EDS to separate NMCI results

Navy Marine Corps Intranet Web site

The Navy Marine Corps Intranet, the Navy's $8.8 billion enterprise network and services contract, is once again dragging down the fourth quarter earnings of Electronic Data Systems (EDS), the lead contractor on the program.

EDS officials announced Feb. 5 that they would separate the company's reporting on its earnings and its reporting on its Navy business, because executives feel that losses caused by NMCI aren't reflective of the company's overall performance.

"The NMCI progress is obviously slower than we had anticipated," said Michael Jordan, EDS' president and chief executive. "Going forward what we intend to do is separate the reporting on the Navy contract from the rest of our operations to give everybody a much cleaner picture of the base business, as well as a lot of transparency on the Navy contract itself."

Jordan said EDS officials had to revise the NMCI rollout plan in midstream because the company was spending a lot of money, time and effort to roll out far fewer seats than it had anticipated.

"On NMCI, early in the fourth quarter it became clear to us that our plans... were not going to be fulfilled and we were spending a lot of capital and expense to generate a lot fewer seats than we thought in terms of rollover," Jordan said. "So we tore the plan apart and developed a new plan that more tightly ties capital spending and expense to the rollout plan. This reduced the number of seats, and therefore the revenue."

The revised deployment schedule, according to Jordan, requires that EDS officials write down deferred construct costs of $559 million.

"If you exclude the cash that went into NMCI, our base business generated over $1 billion of free cash flow," he said.

Robert Swan, EDS' chief financial officer, said EDS has about $2.4 billion invested in NMCI and another $1 billion in operating losses. Swan went on to call NMCI a "significant drain" on EDS' earnings and cash flow and admitted to the program's "poor financial performance."

"Going forward, we will implement a more efficient and predictable network rollout," Swan said. "In October, we [said] that we were working jointly with the Navy on these issues and are making progress, but they remain unresolved. The new deployment plan reduces forecasted cash flows over the remaining life of the contract from $1.9 billion to $900 million."

EDS has had similar problems all year. In the spring, the company announced its first quarter earnings had taken a $126 million hit in large part due to NMCI's $334 million in quarterly losses.