Navy Intranet Pushes EDS Into The Red

Delays and cost overruns associated with its build-out of a massive intranet for the Navy and the Marine Corps helped push EDS to a loss of $126 million, or 26 cents per share, for the first quarter ended March 31. A year ago, EDS posted per-share earnings of 72 cents on income of $354 million. Revenue grew 2% year over year to $5.4 billion.

EDS says it recorded a $334 million pretax loss associated with the Navy-Marine Corps intranet project, a $6 billion effort to place those branches of the armed services on a common IT platform. EDS is the lead contractor on the project. In acknowledging the loss, the services firm cited problems with "seat prices" and the project's deployment schedule. EDS says it still believes the contract will ultimately produce more than $1.9 billion in positive cash flow from 2004 onward.

Also contributing to the first-quarter loss, EDS says, was a $48 million pretax charge to cover severance payments to outgoing CEO Richard Brown.

Of some consternation to analysts is the fact that, in its earnings release, EDS said it was unable to provide guidance for the second half of 2003 because the company is "in the process of a comprehensive strategic and operating review."

"That's not a good sign," says Technology Business Research analyst Humberto Andrade, who notes that EDS's cloudy financial picture could scare off customers. EDS was scheduled to report earnings earlier this month but delayed the announcement so that incoming CEO Michael Jordan could familiarize himself with the firm's financial status.

On the upside, EDS said its free cash flow improved to $122 million during the quarter, compared with a net cash outflow of $184 million a year ago. Andrade says that's a positive sign, noting that a decrease in cash flow would have severe implications for EDS's credit rating and its ability to borrow money: "Things could quickly snowball downhill from there."