CSC Delivers Continued Earnings Growth in Second Quarter 2015

FALLS CHURCH, Va.--(BUSINESS WIRE)--

CSC CSC today reported results for the second quarter of 2015.

“Our transformation efforts at CSC continued to show good progress in our second quarter,” said Mike Lawrie, president and CEO. “In the commercial business, we delivered solid improvements in profitability and are showing good revenue growth in our next-generation offerings, which is helping to offset headwinds in the infrastructure business. Our public sector business has seen a normalization of revenue and continues to deliver strong margins, which is helping to drive overall earnings growth.”

Financial Highlights

• EPS from continuing operations of $1.18 for the second quarter, an increase of $0.17 or 17% when compared with $1.01 for the second quarter of fiscal 2014.
• Income from continuing operations was $177 million for the second quarter, an increase of $18 million sequentially and an increase of $15 million from the prior year.
• Operating income was $349 million, an increase of $45 million sequentially and a decrease of $12 million when compared with the prior year. Operating income margin of 11.3% for the quarter increased from 9.4% on a sequential basis and was unchanged from the prior year.
• Earnings before interest and taxes (EBIT) was $276 million, an increase of $28 million sequentially and $5 million when compared with the second quarter of fiscal 2014. EBIT margin of 9.0% improved from 7.7% on a sequential basis and 8.5% in the prior year.
• Operating cash flow of $217 million in the quarter compares with $270 million in the prior year.
• Free cash flow of $31 million compares with $86 million in the prior period.

Global Business Services

GBS revenue of $1.00 billion in the quarter compares with revenue of $1.02 billion in the year ago quarter. Segment revenue decreased by 3% in constant currency due to the ongoing repositioning of the consulting business towards higher value next-generation offerings and contract completions, partially offset by growth in applications modernization. Operating margin of 13.0% increased from 11.7% in the prior year and 9.9% in the prior quarter, primarily due to the company's cost takeout efforts. New business awards for GBS were $1.2 billion in the quarter.

Global Infrastructure Services

GIS revenue was $1.04 billion in the quarter, a decrease of 8% in constant currency from the prior year. Growth in next-generation offerings of cloud and cyber helped to partially offset the impact of price-downs, restructurings and contract conclusions. Operating margin was 6.6%, which reflects continued investments in new offerings and strategic partnerships, and compares with 9.6% in the prior year and 6.3% in the prior quarter. GIS reported new business awards of $600 million in the quarter.

North American Public Sector

NPS revenue was $1.04 billion in the quarter, a decrease of 1% when compared with $1.05 billion in the second quarter of fiscal 2014. Growth in state and local government revenue largely offset declines from Department of Defense contracts. Operating margin of 15.4% compares with 15.5% in the prior year and 14.8% in the prior quarter, as the business continues to benefit from cost takeout and better contract performance. New business awards for NPS were $1.1 billion in the quarter.

Returning Capital to Shareholders

During the second quarter, CSC returned $310 million to shareholders consisting of $32 million in common stock dividends and $278 million of share repurchases. CSC repurchased 4.6 million shares through open market purchases at an average price of $59.77. In addition, the Company entered into an accelerated share repurchase agreement under which CSC retired an additional 1.3 million shares for $75 million. CSC had 140,454,364 basic shares outstanding on October 3, 2014.

Conference Call and Webcast

CSC senior management will host a conference call and webcast at 5 p.m. EST today. The dial-in number for domestic callers is 877-874-1588. Callers who reside outside of the United States or Canada should dial 719-325-4794. The passcode for all participants is 5068637.

A replay of the conference call will be available from approximately two hours after the conclusion of the call until November 13, 2014. The replay dial-in number is 888-203-1112 for domestic callers and 719-457-0820 for callers who reside outside of the United States and Canada. The replay passcode is also 5068637. A replay of this webcast will also be available on CSC's website.

Non-GAAP Measures

In an effort to provide investors with additional information regarding the Company's preliminary results as determined by generally accepted accounting principles (GAAP), the Company has also disclosed in this press release preliminary non-GAAP information which management believes provides useful information to investors, including: operating income, operating margin, earnings before interest and taxes (EBIT), EBIT margin, and free cash flow. Reconciliations of the preliminary non-GAAP measures to the respective and most directly comparable GAAP measures, as well as the rationale for management's use of non-GAAP measures, is included below.

