CSC Reports Strong Q1 2014 Increase in Profitability

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CSC Reports Strong Q1 2014 Increase in Profitability

Diluted EPS from Continuing Operations of $0.91 Up $0.81 YoY

Net Income of $159 Million Up $117 Million or 279% YoY

Operating Income of $304 Million Up $158 Million or 108% YoY

Operating Income Margin of 9.3% Up from 4.0% in Q1 2013

Raising FY 2014 Target Range for EPS from Continuing Operations to $3.50 - $3.70

FALLS CHURCH, Va.--(BUSINESS WIRE)-- CSC (NYS: CSC) today reported diluted earnings per share of $1.02 consisting of $0.91 from continuing operations and $0.11 from discontinued operations for the first quarter of 2014. During the quarter, CSC announced the sale of two businesses which are now included in discontinued operations. In the first quarter of 2013, CSC reported $0.26 of diluted earnings per share consisting of $0.10 from continuing operations and $0.16 from discontinued operations. Total revenue was $3.26 billion, a decline of 10% in constant currency when compared to $3.63 billion from the year ago period. However, on a more comparable basis, revenue declined by 6% in constant currency.

"We are encouraged with the pace of our turnaround. Our cost takeout actions are driving margin expansion and earnings growth," said Mike Lawrie, president and CEO. "The company is beginning to pivot more towards growth and we are investing in offerings and partnerships that will enhance our differentiation and expand our market coverage. Based on our current progress, we are raising our target for EPS from continuing operations by 20 cents to $3.50 - $3.70."

Financial Highlights

  • EPS from continuing operations of $0.91 compares with $0.10 in the year ago period.
  • Net income was $159 million for the first quarter, an increase of $117 million from net income of $42 million in the prior year.
  • Operating income was $304 million, an increase of $158 million as compared to $146 million for the first quarter of fiscal 2013. Operating income margin was 9.3%, an increase of 530 bps from 4.0% in the year ago period.
  • Earnings before interest and taxes (EBIT) was $241 million, an increase of $167 million as compared to $74 million for the first quarter of fiscal 2013. EBIT margin of 7.4% improved by 540 bps from 2.0% in the prior year.
  • Operating cash flow of $213 million in the quarter compares with the $221 million in the prior year.
  • Free cash flow of negative $9 million improved by $16 million when compared with negative $25 million for the year ago period.
  • Ending cash and cash equivalents were $1.93 billion as of June 28, 2013, an increase of $930 million over the prior year.

New Operating Model

As previously disclosed, CSC has implemented a new operating model to align the company's leadership and assets with its strategy of leading the next generation of IT services and solutions. The new operating model resulted in a change to the Company's reportable segments for fiscal 2014 which are now: Global Business Services (GBS), Global Infrastructure Services (GIS), and the North American Public Sector (NPS).

Global Business Services

GBS provides consulting, industry software & solutions, and applications services. GBS revenue was $1.08 billion in the quarter which compares with revenue of $1.28 billion in the year ago quarter. The revenue decline is primarily due to a net reduction of $72 million from a divested IT staffing business and $55 million from a one-time NHS milestone payment in the prior year. On a more comparable basis, revenue decreased by 4% in constant currency. Operating margin increased to 9.3% from 5.2% in the prior year, 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 provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, as well as CSC's next generation Cloud offerings including secure Infrastructure as a Service (IaaS), private Cloud solutions, CloudMail and Storage as a Service (SaaS).

GIS revenue was $1.15 billion in the quarter, a 4% decrease in constant currency from the prior year primarily due to contract conclusions and contract scope changes in Europe. Operating margin was 7.1%, a significant increase from 1.3% in the prior year as the business benefitted from cost takeout initiatives and better contract performance. GIS reported new business awards of $900 million in the quarter.

North American Public Sector

NPS provides mission-specific IT services, infrastructure and business services primarily to the U.S. federal government and this segment has not changed as a result of the new operating model. NPS revenue was $1.05 billion in the quarter, a decline of 11% as compared to first quarter of fiscal 2013. Revenue in the quarter was impacted by a reduction in professional services at the Department of Defense and other government agencies as the result of sequestration, as well as contracts which are winding down. Operating margin was 11.5% versus 7.9% in the prior year and this improvement is due to the benefit of our cost takeout initiatives and better contract performance. New business awards were $700 million in the quarter.

Returning Capital to Shareholders

During the first quarter, CSC returned $157 million to shareholders consisting of $30 million in common stock dividends and $127 million of share repurchases. CSC repurchased 2.8 million shares at an average price of $44.78 per share during the quarter. CSC had 147,964,168 basic shares outstanding on June 28, 2013.

