Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-Q

For the transition period from _________________ to _________________

Commission File No. 1-4850

Registrant's Telephone Number, Including Area Code: (310) 615-0311

          Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]   No [   ]

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes [X]   No [   ]

          187,316,376 shares of Common Stock, $1.00 par value, were outstanding on October 30, 2003.

 
i

See accompanying notes.

1

See accompanying notes.

 2

See accompanying notes. 

3

4

5

7

8

10

 11

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (the "Company"). The discussion should be read in conjunction with the interim consolidated condensed financial statements and notes thereto and the Company's Annual Report on Form 10-K for the year ended March 28, 2003. The following discusses the Company's results of operations and financial condition for the three and six months ended October 3, 2003 and the comparable periods for the prior fiscal year.

Revenues - Second Quarter

During the second quarter ended October 3, 2003, the Company's total revenues increased 32.0%, or $871.1 million to $3,591.2 million, over the same period last year. On a constant currency basis, total revenues increased approximately 28%. The operations of DynCorp, which the Company acquired on March 7, 2003, provided approximately 26 percentage points of the Company's overall revenue growth.

U.S. Federal sector revenue increased 101.9%, or $780.0 million to $1,545.5 million during the second quarter. DynCorp accounted for approximately 93 percentage points of the growth. Federal sector's other operations provided the remaining 9 percentage points of revenue growth, led by increases from the ongoing work performed for the Naval Sea Systems Command's contracts and the Defense Enterprise Integration Services activity.

Global Commercial sector revenue increased 4.7%, or $91.2 million to $2,045.7 million, over the same quarter of last year. Global Commercial revenue benefited by approximately 5 percentage points due to currency fluctuations in Europe, Australia and Asia.

U.S. Commercial revenue declined 5.2%, or $50.0 million to $907.1 million during the second quarter of fiscal 2004 compared to the same period last year. Lower outsourcing revenue was the primary cause of the decline, and resulted from contract completions and client reductions in billable volumes and discretionary projects. Lower outsourcing activities were partially offset by several new contracts, which in aggregate contributed approximately $75 million in revenue. The most significant new projects include Motorola, Bombardier Transportation, and British Telecom North America.

European revenue of $851.9 million for the second quarter increased 21.1%, or $148.4 million compared to the same period in the prior year. Currency fluctuations favorably impacted revenue growth by approximately 10 percentage points. New outsourcing contracts contributed approximately $150 million in revenue growth, including Royal Mail Group, Bombardier Transportation, Marconi, and the United Kingdom's Department of Health. Declines in European consulting and integration services as well as the financial services market sector were offset by revenue gains in outsourcing activities.

12

Other International revenue for the second quarter declined 2.4% to $286.7 million. Currency fluctuations favorably impacted revenue growth by approximately 11 percentage points. The favorable currency impact was principally offset by a $19 million decline in outsourcing activities and a $12.3 million decline in third party product sales in Australia. The remaining decline was a result of weak third party product sales in Asia.

Revenues - Six Months

The Company's total revenues increased 30.5%, or $1,672.2 million to $7,146.0 million during the six months ended October 3, 2003 as compared to the same period last year. On a constant currency basis, total revenues increased approximately 26%. The operations of DynCorp provided approximately 26 percentage points of the Company's overall revenue growth. The Company utilizes a fiscal reporting calendar and the first quarter of fiscal 2004 included an additional week of business operations compared to the same period last year. Excluding the former DynCorp operations, the additional week of operations is estimated to have contributed approximately 2 percentage points in revenue growth for the six months, with the estimate taking into account CSC's outsourcing and professional services arrangements.

U.S. Federal sector revenue increased 96.1%, or $1,495.2 million to $3,051.4 million during the first six months of fiscal 2004. DynCorp accounted for approximately 90 percentage points of the revenue growth. The remaining revenue growth in Federal sector came primarily from Department of Defense contracts, most notably missile defense, the Army's Logistics Modernization program, and the Naval Sea Systems Command's multiple contracts.

Global Commercial sector revenue increased 4.5%, or $177.1 million to $4,094.6 million, over the first six months of last year. Global Commercial revenue benefited by approximately 7 percentage points due to currency fluctuations in Europe, Australia and Asia.

U.S. Commercial revenue declined 5.6%, or $109.1 million to $1,845.0 million during the first six months of fiscal 2004 compared to the same period last year. The decrease was principally driven by lower revenue in outsourcing activities due to contract completions and reduced billable outsourcing activities, partially offset by several new contracts. New projects in aggregate contributed approximately $140 million in revenue for the six months ended October 3, 2003, with the most significant contributions for the year coming from Bombardier Transportation, British Telecom North America, and Motorola.

