EDS results dragged down by WorldCom

Electronic Data Systems Corp.'s (EDS) second-quarter earnings got dragged down significantly by the company's relationship with bankrupt WorldCom Inc., EDS said in a statement Wednesday.

Earnings were affected by US$101 million, or $0.14 per share, in reserves and write-downs for receivables and other assets associated with EDS' contractual relationships with WorldCom, EDS said. It's unclear whether the entire $101 million in reserves and write-downs will be necessary, the company said.

Thus, EDS' earnings per share came in at US$0.64, on net income of $316 million, for the second quarter ended June 30, 2002, way off from consensus expectations of $0.76 in earnings per share from analysts polled by Thomson Financial/First Call. The expectations didn't include the WorldCom provision, which was disclosed for the first time Wednesday.

Excluding the WorldCom adjustments, earnings per share would have been $0.78, on net income of $383 million.

In last year's second quarter, EDS' earning per share came in at $0.62, on net income of $300 million.

EDS met revenue expectations. Analyst consensus was for revenue of $5.44 billion according to Thomson Financial/First Call, and the company reported revenue of $5.5 billion, up 8 percent from last year's second quarter.

Third-quarter earnings per share will be either 8 cents or 9 cents below previous expectations due to the WorldCom relationship, EDS said.

EDS' stock got battered soon after WorldCom's accounting irregularities were disclosed in late June, and it hasn't recovered, because of investor concerns that WorldCom's woes will affect EDS' bottom line and cause telecommunications service disruptions for EDS and its customers. WorldCom provides telecommunications services for EDS and EDS clients.

EDS is the world's second largest provider of IT services, behind IBM's services unit.

WorldCom granted EDS an 11-year, $6.4 billion IT services outsourcing contract in 1999. Likewise, EDS granted WorldCom an 11-year, $6 billion contract for telecommunications services, also in 1999.

EDS' stock price closed Wednesday at $32.99, up 10.5 percent, before the company issued its earnings report. The company's stock closed at $46.63 on June 25, before WorldCom dropped its bomb later that day, saying it had identified almost $4 billion in accounting irregularities that would force it to restate its financial reports for all of 2001 and the first quarter of 2002. The high point for EDS' stock over the past 52 weeks was $72.45.

EDS has faced various controversies in recent months, including questions about its accounting methods, an accusation in a report by the Texas attorney general that an EDS subsidiary overcharged the state's Health and Human Services Commission in an outsourcing contract to process Medicaid claims, and well-publicized bumps in its multibillion-dollar U.S. Navy contract.

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