Fitch Revises Outlook on EDS to Stable; Debt Affirmed at 'BBB-'

NEW YORK--(BUSINESS WIRE)--Nov. 2, 2005--Fitch Ratings has affirmed Electronic Data Systems Corp.'s (EDS) issuer default rating (IDR) and senior unsecured debt at 'BBB-'. Fitch has also assigned a 'BBB-' rating to the company's bank credit facilities. The Rating Outlook is revised to Stable from Negative. Approximately $3 billion of debt is affected by Fitch's action.

The Stable Outlook and ratings affirmation reflect EDS's stronger contract signings and improved operating performance, especially for the Navy Marine Corp. Intranet (NMCI) contract, moderate debt reduction, and more consistent operating and financial results, along with raised financial guidance for fiscal 2005 and solid 2006 outlook. Fitch believes the company's win rate and competitive position have improved, which are supported by a third-party advisor, Technology Partners International, Inc. (TPI), who has noted EDS's increased share of pipeline value in each of the last four quarters. EDS had the highest percentage of pipeline value from TPI as of Sept. 30, 2005. The ratings affirmation also considers the company's strong liquidity position, declining problem contracts, and possible write-offs for airlines and/or other problem contracts. In addition, Fitch believes EDS will implement additional workforce reductions as necessary in high-cost regions as the company continues to align its cost structure to remain competitive, potentially resulting in additional charges.

Fitch remains concerned about continued pricing pressures and competitive challenges for information technology (IT) services providers, the likelihood that EDS's remaining problem contracts and mega-deals continue to burn cash in 2006 but at a lower rate, and the company's ability to achieve strong contract signings. Fitch believes achieving a 1.0 times (x) book-to-bill ratio (approximately $20 billion of signings) will be challenging for EDS in 2006 due to intense competition from a variety of sources, including in-sourcing, off-shore competition, and stronger competitors, along with lower mega deals in the pipeline. Fitch remains cautious about the potential negative impact for both operating earnings and free cash flow from any renewals with General Motors Corp. (rated 'BB' by Fitch; with a Negative Outlook), nearly a 10% customer. The Securities and Exchange Commission's (SEC) investigation of EDS also remains a concern.

The company's IT services backlog remains solid and contract signings for 2005 are expected to be approximately $20 billion, compared with $14.9 billion in 2004 and $13.2 billion in 2003. Fitch believes contract signings in 2005 will increase by more than 30% due to EDS's improved competitive position rather than high growth for the company's served markets. The company, along with many of its peers, continues to focus on growing its business process outsourcing (BPO) and expanding its role in IT outsourcing, which is responsible for a majority of revenues. At the same time, Fitch believes IT outsourcing continues to be susceptible to significant pricing pressures as some segments are becoming increasingly commoditized, in part due to on-going competition from off-shore providers. In order to lead and outperform, industry, scale, cost competitiveness, and operating strategy have become key to winning and successfully executing on higher-margin transactions. Fitch believes EDS already has the scale along with improved cost competitiveness from on-going restructurings. The operating strategy, centering on the company's Agility Alliance, continues to be implemented with some positive momentum, as indicated by improved contract signings especially for add-on business and new customers.

Fitch expects free cash flow, which includes capital spending for software as well as dividends for 2005, to be greater than $400 million, compared with $150 million and $461 million in 2004 and 2003, respectively. The increase in free cash flow is mostly due to operational improvements for NMCI, along with proceeds from the Navy securitization program, declining negative earnings effect of problem contracts, and slight improvement for core operations.

Fitch believes EDS will be challenged to increase free cash flow in 2006 due to higher capital spending to support stronger contract signings, continued risks associated with increasing profitability of other mega deals, expected margin compression from GM renewals, and continued strategic investments. Additionally, further cash usages could occur for continued pension contributions and cash restructuring charges. However, Fitch expects further improvements for NMCI, declining investment spending, lower operating losses from problem contracts, and higher margins from core operations.

The company reported operating and financial results in-line with expectations for the third quarter ended Sept. 30, 2005, affirmed financial guidance for fiscal 2005, and expects further improvements for 2006. Fitch believes EDS has made progress on its restructuring efforts as total operating margins were 3.4% in the third quarter, compared with 3.1% for the same period last year.

Liquidity at Sept. 30, 2005, included $2.7 billion of unrestricted cash and equivalents and a total of approximately $0.8 billion available under unsecured revolving credit facilities, consisting of a $450 million revolver due September 2006 and a $550 million revolver expiring March 2008. The bank agreement has various covenants, including minimum net worth, fixed charge coverage (no less than 1.15x to December 2005 and 1.25x thereafter), and a leverage test where debt-to-EBITDA cannot exceed 2.25x through December 2005 and 2.00x thereafter. As of Sept. 30, 2005, the company was in compliance with all covenants and had more than a $1 billion cushion for the net worth covenant.

Total debt as of Sept. 30, 2005, was approximately $3.3 billion, consisting of various tranches of senior unsecured notes and capital leases. Approximately $200 million of debt matures in 2006, with the next significant debt maturity occurring in 2009 when $700 million of 7.125% senior notes are due. Estimated leverage (measured by total debt/EBITDA) for the latest 12 months (LTM) ending Sept. 30, 2005, was approximately 1.5x -- flat when compared with year-end 2004. Adjusted leverage was approximately 3.3x, also flat compared with year-end 2004. Free cash flow to total debt is more than 10%. Interest coverage increased to 9x as of Sept. 30, 2005, a minor improvement of from 8x at the end of 2004.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.