Virginia-based Computer Sciences Corp. (CSC) recently entered into an agreement with Citibank N.A. (C) and some other lenders for an unsecured revolving credit facility of $1.5 billion. The new debt will replace an existing facility of a similar amount. The debt was scheduled to mature in July 2012. Citibank is acting as an administrative agent for the purpose, along with certain other lenders.
The new facility will enable Computer Sciences to increase fund availability and finance its continuing working capital requirements. Moreover, the facility will serve as a guarantor, while issuing the company’s U.S. commercial paper. According to a company official, Computer Sciences’ operating activities mostly depend on these credit facilities, which enhance its liquidity position.
In the recently concluded third quarter of fiscal 2011, total debt (long term, net of maturities plus short term) of the company stood at $2.81 billion, down from $3.95 billion in the previous quarter. Debt-to-capitalization ratio in the quarter was 28.0% versus 35.9% in the prior quarter.
Computer Sciences exited the quarter with $1.63 billion in cash and cash equivalents, down from $2.43 billion reported in the previous quarter. The company’s net cash balance (cash less debt including current portion) was a deficit of $1.19 billion, compared with a deficit of $1.29 billion in the prior quarter, a significant improvement.
Computer Sciences delivered decent third quarter results, beating the Zacks Consensus Estimate on the bottom line. However, the top line remained shy of the Zacks Consensus Estimate. But the company gained $2.3 billion worth of new business during the quarter.
The company sees a decent flow of new businesses, especially in the government vertical, which helps cash flows. However, the financial leverage is cause for concern.
Additionally, we are a tad apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture plc (ACN) and Hewlett-Packard Company (HPQ). Contract delays and foreign exchange headwinds could also have a temporary negative impact.
Currently, Computer Sciences has a Zacks #3 Rank, implying a short-term Hold recommendation.
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