Update: EDS to restructure, lay off 2 percent of staff

MIAMI – Electronic Data Systems (EDS), the large and struggling IT services provider, will restructure to reduce costs and improve its bottom line, a plan that includes laying off 2 percent of its workforce and focusing on its core outsourcing business, the company announced Wednesday. 

The restructuring actions will result in pretax charges and asset write-downs of between $425 million and $475 million in 2003, which will have an after-tax impact of between $0.58 and $0.64 per share, a portion of which may be recognized in the current quarter.

EDS had 138,000 employees as of March 31 of this year, an EDS spokesman said Wednesday. Thus, the announced layoffs would total about 2,760. Most will be in the U.S. and Europe.

This round of layoffs is in addition to another set of layoffs announced in October 2002, involving a 3 percent to 4 percent staff reduction, or up to 5,520 jobs. Those layoffs announced in October are still being carried out. As in March, EDS also had about 138,000 employees in October, because between October and March, EDS also hired new people, officials said.

EDS has been struggling on several fronts for the past year or so. Its stock price has shrunk, its sales have been below expectations and it is being investigated by the U.S. Securities and Exchange Commission.

EDS made the restructuring announcement Wednesday morning before the start of a meeting with financial analysts in New York.

“We hope to dispel a lot of the uncertainty that has been swirling around the company,” said Chairman and Chief Executive Officer (CEO) Michael Jordan at the start of the meeting, broadcast over the Web.

EDS will refocus on its core outsourcing business, which generates about 80 percent of its revenue, Jordan said. The company must present one face to its customers, whereas now it has a fragmented and scattered approach to the market, he said.

“We have to have clear priorities and convergence throughout the organization which we don’t have today,” he said.

The retooling will not be completed overnight, he cautioned. “This will be a multiyear task to restore our company to a leadership position,” he said.

Jordan took over from former Chairman and CEO Dick Brown in March. Brown had been in charge since January 1999. Along with Jordan came Jeffrey Heller to step in as EDS president and chief operating officer (COO), posts Heller had held between 1996 and 2000. Heller retired from EDS in February 2002 after 34 years with the company. The COO and president positions had been vacant since then.

The three main goals of EDS’ restructuring are to “stabilize and grow” its core IT outsourcing business, to explore growth opportunities and to strengthen its balance sheet and liquidity.

By recasting itself as a “unified” IT outsourcer, EDS will move from multiple lines of business to a “single-entity” model, which will allow it to provide a single point of contact for each client, improve the way it delivers services, reduce costs and focus its services portfolio, EDS said.

Specifically, EDS plans to continue expanding its offshore outsourcing program, which is called Best Shore and was unveiled in November, and to aggressively increase its activities in business process outsourcing (BPO), a high-growth segment of the outsourcing market, Jordan said.

To cut costs, EDS will address contracts on which it is losing money, improve its use of cash, eliminate redundancies in sales and administration, and sell assets it doesn’t consider core to its operations. In all, EDS expects to enjoy about $230 million in annualized pretax savings.

EDS is maintaining its expectations for the second quarter, which closes at the end of June, of earnings of between $0.33 and $0.38 per share, excluding pretax restructuring charges and asset write-downs. Revenue should come in between $5.4 billion and $5.6 billion and free cash flow in the range of $75 million to $125 million.

For the second half of 2003, EDS expects between $0.70 and $0.80 per share, revenue of around $11 billion and free cash flow between $200 million and $350 million, excluding pretax restructuring charges and asset write downs.

EDS expects 2004 revenue of between $20 billion and $21 billion and free cash flow between $800 million and $1 billion, excluding payments related to restructuring charges.

EDS, based in Plano, Texas, is the world’s second largest IT services provider, behind IBM’s Global Services unit.