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CSC Delivers Revenue Growth and Commercial Margin Expansion in First Quarter 2017
[August 08, 2016]

CSC Delivers Revenue Growth and Commercial Margin Expansion in First Quarter 2017


CSC (NYSE: CSC) today reported results for the first quarter of fiscal year 2017.

"CSC's first-quarter results reflected the transformative steps we have taken with our recent acquisitions of UXC and Xchanging," said Mike Lawrie, chairman, president and CEO. "Revenue was up 9% in constant currency driven by contributions from acquisitions as well as strong momentum within our next-generation offerings. Commercial operating margins were up over the prior year on a comparable basis, as we continue to drive greater operating efficiencies while reinvesting in key areas of the business. Our merger with the Enterprise Services segment of Hewlett Packard Enterprise is progressing as planned with a targeted close of late March 2017."

Financial Highlights

  • Diluted (loss) earnings per share from continuing operations were $(0.15) in the first quarter, compared with $0.46 in the year-ago period. Diluted earnings per share from continuing operations included $(0.32) per share of restructuring costs and $(0.36) per share of transaction and integration-related costs.
  • Non-GAAP diluted earnings per share from continuing operations excluding these items were $0.53, up 13% percent over the prior year.
  • (Loss) Income from continuing operations before taxes was $(36) million for the first quarter, compared with $72 million in the prior year, and includes $(57) million of restructuring and $(70) million of transaction and integration-related costs. Excluding the impact of these items, Non-GAAP income from continuing operations, before taxes was $91 million compared with $97 million a year ago.
  • Commercial operating income, which is operating income of the combined GBS and GIS segments, excluding certain items, was $161 million compared with $136 million in the first quarter of fiscal 2016. Commercial Operating Margin on the same basis was 8.3%, up from 7.5% in the prior year.
  • Net cash provided by operating activities was $50 million in the first quarter, compared with $362 million in the prior year.
  • Free cash flow was $32 million in the first quarter, compared with $158 million in the prior year. During the first quarter of fiscal 2016, CSC's net cash provided by operating activities and free cash flow included the results of its since-divested U.S. federal IT services business, CSRA.

Global Business Services

GBS revenue of $1,049 million in the quarter compares with $919 million in the year ago quarter, an increase of 14.1%. GBS revenue increased 16.4% year-over-year in constant currency. The GBS revenue increase was driven by the contributions from our recent acquisitions. GBS operating margin in the quarter, excluding the impact of certain items, was 10.5% up from 10.1% in the prior year. New business awards for GBS were $0.7 billion in the first quarter.

Global Infrastructure Services

GIS revenue of $881 million in the quarter compares with $885 million in the year-ago quarter, a decrease of 0.5%. GIS revenue increased 1.7% year-over-year in constant currency, driven by the contributions from our recent acquisitions as well as growth in our next-generation offerings, which helped offset contract completions and price-downs. GIS operating margin in the quarter, excluding the impact of certain items, was 5.8% compared with 4.9% in the prior year. New business awards for GIS were $0.9 billion in the quarter.

Returning Capital to Shareholders

During the first quarter, CSC returned $20 million to shareholders, consisting of common stock dividends.

CSC had 140,317,261 basic shares outstanding on July 1, 2016.

Earnings Conference Call and Webcast

CSC senior management will host a conference call and webcast on the same day at 5 p.m. EDT. The dial-in number for domestic callers is 888-631-5930. Callers who reside outside of the United States or Canada should dial 913-312-0831. The passcode for all participants is 5423942. 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 August 15, 2016. 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 5423942. 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: constant currency, operating income, commercial operating income and margin, adjusted operating income, operating and adjusted operating margin, adjusted commercial operating income and margin, EBIT, adjusted EBIT, EBIT and adjusted EBIT margin, free cash flow, and non-GAAP results including non-GAAP income from continuing operations and non-GAAP diluted earnings 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

CSC (NYSE: CSC) leads clients on their digital transformation journeys. The company provides innovative next-generation technology services and solutions that leverage deep industry expertise, global scale, technology independence and an extensive partner community. CSC serves leading commercial and international public sector organizations throughout the world. CSC is a Fortune 500 company and ranked among the best corporate citizens. 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 1, 2016 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 events or otherwise, except as required by law.