About CSC

Computer Sciences Corporation (CSC) is a global leader of next generation information technology (IT) services and solutions. The Company's mission is to enable superior returns on our client's technology investments through best-in-class industry solutions, domain expertise and global scale. CSC has approximately 74,000 employees and reported revenue of $12.9 billion for the 12 months ended October 3, 2014. For more information, visit the company's website at www.csc.com.

All statements in this press release and in all future press releases that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent the Company's intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, many of which are outside the Company's control. These factors could cause actual results to differ materially from such forward-looking statements. For a written description of these factors, see the section titled “Risk Factors” in CSC's Form 10-K for the fiscal year ended March 28, 2014 and any updating information in subsequent SEC filings. The Company disclaims any intention or obligation to update these forward-looking statements whether as a result of subsequent event or otherwise, except as required by law.

Note: During the first quarter of fiscal 2015, CSC adopted a new mark-to-market pension accounting policy and changed its inter-company accounting policy. The company's results from the prior year have been adjusted to reflect these changes.

Business Segment Revenues, Operating Income and Operating Margins
(preliminary and unaudited)
Revenues by Segment
				Quarter Ended
(Amounts in millions)				October 3, 2014						September 27, 2013						% Change					% Change in Constant Currency
Global Business Services				$	1,003					$	1,022					(1.9	)%				(3.2	)%
Global Infrastructure Services				1,036						1,113						(6.9	)%				(8.4	)%
North American Public Sector				1,041						1,052						(1.0	)%				(1.0	)%
Total Revenues				$	3,080					$	3,187					(3.4	)%				(4.3	)%

				Six Months Ended
(Amounts in millions)				October 3, 2014						September 27, 2013						% Change					% Change in Constant Currency
Global Business Services				$	2,091					$	2,076					0.7	%				(1.2	)%
Global Infrastructure Services				2,167						2,260						(4.1	)%				(5.8	)%
North American Public Sector				2,059						2,105						(2.2	)%				(2.2	)%
Total Revenues				$	6,317					$	6,441					(1.9	)%				(3.1	)%

Operating Income and Operating Margins by Segment
				Quarter Ended
				October 3, 2014											September 27, 2013
(Amounts in millions)				Operating Income						Operating Margin					Operating Income						Operating Margin
Global Business Services				$	130					13.0	%				$	120					11.7	%
Global Infrastructure Services				68						6.6	%				107						9.6	%
North American Public Sector				160						15.4	%				163						15.5	%
Corporate				(9		)				—					(29		)				—
Total Operating Income				$	349					11.3	%				$	361					11.3	%

Operating Income and Operating Margins by Segment
				Six Months Ended
				October 3, 2014											September 27, 2013
(Amounts in millions)				Operating Income						Operating Margin					Operating Income						Operating Margin
Global Business Services				$	238					11.4	%				$	233					11.2	%
Global Infrastructure Services				139						6.4	%				199						8.8	%
North American Public Sector				311						15.1	%				290						13.8	%
Corporate				(35		)				—					(29		)				—
Total Operating Income				$	653					10.3	%				$	693					10.8	%

