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CSC > SEC Filings for CSC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for COMPUTER SCIENCES CORP


6-Nov-2012

Quarterly Report

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter and Six Months of Fiscal 2013 versus Second Quarter and Six Months of Fiscal 2012

All statements and assumptions in this quarterly report on Form 10-Q and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking information contained in these statements include, among other things, statements with respect to the Company's financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, management's assessment of estimates related to profitability of its long-term contracts and estimates related to impairment of contract-specific assets, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of the Company's control, which could cause actual results to differ materially from the results described in such statements. These forward looking statements should be read in conjunction with our Annual Report on Form 10-K. The reader should specifically consider the various risks discussed in the Risk Factors section included elsewhere herein.

Forward-looking statements in this quarterly report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

General

The following discussion and analysis provides information management believes relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (CSC or the Company). The discussion should be read in conjunction with the interim Consolidated Condensed Financial Statements and notes thereto and the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 2012. The following discusses the Company's financial condition and results of operations as of and for the second quarter and six months ended September 28, 2012, and the comparable periods of the prior fiscal year.

Second Quarter Overview

The key operating results for the second quarter and for the first six months of fiscal 2013 include:

Second quarter revenues decreased $112 million, or 2.8%, to $3,854 million, while the six month revenues decreased $188 million, or 2.4%, to $7,811 million as compared to the second quarter and six months of the prior fiscal year. On a constant currency basis,(1) revenues decreased $21 million or 0.5% for the quarter and increased $8 million or 0.1% for the first six months.

Income from continuing operations before taxes for the second quarter of fiscal 2013 was $202 million, compared to a loss from continuing operations before taxes of $2,854 million in the second quarter of fiscal 2012, an increase of $3,056 million. Income from continuing operations before taxes for the first six months of fiscal 2013 was $276 million, compared to a loss from continuing operations before taxes of $2,753 million for the same period of 2012, an increase of $3,029 million.

Operating income(2) for the second quarter increased to $298 million as compared to an operating loss of $75 million for the second quarter of fiscal 2012, and operating income margin increased to 7.7% from last year's second quarter margin of (1.9)%. For the first six months, operating income increased to $481 million as compared to $105 million for the same period of 2012, and operating income margins increased to 6.2% from 1.3%.


Earnings before interest and taxes(3) (EBIT) for the second quarter of fiscal 2013 increased to $242 million as compared to a loss before interest and taxes of $2,820 million for the second quarter of fiscal 2012. EBIT margin improved to 6.3% from last year's second quarter margin of (71.1)%. For the first six months of fiscal 2013, EBIT of $356 million increased by $3,045 million from the first six months of fiscal 2012. EBIT margin improved to 4.6% from last year's first six months margin of (33.6)%.

Net income attributable to CSC common shareholders for the second quarter of fiscal 2013 was $130 million, an increase of $3,007 million, as compared to the same period in the prior year. For the first six months of fiscal 2013, net income attributable to CSC common shareholders was $170 million, an increase of $2,864 million, as compared to the same period in the prior year.

Diluted earnings per share (EPS) was $0.83 for the second quarter of fiscal 2013, an increase of $19.39 as compared to $(18.56) for the same period in the prior year. Diluted EPS was $1.09 for the first six months of fiscal 2013, an increase of $18.48 as compared to $(17.39) for the same period in the prior year.

During the second quarter of fiscal 2013, the Company recorded restructuring costs of $58 million, of which $47 million is related to the MSS segment, $10 million is related to the BSS segment and $1 million is related to the NPS segment. For the first six months of fiscal 2013, the Company recorded restructuring costs of $85 million, of which $60 million is related to the MSS segment, $24 million is related to the BSS segment and $1 million is related to the NPS segment.

The Company announced contract awards of $4.2 billion for the second quarter of fiscal 2013, including new NPS segment awards of $1.1 billion, MSS segment awards of $2.2 billion, and BSS segment awards of $0.9 billion. Total backlog(4) at the end of the second quarter of fiscal 2013 was $34.8 billion, a decrease of $2.7 billion as compared to the backlog at the second quarter of fiscal 2012 of $37.5 billion. Of the total $34.8 billion backlog, $5.9 billion is expected to be realized as revenue in the remainder of fiscal 2013. Of the total $34.8 billion, $11.7 billion is not yet funded.

Days Sales Outstanding (DSO)(5) was 72 days at September 28, 2012, an improvement from 86 days at the end of the second quarter of the prior fiscal year.

Debt-to-total capitalization ratio(6) was 54.0% at September 28, 2012, an increase of 4.8 percentage points from 49.2% at March 30, 2012, primarily due to new long-term borrowings secured during the second quarter.

Cash provided by operating activities was $665 million for the first six months of fiscal 2013, as compared to cash used in operating activities of $40 million for the first six months of fiscal 2012, primarily due to higher cash flow of $450 million, associated with the NHS contract.

Cash used in investing activities was $366 million for the first six months of fiscal 2013, as compared to $903 million for the first six months of fiscal 2012, primarily due to lower expenditures on acquisitions.

Cash provided by financing activities was $469 million for the first six months of fiscal 2013, as compared to cash provided of $119 million for the first six months of fiscal 2012, primarily due to proceeds from new the senior notes.

Free cash flow(7) of $212 million for the first six months of fiscal 2013 was favorable to the $671 million outflow for the first six months of fiscal 2012, driven primarily by higher year-over-year cash flow associated with the NHS contract, and reduced payments for purchases for property and equipment and software.

(1) Selected references are made on a "constant currency basis" so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a "constant currency basis" are calculated by translating current period activity into U.S. dollars using the comparable prior period's currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar.


(2) Operating income is a non-U.S. Generally Accepted Accounting Principle (GAAP) measure used by management to assess performance at the segments and on a consolidated basis. The Company's definition of such measure may differ from other companies. We define 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. Management compensates for the limitations of this non-GAAP measure by also reviewing income (loss) from continuing operations before taxes, which includes costs excluded from the operating income definition such as goodwill impairment, corporate G&A, interest and other income (expense). A reconciliation of consolidated operating (loss) income to (loss) income from continuing operations before taxes is as follows:

                                                Quarter Ended
(Amounts in millions)             September 28, 2012      September 30, 2011
Operating income                $             298        $              (75 )
Corporate G&A                                 (70 )                     (66 )
Interest expense                              (45 )                     (46 )
Interest Income                                 5                        12
Goodwill impairment                             -                    (2,685 )
Other income (expense), net                    14                         6
Income from continuing
operations before taxes         $             202        $           (2,854 )



                                               Six Months Ended
(Amounts in millions)             September 28, 2012       September 30, 2011
Operating income                $               481       $              105
Corporate G&A                                  (130 )                   (120 )
Interest expense                                (90 )                    (88 )
Interest Income                                  10                       24
Goodwill impairment                               -                   (2,685 )
Other income (expense), net                       5                       11
Income from continuing
operations before taxes         $               276       $           (2,753 )

(3) Earnings before interest and taxes (EBIT) is a non-U.S. Generally Accepted Accounting Principle (GAAP) measure that provides useful information to investors regarding the Company's results of operations as it provides another measure of the Company's profitability, and is considered an important measure by financial analysts covering CSC and its peers. The Company's definition of such measure may differ from other companies. We define EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, goodwill impairment, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to net income from continuing operations is as follows:

                                                       Quarter Ended
(Amounts in millions)                    September 28, 2012      September 30, 2011
Earnings before interest and taxes      $            242        $           (2,820 )
Interest expense                                     (45 )                     (46 )
Interest Income                                        5                        12
Taxes on Income                                      (64 )                     (12 )
Net Income from continuing operations   $            138        $           (2,866 )



                                                     Six Months Ended
(Amounts in millions)                    September 28, 2012     September 30, 2011
Earnings before interest and taxes      $              356     $           (2,689 )
Interest expense                                       (90 )                  (88 )
Interest Income                                         10                     24
Taxes on Income                                        (96 )                   73
Net Income from continuing operations   $              180     $           (2,680 )


(4) Backlog represents total estimated contract value of predominantly long-term contracts, based on customer commitments that the Company believes to be firm. Backlog value is based on contract commitments, management's judgment and assumptions about volume of services, availability of customer funding and other factors. Backlog estimates for government contracts include both the funded and unfunded portions and all of the option periods. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

For NPS, announced award values for competitive indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. Announced values for non-competitive IDIQ awards represent management's estimate at the award date. Business awards for MSS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. BSS award values are based on firm commitments.

(5) DSO is calculated as total receivables at the fiscal period end divided by revenue-per-day. Revenue-per-day equals total revenues divided by the number of days in the fiscal period. Total receivables includes unbilled receivables but excludes income tax receivables and long-term receivables.

