Fitch Affirms Computer Science's IDR at 'BBB'; Outlook Revised to Stable
NEW YORK -- March 8, 2013
Fitch Ratings has affirmed Computer Sciences Corp.'s (NYSE: CSC) ratings and
revised the Rating Outlook to Stable from Negative. The following ratings were
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
--Unsecured credit facilities (revolver and term loan) at 'BBB';
--Short-term IDR at 'F3'
--Commercial paper (CP) at 'F3'.
KEY RATING DRIVERS
The revision in the Rating Outlook reflects CSC's:
--Faster than expected recovery in profitability due to cost reduction
actions, including the remediation of certain underperforming contracts, and
Fitch's expectations for incremental margin expansion through at least fiscal
CSC's EBITDA margin rebounded from a multi-year low of 7.2% when Mike Lawrie
was appointed CEO in the fiscal fourth quarter of 2012 to 13.6% in the third
quarter ended Dec. 28, 2012. Fitch expects further upside to CSC's EBITDA
margin, forecasting increases of 270 and 160 basis points in fiscal 2013 and
2014, respectively, to 13.1% and 14.7%, despite the divestiture of CSC's
highly profitable credit services business (45% operating profit margin).
--Strengthened liquidity profile following the early redemption and
refinancing of $1 billion of debt previously due in 2013, creation of a
significantly more staggered debt maturity schedule with no material near-term
debt maturities, and enhanced cash position provided by stronger free cash
flow (FCF) and proceeds from the sale of non-strategic assets.
--Demonstrated ability to execute on its cost reduction initiatives without
--Implementation of a more stringent and globally consistent bid process that
mitigates the risk of additional underperforming contracts.
--Renegotiated NHS contract, which reduces uncertainty in terms of litigation
risk, and offers CSC the opportunity to recoup at least a portion of the $1.5
billion in NHS assets that it previously wrote off.
--Conclusion of its audit committee independent investigation in 2012,
resulting in numerous out of period adjustments, none of which were
individually or collectively material.
Rating strengths include:
--Recurring revenue from long-term contracts (75%-80% of total revenue).
--Initial success in achieving $1 billion-$1.2 billion of cost improvement
before reinvestments by the end of fiscal 2014.
--Diversified revenue mix with respect to service offerings and end-markets
served with commercial and government representing 63% and 37%, of total
fiscal 2012 revenue, respectively, pro forma for announced divestitures.
Furthermore, CSC addresses a broad range of industries within the commercial
--Significant market opportunities in cybersecurity, healthcare, cloud,
applications, data analytics and datacenter transformation, particularly for
the federal government.
Rating concerns include:
--A highly challenging U.S. federal market, including automatic cost cuts
triggered on March 2, 2013 due to sequestration and a potential partial
shutdown of the federal government on March 27, 2013 in the absence of
congressional action. CSC's North American Public (NPS) Sector accounted for
36% of total fiscal 2012 revenue pro forma for announced divestitures. Fitch
believes CSC's substantial cost savings opportunities offset the risk
associated with the NPS business.
--Sovereign debt challenges and weak economic environment in Europe (25% of
--Significant capital intensity, which materially increases FCF leverage
(defined as FCF/total debt) compared to EBITDA leverage (total debt/operating
--Ongoing SEC investigation into accounting adjustments and related
disclosures, and several class action lawsuits.
--Achieves its cost reduction target of $1 billion-$1.2 billion before
reinvestment by the end of fiscal 2014 and revenue remains relatively stable,
resulting in stronger FCF;
--Materially reduces its high capital intensity, leading to greater FCF and
lower FCF leverage;
--Profitability improvement is accompanied by revenue growth at least on par
with the industry, incorporating differences in CSC's revenue mix.
--Contract signings significantly decline on a trailing 12-month basis,
indicating a lack of competitiveness under its more stringent bid process;
--A material reduction in federal spending leads NPS revenue to decline well
in excess of the forecasted mid-single-digit rate, which is not partially
offset by commercial sector growth and/or profit margin expansion.
As of Dec. 28, 2012, total liquidity was $3.3 billion, consisting of an
undrawn $1.5 billion revolving credit facility (RCF) due March 2015 and
approximately $1.8 billion of cash pro forma for a $400 million discretionary
U.S. pension contribution. About $800 million of CSC's cash is held offshore,
but is accessible without material adverse tax implications due to
intercompany loans from the parent to its foreign subsidiaries. CSC has
substantial cushion under its financial covenants, which consist of minimum
interest coverage and maximum leverage of 3x.
Total debt was approximately $2.6 billion as of Dec. 28, 2012, primarily
--$350 million of 2.50% term notes due September 2015;
--$250 million term loan due September 2016;
--$1 billion of 6.50% term notes due March 2018; and
--$350 million of 4.45% term notes due September 2022.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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John M. Witt, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Jamie Rizzo, CFA
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