Consolidated Condensed Statements of Operations
(preliminary and unaudited)
				Quarter Ended												Six Months Ended
				October 3,						September 27,						October 3,						September 27,
(Amounts in millions, except per-share amounts)				2014						2013						2014						2013
Revenues				$	3,080					$	3,187					$	6,317					$	6,441
Costs of services (excludes depreciation and amortization and restructuring costs ($(7) and $17 for the second quarter of fiscal 2015 and 2014, respectively, and $1 and $24 for the first six months of fiscal 2015 and 2014, respectively))				2,207						2,317						4,571						4,754
Selling, general and administrative (excludes restructuring costs ($0 and $(2) for the second quarter of fiscal 2015 and 2014, respectively, and $2 and $(2) for the first six months of fiscal 2015 and 2014, respectively))				346						314						690						602
Depreciation and amortization				252						248						524						502
Restructuring costs				(7		)				15						3						22
Interest expense				36						35						75						74
Interest income				(5		)				(3		)				(10		)				(7		)
Other expense, net				6						22						5						21
Total costs and expenses				2,835						2,948						5,858						5,968
Income from continuing operations before taxes				245						239						459						473
Taxes on income				68						77						123						150
Income from continuing operations				177						162						336						323
(Loss) income from discontinued operations, net of taxes				(21		)				80						(29		)				96
Net income				156						242						307						419
Less: net income attributable to noncontrolling interest, net of tax				5						10						10						13
Net income attributable to CSC common stockholders				$	151					$	232					$	297					$	406
Earnings per common share
Basic:
Continuing operations				$	1.20					$	1.03					$	2.26					$	2.09
Discontinued operations				(0.15		)				0.54						(0.20		)				0.64
				$	1.05					$	1.57					$	2.06					$	2.73
Diluted:
Continuing operations				$	1.18					$	1.01					$	2.22					$	2.05
Discontinued operations				(0.14		)				0.53						(0.20		)				0.63
				$	1.04					$	1.54					$	2.02					$	2.68
Cash dividend per common share				$	0.23					$	0.20					$	0.46					$	0.40
Weighted average common shares outstanding for:
Basic EPS				143.279						148.047						144.346						148.951
Diluted				145.596						150.973						147.155						151.476

Selected Balance Sheet Data
(preliminary and unaudited)
				As of
(Amounts in millions)				October 3, 2014						March 28, 2014
Assets
Cash and cash equivalents				$	1,923					$	2,443
Receivables, net				2,664						2,759
Prepaid expenses and other current assets				489						426
Total current assets				5,076						5,628
Property and equipment, net				1,793						2,031
Software, net				794						650
Outsourcing contract costs, net				360						427
Goodwill				1,684						1,667
Other assets				866						986
Total Assets				$	10,573					$	11,389
Liabilities
Short-term debt and current maturities of long-term debt				$	569					$	681
Accounts payable				380						394
Accrued payroll and related costs				498						592
Accrued expenses and other current liabilities				908						1,094
Deferred revenue and advance contract payments				624						624
Income taxes payable and deferred income taxes				41						77
Total current liabilities				3,020						3,462
Long-term debt, net of current maturities				2,214						2,207
Income tax liabilities and deferred income taxes				559						557
Other long-term liabilities				1,061						1,219
Total Equity				3,719						3,944
Total Liabilities and Equity				$	10,573					$	11,389
Debt as a percentage of total capitalization				42.8		%				42.3		%
Net debt as a percentage of total capitalization				13.2		%				6.5		%

Consolidated Condensed Statements of Cash Flows
(preliminary and unaudited)
				Six Months Ended
(Amounts in millions)				October 3, 2014						September 27, 2013
Cash flows from operating activities:
Net income				$	307					$	419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization					524						502
Stock-based compensation					35						33
Gain on dispositions					(13	)					(98	)
Excess tax benefit from stock based compensation					(12	)					(5	)
Unrealized foreign currency exchange gain					4						(22	)
Other non cash charges, net					17						21
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
(Increase) decrease in assets					(32	)					60
Decrease in liabilities					(340	)					(427	)
Net cash provided by operating activities					490						483
Cash flows from investing activities:
Purchases of property and equipment					(201	)					(188	)
Payments for outsourcing contract costs					(28	)					(38	)
Software purchased and developed					(104	)					(91	)
Payments for acquisitions, net of cash acquired					(35	)					(27	)
Business dispositions					(13	)					232
Proceeds from sale of assets					70						12
Other investing activities, net					13						24
Net cash used in investing activities					(298	)					(76	)
Cash flows from financing activities:
Repayment of borrowings under lines of credit					(32	)					—
Principal payments on long-term debt					(139	)					(120	)
Proceeds from stock options and other common stock transactions					125						85
Excess tax benefit from stock-based compensation					12						5
Repurchase of common stock					(559	)					(251	)
Dividend payments					(63	)					(60	)
Other financing activities, net					—						(8	)
Net cash used in financing activities					(656	)					(349	)
Effect of exchange rate changes on cash and cash equivalents					(56	)					(17	)
Net increase in cash and cash equivalents					(520	)					41
Cash and cash equivalents at beginning of year					2,443						2,054
Cash and cash equivalents at end of period				$	1,923					$	2,095

