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CSC Reports Continuing Improvement in Operations in Third Quarter 2013



  CSC Reports Continuing Improvement in Operations in Third Quarter 2013

               Diluted EPS from Continuing Operations of $0.77

                       Operating Income of $268 Million

               Operating Margin of 7.1% Includes Restructuring

                        Free Cash Flow of $245 Million

                           Bookings of $3.0 Billion

   FY2013 EPS from Continuing Operations Target Increased to $2.50 - $2.70

Business Wire

FALLS CHURCH, Va. -- February 5, 2013

CSC (NYSE: CSC) today reported third quarter 2013 diluted earnings per share
of $3.27 consisting of $0.77 from continuing operations and $2.50 from two
businesses that were divested during the quarter. This compares with a diluted
loss per share of ($8.96) in the third quarter 2012, which included a charge
relating to the UK National Health Service (NHS) contract of $9.93 per share.
Total revenues were $3.78 billion compared with $3.69 billion in the year ago
period, an increase of 2.8% in constant currency.

Financial Highlights

  * Diluted EPS from continuing operations of $0.77 per share included a
    workforce restructuring charge of $26 million, or $0.13 per share.
  * Income from continuing operations before taxes of $155 million compares
    with a loss from continuing operations before taxes in the year ago period
    resulting from the $1.5 billion NHS charge.
  * Operating income of $268 million compares with an operating loss in the
    year ago period resulting from the NHS charge.
  * Pre-tax margin of 4.1% compares with a loss in the prior year.
  * Operating margin of 7.1% compares with a loss in the year ago period.
    Operating margin excluding restructuring was 7.7% for the third quarter.
  * Operating cash flow of $413 million compares with $720 million in the
    previous year which included a US Claims settlement of $277 million.
  * Free cash flow of $245 million for the quarter compares with $499 million
    in the previous year which also included the US Claims settlement.
  * The company divested its credit services business and certain businesses
    in Italy during the quarter. The net impact of these transactions is
    reflected in the $2.50 of diluted EPS from discontinued operations.
  * During the quarter, CSC returned cash to shareholders by repurchasing
    approximately 1.97 million shares of common stock for an aggregate price
    of $77 million and paying $31 million in cash dividends, or $0.20 per
    share.
  * Ending cash and cash equivalents were $2.20 billion.

“Our turnaround is tracking to plan. We are transitioning to our new operating
model and we are aligning our assets with our strategy of leading the next
generation of technology services and solutions. Our cost takeout initiatives
are yielding results as demonstrated by higher profit margins in all three
lines of business when compared with the prior year. As a result, we are
raising our target for fiscal year 2013 EPS from continuing operations to
$2.50 - $2.70,” said Mike Lawrie, president and CEO. “During the quarter, we
divested certain non-core businesses and we are using the proceeds to return
cash to shareholders through our share buyback program and incremental
contributions to our pension plans.”

Lines of Business

Managed Services Sector (MSS) revenue of $1.62 billion decreased by 3% as
reported, and 2.8% in constant currency, when compared with the third quarter
of 2012. Segment operating margin increased by 120 basis points to 7.7% due to
better contract performance and cost takeout partially offset by workforce
restructuring charges of $8 million. MSS signed $1.4 billion of new business
during the quarter.

Business Solutions & Services (BSS) revenue of $0.85 billion increased by
28.7% as reported and 29.4% in constant currency. The year-over-year increases
are due to a $204 million reduction of revenue in the year ago period
resulting from NHS. BSS operating margin of 4.2% expanded when compared to a
loss in the prior year due to the NHS charge. Operating margin improved
primarily as the result of cost takeout progress and included a restructuring
charge of $8 million. New business awards for BSS were $0.9 billion.

North American Public Sector (NPS) revenue of $1.34 billion declined by 2.8%
from the third quarter of 2012 primarily due to reductions in contracts from
Civil agencies which were partially offset by revenue growth from Department
of Defense contracts. Operating margin of 10.2% increased by 550 bps when
compared with the prior year and included better cost management and the
benefit of a $22 million settlement. NPS awards of $0.7 billion declined from
one year ago primarily due to delays in government procurement.

Conference Call and Webcast

CSC senior management will host a conference call and Webcast at 11:00 a.m.
EST today. The dial-in number for domestic callers is 800-378-6592. Callers
who reside outside the United States or Canada should dial 719-325-2135. The
passcode for all participants is 9100476. The Webcast audio and any
presentation slides will be available at www.csc.com/investorrelations.

