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, 2002

                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
(Exact name of registrant as specified in its charter)

 

 (972) 604-6000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [ ].

 As of October 31, 2002, there were 476,395,581 outstanding shares of the registrant's Common Stock, $.01 par value per share.

 

 

---

 

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

 

INDEX

  

                                                                                                                                                                    &nb sp;                                       Page No.

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	17
Item 4.	Controls and Procedures	30
Part II - Other Information
Item 1.	Legal Proceedings	31
Item 6.	Exhibits and Reports on Form 8-K	31
Signatures		32
Certification of Chairman and Chief Executive Officer		33
Certification of Chief Financial Officer		34

 

 

2

---

 

PART I 

ITEM 1.    FINANCIAL STATEMENTS 

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)

 

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2002	2001	2002	2001
Revenues	$     5,406	$       5,559	$   16,221	$     15,637
Costs and expenses
Cost of revenues	4,638	4,471	13,408	12,705
Selling, general and administrative	488	468	1,393	1,378
Acquired in-process R&D and other acquisition     related costs	--	141	--	141
Other charges	35	--	35	--
Total costs and expenses	5,161	5,080	14,836	14,224
Operating income	245	479	1,385	1,413
Other income (expense)
Interest expense and other, net	(115)	(102)	(241)	(155)
Reclassification of investment gain from equity	--	--	--	315
Total other income (expense)	(115)	(102)	(241)	160
Income before income taxes and cumulative    effect of a change in accounting principle	130	377	1,144	1,573
Provision for income taxes	44	165	389	591
Income before cumulative effect of a change in    accounting principle	86	212	755	982
Cumulative effect on prior years of a change in    accounting for derivatives, net of income taxes	--	--	--	(24)
Net income	$          86	$          212	$        755	$          958
Basic earnings per share of common stock
Income before cumulative effect of a change in     accounting principle	$      0.18	$        0.45	$      1.57	$        2.10
Cumulative effect on prior years of a change in     accounting for derivatives	--	--	--	(0.05)
Net income	$      0.18	$        0.45	$      1.57	$        2.05
Diluted earnings per share of common stock
Income before cumulative effect of a change in     accounting principle	$      0.18	$        0.44	$      1.54	$        2.04
Cumulative effect on prior years of a change in     accounting for derivatives	--	--	--	(0.05)
Net income	$      0.18	$        0.44	$      1.54	$        1.99
Cash dividends per share	$      0.15	$        0.15	$      0.45	$        0.45

See accompanying notes to unaudited condensed consolidated financial statements.

 

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)

  

	September 30,	December 31,
	2002	2001
ASSETS
Current assets
Cash and cash equivalents	$        343	$          521
Marketable securities	271	318
Accounts receivable and unbilled revenue, net	6,426	5,642
Prepaids and other	1,062	893
Total current assets	8,102	7,374
Property and equipment, net	3,188	3,082
Investments and other assets	954	911
Goodwill	4,036	3,692
Intangible assets, net	1,417	1,294
Total assets	$   17,697	$     16,353
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities	$     3,663	$       3,623
Deferred revenue	681	488
Income taxes	426	220
Current portion of long-term debt	50	36
Total current liabilities	4,820	4,367
Deferred income taxes	163	204
Long-term debt, less current portion	5,141	4,692
Redeemable preferred stock of subsidiaries, minority interests and other long-term       liabilities	567	644
Commitments and contingencies
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; 495,604,217      shares issued at September 30, 2002; 495,593,044 shares issued at December 31,      2001	5	5
Additional paid-in capital	918	962
Retained earnings	7,662	7,122
Accumulated other comprehensive income	(391)	(560)
Treasury stock, at cost, 19,523,065 and 18,277,672 shares at September 30, 2002     and December 31, 2001, respectively	(1,188)	(1,083)
Total shareholders' equity	7,006	6,446
Total liabilities and shareholders' equity	$   17,697	$     16,353

See accompanying notes to unaudited condensed consolidated financial statements.

