Computer Sciences Earnings Call Insights: Free Cash Flow Expectations and the Settlement Benefit

Computer Sciences Corporation (NYSE:CSC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Free Cash Flow Expectations

Julio Quinteros – Goldman Sachs: On the comments around fiscal ’14, the $3.30 consensus; how should we frame the free cash flow expectations for fiscal ’14 around the $3.30 EPS?

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Paul N. Saleh – VP and CFO: I think there’s still some more work to be done, but I would say would be probably more in the $400 million to $500 million of free cash flow at this time.

The Settlement Benefit

Moshe Katri – Cowen & Company: Paul, can you kind of going back to some of the non-recurring items for the quarter? Can you kind of list facilities, including the charges and the settlement benefit?

Paul N. Saleh – VP and CFO: We mentioned the NPS, we had settlement of $22 million, which was a benefit of about $0.10. We had the restructuring of $0.26, which was about $0.12 impact on the quarter and interest expense was also about $19 million, that was for the early termination of debt and that was about $0.09 impact. Then also the tax rate, it was $0.11 impact of benefit in the quarter. Keep in mind again, all of these numbers exclude credit services, so we are just literally with the new guidance offsetting the absence of credit services in our numbers.

Moshe Katri – Cowen & Company: Any details on where we are in terms of looking into the problem contracts that you mentioned, I think during the last update you indicated that maybe five of the 40 looked a bit better were restructured, is the number still 35 or still, are we bringing lower.

Paul N. Saleh – VP and CFO: We’re still managing against the list of 30 to 35 that hasn’t changed. I’d say probably somewhere in the neighborhood of 8 to 10 of those are in materially better shape than we were when we started. We’ve seen a pretty significant improvement across the board on our operating performance. What we’re doing is, we’ve put a new contracting process in place, a new management system around how we manage the transition, the execution of those contract. So, this is just the way we’re now running the business, so I don’t beginning to not think about it is a focused set of accounts, but more just the way we run the business going forward.

Moshe Katri – Cowen & Company: Two final questions, you gave us some preliminary comments on free cash flows for next year, any thoughts on EBIT margins and then maybe an update on NHS in terms of contributions or impact for the quarter?

Paul N. Saleh – VP and CFO: I don’t think we are changing it right now – providing any guidance necessarily on the margins. But I would say NHS with the new service accounting is going to continue to represent lower revenue and lower profitability than we would have originally anticipated. But ultimately we’re building basically a pipeline of revenue that we will be able to amortize once we go into the hosting period. We have over a $150 million of revenue right now that is basically tied up on the balance sheet as part of this service accounting.

Mike Lawrie – President and Chief Executive Officer: And I was over last week with NHS and we’re making some very good progress. We’ve delivered more modules. We’ve received some payments associated with those. We have won a couple of large trusts that have been publicly announced. So overall we’re pleased with the performance around the delivery of the software, the acceptance of the software, and we’ve moved into a world now where we’re out and we’re competing and trying to drive these solutions into these trusts. So initially we’re pretty pleased and, as Paul said, we are beginning to build a (battle wave) here of revenue and profitability, which will be prorated over the course of the contract.