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Computer Sciences (NYSE:CSC)

Q4 2013 Earnings Call

May 15, 2013 11:00 am ET

Executives

Steve Virostek - Director of Investor Relations

John Michael Lawrie - Chief Executive Officer, President, Director and Chairman of Executive Committee

Paul N. Saleh - Chief Financial Officer and Executive Vice President

Analysts

Ashwin Shirvaikar - Citigroup Inc, Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, everyone, and welcome to the CSC Fourth Quarter and Full Year 2013 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Steve Virostek. Please go ahead, sir.

Steve Virostek

Thank you, operator. Good morning, everyone. I'm pleased you've joined us for CSC's fourth quarter and fiscal 2013 earnings call and webcast. On the call with me today are Mike Lawrie, our Chief Executive Officer; and Paul Saleh, our Chief Financial Officer. As usual, this call is being webcast at csc.com, and we've also posted slides to our website, which will accompany our discussion.

On Slide 2, you'll see that some matters we discuss today on the call will be forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on this call. A discussion of risks and uncertainties is included in our Form 10-K, Form 10-Q and other SEC filings.

Moving to Slide 3, we acknowledge that CSC's presentation includes certain non-GAAP financial measures, which we believe provide useful information to investors. In accordance with SEC rules, we have provided a reconciliation of these metrics to the respective and most directly comparable GAAP metrics. Reconciliations can be found in the table of today's earnings release and in an appendix to our slides. Both documents are available on the Investor Relations section of our website.

I'd like to remind our listeners that CSC assumes no obligation to update the information presented on the conference call except, of course, as required by law. And now I'll hand the call to Mike Lawrie.

John Michael Lawrie

Okay. Thank you very much, and good morning, everyone. Thanks for joining us on the call. As I go through the results for the quarter and the full year, I want to put it within the context of what we had talked about at our Investor Day back in September. And as you recall, at that time, I really outlined 6 key things that we were trying to focus on: one was to fix the foundation and get our cost structure under control; begin to expand our market coverage and drive demand for our services; move up the value chain; scale and lead in the next generation of information technology services; rationalize and standardize all our offerings; and implement a disciplined, transparent and accountable management system. And I think it's clear from the results that we've just filed here for the full year, we've made substantial progress across all 6 of those dimensions. And it's also clear that we still have much work to do as we move forward.

So within that context, let me now move to the results for the quarter and the year. And as is my usual practice, I'd like to leave you with 4 key messages, and I'll sort of outline those and then develop them a little further. One, CSC delivered good operational performance in the fourth quarter and for fiscal 2013, driven primarily by our cost takeout and our improved contract management. The second message here is our order intake or our bookings was lower year-over-year due to a significant falloff in our federal government business that we've seen now for some time, as well as a renewed focus on profitability in our commercial business, which led us to bid on fewer higher-value deals. The third key message here is we are making significant investments in our business as we go forward, in our people, in our systems, in our offerings and in our partnerships. And finally, the fourth message is as our confidence continues to grow and as the turnaround begins to take hold, we are increasing our EPS targets from continuing operations from $3.30 to a range of $3.30 to $3.50.

So those are the 4 key messages that myself, and later, Paul will develop. And now let me just turn to the first one around our operating performance for Q4 and for fiscal year 2013.

We had GAAP EPS from continuing operations of $1.57 for the quarter, and this included 4 items. One, a benefit of $1.02 per share from our tax planning actions around our credit services divestiture earlier in the fiscal year. The second item was a $0.24 gain from the sale of our Australian IT staffing business. And the third item was a $0.24 charge from the settling of our class action shareholder lawsuit, which stemmed from the SEC investigation from several years ago. And four, a $0.72 charge for additional restructuring activities.

Normalizing for those items, our non-GAAP EPS from continuing operations was $1.27 in the quarter, and this is assuming and using an effective tax rate of 28%. On the same basis, our non-GAAP EPS from continuing operations for fiscal 2013 was $2.90, and this was ahead of the target EPS from continuing operations. We have provided a range of $2.50 to $2.70. So on an equivalent basis, the earnings were $2.90 a share.

So we're clearly seeing the benefit from our cost takeout actions, which we have been focused on all year. Our operating margin for the fourth quarter was 5.7%, and this included restructuring of $153 million. Excluding restructuring, our operating margin was 9.9%, and this compared with, obviously, the loss the prior year. The operating margin for the fiscal year was 6%, and this included restructuring of $262 million. Excluding restructuring, our operating margin was 7.8% for the full year.

As I said, our margin improvements were primarily driven by our cost takeout achievements and improvements in our focused accounts. We realized approximately $900 million in cost takeout benefits during 2013, which included more than $200 million from the focus accounts, and this compares to the cost takeout target that we had communicated earlier of over $600 million, and $100 million to $200 million from our focus accounts. So this overachievement, if you will, from what we had talked about before, I think, reflects the company's increased focus on our clients and the execution of our economic game plans with some of our key clients. And we're also benefiting from supply chain efficiencies, our delayering actions and a substantial reduction to our overall company overhead.

