CSC (NYSE: CSC) today reported results for the second quarter of fiscal year 2016.

"Second quarter results were in-line with our expectations," said Mike Lawrie, president and CEO. "Profitability again improved year-over-year in our commercial business and remained strong in our public sector business, and we delivered improved cash flow. During the quarter, we also completed the acquisitions of Fixnetix and Fruition Partners, which are consistent with our strategy of shifting our revenue mix to applications, consulting, and next-generation offerings with better growth, profitability, and cash flow. Finally, we remain on track to complete the separation of our U.S. public sector business, pay the $10.50 per share special dividend to shareholders, and complete the merger of our public sector business with SRA."

Financial Highlights
  • Diluted earnings per share from continuing operations were $1.19 in the second quarter and included ($0.30) per share in separation, merger, and other transaction costs, ($0.01) per share in SEC settlement-related items, ($0.14) per share in real estate restructuring charges, and $0.38 per share from a tax valuation allowance benefit. Excluding these items, non-GAAP diluted earnings per share from continuing operations were $1.26, up 7 percent when compared with $1.18 in the second quarter of fiscal 2015.
  • Income from continuing operations before taxes was $176 million. Excluding the impact of certain items, non-GAAP income from continuing operations before taxes was $247 million compared with $245 million a year ago.
  • Operating income was $308 million. Operating income, adjusted for certain items, was $331 million and compares with $349 million in the prior year. Operating margin on the same basis was 12.2 percent, up from 11.3 percent in the prior year.
  • Income from continuing operations was $173 million for the second quarter. Excluding the impact of the items discussed above, non-GAAP income from continuing operations was $183 million, compared with $177 million in the prior year.
  • Earnings before interest and taxes (EBIT) was $204 million and included $48 million in separation, merger, and other transaction costs, $2 million in SEC settlement-related items, and $21 million in real estate restructuring charges. Adjusting for these items, EBIT was $275 million, and compares with $276 million in the second quarter of fiscal 2015, and EBIT margin was 10.1 percent, up from 9.0 percent in the prior year.
  • Year-to-date, net cash provided by operating activities was $441 million compared with $490 million in the prior year.
  • Year-to-date, free cash flow was $170 million compared with $101 million in the prior year, an increase of $69 million.

Global Business Services

GBS revenue of $891 million in the quarter compares with $1,003 million in the year ago quarter, a decline of 3.7 percent year-over-year in constant currency. The GBS revenue decline was driven by the ongoing repositioning of our consulting business and contract completions in our applications business. GBS operating margin, excluding the impact of certain items, was 12.8 percent, down slightly from 13.0 percent a year ago. New business awards for GBS were $0.7 billion in the second quarter.

Global Infrastructure Services

GIS revenue of $854 million in the quarter compares with $1,036 million in the year-ago quarter, a decline of 10.8 percent year-over-year in constant currency. The GIS revenue decline was driven by the impact of restructured contracts, other contract completions, and price-downs, which more than offset growth in next-generation offerings. GIS operating margin, excluding the impact of certain items, was 8.5 percent, up from 6.6 percent a year ago. New business awards for GIS were $0.7 billion in the quarter.

North American Public Sector

NPS revenue was $967 million in the second quarter, a decrease of 7.1 percent when compared with $1,041 million in the second quarter of fiscal 2015. The NPS revenue decline was driven by program completions and changes in task orders, which more than offset new work across all parts of the business. NPS operating margin, excluding the impact of certain items, was 16.6 percent, up from 15.4 percent in the prior year. New business awards for NPS were $1.5 billion in the quarter.

Returning Capital to Shareholders and Separation Update

During the second quarter, CSC returned $32 million to shareholders in common stock dividends. Separately, CSC today announced that its Board of Directors has approved proceeding with the previously announced separation of its U.S. public sector business under a new name, CSRA Inc., as well as the declaration of a special cash distribution of $10.50 in the aggregate per CSC share. The separation will occur through a one-for-one pro rata distribution of all CSRA shares to CSC stockholders on November 27, 2015 after market close.

