ELECTRONIC DATA SYSTEMS CORP /DE/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

Commission File No. 01-11779

ELECTRONIC DATA SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation)		75-2548221 (I.R.S. Employer Identification No.)
5400 Legacy Drive, Plano Texas (Address of principal executive offices)		75024-3199 (ZIP code)

(972) 604-6000

(Registrant's telephone number)

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 .

Indicate by check mark whether the registrant is an accelerated filer. Yes X No .

As of April 30, 2005, there were 518,876,231 outstanding shares of the registrant's Common Stock, $.01 par value per share.

INDEX

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Part I -

Financial Information (Unaudited)

Item 1.

Financial Statements

	Unaudited Condensed Consolidated Statements of Operations	3
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results

of Operations

Item 4.

Controls and Procedures

Part II -

Other Information

Item 1.

Legal Proceedings

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 6.	Exhibits	26

Signatures

PART I

ITEM 1. FINANCIAL STATEMENTS

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

	Three Months Ended
	March 31,
	2005	2004

Revenues...............................................................................................................................................................	$ 4,940	$ 5,196

Costs and expenses
Cost of revenues..........................................................................................................................................	4,481	4,779
Selling, general and administrative............................................................................................................	455	390
Restructuring and other..............................................................................................................................	(4)	(8)
Total costs and expenses...................................................................................................................	4,932	5,161

Operating income.................................................................................................................................	8	35

Interest expense...................................................................................................................................................	(63)	(81)
Interest income and other, net...........................................................................................................................	57	7
Other income (expense).......................................................................................................................	(6)	(74)

Income (loss) from continuing operations before income taxes...................................................	2	(39)

Provision (benefit) for income taxes..................................................................................................................	-	(1)
Income (loss) from continuing operations.......................................................................................	2	(38)
Income from discontinued operations, net of income taxes..........................................................	2	26
Net income (loss).................................................................................................................................	$ 4	$ (12)

Basic earnings per share of common stock
Income (loss) from continuing operations.......................................................................................	$ -	$ (0.07)
Income from discontinued operations..............................................................................................	0.01	0.05
Net income (loss).................................................................................................................................	$ 0.01	$ (0.02)
Diluted earnings per share of common stock
Income (loss) from continuing operations.......................................................................................	$ -	$ (0.07)
Income from discontinued operations..............................................................................................	0.01	0.05
Net income (loss).................................................................................................................................	$ 0.01	$ (0.02)

Cash dividends per share...................................................................................................................................	$ 0.05	$ 0.15

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)

	March 31,	December 31,
	2005	2004
ASSETS
Current assets
Cash and cash equivalents.............................................................................................................................	$ 1,655	$ 2,102
Marketable securities......................................................................................................................................	1,407	1,490
Accounts receivable, net................................................................................................................................	3,307	3,360
Prepaids and other...........................................................................................................................................	995	925
Deferred income taxes.....................................................................................................................................	607	602
Total current assets.....................................................................................................................................	7,971	8,479

Property and equipment, net..............................................................................................................................	2,171	2,216
Deferred contract costs, net...............................................................................................................................	681	708
Investments and other assets............................................................................................................................	828	914
Goodwill.................................................................................................................................................................	3,961	3,657
Other intangible assets, net................................................................................................................................	881	904
Deferred income taxes.........................................................................................................................................	972	866
Total assets...............................................................................................................................................	$ 17,465	$ 17,744

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................................................................................................	$ 547	$ 534
Accrued liabilities............................................................................................................................................	2,675	2,944
Deferred revenue..............................................................................................................................................	1,059	1,062
Income taxes.....................................................................................................................................................	60	58
Current portion of long-term debt and secured A/R facility.....................................................................	656	658
Total current liabilities.................................................................................................................................	4,997	5,256

Pension benefit liability.......................................................................................................................................	1,184	1,157
Long-term debt, less current portion................................................................................................................	3,110	3,168
Minority interests and other long-term liabilities............................................................................................	798	723
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; 522,748,596 shares issued at March 31, 2005 and December 31, 2004.................................................................................................................	5	5
Additional paid-in capital...............................................................................................................................	2,458	2,433
Retained earnings............................................................................................................................................	5,391	5,492
Accumulated other comprehensive loss......................................................................................................	(176)	(59)
Treasury stock, at cost, 5,503,193 and 7,443,650 shares at March 31, 2005 at December 31, 2004, respectively...................................................................................................................................................	(302)	(431)
Total shareholders' equity.........................................................................................................................	7,376	7,440
Total liabilities and shareholders' equity.............................................................................................	$ 17,465	$ 17,744

See accompanying notes to unaudited condensed consolidated financial statements.

ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	Three Months Ended
	March 31,
	2005	2004
Cash Flows from Operating Activities
Net income (loss).........................................................................................................................................	$ 4	$ (12)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization and deferred cost charges................................................................	356	532
Deferred and stock-based compensation.............................................................................................	59	12
Intangible and fixed asset write-downs................................................................................................	2	35
Other..........................................................................................................................................................	(8)	(42)
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable............................................................................................................................	(14)	138
Prepaids and other...............................................................................................................................	(110)	(10)
Deferred contract costs.......................................................................................................................	(25)	(26)
Accounts payable and accrued liabilities........................................................................................	(136)	(438)
Deferred revenue..................................................................................................................................	21	48
Income taxes.........................................................................................................................................	(106)	(12)
Total adjustments............................................................................................................................	39	237
Net cash provided by operating activities...............................................................................................	43	225

Cash Flows from Investing Activities
Proceeds from sales of marketable securities..........................................................................................	403	12
Proceeds from investments and other assets..........................................................................................	101	32
Proceeds related to divested assets and non-marketable equity investments...................................	1	85
Payments for purchases of property and equipment.............................................................................	(146)	(182)
Payments for investments and other assets............................................................................................	(13)	(99)
Acquisitions, net of cash acquired, and non-marketable equity investments...................................	(417)	(50)
Purchases of software and other intangibles..........................................................................................	(39)	(103)
Purchases of marketable securities...........................................................................................................	(323)	(43)
Other..............................................................................................................................................................	7	6
Net cash used in investing activities........................................................................................................	(426)	(342)

Cash Flows from Financing Activities
Proceeds from long-term debt and secured A/R facility........................................................................	-	6
Payments on long-term debt and secured A/R facility..........................................................................	-	(6)
Capital lease payments................................................................................................................................	(35)	(45)
Employee stock transactions.....................................................................................................................	14	16
Dividends paid.............................................................................................................................................	(26)	(73)
Other..............................................................................................................................................................	-	(7)
Net cash used in financing activities........................................................................................................	(47)	(109)
Effect of exchange rate changes on cash and cash equivalents..................................................................	(17)	11
Net decrease in cash and cash equivalents.....................................................................................................	(447)	(215)
Cash and cash equivalents at beginning of period........................................................................................	2,102	2,197
Cash and cash equivalents at end of period....................................................................................................	$ 1,655	$ 1,982

See accompanying notes to unaudited condensed consolidated financial statements.

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 United States generally accepted accounting principles ("GAAP") for interim financial information. In the opinion of management, all material 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 2004 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 it does not control, but in which it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Under such method, the Company recognizes its share of the subsidiaries' income (loss) in other income (expense). If EDS is the primary beneficiary of variable interest entities, the unaudited condensed consolidated financial statements include the accounts of such entities. No variable interest entities were consolidated during the periods presented.

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are used include, but are not limited to, cost estimation for construction elements associated with client contracts, projected cash flows associated with recoverability of non-current assets, liabilities associated with pensions and performance guarantees, loss accruals for litigation, receivables collectibility and the likelihood of vesting of performance-based stock compensation.

Certain reclassifications have been made to the 2004 unaudited condensed consolidated financial statements to conform to the 2005 presentation.

NOTE 2: ACCOUNTING CHANGES

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as of January 1, 2005, using the modified prospective application method. This statement requires the recognition of compensation expense when an entity obtains employee services in stock-based payment transactions. This change in accounting resulted in the recognition of compensation expense of $53 million ($36 million net of tax, or $0.07 per share), for the three months ended March 31, 2005. Compensation expense presented in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2005 includes $37 million in cost of revenues, and $16 million in selling, general and administrative.

Prior to January 1, 2005, the Company recognized compensation cost associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB 25, the difference between the quoted market price as of the date of the grant and the contractual purchase price of shares was charged to operations over the vesting period on a straight-line basis. No compensation cost was recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant and shares acquired by employees under the EDS Stock Purchase Plan or Nonqualified Stock Purchase Plan.

Pro forma net loss and earnings per share disclosures as if the Company recorded compensation expense based on fair value for stock-based awards have been presented in accordance with the provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and are as follows for the three months ended March 31, 2004 (in millions, except per share amounts):

	2004
Net loss:
As reported...........................................................................................................................................................	$ (12)
Stock-based employee compensation cost included in reported net loss, net of related tax effects of $4 million............................................................................................................................................................	8
Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects of $21 million......................................................................................	(40)
Pro forma...............................................................................................................................................................	$ (44)

Basic earnings per share of common stock:
As reported...........................................................................................................................................................	$ (0.02)
Pro forma...............................................................................................................................................................	(0.09)
Diluted earnings per share of common stock:
As reported...........................................................................................................................................................	$ (0.02)
Pro forma...............................................................................................................................................................