I am encouraged by this progress. And as a result of taking more restructuring in the fourth quarter, we are raising our gross takeout -- cost takeout target from what was $1 billion to $1.2 billion through 2014. We're raising that now to $1.3 billion through fiscal 2014.

Our revenue for the year was $15 billion, which reflects a decline of 5.5% in our NPS business and a 2% constant currency growth for our commercial business. And this, on a full year basis, was largely in line with the targets that we had provided at the beginning of our fiscal 2013 year.

We generated free cash flow of $764 million during 2013. This also was ahead of our target of $600 million and before our discretionary pension plan contribution of $500 million. And this left us with a year-end cash balance of $2.1 billion.

In addition, we returned $428 million to our shareholders, $305 million in share repurchases and $123 million in dividends. So we have basically gone ahead and executed and followed through on our previously announced commitment to redeploy proceeds from the divestiture of our credit services business.

We also, throughout the year, made other divestitures, including the IT staffing business I mentioned earlier. We also divested a hardware and software reseller in Southeast Asia and our consulting and systems integration business in Italy. And subsequent to the close of the fourth quarter, we divested our flood insurance business for $46 million in cash. And these decisions, as we've said before, are consistent with CSC's strategy of leading the next generation of information technology services and solutions and exiting some of the businesses that just no longer made sense.

The second key message here that I want to leave you with and talk through a little bit is our order intake. As I said, for the fourth quarter, the order intake was, for the fourth quarter, of $2.9 billion declined as the federal business continued to be impacted by a difficult procurement environment and as the commercial business continued to focus on higher-value opportunities. Now let me just go through in a little more detail.

NPS bookings were $800 million for the fourth quarter and $3.5 billion for the year, for a book-to-bill ratio of 0.6 for both periods. This result was lower than last year and, again, was primarily driven by the uncertainty of sequestration and the lack of decisions that are being made in the federal government. We do have a high volume of $5.4 billion of submitted proposals awaiting awards. So again, the driving factor for NPS is that the number and the value of decisions being made is significantly lower, at least through the fourth quarter, than what we experienced the previous year.

Now moving to the commercial sector. MSS bookings of $1.1 billion for the quarter and $6.9 billion for the year resulted in a book-to-bill ratio of 0.7 for the quarter and 1.1 for the full year. MSS bookings for fiscal 2013 declined by $2.6 billion. About half of that decline was due to a lower volume of recompete opportunities, and the other half of that decline was due to our focus on smaller, less capital-intensive, higher-value opportunities.

Just a little more detail on the recompetes. Our recompete awards were $4 billion in fiscal year 2013, and this is a decline from $5.1 billion in 2012. So that's the $1 billion less that I just referenced. Our win rates, however, during 2013 were modestly higher, even though we had fewer opportunities to recompete for.

MSS bookings, on the other side of the coin here, for contracts of $100 million or less, increased by 10% in fiscal year '13, again, offsetting to some extent the decline in the larger contract bookings. Higher-value offerings, such as applications, cloud, business process outsourcing, increased from approximately 25% of MSS bookings in 2012 to approximately 65% in fiscal 2013, so a significant re-shift of our business from these large, lower-margin contracts to smaller, much higher value contracts. And again, I think this is another indication of us moving up the value chain to these higher-margin offerings.

BSS bookings of $1 billion for the quarter and $3.4 billion for the year increased 11% and 3%, respectively. And the book-to-bill ratio for BSS was 1.3 and 1.0, respectively. BSS bookings experienced strong growth in financial services, business process outsourcing and from NHS, which, again, are characteristic and represent the type of higher value, next-generation solutions that we are actively pursuing.

So when you tie this all up, what does this mean for our outlook? The total ending backlog of $34.4 billion provides the basis for our total revenue outlook of flat to slightly down revenues in fiscal 24 (sic) [ 2014 ], consistent with what we've been talking about. We continue to expect NPS revenue will decline by mid-single-digits, and we expect the commercial sector to be flat to slightly up.

And as I said on prior earnings calls, depending on what happens within the federal sector, there could be pressure on revenue if we do not see some of the submitted proposals that are awaiting award, if we don't see those resolve within some reasonable period of time here.

The third message I want to leave you with is that we're making significant investments in the business. We're investing in our people. We're following through on all our delayering activities. We're going to introduce a competitive salary plan for 2014 to reward our high performers. And additionally, to incent our high performers, we're granting equity to employees much deeper in the organization. We're also investing in a new financial and HR system, and going to a single instance of SAP for finance, human resources and procurement. We're also investing in shared services and moving to our centers in Sterling, Prague and Chennai, India. And this will help us get lower costs and much higher efficiencies as these centers come fully online.

