EDS Grapples With Setbacks

The run of bad news spoiled the mood at EDS' Plano headquarters, where just a week ago, they were concentrating on a 40th birthday party for the company founded by H. Ross Perot.

It's also created a new challenge for chairman and chief executive Richard Brown: Rebuild investor confidence in a company facing its gravest crisis since a new management team arrived in 1999.

EDS shares began to slump shortly after one of its biggest customers, WorldCom, announced last week that it had overstated its earnings by $3.8 billion.

Separately, critics accused EDS of using funny math to make first-quarter revenue look better. The slide continued Monday as the House passed a bill requiring more testing on EDS' biggest contract, a $6.9 billion deal to build a communications network for the Navy and Marines.

Then EDS pulled out of bidding for a $1 billion annual contract to provide technology help for Procter and Gamble Co.

On Tuesday, Moody's Investors Service announced it was reviewing the A1 rating of EDS' senior unsecured debt for possible downgrade because of the company's exposure to WorldCom's problems and soft demand for technology services. A downgrade could make borrowing more costly for EDS.

Finally, EDS announced Tuesday it was laying off 2,000 of its 140,000 workers. Officials insisted that the layoffs were unrelated to any of the other bad news.

EDS shares fell again Tuesday, but only 33 cents, or 1 percent, to $30.12. That was progress after the shares lost 36 percent of their value in a week.

Brown and other executives expressed frustration when they spoke Tuesday with analysts and reporters. Brown said he wanted to "put a stake in the ground" and lay out the facts. He insisted that EDS' accounting is honest and that the company won't be hurt by WorldCom's problems.

"The last few days have been difficult for our company. We've been buffeted by fear, rumor and innuendo,'" Brown said. He said criticism of the company was "perceptual rather than factual."

That might be true, analysts say. But they still want proof that EDS can convert big contract signings of the last few years into cash flow and meaningful growth.

The 11-year, $6.4 billion deal to run WorldCom's computers is only generating about 2.5 percent of EDS' revenue and profit, said Prakash Parthasarathy, an analyst for Banc of America Securities.

"That's not the only thing driving the stock price down," Parthasarathy said. "They have to raise internal growth and generate more cash."

EDS spends heavily in the early years of long-term contracts, which drains cash. Last year, EDS earned $1.36 billion on revenue of $21.54 billion but generated only a disappointing $453 million in cash. Officials repeated Tuesday their forecast of $700 million to $900 million cash flow this year.

Stephen McClellan, an analyst for Merrill Lynch, said EDS' four-year-old management team "has done a terrific job of turning it around. But the jury is out on building and growing the company."

Brown "has got a lot yet to prove at EDS to get the growth and stock price up where they should be," said McClellan, who has followed the company for 30 years and is generally bullish on its prospects.

EDS faces several obstacles to improving its non-acquisition growth. Revenue from its biggest customer, General Motors, has been declining for years. Its management-consulting unit, A.T. Kearney, has posted flat to negative results in recent quarters.

And information-technology outsourcing, which accounts for about three-fourths of EDS' revenue, is sluggish because of the slump in technology spending by corporations.

Brown said the company is committed to its goals of double-digit growth in earnings per share, better profit margins and gaining market share in the industry it created, IT outsourcing, the business of running other companies' computers.

Brown, a former H&R Block and telecommunications chief executive, has restructured EDS to regain the scrappy, entrepreneurial feeling of Perot's original company. He slashed thousands of jobs and cut the number of business units from 48 to four.

"In some ways, it's back to the way it was in the early days," said vice chairman Paul Chiapparone. "We try to have entities operate as small entrepreneurial companies."

Chiapparone joined EDS in 1966 and was a central figure in the company's most trying chapter -- he and another executive were arrested and held for ransom in an Iranian prison in 1979. He said the experience taught him to put other problems in perspective.

"The economy is a bit of a challenge now for EDS," he said. "And there's an air of suspicion around companies. We've got to restore people's confidence."

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