NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Computer Sciences Corp. (NYSE:CSC), including the Issuer Default Rating (IDR) at 'BBB'. Fitch has also revised the Rating Outlook to Stable from Positive.
Today's actions affect $4.6 billion of debt, including the undrawn $2.5 billion revolving credit facility (RCF). A full list of ratings follows at the end of this release.
The ratings and Outlook reflect Fitch's expectations that:
--CSC's 'next generation IT' (cloud, application modernization, mobility, cyber security and analytics for Big Data) will not offset revenue declines from traditional on-premise based services in the intermediate-term.
--Fitch anticipated revenue declines as part of CSC's transformation to a higher margin sales mix. However, Fitch believes an accelerated secular shift toward cloud based services will delay CSC's return to profitable revenue growth.
Fitch believes that traditional on-premise based services will continue to face pricing pressure from lower-cost cloud based alternatives. Global Infrastructure Services (GIS), which constitutes roughly 33% of overall revenues, will decline in the mid to high single digits for fiscal 2015 primarily from price downs and contact modifications.
Fitch expects continued consulting and applications modernization headwinds, resulting in weakness for the Global Business Services (GBS) segment (32% revenues).
CSC has thus far been able to maintain relatively stable EBITDA (nearly $2.3 billion over the LTM ending Jan. 2, 2015) through its cost reduction efforts and reduced capital intensity. This has helped increase EBITDA margin by more than 300 basis points since FY 2013 contributing to more than $700 million (more than $900 million excluding the one-time $195 million SEC settlement) of expected FCF in fiscal 2015.
Fitch believes that CSC will achieve diminishing returns from its cost reduction efforts going forward. Pricing pressure in legacy services is likely to offset anticipated cost reduction from shifting labor to lower cost countries. Therefore, CSC may see declining EBITDA if its next generation IT doesn't begin to offset revenue declines in legacy IT services.
KEY RATING DRIVERS
Rating strengths include:
--Fitch expects CSC's annual FCF (excluding a $195 million SEC settlement in fiscal 2015) will exceed $900 million annually over the intermediate-term with FCF margin in the mid to high-single digits versus low to mid-single digits historically.
--CSC maintains strong credit metrics and profitability for a BBB rated company, including: nearly 18% EBITDA margin, 1.2x EBITDA to DEBT, and 7% FCF margin over the LTM ending Jan. 2, 2015. Fitch feels this is offset by the uncertainty over the secular shift to the cloud that extends the expected timeframe for a return to revenue growth.
--CSC has a diverse revenue mix with respect to service offerings and end-markets served, with commercial and government representing 68% and 32%, respectively, of total fiscal 2014 revenue. Furthermore, CSC addresses a broad range of industries within the commercial sector.
--Fitch expects North American Public Sector (34% revenue) to have flat to slightly positive revenue growth and remain CSC's most profitable segment.
--Secular headwinds in shift away from on-premise;
--Small size of next generation offerings, which despite strong market growth rates may be constrained by an industry-wide labor supply shortage;
--Lower, albeit relatively stable growth rates associated with government budgetary constraints.
Fitch's key assumptions within the rating case for the issuer include:
--Secular shifts away from traditional on-premise service offerings and pricing pressures result in low-single digit negative organic revenue growth, despite strong growth rates from new service offerings and more profitable sales mix.
--CSC's sales mix shift, cost reductions and strengthened contract discipline will result in flat profitability, despite negative revenue growth.
--Increased working capital efficiencies and lower capital intensity associated with the company's shifting sales mix will drive higher and more consistent FCF.
--Shareholder returns will remain modest, despite substantial and growing cash balances available for bolt-on acquisitions aimed at strengthening CSC's next-generation service offerings.
Positive ratings actions could result from:
--Fitch's expectation for sustained positive revenue growth from next generation IT services offsetting declines in on-premise services while maintaining EBITDA margin in the mid- to high-teens and FCF margin above mid- to high-single digits.
Negative ratings actions could result from:
--Fitch's expectations that revenues will continue to decline in the mid- to high-single digit range, indicating a lack of competitiveness for new product offerings; or
--CSC is unable to maintain the pace of cost reductions in the face of ongoing substantial revenue declines pressuring profitability and resulting in total debt to operating EBITDA exceeding 2.5x.
Fitch believes CSC's liquidity was strong as of Jan. 2, 2015 and supported by:
--$2.4 billion of cash, $1.2 billion of which is located outside the United States;
--$2.5 billion of available borrowing capacity under an undrawn revolving credit facility (RCF) due 2020;
--$250 million of available capacity under a committed leasing facility for capital expenditures on IT equipment and associated software.
Fitch's expectation for $900 million of annual FCF beyond the near-term also supports liquidity.
Total debt was approximately $2.7 billion as of Jan 2, 2015, primarily consisting of:
--$350 million of 2.50% term notes due September 2015;
--$389 million note payable (Libor + 17 bps) due Jan. 2016;
--$917 million of 6.50% term notes due March 2018;
--$445 million of 4.45% term notes due September 2022.
Fitch has affirmed CSC's ratings as follows:
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--RCF at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage