Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
QUARTER ENDED JUNE 28, 1996
Commission File No. 1-4850
COMPUTER SCIENCES CORPORATION
Incorporated in the State of Nevada
Employer Identification No. 95-2043126
2100 East Grand Avenue
El Segundo, California 90245
Telephone (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 [ ]
56,219,835 shares of Common Stock, $1.00 par value, were outstanding on
June 28, 1996.
COMPUTER SCIENCES CORPORATION
Index to Form 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
June 28, 1996 and March 29, 1996.............................. 3
Consolidated Condensed Statements of Income,
First quarter ended June 28, 1996 and
June 30, 1995................................................. 4
Consolidated Condensed Statements of Cash Flows,
First quarter ended June 28, 1996 and June 30, 1995........... 5
Notes to Consolidated Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 12
2
PART I, ITEM 1. FINANCIAL STATEMENTS
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
June 28, Mar. 29,
1996 1996
($ in thousands) (unaudited)
_____________ _____________
CURRENT ASSETS:
Cash and cash equivalents $ 18,876 $ 104,867
Receivables 1,061,440 943,355
Prepaid expenses and other current assets 90,043 96,032
_____________ _____________
Total current assets 1,170,359 1,144,254
_____________ _____________
PROPERTY AND EQUIPMENT, at cost 1,261,059 1,147,448
Less accumulated depreciation and amortization 558,658 506,646
_____________ _____________
Property and equipment, net 702,401 640,802
_____________ _____________
EXCESS OF COST OF BUSINESSES ACQUIRED
OVER RELATED NET ASSETS, NET 435,789 420,775
OTHER ASSETS 395,057 389,959
_____________ _____________
Total assets $2,703,606 $2,595,790
============= =============
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt $ 68,845 $ 70,308
Accounts payable 150,895 151,361
Accrued payroll and related costs 221,196 196,221
Other accrued expenses 238,950 255,792
Advance contract payments 35,726 34,580
Income taxes payable 62,926 52,181
_____________ _____________
Total current liabilities 778,538 760,443
_____________ _____________
LONG-TERM DEBT, NET 437,724 405,471
_____________ _____________
OTHER LONG-TERM LIABILITIES 136,394 124,182
_____________ _____________
STOCKHOLDERS' EQUITY (Note A):
Common stock issued, par value $1.00 per share 56,544 56,342
Other stockholders' equity 1,294,406 1,249,352
_____________ _____________
Total stockholders' equity 1,350,950 1,305,694
_____________ _____________
Total liabilities and stockholders' equity $2,703,606 $2,595,790
============= =============
<FN>
See accompanying notes. 3
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
($ in thousands except earnings per share)
First Quarter Ended
____________________________
June 28, June 30,
1996 1995
____________ ____________
Revenues $1,165,072 $966,783
____________ ____________
Costs of services 943,500 774,381
Selling, general and
administrative 94,728 85,893
Depreciation and
amortization 66,165 54,588
Interest expense 7,491 8,663
Interest income (1,360) (1,559)
____________ ____________
Total costs and
expenses 1,110,524 921,966
____________ ____________
Income before taxes 54,548 44,817
Taxes on income 21,300 17,100
____________ ____________
Net income $ 33,248 $ 27,717
============ ============
Earnings per common
share (Note B) $ 0.58 $ 0.49
============ ============
<FN>
See accompanying notes.
4
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
First Quarter Ended
________________________
June 28, June 30,
($ in thousands) 1996 1995
__________ __________
Cash flows from operating activities:
Net income $ 33,248 $ 27,717
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66,165 54,588
Provision for losses on accounts receivable 2,658 6,412
Changes in assets and liabilities, net of
effects of acquisitions:
Increase in assets (78,353) (99,960)
Decrease in liabilities (17,193) (47,519)
__________ __________
Net cash provided by (used in) operating activities 6,525 (58,762)
__________ __________
Investing activities:
Purchases of property, plant and equipment (60,218) (41,641)
Acquisitions, net of cash acquired (55,366) (22,377)
Outsourcing contracts (21,108)
Purchased and internally developed software (12,859) (3,933)
Other investing cash flows 2,415 (6,291)
__________ __________
Net cash used in investing activities (126,028) (95,350)
__________ __________
Financing activities:
Borrowing under (repayment of) commercial paper, net 27,009 (1,338)
(Repayment of) borrowing under lines of credit, net (3,297) 25,524
Principal payments on long-term debt (126) (715)
Proceeds from stock option transactions 5,753 3,493
Other financing cash flows 4,173 (923)
__________ __________
Net cash provided by financing activities 33,512 26,041
__________ __________
Net decrease in cash and cash equivalents (85,991) (128,071)
Cash and cash equivalents at beginning of year 104,867 155,310
__________ __________
Cash and cash equivalents at end of period $ 18,876 $ 27,239
========== ==========
<FN>
See accompanying notes.