CSC had 138,472,660 basic shares outstanding on October 2, 2015.

Earnings 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 800-218-2154. Callers who reside outside of the United States or Canada should dial 913-312-0963. The passcode for all participants is 8931468. 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 November 11, 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 8931468. A replay of this webcast will also be available on CSC's website.

Investor Day Webcast

CSC will host an Investor Day tomorrow, November 5, 2015, in New York, with presentations beginning at approximately 9:30 a.m. ET. An audio webcast of the Investor Day and any presentation slides will be available on CSC's Investor Relations website. The dial-in number for domestic callers is 877 790-0014. Callers who reside outside of the United States or Canada should dial 706 634-5163. The Conference Identification number for all participants is 75987678.

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, adjusted operating income, earnings before interest and taxes (EBIT), adjusted 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.

About CSC

Computer Sciences Corporation (CSC) is a global leader of next generation information technology (IT) services and solutions. The Company's mission is to enable superior returns on our clients' technology investments through best-in-class industry solutions, domain expertise and global scale. CSC has approximately 70,000 employees and reported revenue of $11.3 billion for the 12 months ended October 2, 2015. For more information, visit the company's website at www.csc.com.

All statements in this press release and in all future press releases that do not directly and exclusively relate to historical facts constitute "forward-looking statements." These statements represent the Company's intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, many of which are outside the Company's control. These factors could cause actual results to differ materially from such forward-looking statements. For a written description of these factors, see the section titled "Risk Factors" in CSC's Form 10-K for the fiscal year ended April 3, 2015 and any updating information in subsequent SEC filings. The Company disclaims any intention or obligation to update these forward-looking statements whether as a result of subsequent event or otherwise, except as required by law.
               
Business Segment Revenues, Operating Income and Operating Margins

(preliminary and unaudited)
 

Revenues by Segment
 
Quarter Ended
(Amounts in millions)

October 2, 2015

October 3, 2014
% Change

% Change in Constant Currency
Global Business Services $ 891 $ 1,003 (11.2 )% (3.7 )%
Global Infrastructure Services 854 1,036 (17.6 ) (10.8 )
North American Public Sector 967   1,041   (7.1 ) (7.1 )
Total Revenues $ 2,712   $ 3,080   (11.9 )% (7.2 )%
 
  Six Months Ended
(Amounts in millions)

October 2, 2015

October 3, 2014

% Change

% Change at Constant Currency
Global Business Services $ 1,810 $ 2,091 (13.4 )% (5.7 )%
Global Infrastructure Services 1,739 2,167 (19.8 ) (13.2 )
North American Public Sector 1,924   2,059   (6.6 ) (6.6 )
Total Revenues $ 5,473   $ 6,317   (13.4 )% (8.5 )%
 
       

Operating Income and Operating Margins by Segment
   
Quarter Ended
October 2, 2015 October 3, 2014
(Amounts in millions)

Operating Income
   

Operating Margin

Operating Income

Operating Margin
Global Business Services $ 101 11.3 % $ 130 13.0 %
Global Infrastructure Services 64 7.5 68 6.6
North American Public Sector 160 16.5 160 15.4
Corporate (17 ) (9 )
Total Operating Income $ 308   11.4 % $ 349   11.3 %
 
Six Months Ended
October 2, 2015 October 3, 2014
(Amounts in millions)

Operating Income

Operating Margin

Operating Income

Operating Margin
Global Business Services $ 198 10.9 % $ 238 11.4 %
Global Infrastructure Services 117 6.7 % 139 6.4 %
North American Public Sector 296 15.4 % 311 15.1 %
Corporate & Eliminations (5 ) (35 )
Total Operating Income $ 606   11.1 % $ 653   10.3 %
 
 
Consolidated Condensed Statements of Operations

(preliminary and unaudited)
       
