<PAGE>
===============================================================================
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, 2000
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 No. 01-11779
ELECTRONIC DATA SYSTEMS CORPORATION
a Delaware corporation
IRS Employer Identification No. 75-2548221
5400 Legacy Drive, Plano, Texas 75024-3199
(972) 604-6000
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, 2000, there were outstanding 467,630,598 shares of the
registrant's Common Stock, $.01 par value per share.
===============================================================================
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Income.................... 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............................................................ 9
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K......................................... 15
Signatures........................................................................... 16
</TABLE>
Exhibit 27 Financial Data Schedule (for SEC information only)
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------- -------- --------- ---------
Revenues $4,749.8 $4,714.8 $13,896.4 $13,656.8
-------- -------- --------- ---------
Costs and expenses
Cost of revenues 3,844.6 3,854.4 11,335.8 11,264.8
Selling, general and administrative 442.5 451.5 1,286.6 1,353.0
Restructuring and other charges -- 236.3 -- 616.1
-------- -------- --------- ---------
Total costs and expenses 4,287.1 4,542.2 12,622.4 13,233.9
-------- -------- --------- ---------
Operating income 462.7 172.6 1,274.0 422.9
-------- -------- --------- ---------
Interest expense and other, net (27.3) 74.6 10.2 168.1
-------- -------- --------- ---------
Income before income taxes 435.4 247.2 1,284.2 591.0
Provision for income taxes 156.7 89.0 462.3 212.8
-------- -------- --------- ---------
Net income $ 278.7 $ 158.2 $ 821.9 $ 378.2
======== ======== ========= =========
Earnings per share
Basic $ 0.60 $ 0.32 $ 1.76 $ 0.77
======== ======== ========= =========
Diluted $ 0.59 $ 0.31 $ 1.72 $ 0.75
======== ======== ========= =========
Cash dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.45
======== ======== ========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
<TABLE>
<S> <C> <C>
September 30, December 31,
2000 1999
--------- ---------
Assets
Current assets
Cash and cash equivalents $ 317.7 $ 537.2
Marketable securities 350.6 191.5
Accounts receivable, net 4,443.0 4,423.4
Prepaids and other 723.8 725.6
--------- ---------
Total current assets 5,835.1 5,877.7
--------- ---------
Property and equipment, net 2,459.8 2,459.8
--------- ---------
Operating and other assets
Investments and other assets 1,494.4 1,483.6
Software, goodwill, and other intangibles, net 2,652.0 2,701.2
--------- ---------
Total operating and other assets 4,146.4 4,184.8
--------- ---------
Total Assets $12,441.3 $12,522.3
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 3,408.2 $ 3,690.7
Deferred revenue 528.0 718.3
Income taxes 6.7 93.4
Current portion of long-term debt 18.6 493.6
--------- ---------
Total current liabilities 3,961.5 4,996.0
--------- ---------
Deferred income taxes 258.0 268.2
--------- ---------
Long-term debt, less current portion 2,697.1 2,215.7
--------- ---------
Redeemable preferred stock of subsidiaries, minority
interests, and other long-term liabilities 539.8 507.8
--------- ---------
Shareholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares, none issued -- --
Common stock, $.01 par value; authorized
2,000,000,000 shares; 493,434,892 shares issued
at September 30, 2000, and 493,415,265 shares
issued at December 31, 1999 4.9 4.9
Additional paid-in capital 926.0 971.9
Retained earnings 5,791.3 5,179.2
Accumulated other comprehensive income (199.9) (79.7)
Treasury stock, at cost, 26,394,144 shares at
September 30, 2000, and 27,222,631 shares at
December 31, 1999 (1,537.4) (1,541.7)
--------- ---------
Total shareholders' equity 4,984.9 4,534.6
--------- ---------
Total Liabilities and Shareholders' Equity $12,441.3 $12,522.3
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
<S> <C> <C>
2000 1999
---------- ----------
Net Cash Provided by Operating Activities $ 913.7 $ 1,044.0
---------- ----------
Cash Flows from Investing Activities
Proceeds from sales of marketable securities 212.3 107.6
Proceeds from investments and other assets 64.5 677.4
Payments for purchases of property and equipment (524.6) (505.3)
Payments for investments and other assets (299.4) (182.0)
Payments related to acquisitions, net of cash acquired (6.0) (1,708.7)
Payments for purchases of software and other intangibles (207.6) (78.3)