5
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(A) No dividends were paid during the periods presented. There were
56,544,055 shares at June 28, 1996 and 56,341,855 shares at March
29, 1996 of $1.00 par value common stock issued with 324,220 and
311,928 shares, respectively, of treasury stock.
(B) Primary earnings per common share are based on the weighted average
number of common stock and common stock equivalent shares (dilutive stock
options) outstanding of 57,695,000 and 56,829,000 respectively, for the
three months ended June 28, 1996, and June 30, 1995 (see Part II,
Exhibit 11).
(C) Cash payments for interest on indebtedness were $10,539 and $12,084,
respectively, for the three months ended June 28, 1996, and June 30,
1995. Cash payments for taxes on income were $8,584 and $12,637,
respectively, for the three months ended June 28, 1996, and June
30, 1995.
(D) The financial information reported, which is not necessarily indicative
of the results for a full year, is unaudited but includes all adjustments
which the Company considers necessary for a fair presentation. All such
adjustments are normal recurring adjustments.
(E) On April 28, 1996, the Company entered into an Agreement and Plan of
Merger with The Continuum Company, Inc. ("Continuum") and Continental
Acquisition, Inc., a subsidiary of the Company ("Sub"), pursuant to which
Sub was merged with and into Continuum and Continuum became a wholly
owned subsidiary of the Company, effective August 1, 1996. Each
outstanding share of common stock of Continuum was converted into 0.79 of
a share of the Company's common stock. Continuum is a consulting and
computer services firm serving the needs of the global financial services
industry for computer software and services.
The merger will be accounted for as a pooling of interests. The
following unaudited pro forma data summarizes the combined operating
results of the Company and Continuum as if the merger had occurred at the
beginning of the periods presented (dollars in millions except per-share
amounts).
6
Unaudited Pro Forma First Quarter
---------------------------------
June 28, June 30,
1996 1995
------------- ----------
Revenue $1,303.9 $1,083.0
Net income 45.3 35.9
Earnings per common share* $ .58 $ .47
[FN]
*The pro forma earnings per common share are based on the sum of the
historical average common shares outstanding, as reported by CSC, and the
historical average common shares outstanding for Continuum (adjusted to
reflect common stock equivalents) converted to CSC shares at the exchange
ratio of 0.79.
7
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter of Fiscal 1997 versus
First Quarter of Fiscal 1996
Revenues
The Company derived its revenues from the following market sectors for the
first quarter (dollars in millions):
First Quarter
---------------- Pct.
FY97 FY96 Growth
------- ------- ------
U.S. Commercial $ 407 $345 17.8%
International 312 239 30.9
------- ------- ------
Total Commercial 719 584 23.2
U.S. Federal Government 446 383 16.5
------- ------- ------
Total $1,165 $967 20.5%
======= ======= ======
During the quarter ended June 28, 1996, the Company's total revenue increased
20.5%, or $198 million, over the same period last year. Commercial revenue
continued to lead the growth, increasing 23.2%, or $135 million.
Over one-half of the commercial growth came from the Company's international
operations. International growth was primarily attributable to new
outsourcing contracts signed throughout the past year, including Anglian
Water, Guinness PLC and the National Health Service in Scotland, and the
acquisition of Datacentralen AG during June, 1996.
U.S. commercial revenues grew $62 million or 17.8%. Approximately one-half of
the growth was provided by new outsourcing business, including recent
contracts with James River Corporation and Southern New England Telephone
Company. U.S. consulting revenue also contributed to the growth, reflecting
demand across the Company's range of IT and management consulting services.