Quarter Ended Six Months Ended
(Amounts in millions, except per-share amounts)

October 2, 2015
   

October 3, 2014

October 2, 2015
   

October 3, 2014
 
Revenues $ 2,712   $ 3,080   $ 5,473   $ 6,317  
 
Costs of services (excludes depreciation and amortization and restructuring costs) 1,970 2,207 3,996 4,571
Selling, general and administrative (excludes restructuring costs) 286 346 570 690
Depreciation and amortization 203 252 410 524
Restructuring costs 6 (7 ) 6 3
Separation and merger costs 46 64
Interest expense 35 36 70 75
Interest income (7 ) (5 ) (18 ) (10 )
Other (income) expense, net (3 ) 6   (29 ) 5  
Total costs and expenses 2,536   2,835   5,069   5,858  
 
Income from continuing operations, before taxes 176 245 404 459
Income tax (benefit) expense 3   68   67   123  
Income from continuing operations 173 177 337 336
Loss from discontinued operations, net of taxes   (21 )   (29 )
Net income 173 156 337 307
Less: net income attributable to noncontrolling interest, net of tax 6   5   10   10  
Net income attributable to CSC common stockholders $ 167   $ 151   $ 327   $ 297  
 
Earnings (loss) per common share
Basic:
Continuing operations $ 1.21 $ 1.20 $ 2.37 $ 2.26
Discontinued operations   (0.15 )   (0.20 )
$ 1.21   $ 1.05   $ 2.37   $ 2.06  
Diluted:
Continuing operations $ 1.19 $ 1.18 $ 2.32 $ 2.22
Discontinued operations   (0.14 )   (0.20 )
$ 1.19   $ 1.04   $ 2.32   $ 2.02  
 
Cash dividend per common share $ 0.23 $ 0.23 $ 0.46 $ 0.46
 
Weighted average common shares outstanding for:
Basic EPS 138.295 143.279 138.106 144.346
Diluted EPS 140.532 145.596 140.699 147.155
 
   
Selected Balance Sheet Data

(preliminary and unaudited)
 
As of
(Amounts in millions) October 2, 2015     April 3, 2015
 
Assets
Cash and cash equivalents $ 1,818 $ 2,098
Receivables, net 2,127 2,369
Prepaid expenses and other current assets 500   438
Total current assets 4,445   4,905
 
Property and equipment, net 1,519 1,583
Software, net 774 751
Outsourcing contract costs, net 338 326
Goodwill 1,842 1,671
Other assets 1,095   965
Total Assets $ 10,013   $ 10,201
 
Liabilities
Short-term debt and current maturities of long-term debt $ 894 $ 904
Accounts payable 436 422
Accrued payroll and related costs 377 356
Accrued expenses and other current liabilities 1,028 1,239
Deferred revenue and advance contract payments 587 618
Income taxes payable and deferred income taxes 55   62
Total current liabilities 3,377   3,601
 
Long-term debt, net of current maturities 1,716 1,765
Income tax liabilities and deferred income taxes 451 412
Other long-term liabilities 1,423 1,474
 
Total Equity 3,046 2,949
   
Total Liabilities and Equity $ 10,013   $ 10,201
 
 
Consolidated Condensed Statements of Cash Flows

(preliminary and unaudited)
   
Six Months Ended
(Amounts in millions)

October 2, 2015
   

October 3, 2014
Cash flows from operating activities:
Net income $ 337 $ 307
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 410 524
Stock-based compensation 7 35
Net gain on dispositions of businesses and assets (55 ) (13 )
Excess tax benefit from stock based compensation (16 ) (12 )
Other non cash charges, net 19 21
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in assets 176 (32 )
Decrease in liabilities (437 ) (340 )
Net cash provided by operating activities 441   490  
 
Cash flows from investing activities:
Purchases of property and equipment (184 ) (201 )
Payments for outsourcing contract costs (53 ) (28 )
Software purchased and developed (104 ) (104 )
Payments for acquisitions, net of cash acquired (236 ) (35 )
Business dispositions 34 (13 )
Proceeds from sale of assets 50 70
Other investing activities, net 12   13  
Net cash used in investing activities (481 ) (298 )
 