Payments for purchases of marketable securities (39.0) (33.4)
Other 30.0 126.3
---------- ----------
Net cash used in investing activities (769.8) (1,596.4)
---------- ----------
Cash Flows from Financing Activities
Proceeds from commercial paper and long-term debt 28,276.5 16,437.7
Payments on commercial paper and long-term debt (28,228.5) (15,049.8)
Purchase of treasury stock (210.0) (1,011.8)
Employee stock transactions 68.0 86.1
Dividends paid (209.8) (221.5)
Other 2.1 --
---------- ----------
Net cash provided by (used in) financing
activities (301.7) 240.7
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (61.7) (97.0)
---------- ----------
Net decrease in cash and cash equivalents (219.5) (408.7)
Cash and cash equivalents at beginning of period 537.2 1,038.8
---------- ----------
Cash and cash equivalents at end of period $ 317.7 $ 630.1
========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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, 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 that 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 1999 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1999 unaudited condensed
consolidated financial statements to conform to the 2000 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):
2000 1999
----- -----
For the three months ended September 30:
Basic earnings per share 466.3 490.8
Diluted earnings per share 472.6 503.7
For the nine months ended September 30:
Basic earnings per share 466.2 491.8
Diluted earnings per share 476.7 503.2
Securities which were outstanding but were not included in the computation of
diluted earnings per share because their effect was antidilutive include 399,164
restricted stock units for the three and nine months ended September 30, 2000,
and options to purchase 18.5 million shares for the three and nine months ended
September 30, 2000, and options to purchase 0.9 million shares for the three and
nine months ended September 30, 1999.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $4.3 billion
and $4.2 billion, respectively, at September 30, 2000 and December 31, 1999.
Additionally, software, goodwill, and other intangibles are stated net of
accumulated amortization of $1.5 billion and $1.4 billion, respectively, at
September 30, 2000 and December 31, 1999. Depreciation and amortization expense
for the three and nine months ended September 30, 2000 was $344.7 million and
$1,063.4 million, respectively. Depreciation and amortization expense for the
three and nine months ended September 30, 1999 was $382.2 million and $1,066.4
million, respectively.
6
<PAGE>
Note 4. Restructuring Activities and Other Charges
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 these initiatives, the
Company recorded restructuring charges and related asset writedowns totaling
$1,067.7 million for the year ended December 31, 1999. In the fourth quarter of
1999, the Company reversed residual accruals of $29.4 million related to
previously recorded restructuring charges resulting in a net charge of $1,038.3
million for the year ended December 31, 1999. Amounts recorded for
restructuring activities during 1999 provide for planned workforce reductions of
approximately 15,300 employees, consisting of approximately 3,200 employees who
accepted the Company's early retirement offer and the involuntary termination of
approximately 12,100 individuals employed throughout the Company in managerial,
professional, clerical, consulting and technical positions. Total involuntary
termination and early retirement offer charges amounted to $866.5 million,
$146.2 million of which pertains to the expense associated with special
termination benefits related to the early retirement offer (net of a curtailment
gain), including amounts under our defined benefit pension plan, and $51.3
million of which pertains to changes in the vesting conditions for unvested
restricted stock units and options. In addition, these initiatives 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 $93.9 million related to business exit and facilities
consolidation costs, and asset writedowns of $107.3 million.
Through September 30, 2000, approximately 10,300 employees have left the Company
through involuntary termination as a result of the 1999 initiatives, and
approximately $438.3 million of termination benefits have been charged to the
accrual. In addition, approximately $60.3 million has been paid in connection
with the exit activities described above. The Company expects that remaining
cash expenditures relating to this charge will be incurred primarily in 2000.