A replay of the conference call will be available from approximately two hours
after the conclusion of the call until February 11, 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 9100476. 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

For more information please visit CSC’s company profile.

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 30, 2012 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
                                                                   % Change in
                    December 28,     December 30,                  Constant
(Amounts in         2012             2011             % Change     Currency
millions)
North American      $  1,340         $  1,379         (2.8  )%     (2.8   )%
Public Sector
Managed                1,620            1,670         (3.0  )%     (2.8   )%
Services Sector
Business
Solutions &            853              663           28.7  %      29.4   %
Services
Corporate &            (32     )        (25     )     —            —
Eliminations
Total Revenues      $  3,781         $  3,687         2.5   %      2.8    %
                     
                    Nine Months Ended
                                                                   % Change in
                    December 28,     December 30,                  Constant
(Amounts in         2012             2011             % Change     Currency
millions)
North American      $  4,083         $  4,299         (5.0  )%     (5.0   )%
Public Sector
Managed                4,838            4,908         (1.4  )%     1.0    %
Services Sector
Business
Solutions &            2,601            2,410         7.9   %      11.2   %
Services
Corporate &            (88     )        (90     )     —            —
Eliminations
Total Revenues      $  11,434        $  11,527        (0.8  )%     0.9    %
                                                                           

                                                                    
Operating Income and Operating Margins by Segment
                      Quarter Ended
                      December 28, 2012            December 30, 2011
                                     Operating                       Operating
(Amounts in           Operating      Margin        Operating         Margin
millions)             Income                       Income
North American        $  137         10.2   %      $  65             4.7    %
Public Sector
Managed Services      125            7.7    %      108               6.5    %
Sector
Business
Solutions &           36             4.2    %      (1,459     )      (220.1 )%
Services
Corporate &           (30     )      —             (21        )      —
Eliminations
Total Operating       $  268         7.1    %      $  (1,307  )      (35.4  )%
Income
                       
                      Nine Months Ended
                      December 28, 2012            December 30, 2011
                                     Operating                       Operating
(Amounts in           Operating      Margin        Operating         Margin
millions)             Income                       Income
North American        $  388         9.5    %      $  51             1.2    %
Public Sector
Managed Services      308            6.4    %      162               3.3    %
Sector
Business
Solutions &           65             2.5    %      (1,417     )      (58.8  )%
Services
Corporate &           (63     )      —             (47        )      —
Eliminations
Total Operating       $  698         6.1    %      $  (1,251  )      (10.9  )%
Income
                                                                             

 
Consolidated Condensed Statements of Operations
(preliminary and unaudited)
                                                    
                    Quarter Ended                    Nine Months Ended
                    December 28,     December        December       December
                                     30,             28,            30,
(Amounts in
millions,
except              2012             2011            2012           2011
per-share
amounts)
                                                                     
Revenues            $  3,781         $  3,687        $ 11,434       $ 11,527  
                                                                     
Costs of
services
(excludes
depreciation
and
amortization,
specified
contract
charge,             2,995            3,186           9,141          9,730
settlement
charge and
restructuring
costs ($18 and
$101 for the
third quarter
and first nine
months of
fiscal 2013))
Cost of
services –
specified
contract charge
(excludes           —                1,281           —              1,281
amount charged
to revenue of
$204 (fiscal
2012))
Cost of
services –
settlement
charge              —                —               —              227
(excludes
amount charged
to revenue of
$42 (2012))
Selling,
general and
administrative
(excludes
restructuring
costs ($8 and       278              272             864            838
$10 for the
third quarter
and first nine
months of
fiscal 2013))
Depreciation
and                 270              301             806            868
amortization
Goodwill            —                60              —              2,745
impairment
Restructuring       26               —               111            —
costs
Interest            57               42              147            129
expense
Interest income     (4        )      (8        )     (14      )     (32      )
Other expense       4                12              (1       )     1         
(income), net
Total costs and     3,626            5,146           11,054         15,787    
expenses
                                                                     
Income (loss)
from continuing     155              (1,459    )     380            (4,260   )
operations
before taxes
Taxes on income     32               (38       )     106            (78      )
Income (loss)
from continuing     123              (1,421    )     274            (4,182   )
operations
Income from
discontinued        390              30              419            110       
operations, net
of taxes
Net income          513              (1,391    )     693            (4,072   )
(loss)
Less: net
income (loss)
attributable to     3                (1        )     13             12        
noncontrolling
interest, net
of tax
Net income
(loss)
attributable to     $  510           $  (1,390 )     $ 680          $ (4,084 )
CSC common
shareholders
                                                                     