Non-GAAP Financial Measures

The following tables reconcile non-GAAP financial measures of operating income, earnings before interest and taxes (EBIT) and free cash flow, to the respective most directly comparable financial measure calculated and presented in accordance with GAAP. CSC management believes that these non-GAAP financial measures provide useful information to investors regarding the Company's financial condition and results of operations as they provide another measure of the Company's profitability and ability to service its debt, and are considered important measures by financial analysts covering CSC and its peers.

Management uses operating income to evaluate financial performance and it is one of the measures used in assessing management performance. One of the limitations associated with the use of operating income (as compared to reported earnings) is that it does not reflect the complete financial results of the Company. CSC compensates for these limitations by providing reconciliation between operating income and income from continuing operations, before taxes. Management uses free cash flow as one of the factors in reviewing the overall performance of the business. Management compensates for the limitations of this non-GAAP measure by also reviewing the GAAP measures of operating, investing and financing cash flows as well as debt levels measured by the debt-to-total capitalization and net debt-to-total capitalization ratio.

GAAP Reconciliations

Operating Income

(preliminary and unaudited)

CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment selling, general and administrative (SG&A) expense, excluding corporate G&A and mark-to-market adjustment to pension expense. Operating margin is defined as operating income as a percentage of revenue. Pre-tax margin is defined as income from continuing operations, before taxes as a percentage of revenue. A reconciliation of consolidated operating income to income from continuing operations, before taxes is as follows:

				Quarter Ended												Six Months Ended
(Amounts in millions)				October 3, 2014						September 27, 2013						October 3, 2014						September 27, 2013
Operating income				$	349					$	361					$	653					$	693
Corporate G&A					(67	)					(68	)					(123	)					(132	)
Mark-to-market adjustment to pension expense					—						—						(1	)					—
Interest expense					(36	)					(35	)					(75	)					(74	)
Interest income					5						3						10						7
Other income (expense), net					(6	)					(22	)					(5	)					(21	)
Income from continuing operations before taxes				$	245					$	239					$	459					$	473
Operating margin					11.3	%					11.3	%					10.3	%					10.8	%
Pre-tax margin					8.0	%					7.5	%					7.3	%					7.3	%

Earnings Before Interest and Taxes

(preliminary and unaudited)

CSC defines EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. Reconciliation of EBIT to income from continuing operations is as follows:

				Quarter Ended												Six Months Ended
(Amounts in millions)				October 3, 2014						September 27, 2013						October 3, 2014						September 27, 2013
Earnings before interest and taxes				$	276					$	271					$	524					$	540
Interest expense					(36	)					(35	)					(75	)					(74	)
Interest income					5						3						10						7
Income taxes					(68	)					(77	)					(123	)					(150	)
Income from continuing operations				$	177					$	162					$	336					$	323
EBIT margin					9.0	%					8.5	%					8.3	%					8.4	%

Free Cash Flow

(preliminary and unaudited)

CSC defines free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities), and (3) payments on capital leases and other long-term asset financings. A reconciliation of free cash flow to net cash provided by operating activities is as follows:

				Quarter Ended												Six Months Ended
(Amounts in millions)				October 3, 2014						September 27, 2013						October 3, 2014						September 27, 2013
Net cash provided by operating activities				$	217					$	270					$	490					$	483
Net cash (used in) provided by investing activities					(184	)					25						(298	)					(76	)
Acquisitions, net of cash acquired					35						27						35						27
Business dispositions					18						(176	)					13						(232	)
Short-term investments					—						—						—						(5	)
Payments on capital leases and other long-term asset financings					(55	)					(60	)					(139	)					(120	)
Free cash flow				$	31					$	86					$	101					$	77