The following table depicts activity in the 1999 restructuring accrual for the
nine months ended September 30, 2000 (in millions):
Involuntary
Termination Exit
Costs Costs Total
----------- ---------- ----------
Balance at December 31, 1999 $ 399.3 $ 51.3 $ 450.6
Payments (179.4) (25.3) (204.7)
----------- ---------- ----------
Balance at September 30, 2000 $ 219.9 $ 26.0 $ 245.9
=========== ========== ==========
Note 5. Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2000 was
$184.9 million and $701.8 million, respectively. Comprehensive income for the
three and nine months ended September 30, 1999 was $136.6 million and $223.2
million, respectively. The primary difference between comprehensive income and
net income for the three and nine months ended September 30, 2000 was related to
foreign currency translation adjustments. The primary difference between
comprehensive income and net income for the three months ended September 30,
1999 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.
7
<PAGE>
Note 6. Segment Information
Effective January 1, 2000, the Company reorganized its business on a global
basis along the following four lines of business: Information Solutions,
Business Process Management, E.solutions, and A.T. Kearney. The Company's
segment information is stated in accordance with the new organizational
structure. Revenue and operating income from E.solutions and A.T. Kearney have
been combined to produce the "Consulting" segment. During the third quarter of
2000, the Company continued refining the alignment of contracts along the four
lines of business. As a result, certain reclassifications have been made to
current and prior year financial information to conform to the current
alignment.
Prior to the reorganization, the Company disclosed segment information by
aggregating its client contracts along the following three lines of business:
Systems and Technology Services, Business Process Management, and Management
Consulting Services. Prior period segment data has been restated to reflect the
new reporting structure.
The following is a summary of certain financial information by reportable
segment (in millions):
<TABLE>
For the Three
Months Ended September 30, 2000 1999
-------------------------- ----------------------------------- ----------------------------------
Operating Operating
Revenue Income (Loss) Revenue Income (Loss)
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Information Solutions $ 3,739.4 $ 656.8 $ 3,627.3 $ 608.4
Business Process Management 647.6 102.0 666.7 88.8
Consulting 510.8 56.8 454.9 50.4
All other (148.0) (352.9) (34.1) (338.7)
---------- -------------- ---------- --------------
4,749.8 462.7 4,714.8 408.9
Restructuring and other charges -- -- -- (236.3)
---------- -------------- ---------- --------------
Totals $ 4,749.8 $ 462.7 $ 4,714.8 $ 172.6
========== ============== ========== ==============
</TABLE>
<TABLE>
<CAPTION>
For the Nine
Months Ended September 30, 2000 1999
-------------------------- ----------------------------------- ----------------------------------
Operating Operating
Revenue Income (Loss) Revenue Income (Loss)
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Information Solutions $ 10,666.4 $ 1,799.3 $ 10,391.5 $ 1,654.9
Business Process Management 1,925.5 287.3 1,886.6 216.9
Consulting 1,568.7 152.3 1,302.1 101.6
All other (264.2) (964.9) 76.6 (934.4)
---------- -------------- ---------- --------------
13,896.4 1,274.0 13,656.8 1,039.0
Restructuring and other charges -- -- -- (616.1)
---------- -------------- ---------- --------------
Totals $ 13,896.4 $ 1,274.0 $ 13,656.8 $ 422.9
========== ============== ========== ==============
</TABLE>
The Company currently uses operating income or loss, which consists of segment
revenues less segment costs and expenses (before restructuring and other
charges), to measure segment profit or loss. The Company had previously
measured segment performance using gross profit, which consists of segment
revenues less segment cost of revenues. Revenue and operating income of non-
U.S. operations are measured using fixed currency exchange rates with
differences between fixed and actual exchange rates being included in the "all
other" category. In addition, the "all other" category includes the results of
the Company's Unigraphics Solutions Inc., EDS CoNext, Inc., and eBreviate, Inc.
businesses. Certain historical financial information is not readily available
under the new reporting structure, accordingly, certain group overhead cost
allocations have been made to present 1999 operating income (loss) under the new
reporting structure.
