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Fitch Affirms Computer Sciences' IDR at 'BBB+'; Revises Outlook to Positive

^{Published on 2010-08-03 08:20:48 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed Computer Sciences Corp.'s (NYSE: CSC) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Bank credit facility at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper (CP) rating at 'F2'.

Fitch has revised the Rating Outlook to Positive from Stable.

Approximately $3.7 billion of debt is affected by Fitch's action.

The Positive Rating Outlook reflects CSC's:

--Improved revenue growth prospects, despite increasing demand for low cost offshore services, due to: i) Strong contract signings growth of approximately 19% in fiscal year (FY) 2010 led by a nearly 72% increase in the Managed Services Sector (MSS); ii) Sizeable and growing pipeline in the federal and commercial markets, which increased 25% to $20 billion and 20% to $12 billion, respectively, compared with the year-ago period led by opportunities in applications, cloud computing, cyber security and healthcare; iii) Moderating revenue pressures from existing commercial contracts as the magnitude of restructurings and terminations subsidies relative to FY 2009-2010; and iv) Gradual improvement in demand for discretionary information technology (IT) services, such as consulting and systems integration (C&SI) and applications development.

--Strengthened liquidity profile, supported by a significant cash position of $2.8 billion as of April 2, 2010 and Fitch's expectations that annual free cash flow (FCF) volatility will moderate relative to historical standards as a result of i) Continued focus on effective working capital management, especially days sales outstanding (DSO); ii) lower capital intensity; and iii) Suspension of future pension accruals for its defined benefit plans in the U.S. and U.K., which account for approximately 90% of CSC's worldwide pension assets.

--Increasing operating profit margin from greater utilization of offshore delivery resources, lower capital intensity and effective cost management.

--Improving credit protection metrics subsequent to the early retirement of $500 million of 7.375% senior unsecured term notes due 2011 at the end of FY 2010 and Fitch's expectations for further debt reduction given the company's stated debt to total capital target of 20%-25% compared with nearly 37% currently, sizable excess cash position and flexibility of repaying outstanding borrowings under the credit facility at any time prior to maturity without penalty. Fitch estimates CSC will achieve the midpoint of the debt to total capital target in FY 2013. Fitch's key assumptions consist of EBITDA growth of 5.3% on a compound annual growth rate basis over the three-year period and $500 million of incremental debt reduction. Based on these assumptions, Fitch estimates leverage (total debt/operating EBITDA) of below 1 times (x) in FY 2013 compared with 1.5x at the end of FY 2010, while interest coverage (operating EBITDA/ gross interest expense) improves to nearly 20x from 10x in the same period.

The ratings may be upgraded in the event CSC:

--Remains on target to achieve Fitch's FCF forecast of approximately $800 million-$900 million for fiscal 2011.

--Experiences continued strength in new contract signings that accelerates organic revenue growth without adversely affecting long-term profit margins.

The ratings may be downgraded in the event of:

--Aggressive implementation of U.S. federal procurement reforms, leading to significant in-sourcing.

--Alterations to U.S. tax policies or other legislation that materially reduces federal and/or commercial demand for IT services.

--A material reduction in federal spending, especially within the Department of Defense (DoD), to reduce the sizable federal deficit.

--Significant debt-financed acquisitions.

The ratings reflect CSC's:

--Steady revenue growth and consistent operating profit margins in the upper single digit range for its North American Public Sector (NPS). Fitch views the DoD, which accounts for 74% of total NPS revenue, as less susceptible to any future reductions in federal spending relative to the civil agencies.

--Significant recurring revenues (75%-80%) from long-term contracts.

--Solid contract pricing and execution, which minimizes problem contracts.

--Diversified revenue mix with respect to service offerings and end markets served with commercial and government representing 62% and 38%, of total FY 2010 revenue, respectively. Furthermore, CSC addresses a broad range of industries within the commercial sector.

Rating concerns center on:

--Pressured contract signings in CSC's most profitable operating segment, Business Solutions and Services (BSS).

--Risk of tax or procurement reforms instituted by the U.S. federal government that materially reduce federal and/or commercial demand for IT services.

--Risk of debt-financed acquisitions.

--Pricing pressures in the commercial market due to rising demand for offshore service delivery.

Fitch believes CSC's liquidity was solid as of April 2, 2010, despite the company's decision to fully draw its $1.5 billion credit facility due July 2012 in the fourth calendar quarter of 2008 due to disruptions in the CP market. The proceeds were used to repay all outstanding CP and maturing term debt, and fund working capital. The company has retained the vast majority of the proceeds from the credit facility drawdown. Financial covenants in the credit agreement require minimum interest coverage and maximum leverage of 3x.

Liquidity is supported by approximately $2.8 billion of cash and equivalents and consistently positive FCF. Fitch estimates FCF of approximately $800 million-$900 million in FY 2011 compared with $716 million in FY 2010. Fitch's projected improvement in FCF in FY 2010 is primarily predicated on revenue growth of approximately 5%, a three-day reduction in DSO and a 30 basis point improvement in operating margin. Lastly, CSC could monetize its credit reporting business by exercising a put option prior to Aug. 1, 2013 that requires Equifax Inc. (Equifax) to purchase the business for cash within 180 days after the option exercise date. Although the purchase price will be determined by a third-party appraiser and is subject to negotiation, Equifax, based on an internal analysis, most recently estimated the fair value of the business to be $600 million-$675 million, as of Dec. 31, 2009.

As of April 2, 2010, Fitch estimates total debt was approximately $3.7 billion, consisting primarily of $1.5 billion of credit facility borrowings due 2012 and $1.2 billion of senior unsecured notes and capital leases. Fitch estimates net debt (total debt less cash) declined approximately 50% year-over-year to $960 million at the end of FY 2010 due to a 20% increase in cash and a 12% reduction in outstanding debt. Debt maturities, including capital leases, by FY are $54 million, $1.5 billion, $16 million and $14 million in 2011-2015, respectively and $1.1 billion thereafter.

Applicable criteria are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--'Corporate Rating Methodology', dated Nov. 24, 2009;

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', dated Nov. 24, 2009;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', dated June 19, 2007.

Additional information is available at '[ www.fitchratings.com ]'.

Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018 ]

Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006 ]

Liquidity Considerations for Corporate Issuers

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]

Parent and Subsidiary Rating Linkage Criteria Report

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ]

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