European revenue increased 20.9%, or $288.8 million to $1,671.1 million for the first six months compared to the same period in the prior year. Approximately 14 percentage points of the increase was due to currency fluctuations. New outsourcing contracts accounted for the remaining growth, partially offset by declines in consulting and integration services as well as the financial services market sector. Approximately $215 million in revenue for the six months was from new outsourcing contracts, with the largest contributions from Royal Mail Group, Bombardier Transportation, Marconi and the United Kingdom's Department of Health.

Other International revenue for the first six months declined .4% to $578.5 million. Growth was favorably impacted by approximately 10 percentage points from currency fluctuations. A $36 million decline in outsourcing activities in Australia, plus weaker third party product sales in Australia and Asia, offset the currency impact.

13

During the second quarter of fiscal 2004, the Company announced new business awards of $3.5 billion, bringing total new awards year-to-date to $7.8 billion. Second quarter awards include $2.7 billion related to new U.S. federal contract awards and $722 million related to Global Commercial activities. The Company's growth has created a broad, long-term global revenue base across numerous customers, industries, geographic regions and service offerings. Over 80% of CSC's revenues come from long-term contracts including Global Commercial outsourcing and U.S. federal government engagements.

Costs and Expenses

The Company's costs and expenses as a percentage of revenue are as follows:

Comparing the second quarter and the first six months of fiscal 2004 and 2003, total costs and expenses increased as a percentage of revenue. Higher costs of services as a percentage of revenue and the impact of the special items were partially offset by lower depreciation and amortization, and selling, general and administrative costs. The Company substantially matches revenues and costs to the same currency. Therefore, the foreign currency impact of approximately 4 percentage points on revenues and costs did not have a material impact on costs and expenses as a percentage of revenue.

The increase in costs of services as a percentage of revenue was principally caused by the former DynCorp operations, for which the expense mix is weighted more toward cost of services. The former DynCorp operations increased CSC's consolidated cost of services as a percentage of revenue by approximately 2.0 percentage points for the quarter and 1.8 percentage points for the six months ended October 3, 2003. Other CSC operations had little change for the quarter and six months versus the respective prior year periods.

Lower selling, general and administrative expenses (SG&A) as a percentage of revenue were also significantly driven by the former DynCorp operations, which carry a lower SG&A expense as a percentage of revenue than the composite of other CSC operations. Excluding the effects of the former DynCorp operations, the Company's SG&A expense as a percentage of revenue would have been approximately 6.2% for the second quarter and 6.3% for the six months ended October 3, 2003. The remaining improvement of .2 percentage points for the quarter and six months is primarily related to European performance improvement resulting from cost containment and centralization of back-office functions conducted during the third and fourth quarters of fiscal 2003.

14

The decrease in depreciation and amortization expense as a percentage of revenue is also attributable to the mix impact of the former DynCorp operations, which carry lower depreciation and amortization expense as a percentage of revenue than the composite of other CSC operations. Included in the second quarter amortization was an adjustment to amortization expense of identified intangible assets related to the DynCorp acquisition. Upon completion of third party appraisals, the preliminary fair value estimate of the intangibles of $185 million was decreased to $159.3 million. See Note J in the Notes to Consolidated Condensed Financial Statements for further details, and for discussion of remaining open purchase accounting issues related to the DynCorp acquisition. Excluding DynCorp operations, depreciation and amortization expense increased from 7.3% and 7.2% in the fiscal 2003 second quarter and first six months to 7.8% and 7.9% of revenues in the fiscal 2004 second quarter and first six m onths, respectively. The increase was due to a shift in business mix to more long-term outsourcing and less project work.

Net interest expense remained virtually unchanged as a percentage of revenue compared to the same period in the prior year. Net interest increased $5.4 million and $12.9 million for the quarter and six months versus the same periods in the prior year, and is principally related to additional borrowing compared to the same period last year, offset partially by a slightly lower weighted average interest rate.

