Commentary: EDS: Tell It Like It Is, Mr. Jordan
Michael H. Jordan isn't usually the kind of CEO who avoids hard truths. After joining Westinghouse Electric Corp. in 1993, he wasted no time remaking the ailing conglomerate. Since replacing Richard H. "Dick" Brown at Electronic Data Systems (EDS ) Corp. in mid-March, Jordan pledged to act just as swiftly to steady EDS' ship. He knows he has to squelch fears that EDS is financially crippled. "It ain't true, but our competitors are making hay with it, and we have to deal with that in a straightforward manner," Jordan said during his first presentation to analysts on June 18.
But when it comes to EDS' finances, Jordan could be more forthcoming. At the June event with analysts, he presented forecasts that appear to be overly optimistic and aren't as easy to understand as some investors want. "I don't know if we've seen any true increase in transparency," says analyst Philip W. Ruedi of Baltimore-based T. Rowe Price Group (TROW ) Inc., which owned 3.4 million EDS shares at the end of the first quarter.
Consider EDS' forecast for the second quarter. On June 18, Jordan said free cash flow for the period would total $75 million to $125 million. But that figure left out one-time charges, including the costs of restructuring the company and laying off 2,700 workers. At the same time, the forecast left in a $98 million one-time gain from a court settlement with MCI and a spike in off-balance-sheet equipment leases. EDS says analysts want projections that way and that's how the company has done it in the past. But some think the numbers are unclear. "Cash out the door is cash out the door," says analyst Carol Levenson of newsletter publisher Gimme Credit Publications Inc. The peril of such accounting became clear two weeks later. On June 30, EDS reported that it wasn't going to receive the MCI payment in time to count for the second quarter after all.
Jordan's profit-margin projections aren't much easier to decipher. He says the company's "core operating margin" could reach 17% by 2005, a big jump considering EDS reported operating profits of 8.7% of revenue last year. But EDS says the new figure doesn't include underperforming software and consulting units or corporate overhead. "In this environment, you don't fool around with items of that ilk," says Paul R. Brown, past chairman of the accounting department at New York University's Stern School of Business. Jordan was not available for comment, but a spokesman says EDS is trying to give analysts more insight into its core business' profitability.
Jordan also insists he can produce double-digit operating margins even after subtracting overhead. Never mind that that would be better than IBM's industry-leading 9%-to-10% margin. Says Manoj Tandon of Pzena Investment Management LLC, an EDS investor: "I find it difficult to understand how you get [there]." Both Tandon and Ruedi say margins of 6% to 7% are more likely.
Granted, Jordan is just a few months into what he describes as a "multiyear task." He should be commended for pledging to eliminate percentage-of-completion accounting, a method for handling long-term contracts that allowed EDS to book revenues before it sent customers their bills. But he needs to do more. After facing questions about their disclosure, General Electric (GE ) Co. and Computer Associates (CA ) International Inc. improved transparency and were rewarded with higher stock prices, says NYU's Brown. Jordan should follow suit.
By Andrew Park