EDS Reports 2006 Second Quarter Results
* Pro forma EPS of 20 cents; 26 cents excluding the impact of expensing stock options and performance-based restricted stock units
* As reported EPS of 20 cents
* Revenue of $5.19 billion, up 5 percent on organic basis
* Free cash flow of $362 million
* Contract signings of $5.4 billion, up 103 percent
01 Aug 2006, PLANO, Texas – EDS today reported second quarter net income of $104 million, or 20 cents per share, versus net income of $26 million, or 5 cents per share, in last year’s second quarter.
EDS’ pro forma second quarter net income was $107 million, or 20 cents per share, versus second quarter 2005 pro forma net income of $27 million, or 5 cents per share.
Pro forma second quarter 2006 net income and EPS excludes after-tax losses of $5 million for discontinued operations and a pre-tax reversal of $4 million of previously recognized restructuring expenses (net 0 cents per share).
When further excluding the impact of expensing stock options and performance-based restricted stock units ($43 million pre-tax), pro forma net income was $136 million, or 26 cents per share, versus comparable second quarter 2005 pro forma net income of $54 million, or 10 cents per share.
“EDS continued to drive operational and financial improvements in the second quarter,” said Mike Jordan, EDS chairman and chief executive officer. “Our bottom line benefited from the improved performance of some of our largest accounts, and we expect our margins to continue to expand as we ramp up our productivity and Best Shore initiatives”.
“Our more than $15 billion in first-half contract signings reflected EDS’ best six-month total since 2001. Importantly, this new business was balanced across industries, services lines and geographies and reflects an increasing number of new clients, putting EDS on a path to achieve solid growth,” Jordan said.
EDS signed $5.4 billion in contracts in the second quarter, up 103 percent from $2.6 billion in the year-ago quarter. Significant contracts for the quarter include Kraft Foods Inc., a $1.6 billion new logo, and wins with existing clients Bank of America, $700 million, and the Commonwealth Bank of Australia, $350 million.
EDS also completed the acquisition of a majority stake in MphasiS BFL Limited, a leading applications and business process outsourcing services company based in Bangalore, India.
The acquisition provides EDS with strong complementary capabilities in applications development and business process outsourcing, particularly customer relationship management; enhances the company’s domain expertise in the financial sector; and immediately quadruples the size of EDS’ India workforce to approximately 15,000.
EDS posted second quarter revenue of $5.19 billion, up 5 percent on an organic basis (which excludes the impact of currency fluctuations, acquisitions and divestitures) from $5 billion in the year-ago quarter(1).
Free cash flow was $362 million in the second quarter, an improvement of $244 million versus the year-ago period. (See Note 2 to the Summary of Consolidated Cash Flows for a discussion of free cash flow.)
EDS’ operating margin for the second quarter was 3.0 percent, up from 1.7 percent in the year-ago quarter. Pro forma operating margin was 2.9 percent, up from 1.5 percent in the year-ago quarter. When further excluding the impact of expensing stock options and performance-based restricted stock units, pro forma operating margin was 3.7 percent, compared to 2.4 percent in the year-ago quarter.
The company’s effective tax rate from continuing operations for the second quarter of 2006 was 16 percent. This was primarily due to a $46 million reduction of liabilities for tax contingencies, including the impact of a settlement with the U.S. Internal Revenue Service, partially offset by other items. This resulted in a 3 cent per share favorable impact to the tax rate assumed in the company’s second quarter guidance.
Second Quarter Results by Segment
* Americas: Second quarter revenue was $2.37 billion, up 3 percent compared to the prior-year period. Operating profit was $364 million, up 15 percent from $318 million in the prior-year period, due to improved operating performance on certain major contracts.
* EMEA: Second quarter revenue was $1.60 billion, up 9 percent compared to the prior-year period, driven by the company’s U.K. Ministry of Defence DII contract. Operating profit was $215 million, down slightly from $218 million in the year-ago quarter.
* Asia-Pacific: Second quarter revenue was $352 million, down 8 percent compared to the prior-year period. Operating profit was $39 million, flat compared with the prior-year period of $39 million.
* U.S. Government: Second quarter revenue was $789 million, up 8 percent compared to the prior-year period. Operating profit was $122 million, up 35 percent from $90 million in the prior-year period. Both revenue and operating margin improvements were driven in large part by improved performance of the Navy Marine Corps Intranet contract.
All segment comparisons are at constant currency and exclude the impact of expensing stock options and performance-based restricted stock units.
Updated 2006 Guidance
For full-year 2006, EDS expects revenue of $21 billion to $21.5 billion, compared to prior guidance of $20 billion to $20.5 billion, and TCV of $23 billion to $25 billion, compared to prior guidance of $23+ billion. The company continues to expect pro forma EPS of $0.83 to $0.93(2), $1.05 to $1.15 when excluding the impact of expensing stock options and performance-based restricted stock units, and free cash flow of $800 million to $1.0 billion.
The company has identified additional cost reduction opportunities it expects to pursue in the second half of the year. These actions would result in approximately 15 cents per share of additional severance-related costs, which were not reflected in prior guidance. While the company is maintaining its earlier EPS and free cash flow guidance, these incremental costs are likely to cause full-year 2006 EPS and free cash flow to trend toward the lower end of the ranges. EDS expects these initiatives to have a positive impact on 2007 earnings and margins.
For third quarter 2006, EDS currently expects:
* Pro forma EPS of 16 cents to 21 cents(2), 21 cents to 26 cents when excluding the impact of expensing stock options and performance-based restricted stock units.
* Revenue of $5.3 billion to $5.5 billion.
EDS’ earnings conference call will be broadcast live on the Internet today at 8:00 a.m. Central time (9:00 a.m. Eastern). To access the call and view related financial information, go to www.eds.com/call. If you are unable to listen during the live Webcast, the call will be archived for 30 days at www.eds.com/call.
(1)Excludes discontinued operations for all periods presented.
(2)2006 pro forma EPS guidance excludes reversals of previously recognized restructuring expenses and discontinued operations.
Statements in this press release that are not historical statements, including statements regarding forecasted revenue, EPS, free cash flow, and TCV, 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, 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 in our estimates; for contracts with U.S. Federal government clients, including our NMCI contract, the government’s ability to cancel the contract or impose additional terms and conditions due to changes in government funding, deployment schedules, military action or otherwise; our ability to access the capital markets, including our ability to obtain capital leases, surety bonds and letters of credit; the impact of rating agency actions on our ability to access capital and our cost of capital; 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 claims, litigation and governmental investigations; the success of our multi-year plan and cost-cutting initiatives and the timing and amount of any resulting benefits; the impact of acquisitions and divestitures; a reduction in the carrying value of our assets; the impact of a bankruptcy or financial difficulty of a significant client on the financial and other terms of our agreements with that client; with respect to the funding of 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; fluctuations in foreign currency, exchange rates and interest rates; the impact of competition on pricing, revenues and margins; and the degree to which third parties continue to outsource IT and business processes. 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.
EDS is a leading global technology services company delivering business solutions to its clients. EDS founded the information technology outsourcing industry more than 40 years ago. Today, EDS delivers a broad portfolio of information technology and business process outsourcing services to clients in the manufacturing, financial services, healthcare, communications, energy, transportation, and consumer and retail industries and to governments around the world. Learn more at eds.com.
Note: EDS news releases are archived on this Web site for historical purposes. Information in the stories is accurate at the time of release. However, service offerings and availability, relationships, contacts and other specified information may change over time. Information as stated in the release may or may not be in effect after the date on the release.
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