Cash flows from financing activities:
Borrowings of commercial paper 299
Payments of commercial paper (84 )
Borrowings under lines of credit 1,310
Repayment of borrowings under lines of credit (1,150 ) (32 )
Principal payments on long-term debt (461 ) (139 )
Proceeds from stock options and other common stock transactions 45 125
Excess tax benefit from stock-based compensation 16 12
Repurchase of common stock (118 ) (559 )
Dividend payments (64 ) (63 )
Other financing activities, net (6 )  
Net cash used in financing activities (213 ) (656 )
Effect of exchange rate changes on cash and cash equivalents (27 ) (56 )
Net decrease in cash and cash equivalents (280 ) (520 )
Cash and cash equivalents at beginning of year 2,098   2,443  
Cash and cash equivalents at end of period $ 1,818   $ 1,923  
 

Non-GAAP Financial Measures

The following tables reconcile non-GAAP financial measures of operating income, earnings before interest and taxes (EBIT), adjusted EBIT, and free cash flow, to the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Also presented below are the Company's non-GAAP results, which exclude certain items that management believes are not indicative of the Company's operating performance. CSC management believes that these non-GAAP financial measures provide useful information to investors regarding the Company's financial condition and results of operations as they provide another measure of the Company's profitability and ability to service its debt, and are considered important measures by financial analysts covering CSC and its peers.

Management uses operating income to evaluate financial performance and it is one of the measures used in assessing management performance. One of the limitations associated with the use of operating income (as compared to reported earnings) is that it does not reflect the complete financial results of the Company. CSC compensates for these limitations by providing a reconciliation between operating income and income from continuing operations, before taxes. Management uses free cash flow as one of the factors 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.

Management uses non-GAAP income from continuing operations and non-GAAP EPS to evaluate the Company's results, excluding the impact of items that management believes are not indicative of the Company's operating performance. CSC compensates for the limitations of these non-GAAP measures by providing a reconciliation from non-GAAP results to reported results.

GAAP Reconciliations
 

Operating Income and Adjusted Operating Income
(preliminary and unaudited)
 
CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment selling, general and administrative (SG&A) expense. Operating Income, as defined by CSC, excludes corporate G&A, actuarial and settlement charges related to CSC's pension and other post-employment benefit (OPEB) plans, and separation and merger costs. Operating margin is defined as operating income as a percentage of revenue.
 
Adjusted operating income is computed by excluding from operating income the impact of the second quarter fiscal 2016 real estate restructuring charge and transaction costs associated with fiscal 2016 acquisitions.
 
A reconciliation of consolidated operating income to income from continuing operations, before taxes is as follows:
 
       
Quarter Ended Six Months Ended
(Amounts in millions)

October 2, 2015
   

October 3, 2014

October 2, 2015
   

October 3, 2014
Adjusted Operating income $ 331 $ 349 $ 629 $ 653
Real estate restructuring charge (21 ) (21 )
Transaction costs (2 )   (2 )  
Operating income $ 308 $ 349 $ 606 $ 653
Corporate G&A (61 ) (67 ) (115 ) (123 )
Pension & OPEB actuarial & settlement losses (1 )
Separation and merger costs (46 ) (64 )
Interest expense (35 ) (36 ) (70 ) (75 )
Interest income 7 5 18 10
Other income, net 3   (6 ) 29   (5 )
Income from continuing operations before taxes $ 176   $ 245   $ 404   $ 459  
 
Adjusted Operating margin 12.2 % 11.3 % 11.5 % 10.3 %
Operating margin 11.4 % 11.3 % 11.1 % 10.3 %
 
 

Earnings Before Interest and Taxes and Adjusted Earnings Before Interest and Taxes
(preliminary and unaudited)
 
Earnings before interest and taxes (EBIT) is defined as income from continuing operations less interest expense, interest income and income tax expense. EBIT margin is defined as EBIT as a percentage of revenue.
 