8
<PAGE>
The following is a summary of total assets by reportable segment (in millions):
September 30, December 31,
2000 1999
------------- ------------
Information Solutions $ 7,964.5 $ 7,501.1
Business Process Management 1,677.9 1,679.8
Consulting 1,619.9 1,596.6
All other 1,179.0 1,744.8
------------- ------------
Total $ 12,441.3 $ 12,522.3
============= ============
Total assets in the "all other" category include unallocated assets, primarily
corporate cash, fixed assets and investments, and foreign exchange rate
differences.
Note 7. Commerce One Stock
In April 1999, EDS acquired 2,150,043 shares of Commerce One stock as part of
the Company's acquisition of MCI Systemhouse from MCI WorldCom. In January
2000, EDS entered into a five-year forward sale of the stock that monetized the
Company's position and established the difference between the Company's basis in
the stock and the sales price on the date of the forward sale transaction as the
minimum amount of appreciation that will be realized upon sale. The Company has
the ability to realize further financial benefits if the market price of the
stock appreciates above a certain level at the end of the five-year period.
The Company received $309.5 million in net proceeds as a result of entering into
the forward sale, and recognized this amount as debt. Interest expense will be
recognized over the five-year period using the effective interest rate implicit
in the transaction. On an ongoing basis, EDS recognizes the change in the
market values of Commerce One stock and the debt as components of other
comprehensive income. There will be no further impact on cash flow from
retiring the debt as it is redeemed by the delivery of Commerce One stock.
The accounting for the forward sale arrangement will change upon the adoption of
new accounting standards for derivative instruments on January 1, 2001 as
described under "New Accounting Standards" in Management's Discussion and
Analysis of Financial Condition and Results of Operations below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Electronic Data Systems Corporation, or EDS, is a professional services
firm that offers its clients a portfolio of related services worldwide within
the broad categories of information technology outsourcing, business process
management and consulting. This discussion refers to EDS and its consolidated
subsidiaries and should be read in conjunction with the discussion included in
our 1999 Annual Report on Form 10-K.
Forward-Looking Statements
The statements in this discussion that 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 future revenue growth, expenses and operating margins, as
well as 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, short-
and long-term revenue and earnings growth, the timing of the revenue and
earnings impact for certain contracts, backlog, the value of new contract
signings, business pipeline, 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
9
<PAGE>
we conduct business and the impact of competition on pricing, revenues and
margins; fluctuations in foreign currency exchange rates; the financial
performance of current and future client contracts, including contracts with GM;
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 and revenue estimates; the impact of acquisitions and divestitures
and 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; and the cost of attracting and retaining
highly skilled personnel. Except to the extent required by law, we are not
obligated to update or revise any forward-looking statements whether as a result
of new information, future events or otherwise.
Results of Operations
Revenues. For the three months ended September 30, 2000, total revenues
increased $35.0 million, or 1%, to $4.7 billion when compared to the
corresponding period in 1999 as a result of an increase in revenues from non-GM
clients partially offset by a decrease in revenues from GM. Revenues from non-
GM clients for the quarter ended September 30, 2000, rose $68.1 million, or 2%,
to $3.9 billion when compared to the corresponding period in 1999 primarily as a
result of new contracts signed in 1999 and 2000. This increase was partially
offset by decreases resulting from the divestiture of certain business units and
the discontinuation of certain contracts during 1999 in order to align service
offerings with our four global lines of business to capture synergies and
further leverage our delivery platforms. As a result of these strategic
divestitures, we expect non-GM revenue growth, when compared to the
corresponding periods in 1999, to be stronger in the second half of 2000 than in
the first half of the year. Revenues from GM decreased $33.1 million, or 4%, to
$836.6 million during the three months ended September 30, 2000, compared with
$869.7 million for the corresponding period in 1999. The decrease in revenues
from GM is primarily attributable to the previously announced renegotiation of
certain sector agreements, including the agreements covering GM's North American
operations and GMAC, that became effective January 1, 2000. Revenues from both
GM and non-GM clients were negatively impacted by foreign currency fluctuations,
due primarily to the relative decline of the euro against the U.S. dollar,
during the three months ended September 30, 2000. On a constant foreign
currency basis, total revenues for the three months ended September 30, 2000
increased 3% over the corresponding period in 1999, resulting from an increase
of 5% in revenues from non-GM clients and a decline of 2% in revenues from GM.