Note: On November 27, 2015, CSC completed the separation of CSRA. The Company's results of operations for the first quarter of fiscal 2016 have been adjusted to reflect the separation.





               
Business Segment Revenues, Operating Income and Operating Margins

(preliminary and unaudited)

 

Revenues by Segment

 
Three months ended
(in millions) July 1, 2016 July 3, 2015 % Change

% Change at
Constant
Currency(1)

Global Business Services $ 1,049 $ 919 14.1 % 16.4 %
Global Infrastructure Services   881     885   (0.5 )% 1.7 %
Total Revenues $ 1,930   $ 1,804   7.0 % 9.2 %
 
 

Operating Income and Operating Margins by Segment

 
Three months ended
July 1, 2016 July 3, 2015
(in millions)

Operating
Income

Operating
Margin

Operating
Income

Operating
Margin

Global Business Services $ 73 7.0 % $ 97 10.6 %
Global Infrastructure Services   (4 ) (0.5 )%   53   6.0 %
Commercial Operating Income 69 3.6 % 150 8.3 %
Corporate and Eliminations   (17 ) -   (6 ) -
Total Operating Income $ 52   2.7 % $ 144   8.0 %
 

(1) Selected references are made on a "constant currency basis" so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a "constant currency basis" are non-U.S. Generally Accepted Accounting Principle (GAAP) measures calculated by translating current period activity into U.S. dollars using the comparable prior period's currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar.

   
Condensed Consolidated Statements of Operations

(preliminary and unaudited)

 
Three months ended

(in millions, except per-share amounts)

July 1, 2016     July 3, 2015
 
Revenues $ 1,930   $ 1,804  
 
Costs of services (excludes depreciation and amortization and restructuring costs) 1,421 1,272
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 305 271
Depreciation and amortization 166 174
Restructuring costs 57 -
Interest expense 25 30
Interest income (10 ) (11 )
Other expense (income), net 2   (4 )
Total costs and expenses 1,966   1,732  
 
(Loss) income from continuing operations, before taxes (36 ) 72
Income tax (benefit) expense (16 ) 7  
(Loss) income from continuing operations (20 ) 65
Income from discontinued operations, net of taxes -   102  
Net (loss) income (20 ) 167
Less: net income attributable to noncontrolling interest, net of tax 1   4  
Net (loss) income attributable to CSC common stockholders $ (21 ) $ 163  
 
(Loss) earnings per common share
Basic:
Continuing operations $ (0.15 ) $ 0.47
Discontinued operations -   0.71  
$ (0.15 ) $ 1.18  
Diluted:
Continuing operations $ (0.15 ) $ 0.46
Discontinued operations -   0.69  
$ (0.15 ) $ 1.15  
 
Cash dividend per common share $ 0.14 $ 0.23
 
Weighted average common shares outstanding for:
Basic EPS 138.98 137.92
Diluted EPS 138.98 141.39
   
Selected Balance Sheet Data

(preliminary and unaudited)

 

As of
(in millions) July 1, 2016     April 1, 2016
 
Assets
Cash and cash equivalents $ 1,000 $ 1,178
Receivables, net 1,983 1,831
Prepaid expenses and other current assets 421   403  
Total current assets 3,404   3,412  
 
Software, net 854 712
Outsourcing contract costs, net 331 334
Goodwill 1,817 1,277
Other assets 1,101 631
Deferred income taxes, net 338 345
Property and equipment, net 1,012   1,025  
Total Assets $ 8,857   $ 7,736  
 
Liabilities
Short-term debt and current maturities of long-term debt 700 710
Accounts payable 368 341
Accrued payroll and related costs 331 288
Accrued expenses and other current liabilities 778 720
Deferred revenue and advance contract payments 576 509
Income taxes payable 10   40  
Total current liabilities 2,763   2,608  
 
Long-term debt, net of current maturities 2,543 1,934
Non-current deferred revenue 345 348
Pension obligations 222 298
Deferred tax liabilities 221 181
Non-current income tax liabilities 191 175
Other liabilities 343   160  
Total Liabilities 6,628   5,704  
 
