Fitch Ratings has affirmed Computer Sciences Corp.'s (NYSE: CSC) Issuer
Default Rating (IDR) at 'BBB' and revised the Rating Outlook to Positive
from Stable. Furthermore, Fitch has withdrawn the short-term IDR and
commercial paper rating of 'F3'. A full list of ratings follows at the
end of this release.
KEY RATING DRIVERS
The revision in the Rating Outlook to Positive reflects CSC's:
--Strengthened free cash flow (FCF) and materially improved cash flow
metrics. FCF has primarily benefitted from operating margin expansion as
a result of the company's significant 2012-2014 cost reduction program
and declining capital intensity, albeit at a cost to revenue growth in
the Global Infrastructure Services segment.
Fitch estimates FCF-to-total adjusted debt increased to nearly 15% in
the latest 12 months (LTM) ended Dec. 27, 2013, compared with 3.7% in
fiscal 2013 (March 31), excluding a $500 million discretionary pension
contribution in the current period and a one-time cash receipt of $126
million from the U.K.'s National Health Service in the year-ago period.
--Stabilizing total contract backlog, which is a key determinant of
future revenues. CSC's total contract backlog stabilized at $30.7
billion for two consecutive quarters, with funded and unfunded backlog
relatively flat as well, despite declining average contract durations in
both commercial and public sectors. Fitch estimates 80.5% of total
revenue in fiscal 2014 will be derived from backlog reported at the end
of fiscal 2013.
--Improved new contract due diligence and services delivery execution
reflected in greater overall profitability, including net favorable
adjustments to percentage of completion models. CSC made considerable
investments in people and processes to improve the company's ability to
bid accurately on new contracts and then successfully execute against
the contract bid model through better services delivery.
Rating strengths include:
--A significant percentage of CSC's total revenue is recurring from
long-term services contracts.
--CSC's strong total liquidity, consisting of cash and available
borrowing capacity under its committed revolving credit facility (RCF).
CSC upsized its RCF to $2.5 billion, increasing total liquidity by 29%
year-over-year to nearly $4.7 billion, net of letters of credit, as of
Dec. 27, 2013. CSC's one-year liquidity coverage ratio has improved to
the mid-4x range, reflecting stronger profitability, lower capital
intensity and manageable debt maturities.
--CSC has a diverse revenue mix with respect to service offerings and
end-markets served, with commercial and government representing 68% and
32%, respectively, of total fiscal 2013 revenue. Furthermore, CSC
addresses a broad range of industries within the commercial sector.
Rating concerns include:
--Weak organic revenue growth. Fitch estimates CSC's organic revenue
growth declined 1.3% in fiscal 2013 (March 31) and 7.6% and the first
nine months of fiscal 2014 ended Dec. 27, 2013, excluding the effects of
the federal government shutdown, acquisitions, divestitures (including
Paxus, an Australian IT staffing company accounted for as continuing
operations) and currency fluctuations.
EBITDA prssures from the revenue declines have been more than offset to
date through CSC's substantial cost reduction program from fiscal
2012-2014. However, Fitch believes the most significant of the cost
savings opportunities at CSC will largely be captured by the end of
fiscal 2014 (March 31), potentially resulting in profitability pressures
in the absence of improved revenue performance. CSC's revenue growth is
likely contingent on the commercial sector, given continued spending
pressures in the U.S. federal market, particularly Department of Defense
--Unresolved SEC investigations. Despite concluding an internal
investigation, CSC remains subject to an ongoing investigation by the
SEC's Division of Enforcement and its Division of Corporation Finance.
CSC's discussions to date with the SEC Enforcement Staff have yet to
yield a resolution to the investigation.
On Dec. 11, 2013, CSC received a Wells notice from the SEC Enforcement
Staff, which could lead to the SEC filing a civil enforcement action or
administrative proceeding against the company. On Jan. 14, 2014, CSC
made a Wells submission to convince the SEC such an action is not
warranted. Fitch believes an SEC settlement, if any, will be manageable
in the context of the company's solid liquidity position.
--Spending pressures in the U.S. federal market, particularly DoD, due
to the significant federal budget deficit. CSC's North American Public
Sector (NPS) accounted for 32% of total revenue in the LTM ended Dec.
27, 2013. CSC's NPS derives the majority of its revenue from the DoD
(61%), which faces greater budget spending cuts than do civil agencies.
--Increase in new business signings, particularly next generation IT,
and solid renewals strengthens backlog, ultimately converting to
improving revenue trends and profitable revenue growth.
--Revenue declines accelerate, well in excess of the overall market,
indicating a lack of competitiveness with new product offerings and/or
greater than expected erosion of traditional infrastructure outsourcing
--Significant debt-financed acquisitions and/or share repurchases that
result in a material deterioration in credit protection measures.
As of Dec. 27, 2013, total liquidity was nearly $4.7 billion, consisting
of an undrawn $2.5 billion (RCF) due January 2019 and approximately $2.3
billion of cash. About $1.1 billion of CSC's cash is held offshore, a
portion of which is accessible in a tax-efficient manner through
settlement of inter-company loans or return of capital distributions.
CSC has substantial cushion under its financial covenants, which consist
of minimum interest coverage and maximum leverage of 3x.
Total debt was approximately $2.8 billion as of Dec. 27, 2013, primarily
--$422 million note payable (Libor + 17 bps) due Dec. 2014;
--$350 million of 2.50% term notes due September 2015;
--$938 million of 6.50% term notes due March 2018;
--$409 million of 4.45% term notes due September 2022.
Fitch has affirmed the following ratings:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
--Unsecured RCF at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology, Including Short-Term Ratings and Parent
and Subsidiary Linkage' (Aug. 5, 2013).
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
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