Conference Call and Webcast

CSC senior management will host a conference call and Webcast at 5:00 p.m. EDT today. The dial-in number for domestic callers is 800-533-7954. Callers who reside outside the United States or Canada should dial 785-830-1924. The passcode for all participants is 6393537. The Webcast audio and any presentation slides will be available at

A replay of the conference call will be available from approximately two hours after the conclusion of the call until August 12, 2013. The replay dial-in number is 888-203-1112 for domestic callers and 719-457-0820 for callers who reside outside of the U.S. and Canada. The replay passcode is also 6393537. A replay of this Webcast will also be available on CSC's Web site.

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

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 87,000 employees and reported revenue of $13.8 billion for the 12 months ended June 28, 2013.

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 29, 2013 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.

Business Segment Revenues, Operating Income and Operating Margins

(preliminary and unaudited)


Revenues by Segment

Quarter Ended
(Amounts in millions) June 28, 2013 June 29, 2012 % Change

% Change in

Global Business Services $ 1,083 $ 1,278 (15.3 )% (14.8 )%
Global Infrastructure Services 1,150 1,203 (4.4 )% (3.7 )%
North American Public Sector 1,053 1,183 (11.0 )% (11.0 )%
Corporate & Eliminations   (26 )   (31 )
Total Revenues $ 3,260   $ 3,633   (10.3 )% (9.9 )%

Operating Income and Operating Margins by Segment

Quarter Ended
June 28, 2013 June 29, 2012
(Amounts in millions) Operating Income


Operating Income


Global Business Services $ 101 9.3 % $ 66 5.2 %
Global Infrastructure Services 82 7.1 % 16 1.3 %
North American Public Sector 121 11.5 % 93 7.9 %
Corporate & Eliminations       (29 )
Total Operating Income $ 304   9.3 % $ 146   4.0 %

Consolidated Condensed Statements of Operations

(preliminary and unaudited)

Quarter Ended
(Amounts in millions, except per-share amounts) June 28, 2013     June 29, 2012
Revenues $ 3,260   $ 3,633  
Costs of services (excludes depreciation and amortization and restructuring costs) 2,466 2,977
Selling, general and administrative 292 281
Depreciation and amortization 255 262
Restructuring costs 7 27
Interest expense 39 44
Interest income (4 ) (5 )
Other (income) expense, net (1 ) 12  
Total costs and expenses 3,054   3,598  
Income from continuing operations before taxes 206 35
Taxes on income 65   18  
Income from continuing operations 141 17
Income from discontinued operations, net of taxes 18   25  
Net income 159 42
Less: net income attributable to noncontrolling interest, net of tax 3   2  
Net income attributable to CSC common stockholders $ 156   $ 40  
Earnings per common share
Continuing operations $ 0.92 $ 0.10
Discontinued operations 0.12   0.16  
$ 1.04   $ 0.26  
Continuing operations $ 0.91 $ 0.10
Discontinued operations 0.11   0.16  
$ 1.02   $ 0.26  
Cash dividend per common share $ 0.20 $ 0.20
Weighted average common shares outstanding for:
Basic EPS 149.854 155.227
Diluted 152.238 155.647

Selected Balance Sheet Data

(preliminary and unaudited)

As of
(Amounts in millions) June 28, 2013     March 29, 2013
Cash and cash equivalents $ 1,929 $ 2,054
Receivables, net 2,880 3,199
Prepaid expenses and other current assets 551   420  
Total current assets 5,360   5,673  
Property and equipment, net 2,114 2,184
Software, net 611 611
Outsourcing contract costs, net 487 505
Goodwill 1,444 1,516
Other assets 850   762  
Total Assets $ 10,866   $ 11,251  
Short-term debt and current maturities of long-term debt $ 243 $ 234
Accounts payable 316 373
Accrued payroll and related costs 605 653
Accrued expenses and other current liabilities 1,255 1,425
Deferred revenue and advance contract payments 629 630
Income taxes payable and deferred income taxes 31   34  
Total current liabilities 3,079   3,349  
Long-term debt, net of current maturities 2,461 2,498
Income tax liabilities and deferred income taxes 494 501
Other long-term liabilities 1,720 1,743
Total Equity 3,112 3,160
Total Liabilities and Equity $ 10,866   $ 11,251  
Debt as a percentage of total capitalization 46.5 % 46.4 %

Consolidated Condensed Statements of Cash Flows

(preliminary and unaudited)

Quarter ended
(Amounts in millions) June 28, 2013     June 29, 2012
Cash flows from operating activities:
Net income $ 159 $ 42
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 255 262
Stock-based compensation 17 7
(Gain) loss on dispositions (25 ) 3
Excess tax benefit from stock based compensation (3 )
Unrealized foreign currency exchange gain (12 ) (22 )
Other non cash charges, net 4 18
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in assets 34 (97 )
(Decrease) increase in liabilities (216 ) 8  
Net cash provided by operating activities 213   221  
Cash flows from investing activities:
Purchases of property and equipment (101 ) (122 )
Outsourcing contracts (20 ) (31
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