Total Equity 2,229 2,032
     
Total Liabilities and Equity $ 8,857   $ 7,736  
   
Condensed Consolidated Statements of Cash Flows

(preliminary and unaudited)

 
Three months ended
(in millions) July 1, 2016     July 3, 2015
Cash flows from operating activities:
Net (loss) income $ (20 ) $ 167
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 169 207
Stock-based compensation 14 (12 )
Gain on dispositions - (51 )
Other non-cash charges, net 10 13
Changes in assets and liabilities, net of acquisitions and dispositions:
Decrease (increase) in assets (42 ) 211
Decrease in liabilities (81 ) (173 )
Net cash provided by operating activities 50   362  
 
Cash flows from investing activities:
Purchases of property and equipment (58 ) (90 )
Payments for outsourcing contract costs (27 ) (21 )
Software purchased and developed (36 ) (35 )
Payments for acquisitions, net of cash acquired (423 ) -
Business dispositions - 34
Proceeds from sale of assets 5 43
Other investing activities, net (10 ) (15 )
Net cash used in investing activities (549 ) (84 )
 
Cash flows from financing activities:
Borrowings of commercial paper 511 -
Repayments of commercial paper (511 ) -
Borrowings under lines of credit 920 3
Repayment of borrowings under lines of credit (453 ) -
Debt borrowings 13 -
Debt repayments (120 ) (69 )
Proceeds from stock options 36 24
Taxes paid related to net share settlements of stock-based compensation awards (6 ) (24 )
Repurchase of common stock - (118 )
Dividend payments (19 ) (32 )
Other financing activities, net (17 ) -  
Net cash provided by (used in) financing activities 354   (216 )
Effect of exchange rate changes on cash and cash equivalents (33 ) 39  
Net (decrease) increase in cash and cash equivalents (178 ) 101
Cash and cash equivalents at beginning of year 1,178   2,098  
Cash and cash equivalents at end of period $ 1,000   $ 2,199  
 

Non-GAAP Financial Measures

The following tables reconcile non-GAAP financial measures of operating income, commercial operating income, adjusted operating income, adjusted commercial operating income, operating and adjusted operating margin, commercial and adjusted commercial operating margin, earnings before interest and taxes (EBIT), adjusted EBIT, EBIT and adjusted EBIT margin, 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 presents these non-GAAP results because management believes they assist investors in comparing the Company's performance across reporting periods on a consistent basis by excluding items that management does not believe are indicative of the Company's core operating performance. The non-GAAP measures we provide are also considered important measures by financial analysts covering CSC and its peers.

Management uses operating income and commercial operating income to evaluate financial performance and it is one of the measures utilized to determine executive compensation. 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 (loss) 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.

Adjustments to results of operations include:

  • Restructuring costs - Reflects restructuring costs related to workforce optimization and real estate charges.
  • Transaction and integration-related costs - Reflects costs related to (1) the separation of CSRA, (2) announced merger with the Enterprise Services segment of HPE, and (3) acquisitions.
  • Certain CSRA overhead costs - Reflects costs historically allocated to CSRA but not included in discontinued operations due to accounting rules. These costs are expected to be largely eliminated on a prospective basis.
  • U.S. Pension and OPEB - Reflects the impact of certain U.S. pension and other postretirement benefit (OPEB) plans historically included in CSC's financial results that have been transferred to CSRA as part of the separation.
  • SEC settlement-related items - Reflects costs associated with certain SEC charges and settlements.
  • Tax adjustment - Reflects the adoption of a new accounting standard in fiscal 2016 changing excess tax benefits on stock-based compensation to be recorded as a reduction to income tax expense.

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 (G&A) expenses. Commercial operating income is defined as operating income for the combined GBS and GIS segments. Commercial operating margin is defined as commercial operating income as a percentage of revenue. Operating income, as defined by CSC, excludes corporate G&A, and pension and OPEB actuarial and settlement losses. Operating margin is defined as operating income as a percentage of revenue.

