-- U.S. technology services provider Computer Sciences Corp. (CSC)
recently reported fiscal 2012 revenues of $15.9 billion, and a $4.2 billion
loss from continuing operations.
-- In addition, CSC identified numerous underperforming contracts and
announced a $1 billion cost-reduction program.
-- We are affirming our 'A-2' short-term rating on CSC, and lowering our
corporate credit rating to 'BBB' from 'BBB+' and removing it from CreditWatch.
-- The outlook is negative, reflecting uncertainty as to the timing and
outcome of ongoing negotiations with the U.K. National Health Service,
management execution risks related to cost reductions and organizational
changes, and the potential impact of incremental or prolonged weakness in
European economic conditions and CSC's federal sector.
On May 22, 2012, Standard & Poor's Ratings Services lowered its long-term
ratings on Falls Church, Va.-based Computer Sciences Corp. (CSC) to 'BBB' from
'BBB+', removing the ratings from CreditWatch, where they were placed with
negative implications on Nov. 11, 2011. At the same time, we affirmed our
'A-2' short-term rating on the company. The outlook is negative.
The downgrade reflects CSC's increased leverage following weak fiscal 2012
financial results, more extensive restructuring charges and organizational
changes than we had incorporated into the prior rating, and the lack of
near-term operating performance predictability.
The ratings on CSC reflect the company's "adequate" business profile,
supported by its diversified business and geographic mix and expected
organizational and cost improvements. We believe CSC will maintain an
"intermediate" financial risk profile, incorporating solidly positive free
operating cash flow (FOCF), "adequate" liquidity, and expected operating
margin improvements. Our expectations over the outlook horizon incorporate:
our assumptions for a low- to mid-single-digit revenue decline in fiscal 2013;
an ongoing relationship with the U.K. National Health Service (NHS), even if
contract negotiations experience additional delays; and leverage below 2.5x
exiting fiscal 2013, with further reduction to the low-2.0x area in fiscal
CSC is a global provider of technology services, including management
consulting, systems integration, and IT systems and applications outsourcing
across the federal and commercial markets. Ongoing NHS contract uncertainty
and the identification of underperforming contracts (largely in CSC's managed
services segment and public sector) led to restructuring charges and a
material decline in operating performance over the past two quarters. We
estimate fiscal 2012 EBITDA margins were about 10% (excluding NHS contract
write-offs), as compared with historical annual margins consistently in excess
CSC's remedial actions include simplifying its organizational structure and a
$1 billion reduction in costs over the next 12 to 18 months. Robust growth in
new business bookings over the past three quarters is likely to bolster CSC's
revenue base. However, the company will be challenged to successfully execute
its restructuring actions amid highly competitive and evolving industry
conditions. Given diminished near-term operating performance predictability,
our current rating incorporates the expectation that CSC will sustain a 2%
improvement in EBITDA margins in fiscal 2013 and beyond.
CSC's intermediate financial profile reflects estimated adjusted total debt to
EBITDA in the mid- to high-2x range for fiscal 2013. We expect a combination
of EBITDA improvement and some debt reduction to result in leverage below 2.5x
in fiscal 2013, with further reduction to the low-2.0x level in fiscal 2014.
We also expect CSC to maintain moderate financial policies; the current rating
does not incorporate material acquisitions or share repurchases.
The short-term rating on CSC is 'A-2'. We expect CSC to maintain adequate
liquidity, supported by cash balances of $1 billion as of March 30, 2012, and
solid cash-generation characteristics. Although CSC operates in highly
competitive markets, we do not anticipate the competitive environment will
materially affect the company's liquidity position in the near term.
Liquidity is supported by an undrawn $1.5 billion revolving credit facility
maturing in March 2015, including our expectation that CSC will maintain
adequate covenant headroom. The approximately $1 billion of debt maturing in
the first calendar quarter of 2013 is expected to be addressed through a
mixture of cash (debt reduction) and refinancing. The company's approximately
$125 million annual dividend payment is not likely to materially impact
Until its expiration in August 2013, CSC has additional flexibility from an
agreement that gives the company the option to sell its credit-reporting
business to Equifax Inc. for a price determined by appraisal. Finally, the
current rating incorporates our expectation that resolution of the SEC's
ongoing, formal civil investigation will not have a material impact on CSC's
The negative outlook reflects uncertainty as to the timing and outcome of
ongoing negotiations with the NHS, the lack of near-term operating performance
predictability, and the potential impact of incremental or prolonged weakness
in European economic conditions and CSC's federal sector. In addition, our
estimated fiscal 2012 leverage is somewhat high for the current rating, at
An outlook revision to stable depends on a signed NHS contract (with an
expected reduced contract scope) and leverage in the low-2x area exiting
fiscal 2014. Failure to execute a contract with NHS, or sustainably reduce
leverage over the rating horizon could lead to lower ratings.
Related Criteria And Research
-- Top 10 Investor Questions: How Will The Global Technology Industry
Fare Amid An Economy In Flux?, April 26, 2012
-- Global Technology Ratings Trend Shifts To Negative In The First
Quarter, April 11, 2012
-- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March
-- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Downgraded; Short-Term Rating Affirmed
Computer Sciences Corp.
Corporate Credit Rating BBB/Negative/A-2 BBB+/Watch Neg/A-2
Computer Sciences Corp.
Senior Unsecured BBB BBB+/Watch Neg