  Electronic Data Systems said Monday it swung to a quarterly profit after cutting costs and renegotiating some contracts, but it slashed its 2005 earnings forecast due to investments planned for new business with the British government.

The world's No. 2 technology services company is considering several options about its Chicago-based management consulting unit A.T. Kearney, including a possible sale to shore up its balance sheet.

EDS is also talking to Kearney partners about giving them equity so they could align their interests better with the performance of the money-losing company bought by EDS in 1995. Action is expected to take place this year, EDS said.

The Plano, Texas-company also plans to sell up to 22 properties as it cuts costs to improve its competitiveness.

First-quarter net profit was $4 million, or 1 cent a share, including option costs, compared with a year-ago net loss of $12 million, or 2 cents a share. Last year's loss would have been 9 cents a share if options were expensed.

Profit excluding option expenses and restructuring costs, was 7 cents a share, exceeding analysts' average forecast of 3 cents a share, according to Reuters Estimates.

"It's kind of a slowly improving situation," said Donald Yacktman, president of Yacktman Asset Management, which owns more than 380,000 EDS shares. "Revenue is still below the year-ago level but they started to make money on the contracts."

Total revenue fell 5 percent to $4.94 billion, partly due to its loss of a large deal with the United Kingdom's tax authority last year. Revenue from its largest commercial client General Motors decreased 8 percent to $465 million. A.T. Kearney sales fell 12 percent to $204 million and the unit had an operating loss of $11 million.

The stock rose 1.8 percent to $19.78 in aftermarket trade from a $19.43 close on the New York Stock Exchange.

EDS, after three years of declining sales, said its contract win rates almost doubled from last year and it is on track to deliver on its long-term turnaround goals. New business is the strongest in about three years and free cash outflow was reduced to $82 million from $166 million.

"We have been called to the party more often than last year or 2003," Chief Executive Michael Jordan said in a conference call. "Our long term goals are well within reach."
What's ahead for Windows

Contract signings surged 87 percent to $7.1 billion, boosted by a $3.85 billion contract with Britain's Ministry of Defense. But the initial investment in the contract will hurt its earnings by 10 cents a share and cashflow by $250 million this year and will not contribute to its results until 2007.

The revenue contribution from the Ministry of Defense contract is not going to be significant enough for EDS to alter its 2005 revenue estimates of $20 billion to $21 billion, Chief Financial Officer Bob Swan told reporters.

Its U.S. Navy contract is expected to break even this year after 4.5 years of losses.

"I don't see more shoes dropping, but I don't see a real rebound," said Joseph Vafi, an analyst with Jefferies & Co. "I am not so concerned with its earnings guidance--it's really a story of free cash flow and they've got to stem the reduction of their top line - everything else will fix itself."

EDS expects second-quarter revenue of $5.0 billion to $5.2 billion and a loss of 2 cents to 7 cents per share. Wall Street analysts on average expected earnings of 10 cents a share and revenue of $5.06 billion.

The expected loss includes 26 cent per share for a previously disclosed pension charge from the loss of the contract with Britain's Inland Revenue but excludes stock option expenses.

Story Copyright © 2005 Reuters Limited. All rights reserved.
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