Moody's: EDS on downgrade review

Moody's Investors Service said it placed the Baa3 senior unsecured rating for Electronic Data Systems on review for possible downgrade.

Moody's said the review is prompted by the company's revision in 2004 free cash flow, its approximate $1 billion reduction of Navy contract free cash flow over the 2004 through 2007 contract term, and resulting accelerated amortization of Navy contract costs of $559 million.

Ratings under review for possible downgrade include the company's senior unsecured debt rated at Baa3, senior unsecured shelf rated at prospective Baa3, subordinate shelf rated at prospective Ba1, and preferred shelf rated at prospective Ba2.

On Feb. 5, EDS revised the range for free cash flow guidance (defined by EDS as cash flow from operations less capital expenditures) for 2004 to a range of $500 million to $600 million from prior guidance of $600 million to $800 million. The largest contributor to the lower 2004 free cash flow guidance is the Navy Marine contract.

Also in the fourth quarter 2003 earnings call, EDS reduced 2004 through 2007 Navy contract free cash flow to about $900 million from prior guidance of $1.9 billion. On its own initiative, EDS is in talks with the Navy to adopt a more conservative strategy related to contract implementation.

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