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 

	Nine Months Ended
	September 30,
	2002	2001
Cash Flows from Operating Activities
Net income	$        755	$          958
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,059	1,104
Deferred compensation	41	76
Asset write-downs, including acquired in-process R&D	35	91
Other.	53	(330)
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable and unbilled revenue	(717)	(631)
Prepaids and other	(234)	145
Accounts payable and accrued liabilities	(153)	(470)
Deferred revenue	150	(103)
Income taxes	205	114
Total adjustments	439	(4)
Net cash provided by operating activities	1,194	954
Cash Flows from Investing Activities
Proceeds from sales of marketable securities	38	57
Proceeds from investments and other assets	59	150
Proceeds from divestitures	--	26
Payments for purchases of property and equipment	(790)	(956)
Payments for investments and other assets	(120)	(160)
Payments for acquisitions, net of cash acquired	(107)	(1,850)
Payments for purchases of software and other intangibles	(255)	(235)
Payments for purchases of marketable securities	(12)	(47)
Other	63	(9)
Net cash used in investing activities	(1,124)	(3,024)
Cash Flows from Financing Activities
Proceeds from long-term debt	24	2,294
Payments on long-term debt	(133)	(248)
Net increase in borrowings with original maturities less than 90 days	385	82
Payments for redeemable stock of subsidiary	--	(163)
Purchase of treasury stock	(380)	--
Employee stock transactions	83	211
Dividends paid	(215)	(211)
Other	(17)	8
Net cash provided by (used in) financing activities	(253)	1,973
Effect of exchange rate changes on cash and cash equivalents	5	(62)
Net decrease in cash and cash equivalents	(178)	(159)
Cash and cash equivalents at beginning of period	521	393
Cash and cash equivalents at end of period	$        343	$          234

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5

---

 

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. The information contained herein should be read in conjunction with the Company's 2001 Annual Report on Form 10‑K. 
 

The unaudited condensed consolidated financial statements include the accounts of EDS and its controlled subsidiaries. The Company defines control as a non-shared, non-temporary ability to make decisions that enable it to guide the ongoing activities of a subsidiary and the ability to use that power to increase the benefits or limit the losses from the activities of that subsidiary. Subsidiaries in which other shareholders effectively participate in significant operating decisions through voting or contractual rights are not considered controlled subsidiaries. The Company's investments in entities which it does not control, but has the ability to exercise significant influence over their operating and financial policies, are accounted for under the equity method. 

Certain reclassifications have been made to the 2001 unaudited condensed consolidated financial statements to conform to the 2002 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):
 

Securities that were outstanding but were not included in the computation of diluted earnings per share because their effect was antidilutive include options and contracts to purchase 75 million and 8 million shares of common stock for the three months ended September 30, 2002 and 2001, respectively, 75 million and 9 million shares of common stock for the nine months ended September 30, 2002 and 2001, respectively, and debt and related forward purchase contracts convertible into 33 million shares of common stock for the three months and nine months ended September 30, 2002.

 NOTE 3: REVENUE RECOGNITION

The Company provides services under time-and-material, unit-price and fixed-price contracts, which generally extend up to 10 years. Under time-and-material and certain unit-price and fixed-price contracts under which costs are generally incurred in proportion with contracted billing schedules, revenue is recognized when the customer may be billed. For other unit-price and fixed-price contracts, revenue is recognized on the percentage-of-completion method, based on the percentage which incurred contract costs to date bear to total estimated contract costs after giving effect to the most recent estimates of total cost. Risks relating to service delivery, usage, productivity and other factors are considered in the estimation process. If sufficient risk exists, a zero-profit methodology is applied to a specific client contract's percentage-of-completion model whereby the amount of revenue recognized is limited to the amount of costs incurred until such time as the risks have been partially or wholly mitigated through performance. The effect of changes to total estimated contract revenue and costs, including changes resulting from the cessation of the use of the zero-profit methodology, is recognized in the period such changes are determined. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes apparent and, therefore, could have a significant impact on the Company's earnings during such period. The Company recognizes allowances for doubtful accounts when circumstances indicate an account receivable will not be paid by a customer due to customer liquidity or other issues.