Special Items

As disclosed in the Company's fiscal 2003 Annual Report on Form 10-K, the Company reviewed its operations, product strategies and the carrying value of its assets to identify any potential exit or disposal activities in connection with the DynCorp acquisition in March 2003. As a result, during the second quarter and six months ended October 3, 2003, special items of $9.2 million and $15.4 million ($5.7 million and $9.6 million after tax) or 3 cents and 5 cents per share (diluted), were recorded, respectively. The charges include equipment (and related disposal costs) that cannot accommodate the larger, integrated U.S. Federal sector business, and its use has been discontinued. In addition, after further review the Company determined that certain CSC facilities were no longer needed as a result of the acquisition and costs to exit those facilities are also included in the special items. Since its acquisition of DynCorp, the Company has recorded $20.6 million of special charges related to ex it and disposal activities arising from the acquisition. Due to the complexities and volume of equipment involved, the Company presently expects to complete the exit and disposal activities related to the DynCorp acquisition by the end of fiscal 2004. The Company currently estimates any additional DynCorp-related special charges will not exceed $7 million.

Additionally, as disclosed in the Company's fiscal 2003 Annual Report on Form 10-K, the Company incurred costs to exit and consolidate activities, involuntarily terminate employees, and other costs to integrate DynCorp into the Company. As of October 3, 2003, 53 employees have been involuntarily terminated out of a total of 75 expected to be terminated. The components of the acquisition integration liabilities included in the purchase price allocation for DynCorp are as follows (in millions):

15

Income Before Taxes

Income before taxes increased to $155.4 million and $288.5 million in the fiscal 2004 second quarter and first six months, respectively, versus $129.5 million and $240.7 million in the corresponding prior periods. The resulting pre-tax margins were 4.3% and 4.0% for the quarter and six months, respectively, compared with 4.8% and 4.4% for the corresponding periods in the prior year. The special item described above accounted for the majority of the decline, which was also affected by changes in operating costs and expenses as described above.

Income Taxes

The provisions for income taxes in fiscal 2004 and 2003 are based upon estimated effective tax rates, including the impact of permanent differences between the book bases of assets and liabilities recognized for financial reporting purposes and the bases recognized for tax purposes. The provision for income taxes increased by $10.7 million and $19.3 million for the three and six months ended October 3, 2003, respectively, from the comparable periods last year. The increases were due primarily to higher pre-tax income in both the three and six months ended October 3, 2003 and higher effective tax rates in the three and six months ended October 3, 2003, compared to the same periods last year. The Company's effective tax rates approximated 30.4% and 30.5% for the three and six months ended October 3, 2003, respectively, compared to 28.3% and 28.6% in the comparable periods in fiscal 2003. Effective tax rates on earnings before the Special Items were 30.8% and 30.9% for the three and six month periods ended October 3, 2003, respectively. The increase in the effective rates is a result of increased profits and the decreasing impact of existing favorable permanent tax differences that do not vary directly with income.

Net Income

Net income was $108.1 million for the second quarter of fiscal 2004, up from $92.9 million for the second quarter of fiscal 2003. Fiscal 2004 second quarter diluted earnings per share was 57 cents (including 3 cents per share impact of special items) versus 54 cents reported for last year's second quarter.

For the six months ended October 3, 2003, net income was $200.4 million, up from $171.9 million for the corresponding period last year. Diluted earnings per share for the first six months of fiscal 2004 was $1.06 (including 5 cents per share impact of special items) versus $1.00 reported for last year's first six months.

Cash Flows

Cash provided by operating activities was $377.0 million for the six months ended October 3, 2003, compared with cash provided by operating activities of $257.6 million during the same period last year. The increase of $119.4 million primarily resulted from an increase in earnings and an increase in depreciation and amortization expense and other non-cash charges.

16

The Company's net cash used in investing activities totaled $562.1 million for the first six months of fiscal 2004, compared to $360.3 million during the same period last year. The increase principally relates to investments in property and equipment and outsourcing contract costs in support of major new contract activities including Motorola, Marconi, and the Royal Mail Group. In addition, a significant cash inflow of $73.6 million a year ago related to the disposition of assets associated with the completion of an outsourcing contract was not repeated in fiscal 2004.

Cash provided by financing activities was $83.3 million for the first two quarters of fiscal 2004, nearly unchanged from the $81.6 million provided by financing activities for the same period a year ago.

Financial Condition

During the first six months of fiscal 2004, the Company's capital outlays included $484.3 million of business investments in the form of fixed asset purchases and outsourcing contract costs. These investments were funded from operating cashflows, additional borrowings, and existing cash balances, which decreased from $299.6 million as of March 28, 2003 to $199.1 million at October 3, 2003. The Company's debt-to-total capitalization ratio decreased from 35.0% at March 28, 2003 to 33.9% at October 3, 2003. During fiscal 2002, the Company filed a shelf registration statement covering up to $1.5 billion of debt and/or equity securities. As of October 3, 2003, the shelf registration has $900 million of unissued debt or equity securities.