(6) Debt-to-total capitalization ratio is defined as total current and long-term debt divided by total debt and equity, including noncontrolling interest.

(7) Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. We define 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.

CSC's free cash flow measure does not distinguish operating cash flows from investing cash flows as they are required to be presented in accordance with GAAP, and should not be considered a substitute for operating and investing cash flows as determined in accordance with GAAP. Free cash flow is one of the factors CSC management uses 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.

A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:

                                                           Six Months Ended
(Amounts in millions)                          September 28, 2012      September 30, 2011
Free cash flow                               $             212        $           (671 )
Net cash used in investing activities                      366                     903
Acquisitions, net of cash acquired                         (34 )                  (368 )
Business dispositions                                        2                       -
Short-term investments                                       -                       3
Payments on capital leases and other                       119                      93
long-term asset financings
Net cash provided by (used in) operating     $             665        $            (40 )
activities
Net cash used in investing activities        $            (366 )      $           (903 )
Net cash provided by financing activities    $             469        $            119

Reportable Segments

CSC provides information technology (IT) and business process outsourcing, consulting and systems integration services and other professional services to its customers. The Company targets the delivery of these services within three broad service lines or sectors: North American Public Sector (NPS), Managed Services Sector (MSS), and Business Solutions and Services (BSS).

The Company's reportable segments in fiscal 2013 and 2012 are as follows:

The NPS segment operates principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.

The MSS segment provides large-scale infrastructure and application outsourcing solutions offerings as well as mid-size services delivery to customers globally.

The BSS segment provides industry specific consulting and systems integration services, business process outsourcing, and intellectual property-based software solutions.


Results of Operations

Revenues

Revenues for the NPS, MSS, and BSS segments for the quarter and six months ended
September 28, 2012 and September 30, 2011 are as follows:
                                                   Quarter Ended
                                                                                   Percent
(Amounts in millions)    September 28, 2012      September 30, 2011      Change     Change
NPS                     $           1,375       $           1,436       $  (61 )    (4.2 )%
MSS                                 1,583                   1,619          (36 )    (2.2 )
BSS                                   921                     945          (24 )    (2.5 )
Corporate                               3                       3            -         -
Subtotal                            3,882                   4,003         (121 )    (3.0 )
Eliminations                          (28 )                   (37 )          9         -
Total Revenue           $           3,854       $           3,966       $ (112 )    (2.8 )%



                                                 Six Months Ended
                                                                                   Percent
(Amounts in millions)    September 28, 2012      September 30, 2011      Change     Change
NPS                     $           2,743       $           2,920       $ (177 )    (6.1 )%
MSS                                 3,218                   3,238          (20 )    (0.6 )
BSS                                 1,906                   1,906            -         -
Corporate                               6                       6            -         -
Subtotal                            7,873                   8,070         (197 )    (2.4 )
Eliminations                          (62 )                   (71 )          9         -
Total Revenue           $           7,811       $           7,999       $ (188 )    (2.4 )%

The major factors affecting the percent change in revenues for the quarter and six months ended September 28, 2012 are presented as follows:

                                                 Quarter Ended
                                             Approximate
                                              Impact of
                                              Currency      Net Internal
                            Acquisitions    Fluctuations       Growth        Total
NPS                               0.6 %            -            (4.8 )%     (4.2 )%
MSS                               1.2           (3.3 )%         (0.1 )      (2.2 )
BSS                               1.4           (3.9 )             -        (2.5 )
Cumulative Net Percentage         1.1 %         (2.3 )%         (1.6 )%     (2.8 )%



                                               Six Months Ended
                                             Approximate
                                              Impact of
                                              Currency      Net Internal
                            Acquisitions    Fluctuations       Growth        Total
NPS                               0.7 %            -            (6.8 )%     (6.1 )%
MSS                               1.5           (3.6 )%          1.5        (0.6 )
BSS                               3.5           (4.2 )           0.7           -
Cumulative Net Percentage         1.7 %         (2.5 )%         (1.6 )%     (2.4 )%


North American Public Sector

NPS segment revenues were derived from the following sources:
                                                  Quarter Ended
(Amounts in millions)                                                            Percent
                         September 28, 2012     September 30, 2011     Change     Change
Department of Defense   $               938    $               964    $  (26 )    (2.7 )%
Civil Agencies                          382                    424       (42 )    (9.9 )
Other (1)                                55                     48         7      14.6
Total                   $             1,375    $             1,436    $  (61 )    (4.2 )%



                                                Six Months Ended
(Amounts in millions)                                                            Percent
                         September 28, 2012     September 30, 2011     Change     Change
Department of Defense   $             1,859    $             1,981    $ (122 )    (6.2 )%
Civil Agencies                          770                    828       (58 )    (7.0 )
Other (1)                               114                    111         3       2.7
Total                   $             2,743    $             2,920    $ (177 )    (6.1 )%

(1) Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment.