Adjusted operating income is computed by excluding from operating income restructuring costs, transaction and integration-related costs, certain CSRA overhead costs, and U.S. Pension and OPEB. Adjusted operating margin is defined as adjusted operating income as a percentage of revenue. Adjusted commercial operating income is computed by excluding from operating income restructuring costs, transaction and integration-related costs, and U.S. Pension and OPEB. Adjusted commercial operating margin is defined as adjusted commercial operating income as a percentage of revenue.

Reconciliations of adjusted operating income to (loss) income from continuing operations, before taxes are as follows:

   
Three months ended
(in millions) July 1, 2016     July 3, 2015
Adjusted Operating income $ 144 $ 148
Restructuring costs (57 ) -
Transaction and integration-related costs (35 ) -
Certain CSRA overhead costs - (18 )
U.S. Pension and OPEB -   14  
Operating income $ 52 $ 144
Corporate G&A (70 ) (57 )
Pension and OPEB actuarial and settlement losses (1 ) -
Interest expense (25 ) (30 )
Interest income 10 11
Other (expense) income, net (2 ) 4  
(Loss) income from continuing operations, before taxes $ (36 ) $ 72  
 
Adjusted Operating margin 7.5 % 8.2 %
Operating margin 2.7 % 8.0 %
 

Earnings Before Interest and Taxes and Adjusted Earnings Before Interest and Taxes

(preliminary and unaudited)

EBIT is defined as net (loss) income less income from discontinued operations, net of taxes, interest expense, interest income and income tax benefit (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, including restructuring costs, transaction and integration-related costs, certain CSRA overhead costs, U.S. Pension and OPEB, and SEC settlement-related items. Adjusted EBIT margin is computed as adjusted EBIT as a percentage of revenue.

A reconciliation of adjusted EBIT and EBIT to net (loss) income is as follows:

   
Three months ended
(in millions) July 1, 2016     July 3, 2015
Adjusted EBIT $ 106 $ 116
Restructuring costs (57 ) -
Transaction and integration-related costs (70 ) (3 )
Certain CSRA overhead costs - (33 )
U.S. Pension and OPEB - 14
SEC settlement related items -   (3 )
EBIT $ (21 ) $ 91
Interest expense (25 ) (30 )
Interest income 10 11
Income tax benefit (expense) 16   (7 )
(Loss) income from continuing operations $ (20 ) $ 65
Income from discontinued operations, net of taxes -   102  
Net (loss) income $ (20 ) $ 167  
 
Adjusted EBIT margin 5.5 % 6.4 %
EBIT margin (1.1 )% 5.0 %
 

Free Cash Flow

(preliminary and unaudited)

CSC defines free cash flow as 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 infrequently occurring cash flow items, such as (i) payments for transaction and integration-related costs, (ii) restructuring payments, (iii) SEC settlement-related payments and (iv) cash receipts from the sale of accounts receivables.

A reconciliation of net cash provided by operating activities to free cash flow is as follows:

    Three months ended
(in millions) July 1, 2016     July 3, 2015
Net cash provided by operating activities $ 50 $ 362
Net cash used in investing activities(1) (524 ) (84 )
Acquisitions, net of cash acquired 423 -
Business dispositions - (34 )
Payments on capital leases and other long-term asset financings (45 ) (69 )
Payments for transaction and integration-related costs 93 11
Restructuring payments 35 19
SEC settlement-related payments - 186
Sale of NPS accounts receivables -   (233 )
Free cash flow $ 32   $ 158  
 

(1)

Excludes capital expenditures financed through CSC Finco and other investments.

 

Adjusted Segment Operating Income and Operating Margin

(preliminary and unaudited)

Adjusted operating income is computed by excluding from operating income restructuring costs, transaction and integration-related costs, certain CSRA overhead costs, and U.S. Pension and OPEB. Adjusted operating margin is computed as adjusted operating income as a percentage of revenue. Reconciliations of operating income to adjusted operating income are as follows:

    Three months ended July 1, 2016
(in millions)

Operating
income

   

Restructuring
costs

   

Transaction
and
integration-
related costs

   

Adjusted
operating
income

   

Adjusted
operating
margin

Global Business Services $ 73 (20 ) (17 ) $ 110 10.5 %
Global Infrastructure Services (4 ) (37 ) (18 ) 51   5.8 %
Total Commercial 69 (57 ) (35 ) 161 8.3 %
Corporate and Eliminations (17 ) -   -   (17 ) -
Total $ 52   $ (57 ) $ (35 ) $ 144   7.5 %
   