We're continuing to optimize the workforce, and our 2013 restructuring enabled CSC to reduce our management layers from 13 or, in some places, 14 layers to 8. And we are continuing to transition work to our lower-cost markets and centers. And in the fourth quarter, we accelerated this workforce optimization and further aligned our labor costs with current market opportunities, especially in the European regions that we operate in.

We're also now beginning to significantly consolidate our real estate footprint, and we ended the year with approximately 16 million square feet of owned and leased space. And we're targeting a reduction of over 1 million square feet by the end of 2014. And we're also transitioning to open floor plans and flexible work environments, again, to drive better utilization and take costs out of the business.

We're making significant investments in additional sales people, in some cases, a doubling of the sales force, and investments in training to expand our market coverage and begin to pivot towards driving demand for our new standardized offerings. And we just recently transitioned to salesforce.com, and have our worldwide sales force now up on a common system so that we can add more discipline and streamline our bid processes.

We're also investing a lot of time and energy into partnerships to get a much broader opportunity in the marketplace and, again, to support many of our new standardized offerings. And today, after we announced our earnings, we announced an expanded partnership with SAP to accelerate the banking industry's move to next-generation platforms. And under this expanded alliance, CSC will be SAP's global strategic services partner for the banking industry, and we will provide systems integration services for SAP's banking client accounts. And CSC is now among a handful of these premier global value-added resellers of SAP solutions. So SAP and CSC will jointly sell each other's banking software and solutions, so a significant partnership expansion we announced earlier this morning.

For our incubator businesses, cyber, cloud and Big Data, we're making additional investments to drive future revenue growth and leverage our competitive advantage. Our qualified pipeline for cyber, cloud and Big Data increased by 200% during fiscal 2013. And we saw that pipeline grow from $1.4 billion to over $4.2 billion. Again, you saw a remix not only in our bookings, but we're seeing that same remix to many of these next-generation service offerings in our pipeline as well. And a lot of that growth is coming from the cloud opportunities.

So all these reinvestments are embedded in our financial targets for 2014 and, as I said, represent a remix towards higher value, higher-margin revenue activities. And we'll also continue to drive our cost takeouts, including overhead, in order to fund these reinvestments.

My fourth key messages, as I conclude here, is that our confidence in our cost takeout plans, coupled with our reinvestments, underpin our 2014 outlook. And this is enabling the company to raise its EPS targets from $3.30 to a range of $3.30 to $3.50. So our outlook for revenue remains what it has been. As I said before, we expect revenue for the company to be flat to slightly down. We expect NPS revenues will be down in the mid-single-digits, and we expect commercial revenue to be flat to slightly up. We expect margin expansion from 7% to 8% in 2014. And again, this would be fueled by additional cost takeout and our continued focus on our focus accounts, partially offset by our reinvestments.

Our free cash flow target for 2014 is $500 million, and our priorities for deploying cash haven't changed. So we intend to reinvest in our business. We intend to make some bolt-on acquisitions that fit and are consistent with our strategy that we've communicated. We intend to continue to strengthen our financial position, made a lot of progress on that last year. And we intend to return cash to our shareholders in the form of share buybacks and dividends, as we have in the previous year.

So in closing, what I'm focused on, what we've got the team focused on is continuing to fix the basics, get our costs out, get our systems in place. And as I said, we're raising this cost takeout target to $1.3 billion for 2014. We're making now some big investments back in the company, primarily in our people and our systems and partnerships, to drive not only operational efficiency, but to see and participate in more of the marketplace than we have heretofore. And we're expanding our market coverage and providing the training so that we can get some real execution around some of these new offerings. We continue to focus, as a said, on the focus accounts, driving delivery excellence. We still have a few non-core things that we're looking at in our portfolio of businesses, and we'll continue to return cash to our shareholders and drive innovation with our clients as we move forward.

So with that, I'd like to turn it over to Paul to go through a little more detail on the fourth quarter and full year. Paul?

Paul N. Saleh

Yes, thank you, Mike, and morning, everyone. I'll discuss the financial results for the fourth quarter and update you on our cost takeout program, and I'll also review again the targets for fiscal '14.

Our fourth quarter revenues were $3.7 billion. Our operating margins were 5.7% for the quarter, including restructuring, and 9.9%, excluding restructuring. Our strong year-over-year improvement reflects continued progress in our cost takeout activities. Margins expanded across all 3 lines of business for the quarter and for the full year. Now our EPS from continuing operations was $1.57 for the quarter, which compares with a loss in the prior year. Excluding certain items, which I'll cover in more detail in a moment, non-GAAP EPS from continuing operations was $1.27 at a 28% tax rate.

Now for the full year, revenue was slightly down, margins were up strongly and EPS from continuing operations was $3.20. And our non-GAAP EPS from continuing operations was $2.90, which compares favorably with the target we gave you of $2.50 to $2.70 for the fiscal year.