U.S. federal government revenue for the quarter increased $63 million, or
16.5%, principally from increased task order contract activity with the
Department of Defense and last year's award to provide IT services to the Air
Force Arnold Engineering Development Center. The many new and existing task
order contracts permit the Government discretion in the extent and timing of
new orders.
During the first quarter of fiscal 1997, the Company announced a $2 billion
contract with J.P. Morgan won by a CSC-led consortium (the Pinnacle Alliance).
The contract became effective July 16.
8
As the Company's commercial sector revenues continue to grow faster than
federal, they comprised a larger percentage of total CSC revenue, as shown by
the following table:
Revenue by Market Sector, First Quarter
as a percentage of total FY97 FY96
- ---------------------------- ------- -------
U.S. Commercial 35% 36%
International 27 24
------- -------
Total Commercial 62 60
U.S. Federal Government 38 40
------- -------
Total Revenue 100% 100%
======= =======
Costs and Expenses
The Company's costs and expenses as a percentage of revenue are as follows
(dollars in millions):
Percentage of
Dollar Amount Revenue
---------------- --------------
First Quarter First Quarter
FY97 FY96 FY97 FY96
------- ------- ------ ------
Costs of services $ 944 $774 80.98% 80.10%
Selling, general & admin. 95 86 8.13 8.88
Depreciation and amort. 66 55 5.68 5.65
Interest expense, net 6 7 0.53 0.73
------- ------- ------ ------
Total $1,111 $922 95.32% 95.36%
======= ======= ====== ======
Compared with the first quarter of fiscal 1996, total costs and expenses
improved slightly as a percentage of revenue for the first quarter of fiscal
1997. Costs of services improved nominally in the U.S., offset by lower
utilization and increased use of subcontractor labor in the Company's European
operations. Although the European costs of services increased as a percentage
of revenue, the European operations improved their selling, general and
administrative cost percentage as compared to the same quarter last year. The
European improvement contributed to the overall reduction in the selling,
general and administrative percentage from 8.88% during last year's first
quarter to 8.13% for the current year's first quarter.
9
Income Before Taxes
Income before taxes for the quarter was $54.5 million, up $9.7 million, or
21.7%, over last year's first quarter, reflecting the Company's revenue
growth. The Company's pre-tax profit margin improved from 4.64% to 4.68% for
the two respective quarters.
Net Income
Net income was $33.2 million for the first quarter of fiscal 1997, up $5.5
million, or 20.0%, over the same quarter last year. The effective tax rate
was 39.0%, versus 38.2%. The higher current tax rate is primarily due to
lower utilization of foreign tax credits and the suspension of the research
and engineering tax credit in the U.S. This year's first quarter earnings per
share of 58 cents increased 18.4% over the 49 cents for last year's first
quarter.
Cash Flows
Cash provided by operating activities was $6.5 million for the first quarter
of fiscal 1997, compared with cash used of $58.8 million during the same
period last year. The increase in operating cash flows is principally due to
favorable changes in working capital and higher non-cash expenses for
depreciation and amortization.
The Company's cash expenditures for investing activities totaled $126.0
million for the current period versus $95.4 million during the first quarter
of last year. The increase principally relates to the acquisition of
Datacentralen during the current quarter.
Cash provided by financing activities was $33.5 million for the three months
versus $26.0 million for the same period last year.
Financial Condition
During the first three months of fiscal 1997, the Company's capital outlays
included $115.6 million of business investments in the form of fixed asset
purchases and acquisitions. These amounts were funded from operating cash
flows, additional debt and existing cash, which decreased from $104.9 million
to $18.9 million. As a result of the net increase in borrowings, the
Company's debt-to-total capitalization ratio increased slightly to 27.3% at
June 28, 1996 versus 26.7% at March 29, 1996.
It is management's opinion that the Company will be able to meet its liquidity
and cash needs for the foreseeable future through the combination of cash
flows from operating activities, unused borrowing capacity and other financing
activities, including the issuance of debt and/or equity securities.