For the nine months ended September 30, 2000, total revenues rose $239.6
million, or 2%, to $13.9 billion when compared to $13.7 billion in the
corresponding period in 1999. Revenues from non-GM clients for the nine months
ended September 30, 2000, rose $380.3 million, or 3%, to $11.4 billion from
$11.0 billion in the corresponding period of 1999 primarily as a result of new
contracts signed in 1999 and 2000, and from revenues associated with the
acquisition of Systemhouse in April 1999. Revenues from GM for the nine months
ended September 30, 2000, decreased $140.7 million, or 5%, to $2.5 billion from
$2.6 billion in the comparable period in 1999 due primarily to the reasons
discussed above. Revenues from both GM and non-GM clients were negatively
impacted by foreign currency fluctuations, due primarily to the relative decline
of the euro against the U.S. dollar, during the nine months ended September 30,
2000. On a constant foreign currency basis, total revenues for the nine months
ended September 30, 2000 increased 4% over the corresponding period in 1999,
resulting from an increase of 6% in revenues from non-GM clients and a decline
of 4% in revenues from GM.
Effective January 1, 2000, we reorganized our operations on a global basis
along the following four lines of business: Information Solutions, Business
Process Management, E.solutions, and A.T. Kearney. The segment information
displayed below is in accordance with the new organizational structure. Our
E.solutions and A.T. Kearney lines of business have been combined to produce the
"Consulting" segment. During the third quarter of 2000, we continued refining
the alignment of contracts along our four lines of business. As a result,
certain reclassifications have been made to current and prior year financial
information to conform to the current alignment.
Prior to the reorganization, we disclosed segment information by aggregating
our client contracts along the following three lines of business: Systems and
Technology Services, Business Process Management, and Management Consulting
Services.
We evaluate our operating segment revenue growth on a constant foreign
currency basis. The following table displays total revenue growth by segment
on a constant foreign currency basis for the three and nine months ended
September 30, 2000, as compared to the corresponding periods in 1999:
10
<PAGE>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
Information Solutions 3 % 3 %
Business Process Management (3)% 2 %
Consulting 12 % 20 %
E.solutions 31 % 45 %
A.T. Kearney 1 % 8 %
Revenue growth for the three and nine month periods ended September
30, 2000, as compared to the corresponding periods in the prior year, is
attributable primarily to new contract signings. Revenue growth for the nine
months ended September 2000 is also due in part to revenues associated with the
acquisition of Systemhouse in April 1999. The divestiture of certain business
units in 1999 had the largest impact on revenue growth in the Business Process
Management segment. Revenue growth for the nine months ended September 30, 2000
reflects certain reclassifications as discussed above.
The following table displays the percentage of total revenue by segment:
For the Three Months Ended September 30, 2000 1999
---------------------------------------- ---- ----
Information Solutions 79% 77%
Business Process Management 13 14
Consulting 11 10
All other (3) (1)
---- ----
Total 100% 100%
==== ====
For the Nine Months Ended September 30, 2000 1999
---------------------------------------- ---- ----
Information Solutions 77% 76%
Business Process Management 14 14
Consulting 11 9
All other (2) 1
---- ----
Total 100% 100%
==== ====
Revenues from non-GM clients comprised 82% of total revenues for each of the
three-month periods ended September 30, 2000 and 1999, and 82% and 81%,
respectively, for the nine months ended September 30, 2000 and 1999.
