BDM Takes Steps to Salvage State Welfare Effort

BR>

BDM Takes Steps to Salvage State Welfare Effort

By Nick Wakeman
Staff Writer

BDM International Inc. is taking steps to turn around a welfare system effort that recently hit a snag, causing the company's stock to plunge after lowering its second-quarter earnings expectations.

McLean, Va.-based BDM's problems mirror those of American Management Systems Inc. and Electronic Data Systems Corp., systems integrators whose stock prices also have tumbled after announcing reduced earnings expectations.

BDM's problems stemmed from a single contract for an unidentified state that went awry; AMS experienced a similar problem in March on a telecommunications contract with an unidentified European customer.

BDM Chief Executive, Philip Odeen, BDM photo

BDM chief executive Philip Odeen said in an interview last week that the company is taking a worst-case approach by lowering second-quarter expectations and signaling that subsequent quarterly earnings could be lower than anticipated.

Odeen said he has better than 50 percent confidence that the problems will be resolved. "We want to build the system and the state wants us to build the system," he said.

BDM hired Tom Grissen as the new project manager in May. "A fresh face is often a healthy thing to do in these cases," Odeen said.

BDM said June 9 it would have lower than expected earnings per share for the second quarter because of problems with a welfare system the company is developing for an unnamed state. The second quarter ends June 30.

The value of BDM's stock plunged 25 percent on June 9, falling from $27.50 to $20.75, a drop of $6.75. By June 19, the stock was $21.75, and analysts said they expect the price to rebound, much like AMS' stock prices did after it lowered an earnings report in March.

Changing state and federal welfare laws in the midcourse of the contract was the major cause of the problems, Odeen said. "Work on the contract started two years ago, before there was reform," he said.

Modifying the $25 million fixed-price contract proved difficult, and so far the state and BDM have been unable to resolve the problems, Odeen said.

Similarly, Lockheed Martin Corp. of Bethesda, Md., has run into problems in Massachusetts and California with child support collection systems. State and federal laws change quickly, necessitating changes and subsequent delays in developing the systems. In Massachusetts, the collection system is 18 months behind schedule and $5 million over budget.

BDM CFO Thomas Faulders, BDM photo

Odeen and chief financial officer Thomas Faulders declined to name the state BDM is having the dispute with. "That would not be in our best interest," Faulders said. The company is hopeful that problems can be resolved in the next few months.

With welfare reform, the state broadened the scope of what it wanted in the system. Some added features included more record-keeping to track how long and how many times a recipient had been in the state's welfare program. The state also wants the system to be tied to other programs such as job training, Odeen said.

In the beginning, BDM thought it could make the changes under the fixed-price contract, but by last summer, the company realized it could not, he said. That realization kicked off several rounds of negotiations with the state and by early November the state and BDM agreed to change the structure of the contract, Odeen said.

"We thought the problems were behind us," he said.

But more problems cropped up about two months ago as BDM and the state negotiated further contract modifications. "That was when the [state's] procurement people ruled that the contract could not be converted to time and materials," he said.

A time and material contract is one where the contractor is paid an hourly rate for the work rather than a fixed price for the entire project.

Currently, BDM is not being paid for work under the contract. Out of the $25 million, BDM has only been paid about $8 million, Faulders said.

Despite the dispute, work is continuing on the project. Odeen said the company's relationship with the state is still good, and BDM has about 80 to 90 people working on the project. Work on the project is costing BDM about $800,000 a month, which company officials hope to recoup once the dispute is settled, Odeen said.

In the future, BDM will pay more attention to program management, especially in the early phases of a contract, Odeen said.

"Early in this contract we didn't do a good job in scope control and change management," Odeen said. "Sometimes you need to be more hard-nosed [with the customer.]"

BDM's earning reports caught many off guard, even though the company had told analysts several months ago that the contract had troubles, said Moshe Katri, an analyst with UBS Securities, New York.

The company's stock is expected to rebound, Katri said. "Investors should use this as a buy opportunity," he said.

"This was just an isolated event," said Greg Gould, vice president of market research for Goldman Sachs, New York. "It is just problems with one contract."

One lesson, according to Gould, is that companies should avoid fixed price contracts, especially when dealing with state governments. "They are fickle to begin with," he said.