10
Recent Developments
On April 28, 1996, the Company entered into an Agreement and Plan of Merger
with The Continuum Company, Inc. ("Continuum") and Continental Acquisition,
Inc., a subsidiary of the Company ("Sub") pursuant to which Sub was merged
with and into Continuum and Continuum became a wholly owned subsidiary of CSC,
effective August 1, 1996. Each outstanding share of common stock of Continuum
was converted into 0.79 of a share of CSC common stock. Continuum is a
consulting and computer services firm serving the needs of the global
financial services industry for computer software and services.
11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.1 Agreement and Plan of Merger dated as of April 28, 1996 by
and among the Registrant, The Continuum Company, Inc. and
Continental Acquisition, Inc. (l)
3.1 Restated Articles of Incorporation, effective
October 31, 1988 (c)
3.2 Amendment to Restated Articles of Incorporation, effective
August 10, 1992 (i)
3.3 Amendment to Restated Articles of Incorporation, effective
July 31, 1996 (m)
3.4 Bylaws, amended and restated effective July 31, 1996
10.1 Annual Management Incentive Plan, effective April 2, 1983* (a)
10.2 1978 Stock Option Plan, amended and restated effective
March 31, 1988*
10.3 1980 Stock Option Plan, amended and restated effective
March 31, 1988*
10.4 1984 Stock Option Plan, amended and restated effective
March 31, 1988*
10.5 1987 Stock Incentive Plan* (b)
10.6 Schedule to the 1987 Stock Incentive Plan for United
Kingdom personnel* (b)
10.7 1990 Stock Incentive Plan* (g)
10.8 1992 Stock Incentive Plan, amended and restated effective
August 9, 1993*
10.9 1995 Stock Incentive Plan* (j)
10.10 Deferred Compensation Plan, amended and restated effective
February 9, 1996* (f)
10.11 Restated Supplemental Executive Retirement Plan, effective
August 14, 1995* (j)
10.12 Form of Indemnification Agreement for Directors (d)
10.13 Form of Indemnification Agreement for Officers (e)
10.14 Information Technology Services Agreements with General
Dynamics Corporation, dated as of November 4, 1991 (h)
10.15 $100 million Credit Agreement dated as of September 15, 1994 (e)
10.16 $150 million Credit Agreement dated as of September 15, 1994 (e)
10.17 $350 million Credit Agreement dated as of September 6, 1995 (j)
10.18 $100 million Credit Agreement dated as of January 3, 1995 (e)
10.19 Amended and Restated Rights Agreement, effective
October 30, 1995 (j)
11 Calculation of Primary and Fully Diluted Earnings Per Share
27 Article 5 Financial Data Schedule
28 Revenues by Market Sector
99.1 Annual Report on Form 11-K for the Matched Asset Plan of
the Registrant (f)
99.2 Annual Report on Form 11-K for the Hourly Savings Plan of
CSC Outsourcing Inc. (f)
99.3 Annual Report on Form 11-K for the Employee Savings Plan of
CSC Credit Services, Inc. (to be filed at a later date)
99.4 Annual Report on Form 11-K for the CUTW Hourly Savings Plan
of CSC Outsourcing, Inc. (k)
12
Notes to Exhibit Index:
*Management contract or compensatory plan or agreement
(a)-(i) These exhibits are incorporated herein by reference to the
Company's Annual Report on Form 10-K, as amended, for the fiscal
years ended on the respective dates indicated below:
(a) March 30, 1984 (d) April 3, 1992
(b) April 1, 1988 (e) March 31, 1995
(c) March 31, 1989 (f) March 29, 1996
(g) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on August 15, 1990.
(h) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated November 4, 1991.
(i) Incorporated herein by reference to the Registrant's Proxy
Statement for its August 10, 1992 Annual Meeting of Stockholders.
(j) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on November 13, 1995.
(k) Incorporated herein by reference to the Annual Report on Form 11-K
for the CSC Outsourcing, Inc. CUTW Hourly Savings Plan filed on
February 6, 1996.
(l) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated April 28, 1996.
(m) Incorporated herein by reference to the Registrant's Proxy
Statement for its July 31, 1996 Annual Meeting of Stockholders.