Costs and expenses. Our gross margin percentage [(revenues less cost of
revenues)/revenues] increased to 19.1% for the three months ended September 30,
2000, compared with 18.2% for the corresponding period in 1999. For the nine
months ended September 30, 2000, the gross margin increased to 18.4%, compared
with 17.5% for the comparable period in 1999. The increase in gross margin for
the three and nine months ended September 30, 2000, was due primarily to ongoing
company-wide productivity and repositioning initiatives, and was partially
offset by a decline in the gross margin on our GM business resulting from the
renegotiation of certain sector agreements. See "Revenues" above. In addition,
we incurred incremental expenses during the three and nine months ended
September 30, 2000, when compared to the corresponding periods in the prior
year, related to start-up activities for various e-business activities. We
expect to continue to incur expenses related to these activities in future
periods.
Selling, general and administrative, or SG&A, expenses as a percentage of
revenues decreased to 9.3% for the three months ended September 30, 2000,
compared to 9.6% in the corresponding period in 1999. For the nine months ended
September 30, 2000, SG&A decreased to 9.3%, compared with 9.9% for the
comparable period in 1999. These decreases resulted primarily from the cost-
saving initiatives implemented in 1999. Savings from these initiatives were
partially offset by increased spending for sales, corporate systems, training
and other areas of strategic importance.
In the first quarter of 1999, we began the implementation of initiatives
designed to reduce 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 $1,067.7 million for
the year ended December 31, 1999. In the fourth quarter of 1999, we reversed
residual accruals of $29.4 million related to previously recorded
11
<PAGE>
restructuring charges resulting in a net charge of $1,038.3 million for the year
ended December 31, 1999. Amounts recorded for restructuring activities during
1999 provide for planned workforce reductions of approximately 15,300 employees,
consisting of approximately 3,200 employees who accepted our early retirement
offer and the involuntary termination of approximately 12,100 individuals
employed throughout the company in managerial, professional, clerical,
consulting and technical positions. Total involuntary termination and early
retirement offer charges amounted to $866.5 million, $146.2 million of which
pertains to the expense associated with special termination benefits related to
the early retirement offer (net of a curtailment gain), including amounts under
our defined benefit pension plan, and $51.3 million of which pertains to changes
in the vesting conditions for unvested restricted stock units and options. In
addition, these initiatives 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 $93.9 million
related to business exit and facilities consolidation costs, and asset
writedowns of $107.3 million.
Through September 30, 2000, approximately 10,300 employees have left the
company through involuntary termination as a result of the 1999 initiatives, and
approximately $438.3 million of termination benefits have been charged to the
accrual. In addition, approximately $60.3 million has been paid in connection
with the exit activities described above. We expect that remaining cash
expenditures relating to this charge will be incurred primarily in 2000.
The following table depicts activity in the 1999 restructuring accrual for
the nine months ended September 30, 2000 (in millions):
Involuntary
Termination
Costs Exit Costs Total
----------- ---------- --------
Balance at December 31, 1999 $ 399.3 $ 51.3 $ 450.6
Payments (179.4) (25.3) (204.7)
----------- ---------- --------
Balance at September 30, 2000 $ 219.9 $ 26.0 $ 245.9
=========== ========== ========
Interest expense and other, net. The components of interest expense and
other, net are presented below (in millions):
For the three months ended September 30, 2000 1999
---------------------------------------- ------ ------
Interest and other income $ 23.0 $109.9
Interest expense 50.3 35.3
------ ------
Total $(27.3) $ 74.6
====== ======
For the nine months ended September 30, 2000 1999
--------------------------------------- ------ ------
Interest and other income $166.5 $264.6
Interest expense 156.3 96.5
------ ------
Total $ 10.2 $168.1
====== ======
For the three months ended September 30, 2000, interest expense and other,
net decreased $101.9 million, to ($27.3) million, compared with $74.6 million in
the corresponding period in 1999. Interest and other income decreased $86.9
million, to $23.0 million from $109.9 million, due primarily to a net pre-tax
gain of $81.5 million recognized in 1999 resulting from the sale of certain
equity investments. Interest expense increased $15.0 million, to $50.3 million
from $35.3 million, due primarily to an increased level of debt.