Earnings (loss)
per common
share:
Basic:
Continuing          $  0.77          $  (9.15  )     $ 1.68         $ (27.06 )
operations
Discontinued        2.52             0.19            2.70           0.71      
operations
                    $  3.29          $  (8.96  )     $ 4.38         $ (26.35 )
Diluted:
Continuing          $  0.77          $  (9.15  )     $ 1.67         $ (27.06 )
operations
Discontinued        2.50             0.19            2.69           0.71      
operations
                    $  3.27          $  (8.96  )     $ 4.36         $ (26.35 )
                                                                     
Cash dividend
per common          $  0.20          $  0.20         $ 0.60         $ 0.60
share
                                                                     
Weighted
average common
shares
outstanding
for:
Basic EPS           155.039          155.061         155.209        154.983
Diluted             156.084          155.061         155.848        154.983
                                                                              

 
Selected Balance Sheet Data
(preliminary and unaudited)
                                         
                                          As of
(Amounts in millions)                     December 28, 2012     March 30, 2012
                                                                 
Assets
Cash and cash equivalents                 $    2,198            $   1,093
Receivables, net                          2,939                 3,257
Prepaid expenses and other current        481                   533          
assets
Total current assets                      5,618                 4,883        
                                                                 
Property and equipment, net               2,264                 2,441
Software, net                             628                   649
Outsourcing contract costs, net           532                   562
Goodwill                                  1,523                 1,752
Other assets                              695                   902          
Total Assets                              $    11,260           $   11,189   
                                                                 
Liabilities
Short-term debt and current               $    231              $   1,254
maturities of long-term debt
Accounts payable                          373                   478
Accrued payroll and related costs         662                   789
Accrued expenses and other current        1,275                 1,339
liabilities
Deferred revenue and advance contract     629                   619
payments
Income taxes payable and deferred         117                   57           
income taxes
Total current liabilities                 3,287                 4,536        
                                                                 
Long-term debt, net of current            2,398                 1,486
maturities
Income tax liabilities and deferred       360                   357
income taxes
Other long-term liabilities               1,898                 1,976
                                                                 
Total Equity                              3,317                 2,834
                                                                 
Total Liabilities and Equity              $    11,260           $   11,189   
                                                                 
Debt as a percentage of total             44.2          %       49.2        %
capitalization
                                                                             

 
Consolidated Condensed Statements of Cash Flows
(preliminary and unaudited)
                                      
                                       Nine Months Ended
(Amounts in millions)                  December 28, 2012     December 30, 2011
Cash flows from operating
activities:
Net income (loss)                      $    693              $    (4,072   )
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization and      842                   933
other non-cash charges
Goodwill impairment                    —                     2,745
Specified contract charge              —                     1,485
Settlement charge                      —                     269
Stock-based compensation               36                    36
(Gain) loss on dispositions            (689          )       6
Provision for losses on accounts       6                     6
receivable
Excess tax benefit from stock          (1            )       —
based compensation
Unrealized foreign currency            (72           )       5
exchange (gain) loss
Changes in assets and liabilities,
net of effects of acquisitions and
dispositions:
Decrease in assets                     131                   109
Increase (decrease) in liabilities     132                   (842          )
Net cash provided by operating         1,078                 680            
activities
                                                              
Cash flows from investing
activities:
Purchases of property and              (310          )       (433          )
equipment
Outsourcing contracts                  (90           )       (142          )
Acquisitions, net of cash acquired     (34           )       (368          )
Business dispositions, net             958                   —
Software purchased and developed       (121          )       (172          )
Other investing activities, net        71                    27             
Net cash provided by (used in)         474                   (1,088        )
investing activities
                                                              
Cash flows from financing
activities:
Net borrowings of commercial paper     —                     —
Borrowings under lines of credit       128                   94
Repayment of borrowings under          (156          )       (46           )
lines of credit
Borrowings on long-term debt, net      949                   —
of discount
Principal payments on long-term        (1,172        )       (433          )
debt
Proceeds from stock options and        4                     15
other common stock transactions
Excess tax benefit from                1                     2
stock-based compensation
Repurchase of common stock and         (59           )       —
acquisition of treasury stock
Dividend payments                      (93           )       (93           )
Other financing activities, net        (35           )       (10           )
Net cash used in financing             (433          )       (471          )
activities
Effect of exchange rate changes on     (14           )       (60           )
cash and cash equivalents
Net increase (decrease) in cash        1,105                 (939          )
and cash equivalents
Cash and cash equivalents at           1,093                 1,837          
beginning of year
Cash and cash equivalents at end       $    2,198            $    898       
of period
                                                                            

Non-GAAP Financial Measures

The following tables reconcile operating income, earnings before interest and
taxes (EBIT) and free cash flow to the 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 business unit 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
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 ratio.

