EDS CEO Goes On Defensive

With increased scrutiny from the analyst community over perceived liabilities related to its computer leasing programs, EDS chairman and CEO Dick Brown addressed the issue head-on during a call with analysts this week, stressing the notion that the company's accounting practices and financial footing are "rock solid."

The CEO's move to address perceived accounting irregularities exemplifies how corporations, and the analysts who track their performance, are taking a harder look at accounting and financial reporting in the wake of Enron's collapse.

The company reported $396 million in income on $5.9 billion in revenue for the quarter, and $1.3 billion in income on $21.5 billion in revenue for the year. Quarterly earnings came in at 81 cents a share, excluding a one-time credit. That's 16 percent higher than the same period last year.

In the very first minutes of his address, Brown took up the issue of EDS' accounting, calling it "conservative, clear, concise."

"You've seen the numbers, and they speak for themselves," he said. "You should know by now we trust our commitment. We don't mislead or blame outside forces. You're among our most important audiences and we give it to you straight."

Brown's comments came as a direct result of concerns raised by analysts and company watchers recently that EDS' financial leasing programs, in which the company arranges for banks to finance equipment purchases at the onset of new contracts, create potential liability and could be used to mask irregularities. The main concern is that EDS surrenders some revenue in exchange for shifting the risk of owning the equipment to the banks.

"A few of you have expressed concern and all of you have discussed it," said Brown. "Let me make three major points on this. We have no undisclosed debt or liabilities. Client financing transactions are win-win for our clients and for EDS. Our clients benefit from more favorable financing costs, and we avoid client credit risks. The lenders have no recourse to EDS except in the event of non-performance. This is a risk we have in all of our contracts."

Brown went on to tell analysts of the $2.8 billion in third-party financing that EDS has facilitated since 1995, the company acquired only $30 million in assets -- all of that done voluntarily

The CEO also told analysts that EDS saw its first full year of double-digit operating margin since 1995, with $768 million operating cash flow and $453 million free cash flow for the fourth quarter.

He reiterated past comments that recent pressure on cash was a direct result of accelerated growth, particularly in the area of outsourcing where new contracts require big investments.

"Our initial investments are being paid back--and then some," he said, noting that the company expects additional improvement in cash generation in 2002.

Looking forward, the company told analysts it is comfortable with projections of 65 cents a share in earnings for the first quarter and $3.07 a share for the full year 2002.

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