EDS sets charge as GM split progresses

Electronic News, April 8, 1996

Plano, Texas--As its spin-off from parent General Motors (GM) progresses, Electronic Data Systems (EDS) said it expects to report a 2Q96 nonrecurring charge--ranging from a pretax $500-$750 million, or 66-99 cents per share after tax--due to a workforce "realignment" and the implementation of a voluntary early retirement offer (ERO) for about 2,800 U.S. employees.

The soon-to-be independent company also is in the process of weighing possible redundancies in facilities, and related assets that may not fit long-term strategic objectives.

The board of its soon-to-be ex-parent General Motors (GM) recently considered and approved specific terms for a split-off, as well as a new 10-year $40 million agreement under which EDS will continue to be GM's principal provider of information technology (IT) services.

Also approved by the auto maker's board was a $500 million payment to be paid by EDS to GM.

The planned EDS workforce realignment likely would not lower overall EDS employment but would change the skill mix, it was said. The goal is to improve operating efficiencies and accelerate the move to user-centered computing. When implemented, the realignment and ERO may affect between 4,000-5,000 employees, about 5 percent of the EDS workforce; current worldwide employment is about 95,000.

The amount of the aggregate charge will depend on the number of employees electing early retirement and the determination of which EDS business functions and related facilities would be eliminated or consolidated.

An undetermined portion of the contemplated charge will be non-cash. EDS expects that the restructuring actions will result in savings starting in the second half of 1996.

In addition, EDS said it believes revenues generated from services performed for GM in FY96 will be slightly lower than in FY95, and that these changes could reduce its FY96 earnings by 7-14 cents per share, of which about 3 cents per share may be recorded in 1Q96. EDS expects to record about 8 cents per share in additional split-off costs in FY96, of which 3 cents per share is attributable to interest costs related to the inter-company payment and 5 cents per share is attributable to one-time miscellaneous split-off expenses.

"The long-term impact of the terms of the information technology (IT) services agreement (with GM) cannot be precisely quantified at present, although such terms may have an adverse effect on EDS operating margins unless EDS is able to achieve reductions in the costs of providing services to GM," the company warned.

Restructuring activities are not contingent on the approval or consummation of the proposed split-off from GM. The GM board has approved a proposal for a split-off of its subsidiary to GM Class E shareholders in a tax-free exchange of stock. Under terms of the split-off proposal, each share of GM Class E common stock would be exchanged for one share of EDS common stock, with EDS making a one-time $500 million payment to GM. Final approval by holders of all three classes of GM common stock is required before the split-off becomes effective, which could occur before the end of the second quarter.

Separately, EDS told Electronic News that the agreement for the new spin-off status would include more plant floor automation work with its former parent. "We may have been doing some on a limited basis before, but we will be doing a broader range of services at a broader range of facilities under the new plan," said an EDS spokesperson. He cited "feeding robotics" equipment and machinery, inventory control and delivery systems that are out on the floor. The equipment will allow work to be done on the assembly line and not "away from the floor" as it currently is by other vendors. EDS reported revenues of $12.4 billion in FY95. The company will disclose 1Q96 results about mid-April.