Three months ended July 3, 2015
(in millions)

Operating
income

   

Certain CSRA
overhead costs

   

U.S. Pension
and OPEB

   

Adjusted
operating
income

   

Adjusted
operating
margin

Global Business Services $ 97 - 4 $ 93 10.1 %
Global Infrastructure Services 53   -   10   43   4.9 %
Total Commercial 150 - 14 136 7.5 %
Corporate and Eliminations (6 ) (18 ) -   12   -
Total $ 144   $ (18 ) $ 14   $ 148   8.2 %
 

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 non-GAAP results to reported results is as follows:

   
Three Months Ended July 1, 2016
(in millions, except per-share amounts) As reported    

Restructuring
costs

   

Transaction
and
integration-
related costs

   

Non-GAAP
results

 
Costs of services (excludes depreciation and amortization and restructuring costs) $ 1,421 $ - $ - $ 1,421
 
Selling, general and administrative (excludes depreciation and amortization, and restructuring costs) 305 - (56 ) 249
 
(Loss) income from continuing operations, before taxes (36 ) (57 ) (70 ) 91
Income tax (benefit) expense (16 ) (12 ) (19 ) 15  
(Loss) income from continuing operations (20 ) (45 ) (51 ) 76
       
Net (loss) income (20 ) (45 ) (51 ) 76
Less: net income attributable to noncontrolling interest, net of tax 1   -   -   1  
Net (loss) income attributable to CSC common stockholders $ (21 ) $ (45 ) $ (51 ) $ 75  
 
Effective Tax Rate 44.4 % 16.5 %
 
Basic EPS from continuing operations $ (0.15 ) $ (0.32 ) $ (0.37 ) $ 0.54
Diluted EPS from continuing operations $ (0.15 ) $ (0.32 ) $ (0.36 ) $ 0.53
 
Weighted average common shares outstanding for:
Basic EPS 138.98 138.98 138.98 138.98
Diluted EPS 138.98 (1) 142.43 142.43 142.43
 

(1)

 

Diluted EPS considers the impact of certain common stock equivalents except in periods where there is a loss because the inclusion of these potential common shares would have an antidilutive effect. Hence the share count used to calculate basic EPS is also used to calculate dilutive EPS.

   
Three Months Ended July 3, 2015
(in millions, except per-share amounts) As reported    

Certain
CSRA
overhead
costs

   

U.S. Pension
and OPEB

   

Transaction
and
integration-
related costs

   

SEC
settlement-
related items

   

Tax
adjustment

   

Non-GAAP
results

 
Costs of services (excludes depreciation and amortization and restructuring costs) $ 1,272 $ (17 ) $ 12 $ - $ - $ - $ 1,267
 
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 271 (16 ) 2 (3 ) (3 ) - 251
 
Income from continuing operations, before taxes 72 (33 ) 14 (3 ) (3 ) - 97
Income tax expense 7   (13 ) 5   (1 ) (1 ) (14 ) 31  
Income from continuing operations 65 (20 ) 9 (2 ) (2 ) 14 66
 
Net income 167 (20 ) 9 (2 ) (2 ) 14 168
Less: net income attributable to noncontrolling interest, net of tax 4   -   -   -   -   -   4  
Net income attributable to CSC common stockholders $ 163   $ (20 ) $ 9   $ (2 ) $ (2 ) $ 14   $ 164  
 
Effective Tax Rate 9.7 % 32.0 %
 
Basic EPS from continuing operations $ 0.47 $ (0.15 ) $ 0.07 $ (0.01 ) $ (0.01 ) $ 0.10 $ 0.48
Diluted EPS from continuing operations $ 0.46 $ (0.14 ) $ 0.06 $ (0.01 ) $ (0.01 ) $ 0.10 $ 0.47
 
Weighted average common shares outstanding for:
Basic EPS 137.92 137.92 137.92 137.92 137.92 137.92 137.92
Diluted EPS 141.39 141.39 141.39 141.39 141.39 141.39 141.39


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