EDS Reports Third Quarter 2003 Results
Company Continues Push to Improve Cost Competitiveness; Creates New Business
Reporting Segments to Provide Further Clarity on Its Financial Performance
PLANO, Texas, Oct. 30 -- EDS (NYSE: EDS) todayannounced a third quarter net
loss of $0.6 million, essentially break-even ona per share basis, reflecting the
adoption of new accounting rule EITF 00-21.Excluding a gain of 16 cents per
share on the July sale of the EDS CreditUnion Industry Group and 21 cents per
share in restructuring charges relatedto productivity initiatives, net income in
the quarter was $26 million, or 5 cents per share.
EDS' pro forma earnings of 5 cents per share equate to an estimated
32 cents per share on a pre-EITF 00-21 basis, in line with analyst
estimates(1).
Third quarter revenue rose 6 percent to $5.24 billion (up 3 percent on an
organic basis, which excludes the impact of currency fluctuations and
divestitures) versus the same 2002 quarter. EDS' third quarter base (non-GM)
revenue rose 7 percent to $4.70 billion (up 4 percent on an organic basis)
versus the same period a year ago. GM revenue decreased 7 percent versus the
year-ago quarter to $546 million (down 9 percent in constant currency),
reflecting GM's continued push to reduce discretionary spending. Year-ago
revenue comparisons are on an EITF 00-21 adjusted basis.
In last year's third quarter, EDS posted net income of $86 million, or
18 cents per share, and revenue of $5.33 billion, under its previous revenue
recognition policy where certain contracts used percentage-of-completion (POC)
accounting. Excluding discontinued operations, 2002 third quarter net income
was $103 million, or 21 cents per share -- which equates to a loss of 18 cents
per share on a post-EITF 00-21 basis.
EDS signed $3.4 billion in contracts in the third quarter, versus
$3.0 billion a year ago, driven by activity in the government and
manufacturing sectors. Signings in the first three quarters of 2003 were
$9.7 billion, compared with $16.4 billion in the comparable 2002 period,
reflecting EDS' narrower focus on qualified sales pursuits.
"We continue to implement our comprehensive transformation plan, covering
all aspects of the business," said EDS Chairman and CEO Mike Jordan. "As a
result, we are much better positioned to compete effectively for business in
our pipeline. We also have streamlined our sales process, focusing the
company's resources on its most strategic contract opportunities, where we are
seeing an improved win rate."
Jordan noted, also, that EDS is working to expand its capabilities in
high-growth areas, such as business process outsourcing, and to further
improve its cost position.
EDS posted negative free cash flow of $303 million, versus free cash flow
of $110 million in the same year-ago period (see Note B to the Summary of
Unaudited Consolidated Cash Flows), reflecting a $227 million accelerated
prepayment in July 2003 under a software subscription agreement.
EDS strengthened its liquidity in the quarter, ending September with
$2.6 billion in unrestricted cash and marketable securities, excluding
$1 billion in committed credit lines. EDS recently completed the
renegotiation of its bank lines, which have no outstanding balances; increased
availability under its Navy Marine Corps Intranet financing facility from
$600 million to $900 million; and announced its intention to sell a minority
stake in its PLM Solutions business.
"We remain on track to meet our guidance for the second half of the year,
including estimated pro forma earnings of about 70 cents per share on a POC
basis -- or 17 cents per share on an EITF 00-21 basis(1)," said Bob Swan,
executive vice president and CFO. "On the productivity front, we're reducing
SG&A costs, implementing common practices across our European data center
operations and eliminating redundancies. Our implementation of the accounting
change -- and more disclosure on results by geography and product line -- will
help investors more fully understand our performance and track how
successfully we execute our plan."
Pre-tax restructuring charges in the quarter totaled $159 million,
reflecting ongoing consolidation of operations and work force reductions.
EDS, which had 135,000 employees as of Sept. 30, currently has plans to reduce
its work force by 5,200 employees, or 4 percent of total employees, by year-
end 2004. (The reduction of 5,200 employees includes the planned reduction of
2,700 employees announced in June and is covered by the previously announced
$425 million of estimated pre-tax restructuring charges to be recognized
through the first half of 2004.) EDS' restructuring efforts are now expected
to generate annual savings of $330 million to $360 million, up $100 million
from prior expectations.
Third Quarter Results by Geography and Product Line
To enhance financial disclosure, EDS will now report revenue and operating
income for its core IT business (information technology outsourcing and
consulting, business process outsourcing and applications development) in four
primary areas: Americas, EMEA (Europe, Middle East and Africa), Asia and U.S.
Government.
