Computer Sciences Pares Decline on CEO Turnaround Comments
Computer Sciences Corp. (CSC), a technology contractor for governments and companies, pared a decline in its stock today after new Chief Executive Officer Mike Lawrie gave what he called a “candid glimpse” of his turnaround plans for the company.
The shares dropped 2.8 percent to $27.39 at the close in New York following Lawrie’s comments on a conference call regarding the company’s fourth-quarter preliminary results, which missed analysts’ estimates. The stock earlier fell 8.9 percent for the steepest intraday decline since Dec. 27.
Earnings were hurt by a “pool” of contracts that were mispriced and the cost of delivery underestimated, Lawrie said today on the call -- his first since taking over as CEO last month. The company booked all costs from a U.K. health-contract writedown and posted “substantial” restructuring charges for job cuts mainly in the Nordic and U.K. regions, as Lawrie seeks to reduce costs in line with sales.
“The business does have significant challenges and we should absolutely consider this a pretty significant turnaround effort,” Lawrie said. “The business can clearly be fixed.”
CSC must make more changes, including some in leadership, Lawrie also said on the call. There may be further incremental restructuring costs as contracts are adjusted and renegotiated and the company places more emphasis on profitability than revenue growth, he said.
Profit, excluding certain costs, for the quarter ended March 30, will be 19 cents to 21 cents a share, CSC said yesterday. Analysts predicted 97 cents, the average of estimates compiled by Bloomberg. Revenue will be about $4.1 billion, the company said, in line with analysts’ projections.
“Free cash flow and earnings per share were meaningfully below our estimate” without clarity on one-time charges, David Grossman, an analyst at Stifel Nicolaus & Co., said in a note before today’s call. “The key outstanding question is the run- rate profitability and free cash flow of this business once you sift through the various issues impacting the business and the new management team’s plan to improve.” He recommends buying the shares.
CSC has been under increasing scrutiny as it failed to reach an agreement last month with the U.K.’s National Health Service, after writing off almost $1.5 billion of a disputed contract and withdrawing guidance in December. Earlier this month, the company said it’s still in talks with the British health service and that it can’t guarantee it will reach a deal. CSC reiterated both points in yesterday’s statement.
In May, U.K. Prime Minister David Cameron said his government wouldn’t sign any more agreements with CSC until reviews were completed examining how a contract to centralize electronic patient records missed deadlines. In August, U.K. lawmakers also recommended the matter be investigated.
“The company certainly doesn’t revolve around NHS,” Lawrie said today. “We’ve taken a lot of pain and taken our medicine if you will, and now we hope to reap some of the benefits.”
Lawrie, who previously ran London-based Misys Plc (MSY) and had worked at International Business Machines Corp. under former CEO Lou Gerstner, replaced Mike Laphen as CSC CEO in March. He pledged to be more transparent with investors and analysts to “re-establish trust and credibility.”
CSC is being investigated by the U.S. Securities and Exchange Commission over accounting irregularities in its Nordic and Australia regions, as well as in some Americas outsourcing and other contracts. The company expanded its internal audits last year, and appointed Chris DePippo as chief ethics and compliance officer.
(Visit http://www.csc.com/investorrelations to listen to CSC’s conference call.)
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