GAAP Reconciliations

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

                                                    
Operating income
(preliminary and     Quarter Ended                   Nine Months Ended
unaudited)
                     December       December 30,     December      December
                     28,                             28,           30,
(Amounts in          2012           2011             2012          2011
millions)
                                                                    
Operating income     $  268         $  (1,307 )      $  698        $ (1,251 )
(loss)
Corporate G&A        (56     )      (46       )      (186    )     (166     )
Interest expense     (57     )      (42       )      (147    )     (129     )
Interest income      4              8                14            32
Goodwill             $  —           $  (60    )      $  —          $ (2,745 )
impairment
Other (expense)      (4      )      (12       )      1             (1       )
income, net
Income (loss)
from continuing      $  155         $  (1,459 )      $  380        $ (4,260 )
operations
before taxes
                                                                    
Operating margin     7.1     %      (35.4     )%     6.1     %     (10.9    )%
                                                                             

CSC defines adjusted operating income as operating income plus restructuring
costs. A reconciliation of adjusted operating income to operating income for
the quarter ended December 28, 2012 is as follows:

                           
Adjusted Operating
Income (preliminary          Quarter Ended December 28, 2012
and unaudited)
                                                  Restructuring     Adjusted
(Amounts in millions)        Operating Income     Costs *           Operating
                                                                    Income
Business Solutions &         $    36              $    8            $  44
Services
Managed Services             125                  8                 133
Sector
North American Public        137                  2                 139
Sector
Corporate &                  (30         )        6                 (24     )
Eliminations
Total                        $    268             $    24           $  292   
Operating Margin %           7.1         %                          7.7     %
                                                                             
*  Total restructuring expense: $26 million ($24 million in operating expense
and $2 million in Corporate G&A
                                                                             

CSC defines EBIT as revenue less costs of services, selling, general and
administrative expenses, depreciation and amortization, restructuring costs,
goodwill impairment, and other income (expense). EBIT margin is defined as
EBIT as a percentage of revenue. A reconciliation of EBIT to net income is as
follows:

                                                    
Earnings before
interest and
taxes                Quarter Ended                   Nine Months Ended
(preliminary and
unaudited)
                     December       December 30,     December      December
                     28,                             28,           30,
(Amounts in          2012           2011             2012          2011
millions)
                                                                    
Earnings (loss)
before interest      $  208         $  (1,425 )      $  513        $ (4,163 )
and taxes
Interest expense     (57     )      (42       )      (147    )     (129     )
Interest income      4              8                14            32
Taxes on income      (32     )      38               (106    )     78        
Net income
(loss) from          $  123         $  (1,421 )      $  274        $ (4,182 )
continuing
operations
                                                                    
EBIT margin          5.5     %      (38.6     )%     4.5     %     (36.1    )%
                                                                             

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 (used in) operating activities is as follows:

                                                   
Free Cash Flow
(preliminary        Quarter Ended                   Nine Months Ended
and unaudited)
                    December        December        December        December
                    28,             30,             28,             30,
(Amounts in         2012            2011            2012            2011
millions)
                                                                     
Free cash flow      $  245          $  499          $  457          $ (172   )
Net cash used
in investing        (840     )      185             (474      )     1,088
activities
Acquisitions,
net of cash         —               —               (34       )     (368     )
acquired
Business            956             —               958             —
dispositions
Short-term          —               —               —               3
investments
Payment on
capital leases
and other           52              36              171             129       
long-term asset
financings
Net cash
provided by         $  413          $  720          $  1,078        $ 680     
operating
activities
Net cash
provided by
(used in)           $  840          $  (185  )      $  474          $ (1,088 )
investing
activities
Net cash used
in financing        $  (902  )      $  (590  )      $  (433   )     $ (471   )
activities
                                                                              

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Contact:

CSC
Marcel Goldstein
Corporate Media Relations
703-641-3271
mgoldstein@csc.com
or
Steve Virostek
Investor Relations
703-641-3000
investorrelations@csc.com
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