CSC Announces Earnings, Company Split
Computer Sciences Corp. (CSC) on Tuesday announced that its board of directors unanimously approved a plan to separate the company into two publicly traded companies: one to serve commercial and government clients globally and one to serve public sector clients in the United States. The news came on the same day CSC reported results for the fourth quarter and fiscal year 2015.
“In fiscal 2015, CSC again delivered earnings growth, margin expansion, and healthy cash flow, and returned significant capital to our shareholders. We finished the year with sequential revenue growth on a constant currency basis and good bookings performance,” said Mike Lawrie, president and CEO. “We continue to invest in new offerings to better position CSC to capitalize on the significant growth opportunities we are seeing in the marketplace."
Financial Highlights - Fourth Quarter Fiscal 2015
- Earnings per share from continuing operations was $0.06 in the fourth quarter, compared with $1.83 in the fourth quarter of fiscal 2014, and includes:
- $(1.74) from non-cash pension-related charges,
- $(0.02) from SEC-related and other charges,
- $(1.28) from a special restructuring charge, and
- $1.85 benefit from a tax valuation allowance.
- Non-GAAP diluted earnings per share was $1.26 excluding these items, compared with $1.15 in the fourth quarter of fiscal 2014.
- Income from continuing operations was $13 million in the fourth quarter, compared with $276 million in the fourth quarter of fiscal 2014, and includes:
- $(249) million from non-cash pension-related charges,
- $(3) million from SEC-related and other charges,
- $(183) million from a special restructuring charge, and
- $264 million benefit from a tax valuation allowance.
- Non-GAAP income from continuing operations was $184 million excluding these items, compared with $174 million in the year-ago quarter.
- (Loss) income from continuing operations, before taxes of $(317) million includes:
- $(319) million from non-cash pension-related charges,
- $(5) million from SEC-related and other charges, and
- $(246) million from a special restructuring charge.
- Non-GAAP income from continuing operations, before taxes was $253 million excluding these items.
- Adjusted operating income of $349 million, excluding the special restructuring charge, compares with $364 million in the year-ago quarter. Adjusted operating margin of 12.0% increased from 10.9% in the year-ago quarter.
- Adjusted earnings before interest and taxes (EBIT) of $283 million compares with $296 million in the fourth quarter of fiscal 2014. Adjusted EBIT margin of 9.7% improved from 8.9% in the year-ago quarter.
Financial Highlights - Fiscal Year 2015
- Earnings per share from continuing operations was $0.15 in fiscal year 2015, compared with $5.70 in fiscal 2014, and includes:
- $(3.70) from non-cash pension-related charges,
- $(1.35) from SEC-related and other charges,
- $(1.26) from a fourth quarter fiscal 2015 special restructuring charge, and
- $1.81 benefit from a tax valuation allowance.
- Non-GAAP diluted earnings per share was $4.64 excluding these items, versus $4.27 in fiscal 2014.
- Income from continuing operations was $36 million in fiscal year 2015, compared with $880 million in fiscal 2014, and includes:
- $(541) million from non-cash pension-related charges,
- $(197) million from SEC-related and other charges,
- $(183) million from a fourth quarter fiscal 2015 special restructuring charge, and
- $264 million benefit from a tax valuation allowance.
- Non-GAAP income from continuing operations was $693 million excluding these items, versus $664 million in the prior year.
- (Loss) income from continuing operations, before taxes of $(276) million includes:
- $(782) million from non-cash pension-related charges,
- $(200) million from SEC-related and other charges, and
- $(246) million from a fourth quarter fiscal 2015 special restructuring charge.
- Non-GAAP income from continuing operations, before taxes was $952 million excluding these items.
- Adjusted operating income was $1,334 million, excluding the fourth quarter fiscal 2015 special restructuring charge, and compares with $1,395 million in the prior year. Adjusted operating margin of 11.0% increased from 10.7% in the prior year.
- Adjusted EBIT was $1,080 million and compares with $1,114 million in the prior year. Adjusted EBIT margin of 8.9% improved from 8.6% in the prior year.
- Net cash provided by operating activities was $1.43 billion and compares with $1.56 billion in the prior year.
- Fiscal 2015 free cash flow was $717 million versus $689 million in the prior year.
Global Business Services
GBS revenue of $980 million in the quarter compares with $1,152 million in the year ago quarter. GBS revenue declined by 7.6% in constant currency, driven by contract completions and the ongoing repositioning of the consulting business, partially offset by growth in new offerings. Adjusted operating margin of 16.7% compared with 17.4% in the prior year, reflecting higher investments in the business. New contract awards for GBS were $1.1 billion in the quarter.
Global Infrastructure Services
GIS revenue of $929 million in the quarter compares with $1,173 million in the year ago quarter. GIS revenue declined by 14.8% in constant currency from the prior year, with growth in new offerings such as MyWorkStyle desktop solutions partially offsetting the impact of price-downs, restructurings, and contract completions. Adjusted operating margin of 6.8% compared with 6.1% in the prior year, driven by cost takeout benefits, partially offset by continued investments in the business. GIS reported new contract awards of $1.2 billion in the quarter.
North American Public Sector
NPS revenue was $1.00 billion in the quarter, flat on both a sequential and year-over-year basis. Growth in state health IT, NextGen IT such as Cloud, and business process outsourcing work offset declines in other Department of Defense and federal civilian contracts. Adjusted operating margin of 14.0% increased from 11.2% in the prior year, as the business continues to benefit from better contract performance and cost efficiencies. New contract awards for NPS were $1.0 billion in the quarter.
