The industry's second-largest solution provider, according to the VARBusiness 500, was also forced to restate some of its recent earnings for 2003 as EDS' troubles continued. For the quarter, EDS reported revenue of $4.95 billion, down from $4.99 billion for the same period one year ago. The company's third-quarter loss, which was attributed to a $375 million ($233 million after taxes) or $0.46, a share impairment charge related to the costly and problematic NMCI contract, compared to a restated loss of $16 million or $0.03 a share for the third quarter 2003.
Without the charges, EDS says it would have earned $57 million or $0.11 per share for the quarter. The integrator first announced its would delay its third-quarter report on Oct. 25 and after taking three weeks, EDS nearly missed the Securities and Exchange Commission deadline for the results. The delay originated, according to the company, from a dispute between EDS officials and the company's outside auditor, KPMG, regarding the NMCI contract write-down. EDS also found it had to restate earnings for 2003 because of executive bonus payments and improperly recognized revenue.
However, EDS stated that its audit committee had completed its investigation of the company's quarterly bonus plan accruals and other adjustments and found that there had been no improper activities or conduct involved. The integrator did say KPMG identified "two significant deficiencies" that created weakness in the company's internal controls.
Despite the issues, EDS chairman and CEO Michael Jordan painted a picture of stability for his company during the earnings call Monday. "Our third-quarter results reflect a company that is operationally solid and delivering for its clients," Jordan said during the call. "We moved quickly to deal with our auditor's questions and believe these issues are behind us. Now, we can focus on building our business."
Some analysts aren't so sure. In a report released following EDS' postponement of its third-quarter results, Merrill Lynch, for example, maintained its "sell" rating for EDS stock, citing a lack of stability with the NMCI contract and poor cash-flow generation.
Still, there was some positive news from the company. EDS signed $3.3 billion in contracts in the third quarter, up 4 percent from $3.2 billion in the third quarter a year ago. Its third-quarter revenue was in line with its previous guidance, and EDS also reduced its debt, albeit slightly, and to date has $4.2 billion in cash. As a result, EDS stock rose more than 4 percent Tuesday following the quarterly report, as some financial analysts have begun to forecast improvement for the systems integrator. But EDS has numerous bruises from which it needs to heal, most notably the NMCI contract. The landmark mega-project, which was supposed to generate billions of dollars in revenue for EDS, has left EDS with charges and write-downs because of escalating costs and delays; to date, the NMCI contract has cost the integrator more than $1 billion, according to most estimates, and has not mustered a single cent of profits for EDS. The most recent NMCI asset impairment was caused by a more conservative time line for meeting performance service levels, setbacks in customer satisfaction improvement rates, delays in signing certain contract modifications and additions, and the failure to meet seat cut-over schedules during the quarter, according to EDS.
EDS also must contend with falling revenue from its largest customer, General Motors, which decreased 12 percent year-over-year for the quarter as the automaker reduced its business with the integrator. EDS' sales in the Americas and Europe also fell 4 percent and 10 percent, respectively, as the company faces increasing competitive pressure from the likes of IBM Global Services, Hewlett-Packard and Accenture, as well as a number of government integrators vying for more business with the federal government. Government sales for EDS fell 8 percent year-over-year in the third quarter.
EDS reiterated its prior full-year 2004 guidance of $20 billion to $21 billion in revenue. The Wall Street consensus for EDS' full-year results are $20.6 billion in revenue and earnings of $0.20 per share.