EDS Finally Owns Up to Bleak Outlook

EDS EDS is struggling to reboot.

The glitch-prone computer services giant could soon take dramatic steps -- including slashing its dividend and issuing more shares -- in an effort to dodge a junk credit rating that could further erode its business. The company, which previously downplayed a possible downgrade, finally recognized the threat in an ominous quarterly report filed after the market closed on Monday.

"These credit rating agencies could take further adverse actions with respect to our ratings, which could have an adverse effect on the market price of our securities," the filing states. "In addition, a negative change in our ratings could materially adversely impact our ability to compete for new business as well as our ability to access capital and our cost of capital."

The warning comes as EDS is already fighting -- and failing -- to gain market share in the highly competitive computer services industry. In its glory days, EDS relied on high-profile "megadeals" to grow its business. But the huge contracts required significant cash investments that, in some cases, have yet to pay off. Indeed, the company's largest megadeal -- a contract to create the Navy-Marine Corps Intranet -- has turned into a disaster.

The company's long-struggling stock fell 6.9% to $16.30 -- a 52-week low -- on the latest disclosures.

Point Break

By now, the NMCI deal has triggered big charges, earnings misses and reductions in cash flow guidance. It has also sparked a formal probe by the Securities and Exchange Commission. Moreover, it has now led management to acknowledge breakdowns in its internal control system for a second time.