Returning Capital to Shareholders
During the fourth quarter, CSC returned $257 million to shareholders consisting of $33 million in common stock dividends and $224 million of share repurchases. CSC repurchased 3.2 million shares at an average price of $69.71.
For fiscal year 2015, CSC returned $867 million to shareholders in the form of $131 million in common stock dividends and $736 million of share repurchases. During the year, CSC repurchased 11.7 million shares at an average price of $62.83.
CSC had 138,773,340 basic shares outstanding on April 3, 2015.
Conference Call and Webcast
CSC senior management will host a conference call and webcast at 5 p.m. ET today. The dial-in number for domestic callers is 888-542-1101. Callers who reside outside of the United States or Canada should dial 719-325-2482. The passcode for all participants is 9825381. The webcast audio and any presentation slides will be available on CSC’s Investor Relations website.
A replay of the conference call will be available from approximately two hours after the conclusion of the call until May 26, 2015. The replay dial-in number is 888-203-1112 for domestic callers and 719-457-0820 for callers who reside outside of the United States and Canada. The replay passcode is also 9825381. 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 and unaudited results as determined by U.S. generally accepted accounting principles (GAAP), the Company has also disclosed in this press release preliminary non-GAAP information, and certain further adjustments thereto, which management believes provides useful information to investors, including: operating income, earnings before interest and taxes (EBIT), free cash flow, and non-GAAP results including non-GAAP income (loss) from continuing operations and non-GAAP diluted earnings (loss) per share from continuing operations. 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, are included below.
New Structure
“CSC began its turnaround three years go,” said CEO Mike Lawrie. “That turnaround has progressed strongly, and our focus now turns to positioning the business for long-term growth and leadership. The best way to accelerate that transformation is by separating the company into two businesses, each uniquely positioned to lead its market by focusing strongly on the needs of its clients.”
About the Companies
Both businesses will be industry leaders from day one.
- CSC – Global Commercial will move forward as the trusted information technology (IT) services and solutions partner for Fortune 1,000 companies and non-U.S. government clients, leveraging its industry, infrastructure and consulting expertise to lead customers on their digital transformation journey. With $8.1 billion in FY 15 revenue, CSC Global Commercial will have more than 1,000 customers (including 175 of the Fortune 500), 51,000 employees and 34 delivery centers globally. The business will retain its leadership status across multiple markets, along with innovative offerings and industry-leading strategic partnerships.
- CSC – U.S. Public Sector will be a top three provider of mission-specific IT, infrastructure and business services to U.S. federal, state and defense agencies. Building on more than a half-century of government service, the business also will be a leading IT services provider to national security. The public sector business had FY 15 revenues of $4.1 billion and employs 14,000 people, including 3,500 U.S. military veterans.
Rationale for the Separation
CSC’s Board of Directors made the decision to separate the commercial and public sector businesses as a result of several factors.
- The “Get Fit” phase of the company’s turnaround has been successfully completed. Over the last three years, CSC has implemented a common operating model, streamlined its cost structure, improved its go-to-market performance and brought in proven leadership.
- At the same time, markets have evolved rapidly, with diverging opportunities and challenges. On the commercial side, clients seek partners with a deep understanding of their business who can help lead their digital transformations. In the U.S. public sector, technology demands are increasing, and clients want providers with specific experience in government-focused innovation. By separating, each business will have the scale – among the largest in their respective categories – as well as the focus to meet unique customer needs and market requirements.
- The two segments have different growth profiles and cash flow dynamics. The separation will allow both companies to better optimize their capital strategies and cost structures, and will provide investors with distinct long-term investment opportunities.
- The market for talent has become highly competitive. As two independent, focused and market-leading organizations, each business will be better positioned to recruit and retain the best IT talent.
Based on these factors, CSC’s Board of Directors believes that the next phase of the turnaround, focused on growth, will be enhanced by the ability of the two businesses to function as pure plays focused exclusively on their respective customer segments.
“Our analysis shows significant benefits of going with a pure-play strategy,” Lawrie noted. “We expect this change to enable both businesses to enhance innovation and improve delivery, in ways that are consistent with the rate and pace of the markets they serve.”
Moving Forward
CSC will operate on a “business as usual” basis while details of the separation – including leadership, locations and other details – are being finalized. When the separation is concluded, it is expected that both businesses will have:
- Operational and financial scale;
- Adequate capital, consistent with investment-grade credit profiles; and
- Industry-leading partnerships – built on CSC’s existing partner ecosystem – that have proven instrumental in the company’s recent success.
“During the first three years of CSC’s turnaround, we benefitted from taking a unified approach,” Lawrie concluded. “The progress we’ve made, coupled with the changing demands of the market, make this a good time to give these two businesses room to thrive as independent companies, able to move decisively to capture the opportunities in front of them.”
About the Transaction
The separation is intended to qualify as a tax-free transaction to CSC shareholders. Immediately following the separation, which is expected to be completed by the end of October 2015, CSC shareholders will own shares of both CSC – Global Commercial and CSC – U.S. Public Sector.
Completion of the separation will not require a shareholder vote but will be subject to customary conditions, including final approval of the CSC Board of Directors, the receipt of a favorable opinion from counsel with respect to the tax-free nature of the transaction, and the effectiveness of a Form 10 filing with the U.S. Securities and Exchange Commission.
RBC Capital Markets is serving as financial advisor to CSC. Additional financial advice is provided to CSC by Guggenheim Partners. Allen & Overy LLP is serving as legal advisor.