For the nine months ended September 30, 2000, interest expense and other,
net decreased $157.9 million, to $10.2 million, compared with $168.1 million in
the corresponding period in 1999. Interest and other income decreased $98.1
million, to $166.5 million, compared with $264.6 million. Interest and other
income for the nine months ended September 30, 2000, includes a pre-tax gain of
$97.6 million recorded in the first quarter of 2000 resulting primarily from the
sale of our Kinetra subsidiary, an e-business venture started in 1998. Interest
and other income for the nine months ended September 30, 1999, includes a pre-
tax gain of $171.5 million resulting from the
12
<PAGE>
sale of certain investments. Interest expense increased $59.8 million during the
nine months ended September 30, 2000, to $156.3 million from $96.5 million, due
primarily to an increased level of debt.
Income taxes. The effective tax rate remained constant at 36.0% for the
three and nine months ended September 30, 2000 and 1999.
Net income. For the three months ended September 30, 2000, net income
increased $120.5 million, to $278.7 million, compared with $158.2 million during
the corresponding period of the prior year. Basic and diluted earnings per
share were $0.60 and $0.59, respectively, for the three months ended September
30, 2000, and $0.32 and $0.31, respectively, for the comparable period in the
prior year.
For the nine months ended September 30, 2000, net income increased $443.7
million, to $821.9 million, compared with $378.2 million during the
corresponding period of the prior year. Basic and diluted earnings per share
were $1.76 and $1.72, respectively, for the nine months ended September 30,
2000, and $0.77 and $0.75, respectively, for the comparable period in the prior
year.
As discussed above, we recorded a pre-tax gain of $97.6 million for the
nine months ended September 30, 2000, related to the sale of certain
investments. Excluding this gain, net income for the nine months ended September
30, 2000 would have been $759.4 million, and basic and diluted earnings per
share would have been $1.63 and $1.59, respectively.
During the three months ended September 30, 1999, we recorded a net pre-tax
gain of $81.5 million related to the sale of certain investments, and a pre-tax
charge of $236.3 million related to restructuring activities and asset
writedowns. Excluding these items, 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. During the
nine months ended September 30, 1999, we recorded pre-tax gains of $171.5
million related to the sale of certain investments, and pre-tax charges of
$616.1 million related to restructuring activities and asset writedowns.
Excluding these items, 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.
The following table summarizes the adjustments discussed in the two
preceding paragraphs for the three and nine months ended September 30, 2000 and
1999 (dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues - as reported $4,749.8 $4,714.8 $13,896.4 $13,656.8
-------- -------- --------- ---------
Costs and expenses - as reported 4,287.1 4,542.2 12,622.4 13,233.9
Adjusting item:
Restructuring and other charges -- (236.3) -- (616.1)
-------- -------- --------- ---------
Costs and expenses - pro forma 4,287.1 4,305.9 12,622.4 12,617.8
-------- -------- --------- ---------
Operating income - pro forma 462.7 408.9 1,274.0 1,039.0
-------- -------- --------- ---------
Interest expense and other, net - as reported (27.3) 74.6 10.2 168.1
Adjusting item:
Gain on disposition of certain investments -- (81.5) (97.6) (171.5)
-------- -------- --------- ---------
Interest expense and other, net - pro forma (27.3) (6.9) (87.4) (3.4)
-------- -------- --------- ---------
Income before income taxes - pro forma 435.4 402.0 1,186.6 1,035.6
Provision for income taxes - pro forma 156.7 144.7 427.2 372.8
-------- -------- --------- ---------
Net income - pro forma $ 278.7 $ 257.3 $ 759.4 $ 662.8
======== ======== ========= =========
Earnings per share - pro forma
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Basic $ 0.60 $ 0.52 $ 1.63 $ 1.35
======== ======== ========= =========
Diluted $ 0.59 $ 0.51 $ 1.59 $ 1.32
======== ======== ========= =========
</TABLE>
Liquidity and Capital Resources
At September 30, 2000, we held cash and cash equivalents of $317.7 million,
had working capital of $1.9 billion, and had a current ratio of 1.5-to-1. This
compares to cash and cash equivalents of $537.2 million, $881.7 million in
working capital, and a current ratio of 1.2-to-1 at December 31, 1999.
