Computer Sciences Earnings Call NUGGETS: Free Cash Flow, NHS Improvements

On Wednesday, Computer Sciences Corporation (NYSE:CSC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Free Cash Flow

Matthew Diamond – Deutsche Bank: This is actually (Matt Diamond) on for Bryan Keane. Couple questions I have; one is the free cash flow. Historically, CSC has had three – free three quarters and then given fiscal year had been very negative free cash flow quarters followed by a fourth of pretty substantial improvement. Do you still expect some wild swings in the free cash to get to the 300 million to 350 million guidance and what exactly can you do to iron out the lumpiness of the free cash flow?

A Closer Look: Computer Sciences Corporation Earnings Cheat Sheet>>

Paul N. Saleh – VP and CFO: Well, the first quarter, actually as Mike mentioned, benefited from the lack of bonus payments which was helpful but actually what you have seen as this also puts a whole lot more discipline around CapEx which is one of the reason why you saw also the improvement in cash flow in the first quarter. I would expect through over time some lumpiness but I think we should see some steady improvement again in free cash flow throughout the year.

Matthew Diamond – Deutsche Bank: I want to touch on those troubled contracts that were mentioned. I know there were about 35 to 40 of them and we’ve heard from your competitors that the pricing environment has been pretty stable and if you are renegotiating some pricing terms how is that going and are you seeing any headwinds maybe from the weakening macro and little bit of uncertainties that were mentioned?

Paul N. Saleh – VP and CFO: I think as we’ve said before we are doing number of things it is not just renegotiating but it is going back and applying much greater discipline to many of the contracts we have now and some instances where there were changes made that were never build, we are collecting those and in some cases we are sitting down and trying to work out a win-win between the client and us. Sometimes that might result in little less revenue, but more profitability. So, we are using all the tools and procedures available to us and applying that sort of on a one-by-one basis with those 35 or 40 clients and then we’re applying the same project disciplines and bidding disciplines and contracting disciplines for all of our new awards as we go forward. So, we try to minimize the number of problems we encounter going forward.

Matthew Diamond – Deutsche Bank: Last one on the operating margins a good results at 4.6% and is the FY ’13 guidance of 5.4% to 6.4% would imply, it seem like a pretty nice expansion in the second through fourth quarters. Is that the right way to think about that and what is the margin trend quarter-by-quarter, how should we really think about that to get to the 5.4% to 6.4%?

Paul N. Saleh – VP and CFO: Yeah, I think you’ll see more of this in the second half I think that’s right. Part of this will be determined on how some of these cost savings begin to flow through for the year as you know you start some actions like we were doing a procurement, but some of that doesn’t show up until later quarters and to be quite candid about it, I’m not exactly sure how this is going to flow quarter-by-quarter, but I think the way you articulated is the way I would think about it.

NHS Improvements

Julio Quinteros – Goldman Sachs: So real quickly, just on a couple of items. The free cash flow number for the year, are there any adjustments on that or is that, so I’ll just take that as kind of a straightforward operating cash, less CapEx number. Are there any other definitional adjustments considered in that number?

Paul N. Saleh – VP and CFO: No. There are no definitional adjustments and fact that it is literally how we are going to find free cash flow and I would add also another thing that we’d also will be working very hard to continue to improve our working capital management and our receivables collection. So that math is going to see improvement in free cash flows.

Julio Quinteros – Goldman Sachs: Then so, maybe, is there a way to think about that target, the $300 million to $350 million for the year. If you think about the relative improvement on the NHS side versus the core business, can you help us decompose a little bit on what’s coming from NHS improvements? For example, this quarter presumably some of the cash came from the Lorenzo payments. How do we think about for the full year in terms of core business free cash flow versus the NHS itself?

Mike Lawrie – President and CEO: Right now the NHS is actually operating at breakeven. It’s – and we still have, as we mentioned before, people working on NHS and we are expensing all of these costs. So NHS is not contributing to improve cash flow performance per se. I think all the improvements I mentioned to you is still with greater discipline around capital allocation across the Company. We are asking – we’re putting some hurdles for costs of capital on every project. We are seeing, as we have talked about improvement in our contract, less focused contract that’s a major improvement on year-over-year basis. As the year progress, we are going to see the benefit of some of these cost actions that we are taking to start to flow through the cash flow lines.

Julio Quinteros – Goldman Sachs: Then just to be clear, so none of the NHS Lorenzo related work in terms of cash flow for this quarter was a benefit to your free cash flow result this quarter?

Mike Lawrie – President and CEO: Not really.