Adjusted EBIT is computed by excluding from EBIT the impact of certain items in the second quarter and first six months of fiscal 2016, including separation, merger, and other transaction costs, the gain on a business divestiture, SEC settlement-related items, and the real estate restructuring charge. Adjusted EBIT margin is computed as adjusted EBIT as a percentage of revenue.
 
A reconciliation of adjusted EBIT and EBIT to income from continuing operations is as follows:
       
Quarter Ended Six Months Ended
(Amounts in millions)

October 2, 2015
   

October 3, 2014

October 2, 2015
   

October 3, 2014
Adjusted EBIT $ 275 $ 276 $ 520   $ 524
Separation, merger, & other transaction costs (48 ) (66 )
Gain on business divestiture 22
SEC settlement-related items (2 ) 1
Real estate restructuring charge (21 )   (21 )  
EBIT 204 276 456 524
Interest expense (35 ) (36 ) (70 ) (75 )
Interest income 7 5 18 10
Income tax expense (3 ) (68 ) (67 ) (123 )
Income from continuing operations $ 173   $ 177   $ 337   $ 336  
 
Adjusted EBIT margin 10.1 % 9.0 % 9.5 % 8.3 %
EBIT margin 7.5 % 9.0 % 8.3 % 8.3 %
 
 

Free Cash Flow
(preliminary and unaudited)
 
CSC defines 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.
 
Free cash flow is further adjusted for certain non-recurring cash flow items, such as (i) payments related to separation, merger, and transaction costs related to fiscal 2016 acquisitions, (ii) payments related to the fiscal 2015 fourth quarter special restructuring, (iii) SEC settlement-related payments, and (iv) benefit from the sale of NPS accounts receivables.
 
A reconciliation of free cash flow to the most directly comparable GAAP financial measures is as follows:
       
Quarter Ended Six Months Ended
(Amounts in millions)

October 2, 2015
   

October 3, 2014

October 2, 2015
   

October 3, 2014
Net cash provided by operating activities $ 117 $ 217 $ 441 $ 490
Net cash used in investing activities (397 ) (184 ) (481 ) (298 )
Acquisitions, net of cash acquired 236 35 236 35
Business dispositions 18 (34 ) 13
Payments on capital leases and other long-term asset financings (42 ) (55 ) (111 ) (139 )
Payments of separation, merger, and other transaction costs 49 57
Payments of special restructuring costs 32 51
SEC settlement-related payments 1 187
Sale of NPS accounts receivables 57     (176 )  
Free cash flow $ 53   $ 31   $ 170   $ 101  
 
 

Adjusted Segment Operating Income and Operating Margin
(preliminary and unaudited)
 
Adjusted operating income is computed by excluding from operating income, the impact of the second quarter fiscal 2016 real estate restructuring charge and the transaction costs associated with fiscal 2016 acquisitions. Reconciliations of adjusted operating income to operating income, for the quarter and six months ended October 2, 2015, are as follows:
   
Quarter Ended October 2, 2015
(Amounts in millions)

Operating income
   

Real estate restructuring charge
   

Transaction costs
   

Adjusted operating income
   

Adjusted operating margin
Global Business Solutions $ 101 $ 12 $ 1 $ 114 12.8 %
Global Infrastructure Services 64 8 1 73 8.5
North American Public Sector 160 1 161 16.6
Corporate (17 )     (17 )  
Total $ 308   $ 21   $ 2   $ 331   12.2 %
 
 
Six Months Ended October 2, 2015
(Amounts in millions)

Operating income

Real estate restructuring charge

Transaction costs

Adjusted operating income

Adjusted operating margin
Global Business Solutions $ 198 $ 12 $ 1 $ 211 11.7 %
Global Infrastructure Services 117 8 1 126 7.2
North American Public Sector 296 1 297 15.4
Corporate (5 )     (5 )  
Total $ 606   $ 21   $ 2   $ 629   11.5 %
 