Now on the current slide, we've provided a road map that adjusts EPS from continuing operations to non-GAAP EPS from continuing ops for the fourth quarter. Now on the slide, we've highlighted 4 items. During the quarter, we closed the sale of our Australian IT staffing business and reported a pretax accounting gain of $38 million or $0.24 per share. Now the gain is included in continuing ops because of our ongoing commitment to buy services from this entity, but we're able to fully offset the taxes on the gain.

And we also had a $1.02 benefit from tax planning, which I'll also cover in more detail later. Now this tax benefit was offset by additional restructuring activities in the amount of $156 million or $0.72 per share, and a $53 million pretax charge or $0.24 per share related to a settlement of a shareholder securities class action lawsuit.

If you normalize for these items, non-GAAP EPS from continuing operations was $1.27 in the quarter, using an effective tax rate of 28%, which is consistent with the tax rate we had expected for the full year.

Now let me turn to some financial highlights for the quarter and the fiscal year. I indicated earlier, we reported a lower tax rate for the fourth quarter and also for the full year. We successfully executed a number of tax planning activities. We were able to monetize a capital loss through a financing transaction and, in the process, offset a significant portion of the capital gain resulting from the sale of the credit services business. Now we recognized $229 million in tax savings from these activities in the quarter. That was partially offset by a valuation allowance of $77 million from one of our international subsidiaries. Overall, we reported a net tax benefit of $139 million for the quarter and $35 million for the full year.

Turning to restructuring. Our focus has been on rightsizing our cost structure by reducing management layers, broadening spans of control, making greater use of offshore resources and consolidating our real estate footprint. In total, we took $153 million in restructuring charges for the quarter and $264 million for the full year.

Free cash flow for the quarter was $307 million, excluding a $500 million discretionary pension contribution, which we made in the quarter. And for the full year, free cash flow on the same basis was $764 million. Now this compares favorably with $59 million of free cash flow for fiscal '12. Our free cash flow performance reflects the benefits of our cost takeout program, greater capital efficiencies and better working capital management. Days sales outstanding, excluding unbilled receivables, was 44 days. Now our total CapEx and payments on capital leases were $877 million or 5.8% of revenue for fiscal '13, which is down from the $1.1 billion or 7.4% of revenue in the prior year.

Let me turn to the company's capital structure. During the fourth quarter, we raised $125 million as part of a plan to monetize a capital loss for tax purposes. We raised a combination of preferred stock and debt at one of our subsidiaries, and these securities are classified as debt for GAAP purposes. For the full year, we refinanced $1 billion in maturing debt, moved out our maturity schedules and improved our credit profile. During the fourth quarter, 2 rating agencies raised our credit outlook to stable. Our average cost of debt is now approximately 5.3%.

Now we've been following through on our plans to rebalance our asset portfolio and focus on next-generation IT solution and services. During the quarter, as I indicated earlier, we closed the sale of an IT staffing business in Australia, and we also divested a reseller business in Asia. For the full year, we divested 4 businesses, which collectively generated annual revenues of approximately $850 million. Gross proceeds from these divestitures were just over $1.1 billion.

We're also delivering on our capital allocation priorities. We're reinvesting in our business, pursuing bolt-on strategic acquisitions, strengthening our financial position and returning more cash to shareholders. During the quarter, we made a discretionary contribution of $500 million to our pension plans using the proceeds from asset sales. Now this is consistent with the plan we shared with you previously. Our U.S. pension plans are now funded at 89%, and our non-U.S. plans are funded at 85%. We also returned more capital to shareholders in the form of share buybacks and dividends. In the quarter, we purchased 4.7 million shares for $228 million at an average price of $48.15. And for the full year, we purchased 6.7 million shares for $305 million at an average price of $45.47. Dividends were $30 million in the quarter and $123 million for the full year. So in total, we returned $428 million to shareholders in fiscal year 2013.

Now let me turn to our segment results, and I'll begin with our Public Sector business. NPS revenues were $1.3 billion in the fourth quarter, a decline of 6.8% compared with the prior year. Department of Defense revenues, which accounted for 68% of the business, were $884 million, a decline of 8% versus the prior year. Revenue from the civil agencies was $365 million, a decline of 8% year-over-year. Now for the full year, NPS revenues were $5.4 billion, a decline of 5.5%, which is in line with the expectations we previously shared with you of a mid-single-digit decline. Operating margin was 10% in the quarter for NPS, and close to 11% excluding restructuring. Those improved margins were driven by better contract management and tight cost control.

For the full year, NPS operating margin was 9.6% as reported and 9.9% adjusted for restructuring. NPS bookings were $800 million for the quarter and $3.5 billion for the year, reflecting the continued uncertainties and delay in government awards.