Third quarter revenue in the Americas was $2.28 billion, down 3 percent
from the same period last year, reflecting lower GM revenue, the sale of the
credit union business and renegotiated contracts. EMEA revenue was
$1.42 billion, up 4 percent from the same period last year, due to higher
contract signings in the financial sector. Asia revenue was $246 million,
down 10 percent from the 2002 third quarter, while U.S. Government revenue was
$790 million, up 39 percent from the same period last year. All comparisons
are in constant currency and exclude divested operations. Year-ago revenue
comparisons are on an EITF 00-21 adjusted basis.
In the just-completed quarter, A.T. Kearney revenue declined 26 percent
(constant currency) to $192 million from a year ago on an EITF 00-21 adjusted
basis, reflecting continued softness in high-value management consulting. PLM
Solutions revenue rose 8 percent from a year ago to $212 million, reflecting
higher sales of software, maintenance and services.
Product line breakdown: EDS also has started to report results by its
major product lines. Information technology outsourcing (ITO) accounted for
approximately 56 percent of EDS' third quarter revenue. Applications
development accounted for 20 percent, and business process outsourcing
accounted for 13 percent, while IT consulting generated 3 percent of total
revenue in the quarter. PLM Solutions and A.T. Kearney each accounted for
4 percent of the total.
Conference Call
EDS' securities analysts conference call will be broadcast live on the
Internet today at 4 p.m. Central time (5 p.m. Eastern). To access the call
and view related financial information, go to www.eds.com/call . Interested
parties will need Windows MediaPlayer or Real Player to listen to the call.
For those unable to listen during the live Web cast, the call will be archived
for 30 days at www.eds.com/call .
Note: Revised income statements for the first and second quarters of 2003
and pro forma income statements for 2002 and 2001 reflecting EITF 00-21
adjustments are available online at www.eds.com/proforma .
About EDS
EDS, the premier global outsourcing services company, delivers superior
returns to clients through its cost-effective, high-value services model.
EDS' core portfolio comprises information-technology and business process
outsourcing services, as well as information-technology transformation
services. EDS' two complementary, subsidiary businesses are A.T. Kearney, one
of the world's leading high-value management consultancies, and PLM Solutions,
a leader in product data management, collaboration and product design
software. With 2002 revenue of $21.5 billion, EDS is ranked 80th on the
Fortune 500. The company's stock is traded on the New York and London stock
exchanges. Learn more at www.eds.com .
The statements in this press release that are not historical statements,
including statements regarding expected earnings, revenue and free cash flow,
the impact of accounting rules, and the value of new business signed, are
forward-looking statements within the meaning of the federal securities laws.
These statements are subject to numerous risks and uncertainties, many of
which are beyond our control, which 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 impact of general economic
and other conditions on the discretionary spend of our existing clients and
our ability to obtain new business; the degree to which third parties continue
to outsource IT and business processes; the performance of current and future
client contracts in accordance with our cost, revenue and cash flow estimates,
including our ability to achieve any operational efficiencies modeled in our
estimates; for contracts with U.S. federal government clients, including our
Navy Marine Corps Intranet contract, the government's ability to cancel the
contract or impose additional terms and conditions due to changes in
government funding, deployment schedules or otherwise; the inability to
provide contract performance guarantees due to the cost or availability of
surety bonds or letters of credit resulting from the general reduction in
capacity of these markets or otherwise; the impact of third-party benchmarking
provisions in certain client contracts; the impact on a historical and
prospective basis of accounting rules and pronouncements; the impact of
litigation and governmental investigations; the success of our strategic
reorganization and cost cutting initiatives and the timing and amount of any
resulting benefits; the impact of acquisitions and divestitures, including our
ability to improve productivity and achieve synergies from acquired
businesses; our ability to attract and retain highly skilled personnel; a
reduction in the carrying value of our assets; the impact of a bankruptcy or
the financial difficulty of a significant client on the financial and other
terms of our agreements with that client; the termination of a significant
client contract, including our contract with GM; with respect to the funding
of our pension plan obligations, the performance of our investments relative
to our assumed rate of return; changes in tax laws and interpretations and
failure to obtain treaty relief from double taxation; failure to obtain or
protect intellectual property rights; and fluctuations in foreign currency and
exchange rates. We disclaim any intention or obligation to update or revise
any forward-looking statements whether as a result of new information, future
events or otherwise, except as may be required by law.
(1) Estimates of earnings under previous accounting rules were prepared
using POC accounting models used to report operating results through
June 30, 2003, as adjusted for current events affecting the
respective contract. However, since EDS' accounting records for the
third quarter of 2003 were prepared under EITF 00-21, such adjusted
POC models were not subject to EDS' POC accounting controls and
procedures in place in previous periods. Accordingly, the pre-EITF
earnings per share presented above is an estimate. Pro forma
earnings estimates exclude restructuring charges and divestiture
gains.
