(The following statement was released by the rating agency)
NEW YORK, March 08 (Fitch) Fitch Ratings has affirmed Computer
(NYSE: CSC) ratings and revised the Rating Outlook to Stable
from Negative. The
following ratings were affirmed:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
--Unsecured credit facilities (revolver and term loan) at 'BBB';
--Short-term IDR at 'F3'
--Commercial paper (CP) at 'F3'.
KEY RATING DRIVERS
The revision in the Rating Outlook reflects CSC's:
--Faster than expected recovery in profitability due to cost
including the remediation of certain underperforming contracts,
expectations for incremental margin expansion through at least
CSC's EBITDA margin rebounded from a multi-year low of 7.2% when
Mike Lawrie was
appointed CEO in the fiscal fourth quarter of 2012 to 13.6% in
the third quarter
ended Dec. 28, 2012. Fitch expects further upside to CSC's
forecasting increases of 270 and 160 basis points in fiscal 2013
respectively, to 13.1% and 14.7%, despite the divestiture of
profitable credit services business (45% operating profit
--Strengthened liquidity profile following the early redemption
of $1 billion of debt previously due in 2013, creation of a
staggered debt maturity schedule with no material near-term debt
enhanced cash position provided by stronger free cash flow (FCF)
from the sale of non-strategic assets.
--Demonstrated ability to execute on its cost reduction
--Implementation of a more stringent and globally consistent bid
mitigates the risk of additional underperforming contracts.
--Renegotiated NHS contract, which reduces uncertainty in terms
risk, and offers CSC the opportunity to recoup at least a
portion of the $1.5
billion in NHS assets that it previously wrote off.
--Conclusion of its audit committee independent investigation in
in numerous out of period adjustments, none of which were
Rating strengths include:
--Recurring revenue from long-term contracts (75%-80% of total
--Initial success in achieving $1 billion-$1.2 billion of cost
before reinvestments by the end of fiscal 2014.
--Diversified revenue mix with respect to service offerings and
served with commercial and government representing 63% and 37%,
of total fiscal
2012 revenue, respectively, pro forma for announced
CSC addresses a broad range of industries within the commercial
--Significant market opportunities in cybersecurity, healthcare,
applications, data analytics and datacenter transformation,
particularly for the
Rating concerns include:
--A highly challenging U.S. federal market, including automatic
triggered on March 2, 2013 due to sequestration and a potential
of the federal government on March 27, 2013 in the absence of
action. CSC's North American Public (NPS) Sector accounted for
36% of total
fiscal 2012 revenue pro forma for announced divestitures. Fitch
substantial cost savings opportunities offset the risk
associated with the NPS
--Sovereign debt challenges and weak economic environment in
Europe (25% of
--Significant capital intensity, which materially increases FCF
(defined as FCF/total debt) compared to EBITDA leverage (total
--Ongoing SEC investigation into accounting adjustments and
and several class action lawsuits.
--Achieves its cost reduction target of $1 billion-$1.2 billion
reinvestment by the end of fiscal 2014 and revenue remains
resulting in stronger FCF;
--Materially reduces its high capital intensity, leading to
greater FCF and
lower FCF leverage;
--Profitability improvement is accompanied by revenue growth at
least on par
with the industry, incorporating differences in CSC's revenue
--Contract signings significantly decline on a trailing 12-month
indicating a lack of competitiveness under its more stringent
--A material reduction in federal spending leads NPS revenue to
decline well in
excess of the forecasted mid-single-digit rate, which is not
partially offset by
commercial sector growth and/or profit margin expansion.
As of Dec. 28, 2012, total liquidity was $3.3 billion,
consisting of an undrawn
$1.5 billion revolving credit facility (RCF) due March 2015 and
$1.8 billion of cash pro forma for a $400 million discretionary
contribution. About $800 million of CSC's cash is held offshore,
accessible without material adverse tax implications due to
from the parent to its foreign subsidiaries. CSC has substantial
its financial covenants, which consist of minimum interest
coverage and maximum
leverage of 3x.
Total debt was approximately $2.6 billion as of Dec. 28, 2012,
--$350 million of 2.50% term notes due September 2015;
--$250 million term loan due September 2016;
--$1 billion of 6.50% term notes due March 2018; and
--$350 million of 4.45% term notes due September 2022.
John M. Witt, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Jamie Rizzo, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
The ratings above
were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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