Now let me turn to our commercial business, and I'll start with our Managed Services Sector. MSS reported revenue of $1.6 billion for the quarter, a decline of approximately 4% year-over-year in constant currency. For the quarter, operating margin was 3.4% as reported and 10.8% excluding restructuring. Now this represents a significant improvement when compared with the prior year, and it reflects better performance from our focus accounts and the benefit of our cost takeout initiatives.

For the full year, MSS revenues were $6.5 billion, which is relatively flat in constant currency, while margins expanded. Now bookings for the full year declined due to 3 factors that Mike shared with you: a reduced volume of recompetes; a focus on smaller, less capital-intensive opportunities; and a greater emphasis on higher-margin contracts.

Now let me turn to our Business Solutions & Services sector. Revenue in BSS was $796 million in the quarter, a decline of 12% in constant currency, but a decline of only 6% after adjusting for the divestiture of our Australian IT staffing business. Operating margins were at 9.9% in the fourth quarter and 10.8% excluding restructuring.

For the full year, BSS revenue was $3.3 billion, an increase of 6% in constant currency. Operating margin for 2013 was 4.2% including restructuring, and 5.3% excluding restructuring. Bookings in BSS of $3.4 billion for the full year were relatively flat when compared with the prior year.

Now finally, let me update you on our cost takeout and reinvestment activities. We generated about $900 million of cost savings on a year-over-year basis, well above our original target of $600 million. Our focus was on better contract management, improved performance from our focus accounts, greater efficiencies in supply chain and procurement, as well as a focus on workforce optimization and enterprise overhead reductions.

For the full year, we reinvested approximately $400 million of these cost savings to rightsize our business. The amount of reinvestment was greater than our prior target of more than $250 million for the full year. That was our original target. This level of investment was supported by the higher cost savings we generated.

Now our reinvestments were in the form of restructuring and customer-committed savings. In addition, we made investments in systems for finance and human resources and procurements, and in sales automation tools.

Based on the progress we made to date, we're now targeting $1.3 billion of cumulative cost savings through 2014, which is ahead of our prior target of $1 billion to $1.2 billion in cost savings. Now this means we expect to deliver another $400 million of cost takeout in fiscal '14. And similarly, we're now targeting about $300 million of reinvestments for 2014.

So in summary, we delivered strong operating improvement in 2013, and we made great progress on our cost takeout initiatives. We are raising our target EPS from continuing operations from $3.30 to a range of $3.30 to $3.50, and we're targeting an effective tax rate of approximately 32% for the year. Our revenue target for the company remains unchanged, flat to slightly down in total, mid-single-digit decline for NPS, and flat to slightly up for commercial revenues.

Now free cash flow target for fiscal '14 is $500 million, which includes funding the restructuring actions we took in the fourth quarter.

Now I'll turn the call back over to the operator.

John Michael Lawrie

Operator, we'll be happy to take some questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ashwin Shirvaikar.

Ashwin Shirvaikar - Citigroup Inc, Research Division

So my first question is with regards to the additional restructuring. What kind of activities do you envision there? As you go through, are you finding more low-hanging fruit? What specifically do you intend to do?

John Michael Lawrie

Yes, a lot of that restructuring, Ashwin, is directed at Europe. It's directed at people, delayering activities as we begin to remix our skill base and as we begin to retool here around many of our new offerings. That's one activity. We've got significant real estate consolidations that we want to do. So those are the 2 primary things we want to do. When I talk about real estate, I'm also talking about the consolidation of our data centers. So those are the 2 principal activities, primarily in the European theater, that we are now funding as we go into 2014.

Ashwin Shirvaikar - Citigroup Inc, Research Division

And could you provide an update on, sort of generically, on the problem contact resolution, where you stand with that?

John Michael Lawrie

Yes, we don't really call them problem anymore, they're focus. As I mentioned, we had over $200 million in improvement year-to-year. So we're really very, very pleased with that. And what this really did for us was to begin to build a new set of disciplined processes around the way we manage transitions and the way we manage the full life cycle of these contracts. We put economic game plans in place for all of these focus accounts, and that drove significant results in the focus accounts. But it's also beginning to drive results across all of our portfolio of clients as we apply these disciplines across the entire client base.

Operator

We'll go to our next question from Keith Bachman with Bank of Montréal.

Keith F. Bachman - BMO Capital Markets U.S.

I had 2, if I could. Mike, could you talk a little bit about how you see the booking trends for this upcoming fiscal year? In other words, do you think the bookings will be at a rate that's greater than 1? I was a little bit, not so much surprised on the federal, but the commercial was pretty weak when everybody else has been reporting very good numbers on the bookings side. So maybe give us a little bit of flavor on how,, just directionally, you see the book to bill this year, and then I have a follow-up.

