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EDS back in profit, but debts climb

More surgery likely, and a sudden end to boom times could be nasty

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EDS returned to profit in its Q2, after losing $21 million in the last quarter as a result of savage staff cuts - and not that there was a whiff of earlier woes in its quarterly report, which showed revenue of $4.6 billion, up sequentially 6.6 per cent on the previous quarter, and just 6.9 per cent over the year-earlier quarter. Net income for the quarter was $240 million. As a consequence, EDS finished the quarter with $542 million less cash, and long-term debt increased by $953 million, compared with the end of 1998. The debt is now $2.137 billion. The staff reduction programme continues, with 8,000 old-timers (that means more than 50 years old to EDS) being offered early retirement. The "offer" may be made compulsory, since EDS also plans to sack more people before the end of the year. They will join the 5,200 employees who were given the boot in April, and 3,200 terminations in the first quarter (with a restructuring cost of $380 million). A restructuring cost is included in the accounts for the quarter just ended, which is strange to say the least, and leads to the suspicion that EDS wanted to show an improved quarter, and has found some way of holding over the restructuring cost to the next quarter. In 1996 and 1997, 4,750 staff were terminated involuntarily, and 1,750 opted for early retirement, at a cost of $270 million. The latest terminations are part of CEO Richard Brown's plan to cut $1 billion from the estimated $17 billion annual expenses bill. EDS now has around 125,000 employees. Formal reports from EDS are littered with phrases like: "severance costs", "involuntary terminations", "business exit", "facilities consolidation", and "asset write downs". It makes one wonder how such supposedly hot-shot consultants (AT Kearney is in the EDS stable) could have got their staffing requirements and business management so wrong. Ironically, EDS is also recruiting for its e-business and services sector which it claims has 20,000 people, although it also says its E.Solutions unit is new, suggesting EDS is very late to the game. The quarter was marked by a strategic alliance with Microsoft that looks like reducing the options to be thrust at EDS' clients in many cases, forcing them to suffer the slings and arrows of Windows 2000. In April, EDS acquired MCI WorldCom's information technology services unit MCI Systemhouse, which had 1998 revenues of $1.7 billion, for $1.65 billion in borrowed cash. Three other deals with MCI are pending. The recent downside for EDS is that the state of Connecticut came to its senses and decided not to go ahead with a $5 billion privatisation contract that it had been tentatively awarded against rivals IBM and CSC. Governor John Rowland said he was not certain that the computer service would be guaranteed in six or seven years if the state put itself in the hands of EDS. Perhaps Governor Rowland had been visiting some UK EDS sites, like that of the Royal Borough of Kingston-upon-Thames, where there has been an almighty cock-up. But EDS' greatest concern should be its debt. Six of the last ten quarters have shown reduced earnings, so there is no certainty that EDS can earn itself out of debt. It is increasing its debt with a $500 million commercial note, which Moody's hopes will be used to against its $2.5 billion bank facility. If the US boom stops, EDS could be in deep trouble. ®

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