to be complete by the end of May 1999. However, based on
diligence performed by EDS in connection with the acquisition, as well as the
representations and warranties made by the sellers of that business to EDS, we
expect the remediation of Systemhouse's internal systems to be completed on a
timely basis.
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. As indicated under "Recent
Developments" above, we have agreed to sell EDSNET(R) and certain related
network assets to MCI WorldCom in connection with the outsourcing of our network
to MCI WorldCom.
The Y2K remediation of EDSNET(R) is a corporate mission critical
project and is expected to be completed by the end of the second quarter of
1999. Although we expect such remediation to be completed on a timely basis,
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 continue to prepare 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. We are also seeking to increase network capacity where cost efficient
to prepare for this possibility.
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 $95.0 million in costs related to the remediation of our internal
systems, of which approximately $15.0 million is attributable to the operation
of our Y2K Program Office. Of the approximately $80.0 million estimated cost for
remediation projects, approximately $50.0 million has been incurred through
March 31, 1999 and substantially all of the remainder should be incurred by the
end of the third quarter of 1999. Included in this estimate are costs for the
accelerated replacement of non-compliant equipment and software. Approximately
$12.0 million of expense related to this replacement equipment and software will
be recognized as depreciation, amortization, or lease expense after January 1,
2000. Because our hardware and software is generally refreshed on an ongoing
basis in accordance with normal business practices, the substantial majority of
the total estimated remediation costs represents labor expense. As of March 31,
1999, approximately $10.0 million had been incurred for the operation of the Y2K
Program Office.
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The majority of the remaining costs will be incurred and expensed ratably during
1999. The foregoing estimates do not include costs for the remediation of
Systemhouse's internal systems. At the time of the acquisition of Systemhouse on
April 22, 1999, such costs were estimated by the sellers at $20.0 million, of
which approximately $9.0 million had been incurred prior to the acquisition,
although such estimate is currently being reviewed by EDS' Y2K Program Office.
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 March 31, 1999, rose
$384.3 million, or 9.7%, over the corresponding quarter in 1998 to $4.33
billion. Revenues from non-GM clients for the quarter ended March 31, 1999, rose
$344.3 million, or 11.7%, to $3.29 billion from $2.95 billion for the same
period in 1998. The increase in non-GM revenues was primarily the result of new
contracts signed in 1998. Revenues from GM increased 4.0%, to $1.04 billion,
during the three months ended March 31, 1999 compared with $995.3 million for
the corresponding period in 1998. We estimate that revenues from GM for calendar
year 1999 will be lower than in 1998. The following table displays the
percentage of total revenue by segment:
For the Three Months Ended March 31, 1999 1998
---- ----
Systems and technology services 72% 71%
Business process management 18 19
Management consulting 6 6
All other 4 4
--- ---
Total 100% 100%
=== ===
Revenues from non-GM clients comprised 76.1% and 74.8% of total
revenues for the three months ended March 31, 1999 and 1998, respectively. We
expect this trend to accelerate as revenues from non-GM clients, including
revenues associated with the acquisition of Systemhouse discussed above, are
anticipated to increase while revenues from GM are anticipated to decline.
Costs and Expenses. The gross margin [(revenues less cost of
revenues)/revenues] declined to 16.6% for the three months ended March 31, 1999,
compared with 18.1% for the corresponding period in 1998. This decrease was due
primarily to 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,
and a decrease in the gross margin on the Company's GM business. Although
revenues from contracts with GM increased during the first quarter of 1999 as
compared with the first quarter of 1998, this increase was due primarily to
additional hardware and software pass-throughs that generated a lower operating
margin than other service offerings. During the first quarter of 1999, we began
the implementation of plans designed to improve gross margins for the remainder
of 1999 and into future years. See "Restructuring and Other Charges" below.
Selling, general and administrative expenses as a percentage of
revenues remained relatively constant at 10.3% for the three months ended March
31, 1999 compared to 10.4% in the corresponding period in 1998.
Restructuring and Other Charges
In the first quarter of 1999, we began implementation of an initiative
to reduce our costs, streamline our organizational structure, and exit certain
operating activities. As a result of this initiative, we recorded restructuring
charges and related asset writedowns totaling $379.8 million in the quarter
ended March 31, 1999. This initiative involves the involuntary termination of
approximately 5,200 individuals employed throughout the Company in managerial,
professional, clerical, consulting and technical positions, the exit of certain
business activities and the consolidation of facilities, and the writedown of
certain assets to net realizable value. Charges associated with this action
include $285.0 million relating to severance costs associated with involuntary
terminations, $52.0 million
11
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relating to business exit and facilities consolidation costs, and asset
writedowns of $42.8 million. The accrual for business exit activities and
consolidation of operations includes estimated costs of $14.1 million to
terminate a software license agreement, $11.9 million to terminate certain
leases, $13.6 million to terminate certain customer contracts, and $12.4 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 $23.7 million to write-off
software, goodwill, and other intangibles, $17.4 million for computer-related
equipment, and other writedowns of $1.7 million. Such asset writedowns, which
predominantly related to businesses that we have 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 we continue to explore opportunities for organizational
improvements and cost reductions, we could decide to take actions that would
result in restructuring and other charges in the future.