John Michael Lawrie

Yes, I think the -- as we look out over this upcoming fiscal year, we're making a pretty dramatic shift here to higher value, higher-margin offerings and much less focus on these very large capital-intensive deals. So that is a fairly significant remix of our portfolio and of our pipeline. What we're beginning to see is we are beginning to see substantial pipeline growth. I would say that what we're planning to see is, I think, the bookings will continue to be a little bit on the weak side, probably in the neighborhood of 1.0 or a little less through the first quarter and the second quarter. But what we are anticipating is we're anticipating that to begin to pick up in the second half of this next fiscal year. And that's why we have laid in the revenue plan, that we have talked about last year and we reiterated this morning, of sort of flat growth to slightly up growth in the commercial sector. But we're clearly now beginning to move to the next phase of this turnaround, which I term win more. That's why we have added substantial sales capacity worldwide, why we are expanding dramatically our partner offerings. This is all geared towards beginning to pivot to driving some growth around these new offerings. And I expect to begin to see that show up not only in the pipelines, but in the book to bill and the revenue as we get into the second half of 2014.

Keith F. Bachman - BMO Capital Markets U.S.

All right, fair enough. And my follow-up is related to the guidance. And if I look at the EBIT dollar that you reported in FY '13, if you normalize for the dispositions, as well as restructuring, it looks to be around $900 million. And implicit in your guidance seems to be very little increase in the EBIT dollars in FY '14, when you would think some of the restructuring would continue to flow through and NHS would assume to go from a negative to a positive or at least to a neutral, I should say. Are we missing something?

John Michael Lawrie

No, I'll let Paul comment a little -- a greater detail. But NHS, as you know, we are not taking any of that revenue upfront. We are taking that on a ratable basis across the length of the contract, which was a 5-year contract. By the way, we are seeing some significant sales gains in NHS. We don't talk about that too much anymore because it's really no longer a problem. So we're actually selling, we're installing and going live with many trust. But that revenue doesn't show up in the period that we do this. It gets rated over the 5-year contract period. That's [indiscernible]

Keith F. Bachman - BMO Capital Markets U.S.

I'm sorry, I said NHS, I meant to actually say iSOFT is reporting a loss and will presumably go more to a kind of a neutral position.

John Michael Lawrie

Yes, but we still got -- the big piece of iSOFT is NHS. That has changed the revenue profile of that business. Now in terms of the restructuring, yes, we took a significant restructuring in the fourth quarter, and that will take time to play out. Most of this is geared to Europe. And we've got works councils and other things to go through. So we don't expect a lot of that to filter through to the bottom line until the second half of 2014.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. But Paul, am I wrong that the EBIT dollar levels are fairly minimal growth from FY '13 to FY '14 if you normalize for the things I just mentioned?

Paul N. Saleh

Yes, I think the way to look at it, as we indicated, if you look at our starting points for 2013 and if you look at what we are guiding -- we have targeted for next -- for this coming year, we have $400 million of costs, additional incremental cost takeout year-over-year. But we've also pointed to additional investments of -- in the form of about $300 million of reinvestments. So the net of these 2 things is about $100 million. And then if you look at it also, we have -- we expect maybe about a $40-some million return on the investment that we made in the fourth quarter in the form of restructuring because, as Mike mentioned, some of this thing is not going to pan out immediately. It's in jurisdictions that take a while just to impact and transition. We also have, in our model, the benefit of the pension expense reduction as a result of the investment that we made this year of $500 million in discretionary pension spending, which should give us a $30 million lift on a year-over-year basis in expenses, but offsetting that, I would say, due to the NPS. NPS has been operating at a very high margin, non-sustainable. If you remember, we told you [indiscernible] in the high 9%. And with the government, we have 50% of our business is cost plus. You reset your overhead rates for 2014. So if you look at the NPS revenue targets, plus the margin coming back down to something a little bit more sustainable, which is a 9%, you'll see that the numbers really do foot to the guidance, the targets that we have given you.

Operator

We'll go to our next question from Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I was hoping that you could give us a little bit of color, I think you touched on sales hires. Maybe you could -- and I don't know how much you want to get into the actual numbers, but give us some sort of either quantitative or qualitative color around where those hires are taking place, when they're coming on and what the ramp times would be?