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
SUMMARY OF UNAUDITED RESULTS OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 (E) 2002
Revenues (A) $5,239 $5,334 $15,796 $15,994
Costs and expenses
Cost of revenues (B) 4,691 4,576 13,960 13,214
Selling, general and
administrative 452 488 1,382 1,393
Restructuring and other (C) 20 --- 111 ---
Total costs and expenses 5,163 5,064 15,453 14,607
Operating income 76 270 343 1,387
Other income (expense) (57) (114) (187) (239)
Income from continuing
operations before
income taxes 19 156 156 1,148
Provision for income taxes 20 53 66 390
Income (loss) from continuing
operations (1) 103 90 758
Income (loss) from discontinued
operations, net of income
taxes (D) --- (17) (2) (3)
Income (loss) before cumulative
effect of changes in accounting
principles (1) 86 88 755
Cumulative effect on prior years
of changes in accounting
principles, net of income
taxes (E) --- --- (1,432) ---
Net income (loss) $(1) $86 $(1,344) $755
Basic earnings per share
of common stock (F)
Income from continuing
operations $--- $0.21 $0.19 $1.58
Income (loss) from
discontinued operations --- (0.03) --- (0.01)
Cumulative effect on prior
years of changes in
accounting principles --- --- (3.00) ---
Net income (loss) $--- $0.18 $(2.81) $1.57
Diluted earnings per share
of common stock (F)
Income from continuing
operations $--- $0.21 $0.18 $1.55
Income (loss) from
discontinued operations --- (0.03) --- (0.01)
Cumulative effect on prior
years of changes in
accounting principles --- --- (2.94) ---
Net income (loss) $--- $0.18 $(2.76) $1.54
Weighted average number
of shares outstanding
Basic 479 480 478 480
Diluted 479 488 487 490
Cash dividends per share $0.15 $0.15 $0.45 $0.45
Refer to the following accompanying notes to the summary of results of
operations.
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO THE SUMMARY OF UNAUDITED RESULTS OF OPERATIONS
(A) Revenues from base (non-GM) clients were $4,693 million and $4,749
million for the three months ended September 30, 2003 and 2002,
respectively. Revenues from GM were $546 million and $585 million
for the three months ended September 30, 2003 and 2002,
respectively. Revenues from base clients were $14,102 million and
$14,061 million for the nine months ended September 30, 2003 and
2002, respectively. Revenues from GM were $1,694 million and $1,933
million for the nine months ended September 30, 2003 and 2002,
respectively.
(B) Cost of revenues for the three months ended September 30, 2002
include charges totaling $105 million related to the Company's
contracts with MCI and U.S. Airways, both of which filed for
bankruptcy in the third quarter of 2002. Cost of revenues for the
nine months ended September 30, 2002 include charges totaling
$206 million related to the MCI and U.S. Airways bankruptcies. Cost
of revenues for the nine months ended September 30, 2003 include a
$98 million credit, recognized in the second quarter, reversing a
portion of charges taken in 2002 related to the MCI bankruptcy.
(C) Restructuring and other for the three months ended September 30,
2003 relates to the Company's 2003 initiative to reduce its costs,
streamline its organizational structure and exit certain operating
activities. Amounts recognized in the third quarter consist of
involuntary employee termination charges of $159 million, offset by
a $139 million gain related to the sale of the Credit Union Industry
Group. Restructuring and other for the nine months ended September
30, 2003 also includes asset write-downs of $36 million and
executive severance charges of $7 million recognized in the second
quarter and a $48 million one-time severance charge related to the
Company's former Chairman and Chief Executive Officer recognized in
the first quarter.
(D) Discontinued operations represents the net results of the Consumer
Network Services unit sold during 2002 and the subscription
fulfillment business sold during the second quarter of 2003.
(E) During the third quarter of 2003, the Company changed its accounting
for multiple-element service contracts as a result of its adoption
of the provisions of Emerging Issues Task Force ("EITF") 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, on a
cumulative basis as of January 1, 2003. Generally, revenue is now
recognized as it is billed, unless it is contingent on the provision
of future service or otherwise earned over future periods, and costs
incurred to construct IT systems for the client are deferred and
amortized over the contract's term. The cumulative effect of this
accounting change on years prior to 2003 was a charge of
$2.24 billion ($1.42 billion after tax) reflected in the first
quarter of 2003. Results for the first two quarters of 2003 have
been adjusted to reflect the retroactive adoption of the new
accounting standard in those periods. During the first quarter of
2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, Accounting for Asset Retirement
Obligations. The cumulative effect of SFAS No. 143 on years prior
to 2003 was a charge of $25 million ($17 million after tax)
reflected in the first quarter of 2003.
