The Plano, Texas-based company said it is considering cutting the dividend by two-thirds and selling some of its equity in a bid to raise about $1bn.
Last month the company lowered its earnings guidance for the year to reflect further uncertainty on its troublesome US Navy Marine Corp Intranet contract as well as the offloading of its UGS PLM Solutions business. At the same time, it said it believed it is not in immediate danger of being downgraded to junk status by the major credit rating agencies, despite having been placed under review for downgrade by Moody’s Investment Service.
EDS desperately needs to avoid such a downgrade – not because of the increase in interest payments it would have to make, but because junk status would batter its credibility, and make the signing of new customers extremely difficult, especially the long-term outsourcing deals it is now targeting.
Its problems began in summer 2002 when major customers WorldCom Inc and US Airways collapsed into Chapter 11 bankruptcy protection. It issued a shock profit warning in September 2002 which prompted an investigation by the Securities and Exchange Commission. Since then the company’s main problem has been cash, as problem deals – especially the MCI contract – have drained its resources.
It has sold off various assets and subsidiaries, most notably its UGS PLM Solutions business which it sold for over $2bn cash. Even though it negotiated a good price for the unit, it had been one of its biggest cash generators, and therefore EDS had to reduce its cash flow projections for the year.