NPS revenue decreased $61 million, or 4.2%, in the second quarter of fiscal 2013, and decreased $177 million or 6.1% in the first six months of fiscal 2013, as compared to similar periods of fiscal 2012. For both the second quarter and the six months ended September 28, 2012, the NPS revenue decline was due to revenue decreases on both Department of Defense group (DOD) contracts and contracts with Civil Agencies. These decreases were slightly offset by revenue increases from Other contracts. NPS' second quarter and six months' revenue included $9 million and $10 million, respectively, of net favorable adjustments on certain contracts accounted for under the percentage of completion method. NPS' second quarter and six months' year-over-year revenue comparisons also benefited from fiscal 2012 adverse adjustments on certain contracts accounted for under the percentage of completion method, which did not repeat in fiscal 2013.

The second quarter decrease in revenue from DOD contracts was due to reduced revenue of $66 million from contracts primarily with the U.S. Air Force that either had concluded or were winding down and reduced revenue due to net reduction in tasking on existing contracts of $7 million. The quarter-over-quarter revenue trend, however, benefited from the second quarter fiscal 2012 non-recurring adverse adjustment to revenue of $42 million, resulting from the settlement on a contract with the U.S. Army.

The second quarter decrease in revenue from Civil Agencies was primarily due to a net reduction in scope on existing contracts of $43 million, reduced revenue of $10 million from contracts with the Department of Commerce and the Department of State which either concluded or are winding down, and reduced revenue due to timing of certain contractual milestones of $5 million. These revenue decreases were partially offset by increased revenue of $30 million on a contract with the Department of State, which commenced late in fiscal 2012 and ramped up in fiscal 2013.

The six month decrease in revenue from DOD contracts was due to reduced revenue from contracts primarily with the U.S. Air Force that either had concluded or were winding down of $136 million, and reduced revenue due to a net reduction in tasking on existing contracts of $28 million. The year-over-year revenue trend, however, benefited from the second quarter fiscal 2012 adverse non-recurring adjustment to revenue of $42 million, resulting from the settlement on a contract with the U.S. Army.

The six month decrease in revenue from Civil Agencies was primarily due to a net reduction in scope on existing contracts of $81 million, and reduced revenue of $11 million due to the conclusion of a contract with the Department of Commerce. These revenue decreases were partially offset by increased revenue of $47 million on a contract with the Department of State, which commenced late in fiscal 2012 and fully ramped up in fiscal 2013.


NPS' revenue decreases continue to reflect the ongoing uncertainty in government budgets and the difficulties customers are facing in awarding new initiatives. Delays in award decisions continue to be the most significant issue in the industry, with delays ranging from six to eighteen months on submitted proposals.

In August 2011, President Obama signed into law the Budget Control Act of 2011, which increased the U.S. Government's debt ceiling and enacted 10-year discretionary spending caps expected to generate over $1 trillion in savings for the U.S. Government. According to the Office of Management and Budget, these savings include $487 billion in DOD baseline spending reductions over the next 10 years, starting in 2013. In addition, barring Congressional action, further budget cuts (or sequestration) as outlined in the Budget Control Act of 2011 will be implemented starting in January 2013. Sequestration would lead to additional reductions of approximately $500 billion from the Pentagon's top line budget over the next decade, resulting in aggregate reductions of about $1 trillion over 10 years. In June 2012, the Office of Management and Budget announced that the budget for Overseas Contingency Operations and any unobligated balances in prior year funds will also be included in aggregate reductions. The DOD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Any reduction in levels of DOD spending, cancellations or delays impacting existing contracts or programs, including through sequestration, could have a material impact on the operating results of the NPS business. While DOD would sustain the bulk of sequestration cuts affecting the Company, Civil Agencies may be significantly impacted as well.

During the quarter and six months ended September 28, 2012, NPS won new contracts of $1.1 billion and $2.0 billion, as compared to $3.1 billion and $4.0 billion in the comparable periods in the prior year.

Managed Services Sector

MSS segment revenue decreased $36 million, or 2.2%, and decreased $20 million, . . .

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