The Company has an option to require a subsidiary of Equifax Inc. to purchase the Company's credit reporting business as further described in Note 13 to the Consolidated Financial Statements included in of the Company's Annual Report on Form 10-K for fiscal 2003. The exercise price of this put option is equal to the appraised value of the business.

It is management's opinion that the Company will be able to meet its liquidity and cash needs for the foreseeable future through a combination of cash flows from operating activities, cash balances, unused borrowing capacity and other financing activities, including the issuance of debt and/or equity securities, and/or the exercise of the put option described above.

The Company's sources of liquidity include the issuance of commercial paper and short-term borrowings. If the Company were unable to sell commercial paper or if the Company determined it was too costly to do so, the Company has the ability to borrow under two syndicated backstop credit facilities.

At October 3, 2003, the Company's syndicated credit facilities were comprised of a $321 million facility, which expires August 18, 2005 and a $354 million facility which expires August 15, 2004. As of October 3, 2003, the Company had no borrowings under these facilities and is in compliance with all terms of the agreements.

At October 3, 2003, the Company had $208.2 million of short-term debt and current maturities of long-term debt and $2.3 billion of long-term debt, including $40.0 million of commercial paper borrowings. As further described in Note 7 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for fiscal 2003, the classification of the Company's outstanding commercial paper is determined by the expiration dates of its backstop credit facilities.

17

The Company has not changed its critical accounting policies. These policies are described in "Management's Discussion and Analysis" of the Company's Annual Report on Form 10-K for fiscal 2003.

In November 2002 and May 2003, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance became effective for all revenue arrangements entered into after July 4, 2003. Adoption of this statement did not have a significant impact on the Company's consolidated financial condition or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement was effective for contracts entered into or modified after June 30, 2003. Adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement was effective for financial instruments entered into or modified after May 31, 2003. Adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations.

In May 2003, the EITF reached a consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 01-08 provides guidance on how to determine whether an arrangement contains a lease that is within the scope of FASB Statement No. 13, "Accounting for Leases," and is effective for arrangements entered into or modified after June 30, 2003. The guidance in Issue No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset, and could require lease accounting for certain outsourcing contracts, for which it is not economically feasible or practical to deliver service using alternative assets. CSC anticipates that in situations where lease accounting is required, the leases would be classified as operating leases, and therefore would not have a significant effect on the Company's consolidated financial statements. However, this may change depending on the facts and circumstances of each indivi dual contract, including certain contracts that for security or proprietary reasons inhibit movement of equipment, in which case capital lease classification may be required. Adoption of this statement did not have a significant effect on the Company's consolidated financial position at October 3, 2003, or results of operations for the quarter and six months ended October 3, 2003.

18

Forward-Looking Statements

All statements in this quarterly report on Form 10-Q and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking information contained in these statements include, among other things, statements with respect to the Company's financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from the results described in such statements.

These factors include, without limitation, the following: (i) changes in the Global Commercial demand for information technology outsourcing, business process outsourcing and consulting and systems integration services; (ii) changes in U.S. federal government spending levels for information technology and other services; (iii) competitive pressures; (iv) the credit worthiness of the Company's commercial customers; (v) the Company's ability to recover its accounts receivable; (vi) the Company's ability to recover its capital investment in outsourcing contracts; (vii) the Company's ability to continue to develop and expand its service offerings to address emerging business demands and technological trends; (viii) the future profitability of the Company's long-term contracts with customers; (ix) the future profitability of the Company's fixed-price contracts; (x) the Company's ability to consummate and integrate acquisitions and form alliances; (xi) the Company's ability to attract and retain qualified personnel; (xii) early termination of client contracts; and (xiii) general economic conditions and fluctuations in currency exchange rates in countries in which the Company does business.

Forward-looking statements in this quarterly report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

19

For a discussion of the Company's market risk associated with interest rates and foreign currencies as of March 28, 2003, see "Quantitative and Qualitative Disclosures about Market Risk" in the Part II, Item 7A, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Company's Annual Report on Form 10-K for the fiscal year then ended. For the six months ended October 3, 2003, there has been no significant change in related market risk factors.

"Disclosure controls and procedures" are the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of October 3, 2003 and, based upon this evaluation, have concluded that they are effective in all material respects.

"Internal control over financial reporting" is a process designed by, or under the supervision of, the issuer's principal executive and financial officers, and effected by the issuer's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

1)	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
2)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

During the fiscal quarter ended October 3, 2003, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

20

21

22

23

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.