 

Non-GAAP Results
(preliminary and unaudited)
 
Non-GAAP results are financial measures calculated by excluding certain items, which management believes are not indicative of the Company's operating performance. A reconciliation of select non-GAAP results to reported results is as follows:
   
Quarter ended October 2, 2015
(Amounts in millions, except per-share amounts)

As reported
   

Separation, merger, & other transaction costs
   

SEC settlement- related items
   

Real estate restructuring charge
   

Tax valuation allowance benefit
   

Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs) $ 1,970   $   $   $   $   $ 1,970  
 
Selling, general and administrative (excludes restructuring costs) $ 286   $ (2 ) $ (2 ) $   $   $ 282  
 
Income (loss) from continuing operations, before taxes $ 176 $ (48 ) $ (2 ) $ (21 ) $ $ 247
Income tax expense (benefit) 3   (6 )   (2 ) (53 ) 64  
Income (loss) from continuing operations $ 173   $ (42 ) $ (2 ) $ (19 ) $ 53   $ 183  
 
Net income (loss) $ 173 $ (42 ) $ (2 ) $ (19 ) $ 53 $ 183
Less: net income attributable to noncontrolling interest, net of tax 6           6  
Net income (loss) attributable to CSC common stockholders $ 167   $ (42 ) $ (2 ) $ (19 ) $ 53   $ 177  
 
Effective tax rate 1.7 % 26.0 %
 
Basic EPS from continuing operations $ 1.21 $ (0.30 ) $ (0.01 ) $ (0.14 ) $ 0.38 $ 1.28
Diluted EPS from continuing operations $ 1.19 $ (0.30 ) $ (0.01 ) $ (0.14 ) $ 0.38 $ 1.26
 
Weighted average common shares outstanding for:
Basic EPS 138.295 138.295 138.295 138.295 138.295 138.295
Diluted EPS 140.532 140.532 140.532 140.532 140.532 140.532
 
   
  Six months ended October 2, 2015
(Amounts in millions, except per-share amounts)

As reported
   

Separation, merger, & other transaction costs
   

Gain on business divestiture
   

SEC settlement- related items
   

Real estate restructuring charge
   

Tax valuation allowance benefit
   

Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs) $ 3,996   $   $   $   $   $   $ 3,996  
 
Selling, general and administrative (excludes restructuring costs) $ 570   $ (2 ) $   $ 1   $   $   $ 569  
 
Income (loss) from continuing operations, before taxes $ 404 $ (66 ) $ 22 $ 1 $ (21 ) $ $ 468
Income tax expense (benefit) 67   (13 ) 8   1   (2 ) (53 ) 126  
Income (loss) from continuing operations $ 337   $ (53 ) $ 14     $   $ (19 ) $ 53   $ 342  
 
Net income (loss) $ 337 $ (53 ) $ 14 $ $ (19 ) $ 53 $ 342
Less: net income attributable to noncontrolling interest, net of tax 10             10  
Net income (loss) attributable to CSC common stockholders $ 327   $ (53 ) $ 14   $   $ (19 ) $ 53   $ 332  
 
Effective tax rate 16.6 % 26.9 %
 
Basic EPS from continuing operations $ 2.37 $ (0.38 ) $ 0.10 $ $ (0.14 ) $ 0.38 $ 2.40
Diluted EPS from continuing operations $ 2.32 $ (0.38 ) $ 0.10 $ $ (0.14 ) $ 0.38 $ 2.36
 
Weighted average common shares outstanding for:
Basic EPS 138.106 138.106 138.106 138.106 138.106 138.106 138.106
Diluted EPS 140.699 140.699 140.699 140.699 140.699 140.699 140.699
 

Click here to subscribe to Mobile Alerts for CSC.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151104006745/en/

Copyright Business Wire 2010