(F) Basic and diluted earnings per share of common stock were $0.05 for
the three months ended September 30, 2003 after excluding
restructuring and other and the gain related to the sale of the
Credit Union Industry Group (see Note C).
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
SUMMARY OF UNAUDITED Consolidated Balance Sheets
(in millions)
September 30, December 31,
2003 2002
ASSETS
Current assets
Cash and cash equivalents $2,573 $1,642
Marketable securities 426 248
Accounts receivable and unbilled
revenue, net 3,230 6,435
Prepaids and other 1,078 1,060
Deferred income taxes 275 ---
Total current assets 7,582 9,385
Property and equipment, net 2,891 3,023
Deferred contract costs, net 1,321 ---
Investments and other assets 935 986
Goodwill 4,300 4,077
Other intangible assets, net 1,585 1,409
Deferred income taxes 464 ---
Total assets $19,078 $18,880
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $456 $710
Accrued liabilities 3,257 2,964
Deferred revenue 1,129 830
Income taxes 14 386
Current portion of long-term and
secured revolving debt 2,742 1,239
Total current liabilities 7,598 6,129
Deferred income taxes --- 51
Pension benefit liability 1,200 1,113
Long-term debt, less current portion 4,042 4,148
Minority interests and other
long-term liabilities 443 417
Shareholders' equity 5,795 7,022
Total liabilities and shareholders'
equity $19,078 $18,880
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
SUMMARY OF UNAUDITED Consolidated Cash Flows
(in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Net cash provided by operating
activities (A) $332 $435 $866 $1,194
Cash Flows from Investing Activities
Proceeds from sales of marketable
securities 119 22 148 38
Proceeds from investments and
other assets 101 23 478 59
Proceeds from divested assets 217 --- 224 ---
Payments for purchases of
property and equipment (203) (196) (571) (790)
Payments for investments
and other assets (169) (55) (438) (120)
Payments for acquisitions, net
of cash acquired (5) (82) 11 (107)
Payments for purchases of software
and other intangibles (334) (101) (431) (255)
Payments for purchases of
marketable securities (352) --- (354) (12)
Other 2 12 21 63
Net cash used in investing
activities (624) (377) (912) (1,124)
Cash Flows from Financing Activities
Proceeds from long-term and secured
revolving debt 79 3 1,869 24
Payments on long-term and secured
revolving debt (142) --- (319) (124)
Net increase (decrease) in
borrowings with original
maturities less than 90 days (162) 401 (235) 385
Payments on capital leases (32) (8) (82) (14)
Purchase of treasury shares --- (317) --- (380)
Employee stock transactions 12 9 36 83
Dividends paid (72) (71) (215) (215)
Other (12) (8) (27) (12)
Net cash provided by (used in)
financing activities (329) 9 1,027 (253)
Effect of exchange rate changes
on cash and cash equivalents 6 1 (50) 5
Net increase (decrease) in cash
and cash equivalents (615) 68 931 (178)
Cash and cash equivalents at
beginning of period 3,188 275 1,642 521
Cash and cash equivalents at
end of period $2,573 $343 $2,573 $343
(A) Depreciation and amortization was $479 million and $370 million for
the three months ended September 30, 2003 and 2002, respectively.
Depreciation and amortization was $1,415 million and $1,059 million
for the nine months ended September 30, 2003 and 2002, respectively.
The increase in depreciation and amortization in 2003 is due to the
amortization of deferred contract costs resulting from the Company's
change in accounting for its multiple-element service contracts.
See Note E to the Summary of Unaudited Results of Operations.
(B) EDS defines free cash flow as net cash provided by operating
activities, less capital expenditures. Capital expenditures is the
sum of (i) net cash used in investing activities, excluding proceeds
from sales of marketable securities, proceeds from divested assets,
payments for acquisitions, net of cash acquired, and payments for
purchases of marketable securities, and (ii) payments on capital
leases. It is a non-GAAP measure and should be viewed together with
the Summary of Unaudited Consolidated Cash Flows. Free cash flow
for the three months ended September 30, 2003 and 2002 reflects net
cash provided by operating activities of $332 million and $435
million, respectively, less capital expenditures of $635 million and
$325 million, respectively. The free cash flow forecast for full
year 2003 is approximately $100 million.
CONTACT:
Sean Healy
972-605-1290
shealy@eds.com
SOURCE Electronic Data Systems Corporation
-0- 10/30/2003
/CONTACT: Sean Healy of Electronic Data Systems Corporation,
+1-972-605-1290, or shealy@eds.com /
/FCMN Contact: kathi.killion@eds.com /
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(EDS)
END