As of March 31, 1999, approximately 150 employees have left EDS and
termination benefits of $2.8 million have been charged to the accrual. The
Company expects that cash expenditures relating to this charge will be incurred
primarily in the remainder of 1999.
As of March 31, 1999, the 1996 and 1997 restructuring activities
resulted in approximately 4,750 employees involuntarily terminated and
approximately 1,750 employees accepting early retirement offers. The
restructuring activities have resulted in cash expenditures of $269.8 million
since the second quarter of 1996. The restructuring actions contemplated under
the 1996 and 1997 plans are essentially complete as of March 31, 1999. The
remaining restructuring reserve of $22.1 million is primarily comprised of
severance-related payments to terminated employees, lease payments for exited
facilities, and reserves for other restructuring activities.
The following table depicts restructuring reserve activity for the quarter ended
March 31, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance 285.0
Accrual for business exit activities and
consolidation of operations 52.0
Cash payments (5.1)
-----
Balance at March 31, 1999 $365.7
=====
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.
Interest Expense and Other, net. Interest Expense and Other, net
increased $46.9 million in the first quarter of 1999 to $73.9 million, compared
with $27.0 million in the corresponding period in 1998. Interest and other
income increased $31.1 million, to $95.7 million from $64.6 million in the
comparable period in 1998, due primarily to a pre-tax gain of $63.5 million
resulting from a sale of a portion of our limited partnership investments. We
expect to continue divesting of certain non-core assets, including the sale of
our remaining limited partnership investments, during 1999. Interest expense
declined $15.8 million in the first quarter of 1999 to $21.8 million, compared
with $37.6 million in the corresponding period of 1998, as a result of a
decreased level of debt.
Income Taxes. The effective tax rate remained constant at 36.0% for
the three months ended March 31, 1999 and 1998.
Net Income (Loss). For the three-month period ended March 31, 1999, net
income decreased $204.8 million to a net loss of $(20.6) million compared to net
income of $184.2 million during the corresponding period of the prior year. Both
basic and diluted earnings (loss) per share for the three months ended March 31,
1999 and 1998 were $(0.04) and $0.37, respectively.
Excluding the pre-tax charges of $379.8 million related to the
restructuring and other charges, and the pre-tax gain of $63.5 million
associated with the sale of a portion of our limited partnership investments,
net income for the three months ended March 31, 1999 would have been $181.8
million, and basic and diluted earnings per share would have been $0.37 and
$0.36, respectively. Excluding the pre-tax charge of $42.5 million for amounts
12
<PAGE>
allocated to acquired in-process research and development, net income for the
three months ended March 31, 1998 would have been $211.3 million, and basic and
diluted earnings per share would have been $0.43.
Return on stockholders' equity was 9.7% for the twelve-month period
ended March 31, 1999, compared to 13.9% for the comparable period ended March
31, 1998. This decrease was due primarily to a decrease in net income for the
twelve months ended March 31, 1999 as a result of restructuring and other
charges.
Liquidity and Capital Resources
At March 31, 1999, we held cash and cash equivalents of $1.25 billion,
had working capital of $2.05 billion, and a had current ratio of 1.5-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 March 31, 1999, consisted of $1.19 billion in
long-term debt, less current portion, and $5.61 billion in stockholders' equity.
Total debt (which includes redeemable preferred stock of subsidiaries) was $1.42
billion at March 31, 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 20.2% at March 31, 1999, and 19.3% at December 31, 1998.
The ratio of long-term debt to capital was 19.6% at March 31, 1999 and 18.7% at
December 31, 1998. At both March 31, 1999, and December 31, 1998, we had
committed lines of credit of approximately $2.5 billion, all unused, which serve
as a backup facility for commercial paper borrowings. As previously discussed,
we acquired Systemhouse on April 22, 1999 for $1.65 billion in cash. This
purchase was financed approximately 50% with cash and 50% with commercial paper
borrowings.
Cash flows provided by operating activities decreased $254.6 million
during the three months ended March 31, 1999 to $369.0 million from $623.6
million in the comparable period in the prior year. This decrease was primarily
due to the decrease in earnings and changes in working capital items. Cash
provided by investing activities during the three months ended March 31, 1999
increased $364.8 million to $103.1 million compared to a use of $(261.7) million
in the comparable period in the prior year, primarily due to increased proceeds
from investments and other assets. Cash flows used in financing activities
decreased $41.6 million to $225.5 million during the three months ended March
31, 1999 compared to $267.1 million during the same period of 1998 due to a
reduction in payments on long-term debt, partially offset by increased treasury
stock purchases. For the three-month periods ended March 31, 1999 and 1998, EDS
paid cash dividends totaling $73.6 million and $73.8 million, respectively.
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to EDS' Annual Report on Form 10-K for the year ended
December 31, 1998 for information regarding certain litigation in connection
with the split-off of EDS from GM. On March 25, 1999, the defendants' motion to
dismiss the third amended consolidated complaint was granted. On April 23, 1999,
the plaintiffs filed a notice of appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
1999.
13
<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: May 14, 1999 By: /s/ James E. Daley
---------------------------------
James E. Daley
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: May 14, 1999 By: /s/ H. Paulett Eberhart
---------------------------------
H. Paulett Eberhart
Senior Vice President
(Principal Accounting Officer)
14
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