Problems mount for EDS
The IT services giant reports deepening troubles with a major commercial contract and predicts a loss of up to $75 million related to pension liability.
On Monday, the information technology services giant reported in a U.S. Securities and Exchange Commission filing that an unnamed commercial client "has indicated that it believes we are in default of our obligations and that the contract is subject to termination by the client."
EDS also disclosed that it expects to suffer a loss of up to $75 million related to pension liability in a lost massive contract with U.K. tax agency Inland Revenue to Cap Gemini Ernst & Young.
The setbacks are the latest in a string of disappointments for Plano, Texas-based EDS, which reported a fourth-quarter net loss of $354 million in February and recently announced that an SEC probe into the company has expanded.
EDS said that by the end of 2003, it had made a net investment of about $150 million in assets--including equipment and software--associated with the major commercial contract. The contract has weathered delays, and milestones have been missed, according to the company.
EDS said it was in negotiations with the client but that significant losses could result from the situation. "It is possible that even if the parties reach a negotiated solution, the impact of that agreement could result in an impairment of some of the associated assets," EDS said in its filing. "Any impairment of associated assets related to this contract could be material."
EDS has discussed this troubled contract before without mentioning a default allegation.
The client is most likely Dow Chemical, according to an industry source. "This is obviously something that's been slowly spinning out of control," the source said.
Dow Chemical did not immediately respond to a request for comment.
An EDS representative declined to comment on the identity of the customer involved in the contract.
In its filing, EDS said it recognized operating losses of $255 million under that agreement in 2003.
The commercial deal in question isn't the only troubled contract at EDS. A massive project to upgrade the U.S. Navy's computer and communication systems has been delayed for reasons that include "inefficient program management," according to EDS. The company recently wrote off $559 million related to the Navy agreement.
That prompted an expanded probe by the SEC, which is also examining EDS' stock-hedging efforts, customer contracts that contain "prepayment" provisions, and the events leading up to the company's third-quarter 2002 earnings warning.
The expected loss of up to $75 million mentioned in the filing stems from pension liability associated with the staff EDS used on a contract with the Inland Revenue. As the company's contract with the U.K. government agency has been terminated, those employees will be transferred to a new IT provider in July, EDS said.
"The pension liability associated with this work force will also transition to the new provider, resulting in the recognition of a settlement loss of up to $75 million," EDS said. "The actual amount of the loss will be determined and recognized in the company's statement of operations upon final settlement of the obligation, which is expected to occur in late 2004 or early 2005."
On Sunday, EDS said it had reached an agreement to sell a software and services unit for $2.05 billion in cash to a group of private-equity firms. The unit, UGS PLM Solutions, focuses on applications and services related to product data management, collaboration and design. EDS said the buyers are Bain Capital, Silver Lake Partners and Warburg Pincus.
CEO Mike Jordan said the deal will help EDS concentrate on its main businesses and improve its finances. "We said our ongoing focus will be strengthening our core information technology and business process outsourcing operations and our balance sheet," Jordan said in a statement. "This transaction supports both priorities and further enhances our competitive position."