BearingPoint Inc.'s debt was placed on review by Moody's Investors Service yesterday for a possible downgrade to below investment grade on concerns about the McLean consulting company's declining profit.
On Thursday, BearingPoint reported a 61 percent drop in first-quarter earnings, mainly because of higher expenses and taxes and declining business in Europe. Paul Hsi, an analyst for Moody's, said that the results did not meet his expectations. "We want to understand how the company's going to make up for the shortfall" over the year, Hsi said.
A downgrade would probably have less of an impact on BearingPoint, which designs and installs computer systems, than it would on companies, such as Electronic Data Systems Corp., that manage major technology projects for customers, said Joseph Vafi, an analyst for Jefferies & Co. Those companies depend on inexpensive debt because they sink lots of their own money into computers and software for specific jobs. BearingPoint, on the other hand, takes on smaller projects that require less capital and more brainpower.
But the Moody's review reflects the fact that BearingPoint isn't generating the amount of cash that most consulting companies, whose performance closely mirrors the economy's, do in good times. The company is fighting to keep consulting fees from falling amid fierce competition while it invests money in new offices in India and China to take advantage of the availability of lower-wage software engineers abroad.
The Moody's review affects a $250 million revolving credit line and shelf registrations for senior unsecured and subordinated debt and preferred stock.
BearingPoint has struggled over the past few years as the economy faltered and corporate spending on technology and consulting services plunged. The company's European practices, acquired from Andersen Worldwide and the German auditing firm KPMG DTG, are recovering more slowly than BearingPoint initially predicted. The company has had difficulty laying off consultants in Europe, especially in Germany, because of restrictive labor laws. Billing rates and the time it takes to collect bills in Europe are also lagging behind comparable figures in the United States.
John Schneidawind, a BearingPoint spokesman, declined to comment on consequences of a lower debt rating.
Costs associated with the increasing use of subcontractors contributed significantly to last quarter's drop in earnings. Executives said on a conference call with investors that the company primarily hired subcontractors to work on projects for the federal government -- one of BearingPoint's few growing business areas. Companies that win government jobs are often contractually required to give a certain percentage of work to subcontractors, usually firms owned by women or minorities.
Hsi said he will assess the company's plans to shift more work from subcontractors to full-time employees.
Cutting costs to correspond with ebbing business can be difficult for a consulting company like BearingPoint that relies on short-term projects, Vafi said. Executives can't count on revenue from contracts far into the future and therefore have a more difficult time deciding whether a rise in business is the start of a sustained trend or just a blip. The wrong call could mean the company hires workers who will sit idle and be a drag on profit, he said.