John Michael Lawrie

Okay. Yes, our applications business, for example, we're essentially doubling the size of the sales force. And that's pretty much around the world, particular focus in North America. We're probably in the ramp about halfway through that in the United States and probably 1/4 of the way there in the rest of the world. We are doubling our cloud, our cyber and our Big Data sales force. And I'd say we're probably roughly 1/3 of the way through that. We're beginning to add resources, what I'll call coverage resources, particularly in Asia. And that's just getting started. And we also made a very significant shift here, where we took our account general managers, that heretofore were only compensated for the profitability of the product line or the offering line that they represented, and we have pivoted them towards the profitability of the entire account and also are now incenting them for cross-sell opportunities. Because one of the significant opportunities we have is we only have about a 10% cross-sell in our accounts. So, for example, if we have MSS and we've got an infrastructure contract, in only roughly 10% of those accounts do we sell applications services or business process services or software, et cetera. So we have completely re-pivoted that coverage resource. And that is a significant increase, over 300 people, just to put a flavor on that, around the world. So that gives you a flavor. I'd also say our infrastructure sales force, we're doubling. So as we move to some of our newer infrastructure offerings, we're making a significant investment in sales people there. And that's probably about 1/3 to 40% ramped up as we speak. Now there is a lag. So once you get these people onboard and you get them trained, that doesn't equate immediately to increased revenue or bookings. But as I said, what we are seeing is we're beginning to see pipeline opportunities grow pretty significantly, which is the first thing you'd expect to see with a new sales force as they begin to identify opportunities. And the next step is they have to prosecute those and close them and get that filtering through the P&L.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Got it. And then just one follow-up. On the NPS business, it looks like DoD is kind of a little bit below what you're guidance is for the next out year. Maybe you could provide a little bit of color on why you think you might tip the mid-single-digit decline guidance that you have out there, with the DoD kind of tracking below that, and then just any color you want to give on the margin side of that business.

John Michael Lawrie

Well, the reason we're still comfortable at this point in the mid-single-digits is the substantial backlog of opportunities that we have submitted bids on. We're comfortable that those decisions are going to be made. I can't tell you when. I can tell you that they've been delayed, but we are expecting some of those awards to be made. And some of those awards are in the Department of Defense. So as those are awarded, I expect to see that mid-single-digit number be more realistic than what we saw in the fourth quarter with DoD.

Operator

We'll take our next question from Rod Bourgeois with Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. Yes, so Rob Bourgeois here. Guys, I want to ask a little more about how the restructuring charge plan has changed since the outset of fiscal '13? If you go back to Q1 of fiscal '13, you did $27 million in restructuring. I think at the time, we asked about that relatively small amount of restructuring since we believed more restructuring was needed for the turnaround. I think the response at the time was that there would be more restructuring but they would be incremental. Since Q1 and the remaining 3 quarters of fiscal '13, it looks like the restructuring charges were $237 million. So it does seem the turnaround plan has become more restructuring charge intensive. And by the way, that makes a lot of sense, I think, versus the original plan. But nevertheless, there seems to be a substantial departure from the original plan. And I just want to know what drove the change in plan. I mean, normally, when a restructuring charge plan goes up, it's either revenue prospects are not as good or you've determined that to take cost out, it requires more restructuring rather than just sort of better management and efficiency gains. So I just want to know what the turning point was in the restructuring charge plan change.

John Michael Lawrie

Yes, I think there was more restructuring. I had talked about roughly $30 million, $40 million a quarter kind of a run rate. I mean, what we did in the fourth quarter is we have basically loaded some of 2014 into 2013. So when you look at it that way, it is an increase, but not as substantial. And I mean, the truth is, as we got into this and we got into the accounts, and we began to look at what was out there, particularly in Europe, we concluded that in order to get the business operating at a margin level that we were comfortable with long term and to create a solid baseline off of which we could grow, we decided to spend more restructuring the business. And as I've said many times, part of the outsourcing business is you always reduce labor costs, you reduce other structural inefficiencies as you go throughout a contract. But because CSC had, had a lot of profitability issues over the previous years, a lot of that restructuring was not taken. And we decided to go ahead and take that so that we could get on a much more profitable base. The other substantial difference from where we were initially is probably the real estate portfolio. As we began to look at the real estate portfolio and saw the number of data centers we had -- and I think, Paul, correct me if I'm wrong, it was 60-some data centers around the world. As we really got our arms around what was out there and the level of those centers and what customers they were supporting and what offerings they're supporting, we concluded that if we're really going to get this business on a profitable base and prepare to begin to grow, we needed to get the base infrastructure in much better, better shape than it was.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay, that make sense. And I just want to inquire about the fiscal '14 free cash flow guidance. If you believe a 7.8% operating margin is indicative of CSC's underlying operating margin performance in fiscal '13, and you're still making cost takeout improvements, I guess, I'm wondering the free cash flow outlook for fiscal '14 looks small relative to a company that has a near 8% operating margin. So there just seem to be a disconnect between the margin performance versus the free cash flow outlook. And is there a big investment, a lumpy investment for fiscal '14, or a different way to explain that?

Paul N. Saleh

No, actually, that's a good question. In my comments, I indicated the fact that the $500 million that we're targeting includes payments for the restructuring that we took in fourth quarter, and some of it was even taken in the third quarter, that we have not yet executed on. And a lot of it is overseas just because of the timing of some of the decisions that have to be communicated. So if I look at it, there's about $190 million of restructuring payments that have not been yet made, but they have to be funded from cash flow. In addition to that, I would say to you that the compensation, the bonus that will be paid in the first quarter of this year are higher than they were in 2013, obviously, given the performance of the company. And so it would be at least about $100-some million. So I would say those are the 2 factors. But your point is very well taken, that on the long run, you will see the free cash flow just really be much more aligned, I think, with our objective, which was to be much higher than 100% conversion to net income.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

But Paul, is the bonus payment for next year, is it higher than what it would be a normal bonus in the out years? And is the cash restructuring charge in fiscal '14 much different than what it would have been in fiscal '13? I mean, it just -- right?