Total debt of $2.9 billion remained constant at September 30, 2000 when
compared with December 31, 1999. Total debt consists of notes payable,
commercial paper and redeemable preferred stock of subsidiaries. The total
debt-to-capital ratio (which includes total debt and minority interests as
components of capital) declined to 36% at September 30, 2000 when compared with
38% at December 31, 1999. At both September 30, 2000, and December 31, 1999, we
had committed lines of credit of approximately $1.3 billion, all unused, which
serve as a backup facility for commercial paper borrowings.
Cash flows provided by operating activities decreased $130.3 million during
the nine months ended September 30, 2000, to $913.7 million from $1.0 billion in
the corresponding period in the prior year. This decrease was primarily due to
changes in working capital items, partially offset by an increase in net income.
Cash used in investing activities during the nine months ended September 30,
2000 decreased $826.6 million, to $769.8 million, due primarily to a decrease in
payments related to acquisitions partially offset by a decrease in proceeds from
investments and other assets. Cash used in investing activities during the
corresponding period in the prior year included the acquisition of Systemhouse
for approximately $1.6 billion. Cash flows used in financing activities
increased $542.4 million during the nine months ended September 30, 2000, to
$301.7 million, compared with cash provided by financing activities of $240.7
million during the corresponding period of 1999, due primarily to a decrease in
net borrowings on long-term debt, partially offset by a decrease in the purchase
of treasury stock. For the nine months ended September 30, 2000 and 1999, EDS
paid cash dividends totaling $209.8 million and $221.5 million, respectively.
Recent Acquisition
On October 23, 2000, our Unigraphics Solutions Inc. subsidiary completed the
acquisition of all outstanding shares of common stock of Engineering Animation,
Inc., or EAI, at a net price of $13.75 per share. EAI develops and produces
Internet-enabled visual process management, collaboration, communication and
analysis software solutions and related services for extended manufacturing
enterprises. We estimate that the total amount of funds required to consummate
the acquisition and to pay related fees and expenses will be approximately $209
million and will be funded through existing general corporate facilities. We
expect that a portion of the EAI purchase price will be allocated to in-process
research and development, or R&D, and expensed in the fourth quarter. Amounts
allocated to in-process R&D will be based upon an independent, third-party
appraisal.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 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, as amended by SFAS 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133, and SFAS 138, Accounting for Certain Derivatives
Instruments and Certain Hedging Activities, require that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. If the Company adopted these accounting standards on October 1,
2000, adoption would result in a one-time increase in net income of
approximately $175 million, primarily related to the reclassification of certain
equity securities into the trading portfolio. The adoption would also impact
assets and liabilities recorded on the balance sheet. The provisions of this
statement are effective for the Company as of January 1, 2001. The impact of
adopting this statement on January 1, 2001, will not be determinable until
December 31, 2000.
14
<PAGE>
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This interpretation clarifies the application of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and is effective July 1, 2000.
The adoption of this interpretation did not have a material effect on our
results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This bulletin summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B that delayed the implementation date
of SAB No. 101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. We do not expect our adoption of the provisions of this
bulletin as of October 1, 2000, to have a material effect on our results of
operations or financial position.
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, 2000, EDS filed the following
Current Report on Form 8-K:
(i) Current Report on Form 8-K dated September 5, 2000 reporting a press
release under Item 5 - Other Events and Item 7 - Exhibits.
15
<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 13, 2000 By: /s/ James E. Daley
-------------------------------
James E. Daley
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 13, 2000 By: /s/ John Adams
-------------------------------
John Adams
Vice President and Controller
(Principal Accounting Officer)
16