Reports on Form 8-K
There was one report on Form 8-K filed during the first quarter of fiscal
1997. On May 2, 1996, the Registrant filed a Current Report on Form 8-K
dated April 28, 1996 reporting that the Registrant had entered into an
Agreement and Plan of Merger dated as of April 28, 1996 by and among the
Registrant, Continental Acquisition, Inc., a wholly owned subsidiary of
the Registrant, and The Continuum Company, Inc.
13
SIGNATURES
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.
COMPUTER SCIENCES CORPORATION
Date: August 9, 1996 By: /s/ Denis M. Crane
-----------------------------
Denis M. Crane
Vice President and Controller
Chief Accounting Officer
14
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit Page
- ------- ---------------------- ----
2.1 Agreement and Plan of Merger dated as of April 28, 1996 by
and among the Registrant, The Continuum Company, Inc. and
Continental Acquisition, Inc. (l)
3.1 Restated Articles of Incorporation, effective
October 31, 1988 (c)
3.2 Amendment to Restated Articles of Incorporation, effective
August 10, 1992 (i)
3.3 Amendment to Restated Articles of Incorporation, effective
July 31, 1996 (m)
3.4 Bylaws, amended and restated effective July 31, 1996
10.1 Annual Management Incentive Plan, effective April 2, 1983* (a)
10.2 1978 Stock Option Plan, amended and restated effective
March 31, 1988*
10.3 1980 Stock Option Plan, amended and restated effective
March 31, 1988*
10.4 1984 Stock Option Plan, amended and restated effective
March 31, 1988*
10.5 1987 Stock Incentive Plan* (b)
10.6 Schedule to the 1987 Stock Incentive Plan for United
Kingdom personnel* (b)
10.7 1990 Stock Incentive Plan* (g)
10.8 1992 Stock Incentive Plan, amended and restated effective
August 9, 1993*
10.9 1995 Stock Incentive Plan* (j)
10.10 Deferred Compensation Plan, amended and restated effective
February 9, 1996* (f)
10.11 Restated Supplemental Executive Retirement Plan, effective
August 14, 1995* (j)
10.12 Form of Indemnification Agreement for Directors (d)
10.13 Form of Indemnification Agreement for Officers (e)
10.14 Information Technology Services Agreements with General
Dynamics Corporation, dated as of November 4, 1991 (h)
10.15 $100 million Credit Agreement dated as of September 15, 1994 (e)
10.16 $150 million Credit Agreement dated as of September 15, 1994 (e)
10.17 $350 million Credit Agreement dated as of September 6, 1995 (j)
10.18 $100 million Credit Agreement dated as of January 3, 1995 (e)
10.19 Amended and Restated Rights Agreement, effective
October 30, 1995 (j)
11 Calculation of Primary and Fully Diluted Earnings Per Share
28 Revenues by Market Sector
27 Article 5 Financial Data Schedule
99.1 Annual Report on Form 11-K for the Matched Asset Plan of
the Registrant (f)
99.2 Annual Report on Form 11-K for the Hourly Savings Plan of
CSC Outsourcing Inc. (f)
99.3 Annual Report on Form 11-K for the Employee Savings Plan of
CSC Credit Services, Inc. (to be filed at a later date)
99.4 Annual Report on Form 11-K for the CUTW Hourly Savings Plan
of CSC Outsourcing, Inc. (k)
15
Notes to Exhibit Index:
*Management contract or compensatory plan or agreement
(a)-(i) These exhibits are incorporated herein by reference to the
Company's Annual Report on Form 10-K, as amended, for the fiscal
years ended on the respective dates indicated below:
(a) March 30, 1984 (d) April 3, 1992
(b) April 1, 1988 (e) March 31, 1995
(c) March 31, 1989 (f) March 29, 1996
(g) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on August 15, 1990.
(h) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated November 4, 1991.
(i) Incorporated herein by reference to the Registrant's Proxy
Statement for its August 10, 1992 Annual Meeting of Stockholders.
(j) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on November 13, 1995.
(k) Incorporated herein by reference to the Annual Report on Form 11-K
for the CSC Outsourcing, Inc. CUTW Hourly Savings Plan filed on
February 6, 1996.
(l) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated April 28, 1996.
(m) Incorporated herein by reference to the Registrant's Proxy
Statement for its July 31, 1996 Annual Meeting of Stockholders.
16