EDS Reports Fourth Quarter and Year-End Results

Company posts quarterly net income of 12 cents per share before charges

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Friday, February 13, 2004; 12:00 AM

Takes $559 million charge for NMCI contract; $84 million restructuring charge; $7 million loss from discontinued operations; leads to fourth quarter net loss of 74 cents per share

Revises NMCI schedule to contain capital and reduce risk

Quarterly revenue up 8 percent

Fourth quarter free cash flow $387 million
PLANO, Texas -- EDS today reported a fourth quarter net loss of $354 million, or 74 cents per share, after writing down the entire $559 million in deferred costs related to the Navy Marine Corps Intranet (NMCI) program, and recognizing $84 million of previously disclosed pre-tax restructuring charges and after-tax losses of $7 million from discontinued operations.

EDS posted fourth quarter net income of $59 million, or 12 cents per share, excluding the write-down, restructuring charges and discontinued operations. Comparable fourth quarter 2002 net income was $194 million, or 40 cents per share, excluding income from discontinued operations of $107 million and a restructuring credit of $3 million.1

EDS said it is working closely with the Department of the Navy to stabilize the NMCI program and is making significant progress improving its other focus accounts.

“We are continuing to put EDS’ house in order,” said Chairman and CEO Mike Jordan. “Our fourth quarter results, excluding NMCI, met expectations. Operationally, we completed our management team and solidified our technology and marketing strategies.

“We have changed our approach to the NMCI program and have developed a more efficient and predictable rollout schedule with our client. This enables effective use of capital and supports the long-term viability of the account. The revised deployment schedule and revenue assumptions required the write-down of deferred costs in the fourth quarter.”

EDS reported fourth quarter total revenue of $5.76 billion, up 8 percent from $5.35 billion in the year-ago quarter, driven by growth in IT outsourcing services revenue and favorable foreign exchange rates. Organic revenue, which excludes the impact of currency fluctuations, rose 2 percent.1

Fourth quarter non-GM revenue rose 11 percent to $5.20 billion (up 5 percent on an organic basis) versus the same period a year ago. GM revenue decreased 14 percent versus the year-ago quarter to $565 million (down 18 percent in constant currency), reflecting GM’s push to reduce discretionary spending.1

EDS signed $4.3 billion in contracts in the fourth quarter versus $8.1 billion a year ago. Signings for the full-year 2003 totaled $14 billion, versus $24.4 billion in 2002. Jordan said an expected uptick in overall IT services spending in the second half of 2004 and EDS’ improving competitive position should provide EDS with sales momentum in the third and fourth quarters.

“We now have the resources, leadership and sales capabilities in place to re-establish EDS in the market. Our 2004 focus is squarely on growing the business,” said Jordan.

Free cash flow in the quarter was $387 million versus $848 million in the 2002 fourth quarter. Excluding the impact of NMCI, free cash flow would have been $507 million in the quarter and more than $1 billion for the full year. (See Note 2 to Summary of Consolidated Cash Flows for a discussion of free cash flow.)

“EDS ended 2003 with a much healthier balance sheet and better cost structure,” said Bob Swan, executive vice president and CFO. “We invested significant capital to grow the business and improve our competitiveness, while ending the year with more than $3 billion in cash, marketable securities and untapped credit lines.”

Navy Marine Corps Intranet
EDS said it currently forecasts the NMCI contract will generate $800 million to $1 billion in free cash flow through 2007. To achieve this goal, EDS is working with the Navy on a more controlled rollout. The revised deployment schedule and revenue assumptions required the write-down of $559 million in deferred costs in the fourth quarter. EDS noted its negotiations with the Navy for additional services and cost recoveries are not reflected in the current forecast.

NMCI program improvements include:

A reorganized and strengthened account team now reporting directly to EDS President and COO Jeff Heller;

Improved coordination and cooperation with the Department of the Navy;

A more effective, base-by-base deployment schedule that decreases risks and improves control and predictability; and

Efforts to accelerate 100 percent payment on seats already deployed on the network and to improve compensation on legacy applications.
“There have been exceptional technological accomplishments despite ongoing hurdles with the Navy Marine Corps contract,” Jordan said. “We have implemented the largest and most modern network of its kind, providing secure computing for the Department of the Navy. We have received orders for more than 300,000 computer seats and are on track to integrate approximately 1,000 divergent networks into one.” Jordan emphasized that the relationship between EDS and the Navy remains strong, and both sides are strongly committed to the success of the program.

Core Results by Geography/Market Segment (excludes A.T. Kearney and UGS PLM Solutions)

Americas: Fourth quarter revenue in the Americas was $2.35 billion, down 4 percent from the same period last year, reflecting lower GM revenue, a divestiture and renegotiated contracts. Operating profit was $287 million, down 13 percent.

EMEA: Fourth quarter revenue was $1.50 billion, down 1 percent from the same period last year, as financial services growth was offset by client run-off. Operating profit declined 1 percent to $149 million, reflecting client run-off and the stabilization of key accounts.

Asia: Revenue for the quarter rose 8 percent to $298 million, year over year, driven by growth in the government sector. Operating profit dropped 26 percent to $24 million due to financial services program implementation costs.

U.S. Government: Revenue jumped 24 percent to $912 million for the fourth quarter, reflecting growth in the NMCI program and other defense-related contracts. Operating profit was $15 million, reflecting NMCI-related program costs (excludes impact of NMCI write-down).
Subsidiary Results

A.T. Kearney: Revenue for the quarter declined by 8 percent to $214 million from the fourth quarter in 2002, while operating income declined 89 percent to $3 million, reflecting continued market pricing pressures in high-value management consulting.

UGS PLM Solutions: Fourth quarter revenue rose 8 percent from a year ago to $248 million, while operating income jumped 49 percent to $56 million, reflecting strong demand for Teamcenter® collaboration software and high acceptance of new NX Knowledge-Driven CAD software.
All comparisons are in constant currency.

Full-year 2003 Results
For full-year 2003, EDS posted a loss of $1.70 billion ($3.55 per share), versus 2002 earnings of $460 million, or 94 cents per share. 1

EDS’ 2003 net income was $239 million, or 49 cents per share, excluding the one-time cumulative accounting adjustment related to the adoption of EITF 00-21 ($1.42 billion after-tax or $2.96 per share), restructuring and other charges ($334 million pre-tax or 47 cents per share), a cumulative accounting adjustment related to the adoption of SFAS 143 ($17 million after-tax or 3 cents per share), a gain on a divestiture ($139 million pre-tax or 16 cents per share), a loss from discontinued operations ($14 million after-tax or 3 cents per share) and a deferred cost write-down on the NMCI contract ($559 million pre-tax or 73 cents per share).

This compares to $348 million, or 71 cents per share, in 2002, which excludes income from discontinued operations ($110 million or 22 cents per share) and restructuring and other credits of $3 million pre-tax. 1 As-reported full-year 2002 net income was $1.12 billion, or $2.28 per share, based on a different accounting methodology (percentage of completion) used in that period.

Full-year 2003 revenue reached $21.5 billion, up 7 percent versus $20.1 billion in 2002 (up 2 percent on an organic revenue basis).1

Full-year 2003 free cash flow was $230 million versus $985 million a year ago. Excluding NMCI, full-year free cash flow exceeded $1 billion.

2004 Guidance
EDS provided the following guidance for 2004. The company currently expects:

Full-year revenue of $21-$22 billion;

EPS of 50-60 cents, including NMCI; $1.00-$1.10 per share, excluding NMCI;2

Full-year free cash flow of $500-$600 million, including NMCI.
For the first quarter of 2004, EDS currently expects:

Total revenue of $5.0-$5.2 billion;

EPS of negative 4 cents to plus 1 cent; 15-20 cents per share, excluding NMCI.2
“We believe we have a realistic view of our business prospects for 2004,” Swan said. “In addition, we will continue to take steps to strengthen our balance sheet and have laid out a road map to improve our liquidity position to approximately $5 billion by year-end.”

EDS intends to provide additional information for 2004 on February 17 in conjunction with its securities analyst meeting.

Conference Call
EDS’ securities analysts conference call will be broadcast live on the Internet today at 4 p.m. Central time (5 p.m. Eastern). To access the call and view related financial information, go to www.eds.com/call. You need Windows MediaPlayer or Real Player to listen to the call. The call also will be archived for 30 days at www.eds.com/call.

Note: Pro forma income statements for 2002 and 2001 reflecting EITF 00-21 adjustments are available online at www.eds.com/proforma.

1All year ago comparisons are adjusted for EITF 00-21 and discontinued operations.

2Pro forma earnings estimates exclude restructuring charges and the impact of discontinued operations.

About EDS
EDS, the world’s most experienced outsourcing services company, delivers superior returns to clients through its cost-effective, high-value services model. EDS’ core portfolio comprises information-technology and business process outsourcing services, as well as information-technology transformation services. EDS’ two complementary, subsidiary businesses are A.T. Kearney, one of the world’s leading high-value management consultancies, and UGS PLM Solutions, a leader in product data management, collaboration and product design software. EDS is ranked 80th on the Fortune 500. The company’s stock is traded on the New York (NYSE: EDS) and London stock exchanges.