Company Recognizes $334 Million Pre-Tax Loss on Navy Marine Corps Intranet Contract
-- A first quarter net loss of 26 cents per share on an as-reported basis versus the comparable result of earnings per share of 72 cents a year ago. As reported results reflect a $334 million cumulative loss associated with the Navy Marine Corps Intranet (NMCI) contract. -- Total revenue of $5.37 billion, up 2 percent from the year-ago quarter, down 3 percent at constant currency. -- Free cash flow of $122 million versus negative free cash flow of $184 million a year ago (see discussion below).
"The new management team took extra time this quarter to thoroughly review our business financials. The review led to today's action on the NMCI contract and, while no one likes reporting a loss, we believe we have addressed our major exposures," said Michael Jordan, EDS chairman and chief executive officer. "Now we can focus on growing our core outsourcing business in a long term growth industry where we are one of the two global players."
EDS today reported a net loss of $126 million or 26 cents per share in the quarter ended March 31, 2003. This compares with net income of $354 million, or 72 cents per share, in the 2002 quarter.
First quarter 2003 as reported results reflect a $334 million cumulative pre-tax loss associated with the Navy Marine Corps Intranet contract. First quarter 2003 results also include a $48 million pre-tax ($31 million after- tax), or 6 cent per share, charge related to the former CEO's severance; the $17 million after-tax, or 3 cent per share, cumulative effect of a change in accounting principle;(1) and a $1 million loss from discontinued operations.
Adjusted for the loss on the NMCI contract, severance charge, accounting change and discontinued operations, first quarter 2003 net income was $144 million, or 30 cents per share. This compares to net income in the year- ago period of $347 million, or 70 cents per share, which excludes $7 million of after-tax income, or two cents per share, from discontinued operations.
Total revenue increased 2 percent versus the year-ago quarter to $5.37 billion. Total revenue decreased 3 percent on a constant currency basis. Revenue growth from outsourcing contracts signed late in 2002 was offset by a decrease in General Motors revenues. The overall weakness in client discretionary spending continued to impact EDS' shorter cycle businesses. General Motors revenues decreased 16 percent versus the year-ago period to $571 million, reflecting GM's continued efforts to reduce discretionary spending and the impact of new sector agreements entered into at the end of 2002.
Free cash flow increased to $122 million versus a net cash outflow of $184 million a year ago, driven by lower capital expenditures and additional customer financing. Free cash flow is defined in Note 2 to the Summary of Consolidated Cash Flows. EDS reports free cash flow to enhance understanding of the cash generated by its business. It is a non-GAAP measure and should be viewed together with the Summary of Consolidated Cash Flows.
Jordan said, "The EDS management team is working to improve our competitive position in the core outsourcing business. A key task will be improving our balance sheet, for which our first quarter cash flow turnaround is a key positive step."
EDS signed $3 billion in contracts in the quarter versus $7.2 billion a year ago, reflecting management's decision not to pursue certain business and an increasingly competitive sales environment.
In the case of the NMCI contract, first quarter developments required an adjustment in the estimated average "seat price" and deployment schedule, resulting in a loss for the quarter. EDS noted these developments will have a negative impact of approximately $100 million on free cash flow in 2003, relative to prior guidance, and now does not expect the contract to turn cash flow positive until mid-2004. The company continues to expect the NMCI contract to generate more than $1.9 billion in positive cash flow from 2004 onward.
EDS reported an operating loss of $104 million in the quarter. Excluding the loss on the NMCI contract and the severance charge, first quarter operating margin was 5.1 percent versus 11.2 percent a year ago, reflecting delivery issues in outsourcing, market pressures in the consulting sector, declines in higher margin discretionary IT services spending, and new GM sector agreements.
"EDS' priorities remain cash flow, earnings and growth, in that order," said Robert Swan, executive vice president and chief financial officer. "We recognize we have a lot of work to do. However, this quarter we improved our cash generation, took several steps to address our underperforming contracts and made progress toward our goal of raising $500 million in cash through the divestiture of non-core, non-strategic assets."
Swan noted the company is in the process of a comprehensive strategic and operating review, and, as a result, is not in a position to provide guidance for the second half of 2003. "As we move through the year, we will look to improve our cost structure, strengthen the balance sheet and invest in focused growth prospects," Swan said. "We will remain disciplined in pursuing the right business opportunities and not sacrificing the bottom line for top-line growth."
Line of Business Results
Operations Solutions revenues of $3.58 billion were flat at constant currency versus the year-ago quarter. Growth from large IT outsourcing contracts signed late in 2002 was offset by the decline in General Motors revenue. First quarter highlights include a $407 million, four-year contract with the California Department of Health Services to continue to manage Medi- Cal, the California Medicaid program. Operations Solutions also announced the industry's first 100 percent service level assurance for new Web and applications hosting engagements.
Solutions Consulting revenues decreased 7 percent at constant currency from the year-ago quarter to $1.33 billion. Solutions Consulting continued to be impacted by the weak economy and the associated slowdown in corporate discretionary spending. In business highlights, Solutions Consulting continued to build on EDS' global delivery capabilities in the first quarter, adding 1,500 applications services personnel at its 16 Best Shore(SM) solution centers around the world, and its industry-specific technology consulting practice, with the hiring of 35 senior-level consultants.
A.T. Kearney revenues decreased 14 percent at constant currency from a year-ago to $239 million, reflecting continued softness in the global market for high-value management consulting. In the quarter, A.T. Kearney launched an Enterprise Services Transformation practice to address strategic issues related to business process management. A.T. Kearney also initiated a new Government practice, building on best practices from consulting engagements with the UK government.
PLM Solutions revenues decreased 11 percent at constant currency from a year ago to $201 million, reflecting challenges in the overall manufacturing market. In the quarter, PLM Solutions launched Teamcenter(R) software solutions customized for the aerospace and defense, automotive supplier, high tech electronics, and consumer and packaged goods industries.
Conference Call and Upcoming Events
EDS' first quarter conference call with securities analysts will be broadcast live on the Internet today at 4 p.m. Central, 5 p.m. Eastern time. To access the call, as well as additional financial information posted on the company's Web site, go to http://www.eds.com/call . Interested parties will need Windows MediaPlayer or Real Player to listen to the call. For those unable to listen during the live webcast, the call will be archived for 30 days at http://www.eds.com/call .
EDS also announced today it will hold a meeting with securities analysts in New York City in mid-June to discuss company strategy. Details on the location, date and time of that meeting will be finalized and announced shortly. The analysts' meeting will be broadcast live over the Internet.
EDS, the leading global services company, provides strategy, implementation, business transformation and operational solutions for clients managing the business and technology complexities of the digital economy. EDS brings together the world's best technologies to address critical client business imperatives. It helps clients eliminate boundaries, collaborate in new ways, establish their customers' trust and continuously seek improvement. EDS, with its management consulting subsidiary, A.T. Kearney, serves the world's leading companies and governments in 60 countries. EDS reported revenues of $21.5 billion in 2002. The company's stock is traded on the New York Stock Exchange and the London Stock Exchange. Learn more at