 

6

---

 

Unbilled revenue of $2.9 billion and $1.8 billion at September 30, 2002 and December 31, 2001, respectively, represents costs and related profits in excess of billings on certain unit-price and fixed-price contracts. Unbilled revenue was not billable at the balance sheet dates but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. Of the $2.9 billion unbilled revenue balance outstanding at September 30, 2002, all but approximately $490 million is expected to be billed within one year. A specific client's aggregate unbilled revenue balance may not decrease when future billings are rendered because additional costs and related profits in excess of billings may also be incurred in the future in accordance with the contractual agreements. At September 30, 2002, unbilled revenue relating to contracts with U.S. Federal, state and international government clients totaled $1.7 billion. 

During the three and nine months ended September 30, 2002, the Company recognized provisions for bad debt of $105 million and $197 million, respectively, in connection with the bankruptcy filings of WorldCom, Inc. and US Airways, Inc. (see Note 11). 

NOTE 4: PROPERTY AND EQUIPMENT 

Property and equipment is stated net of accumulated depreciation of $4.9 billion and $4.6 billion at September 30, 2002 and December 31, 2001, respectively. Depreciation expense for the nine months ended September 30, 2002 and 2001 was $726 million and $724 million, respectively.

 NOTE 5: INVESTMENTS AND OTHER ASSETS

 Investments in marketable and non-marketable equity securities are monitored for impairment and written down to fair value with a charge to earnings if a decline in fair value is judged to be other than temporary. The fair values of equity securities are determined based on quoted market prices.  If quoted market prices are not available, fair values are estimated based on an evaluation of numerous indicators including, but not limited to, offering prices of recent issuances of the same or similar equity instruments, quoted market prices for similar companies and comparisons of recent financial information, operating plans, budgets, market studies and customer information to the information used to support the initial valuation of the investment. The Company considers several factors to determine whether a decline in the fair value of an equity security is other than temporary, including the length of time and the extent to which the fair value has been less than carrying value, the financial condition of the investee and the intent and ability of the Company to retain the investment for a period of time sufficient to allow a recovery in value. The carrying value of investments in non-marketable equity securities accounted for under the cost method of accounting totaled $47 million at September 30, 2002.

 The Company holds interests in various equipment financing leases accounted for as leveraged leases with a net investment balance totaling $119 million at September 30, 2002. The Company also has an equity interest totaling $187 million at September 30, 2002 in a partnership which holds leveraged aircraft lease investments, approximately 90% of which are with U.S. carriers, including approximately 20% with United Airlines.  The Company accounts for its interest in the partnership under the equity method. Due to uncertainties regarding the recoverability of the partnership's leveraged lease investments with US Airways, the Company recorded a $35 million writedown to its investment in the partnership during the three months ended September 30, 2002. In addition, the Company recognized equity investment impairment losses totaling $26 million during the three months and nine months ended September 30, 2002, and $28 million during the three months and nine months ended September 30, 2001. These amounts are reflected in other income (expense) in the Company's unaudited condensed consolidated statements of income.

 

7

---

 

NOTE 6: GOODWILL AND INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company fully adopted the provisions of SFAS No. 142 effective January 1, 2002.

 Under SFAS No. 142, the Company was required to perform transitional impairment tests for its goodwill and certain intangible assets as of the date of adoption. The Company completed the required transitional impairment tests during the six months ended June 30, 2002. No impairment losses were identified as a result of these tests.

 The following is a summary of net income and earnings per share for the three months and nine months ended September 30, 2001, as adjusted to remove the amortization of goodwill and intangible assets with indefinite useful lives (in millions, except per share amounts):

 

The Company changed its segment reporting during 2002 to conform to a new organizational structure (see Note 9). The following is a summary of changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2002 (in millions):