Recast Fiscal 2014 and Fiscal 2013 Quarterly Revenues by Segment
(preliminary and unaudited)
Fiscal 2014				Quarter ended
(Amounts in millions)				June 28, 2013					September 27, 2013					December 27, 2013					March 28, 2014					Total for Fiscal 2014
Global Business Solutions				$	1,054				$	1,022				$	1,093				$	1,152				$	4,321
Global Infrastructure Services					1,147					1,113					1,145					1,173					4,578
North American Public Sector					1,053					1,052					990					1,004					4,099
Total Revenues				$	3,254				$	3,187				$	3,228				$	3,329				$	12,998

Fiscal 2013				Quarter ended
(Amounts in millions)				June 29, 2012					September 28, 2012					December 28, 2012					March 29, 2013					Total for Fiscal 2013
Global Business Solutions				$	1,257				$	1,185				$	1,201				$	1,201				$	4,844
Global Infrastructure Services					1,188					1,153					1,178					1,170					4,689
North American Public Sector					1,183					1,190					1,157					1,132					4,662
Total Revenues				$	3,628				$	3,528				$	3,536				$	3,503				$	14,195

Recast Fiscal 2014 and Fiscal 2013 Quarterly Operating Income (Loss) by Segment
(preliminary and unaudited)
Fiscal 2014				Quarter ended
(Amounts in millions)				June 28, 2013					September 27, 2013						December 27, 2013						March 28, 2014						Total for Fiscal 2014
Global Business Solutions				$	113				$	120					$	140					$	201					$	574
Global Infrastructure Services					92					107						91						92						382
North American Public Sector					127					163						122						112						524
Corporate					—					(29	)					(15	)					(20	)					(64	)
Total Operating Income				$	332				$	361					$	338					$	385					$	1,416

Fiscal 2013				Quarter ended
(Amounts in millions)				June 29, 2012						September 28, 2012						December 28, 2012						March 29, 2013						Total for Fiscal 2013
Global Business Solutions				$	75					$	89					$	106					$	133					$	403
Global Infrastructure Services					23						52						67						26						168
North American Public Sector					99						147						136						129						511
Corporate					(28	)					(4	)					(28	)					(53	)					(113	)
Total Operating Income				$	169					$	284					$	281					$	235					$	969

Impact on Fiscal 2014 Consolidated Condensed Statements of Operations

The following table presents the effects of retrospectively applying the change in the pension accounting policy, by selected line items, of the accompanying unaudited Consolidated Condensed Statements of Operations:

				Quarter ended September 27, 2013
(Amounts in millions, except per-share amounts)				As previously reported					As Revised					Impact of change in accounting methods
Revenue				$	3,187				$	3,187				$	—
Costs of services					2,338					2,317					(21	)
Selling, general & administrative expenses					316					314					(2	)
Income from continuing operations, before taxes					216					239					23
Taxes on income					70					77					7
Income from continuing operations					146					162					16
Income from discontinued operations, net of taxes					63					80					17
Net income					209					242					33
Net income attributable to noncontrolling interest, net of tax					6					10					4
Net income attributable to CSC common stockholders					203					232					29
Basic EPS - Continuing Operations				$	0.95				$	1.03				$	0.08
Basic EPS - Discontinued Operations				$	0.42				$	0.54				$	0.12
Diluted EPS - Continuing operations				$	0.93				$	1.01				$	0.08
Diluted EPS - Discontinued operations				$	0.41				$	0.53				$	0.12

				Six months ended September 27, 2013
(Amounts in millions, except per-share amounts)				As previously reported					As Revised					Impact of change in accounting methods
Revenue				$	6,441				$	6,441				$	—
Costs of services					4,794					4,754					(40	)
Selling, general and administrative expenses					608					602					(6	)
Income from continuing operations, before taxes					427					473					46
Taxes on income					136					150					14
Income from continuing operations					291					323					32
Loss from discontinued operations, net of taxes					77					96					19
Net income					368					419					51
Net income attributable to noncontrolling interest, net of tax					9					13					4
Net income attributable to CSC common stockholders					359					406					47
Basic EPS - Continuing operations				$	1.89				$	2.09				$	0.20
Basic EPS - Discontinued Operations				$	0.52				$	0.64				$	0.12
Diluted EPS - Continuing operations				$	1.86				$	2.05				$	0.19
Diluted EPS - Discontinued operations				$	0.51				$	0.63				$	0.12

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