Paul N. Saleh

Rod, I understand your point. But I'm trying to give you the perspective that getting into '14 versus relatively '13, if you're comparing the 2 years, you have at least $100 million more of bonus payment that you did not have in 2013. In addition to that, when we go into '14, we still have to fund for the $190 million of restructuring. And if you look at free cash flow in 2013, just to see -- to put things in perspective, we also had an NHS payment that came to us as we settle with -- we settled all claims with the NHS and we recast the agreements.

John Michael Lawrie

But long term, I think the question is -- I mean, longer term, as you look out, the business should have a higher cash -- free cash flow. You're exactly right.

Paul N. Saleh

Without a doubt.

John Michael Lawrie

So I mean, I look at this as we're sort of normalizing in 2014. We didn't pay bonuses for years. The good news is we are paying bonuses because the company is performing much better. So you've got a 1-year blip in that. But then you get onto a much more normalized basis and it should -- as we've said before, we should be generating cash much closer to the EBITDA performance of the business.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Can I ask one more question on that as we talk about normalizing cash flow? I mean, you're in the phase one of cost takeout in the turnaround. But maybe toward the end of fiscal '14, you try to move more into a let's-chase-growth mode. Won't that require an uptick in CapEx? So that now we move into fiscal '15 and, yes, we're exiting some of the cash restructuring charges and the higher bonus stuff, but now we've got to go for growth. Will there be a need to then increase CapEx or maybe not?

John Michael Lawrie

No, I think CapEx, we're getting more comfortable with that we can get that under control. I think the number was around 5% of revenue in 2013. We sort of see that continuing going forward, and there's a couple of key factors. We've made a couple of very significant announcements with some of our partners, where we are now buying the equipment, not upfront and taking the capital charge, but we are paying for that equipment as we deliver the service to our clients. So we are beginning to shift through many of our arrangements with our key partners, much more of a services orientation to that capital expenditure. That is consistent with our long-term strategy, which is to reduce the capital intensity of this business. So that will continue as we go forward. So no, as we pursue growth, I am not expecting a huge uptick in capital requirements to fund that growth. What we need is we need more feet on the street. We need more coverage. We need to see more of the marketplace. We need to develop broader partnerships to help us prosecute those opportunities, and that's exactly what we're doing. The other thing is a lot of our new offerings, so cloud, cyber, Big Data, these are not nearly as capital intensive as these big infrastructure deals, where we had to buy data centers and networks and all kinds of other capital expenditures associated with that business. And by the way, I think this is a positive for this business as we go forward, less capital intensity.

Operator

We'll go to our next question from Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

At the end of the third quarter '13, we were at $400 million of cost takeout. We ended up at $900 million. So that means the fourth quarter had $500 million of cost takeout, but I don't see it showing up in the P&L. So I'm trying to figure out where that went.

Paul N. Saleh

No, actually, let's be careful. When we say we took $900 million of cost takeout, you have to look at it on a year-over-year basis, not in a sequential way. And so if you look at last year's fourth quarter, there was a big jump in our cost structure in the fourth quarter. When you look at literally what we delivered this year, on a year-over-year basis, we did deliver approximately, I said, $900 million -- a little bit over $900 million in cost savings in such areas as supply chain, workforce optimization, overhead and this contract management focus account that Mike mentioned. So it's on a year-over-year basis. Don't look at it on a sequential basis.

Bryan Keane - Deutsche Bank AG, Research Division

And then the investments, I had $200 million to $250 million per year. So we're talking $400 million to $500 million. Now we're talking about $700 million for investments. Is that -- can you just explain the big increase?

Paul N. Saleh

Yes, it was about $250 million a year, so it was about $500 million. For this year, as Mike mentioned, as we dig deeper and we see opportunities in such things as real estate or with the workforce optimization or overhead, we've taken additional action, because they were supported by the additional savings and the additional return that we can generate on those kind of investments, and in rightsizing some of our businesses, particularly, as we mentioned, in Europe. So I would say to you, we're just really in the latter phases of that. That said, there's always going to be some reinvestments to make in the business. But we're entering this year, in particular, though, with additional investment that we need to do in our system. This is the heaviest portion of our investment for HR and, particularly, financial systems transformation. And also, there always is some of the saving -- the customer-committed savings and repricing that we have to deal with. But I would say what we gave you before was $250 million -- about $250 million. Now we just brought it up to $300 million for 2014.

Bryan Keane - Deutsche Bank AG, Research Division

Yes, but combined, it's a full $200 million then, even using the high end of your guidance?

Paul N. Saleh

Right. And the -- but also the savings has been realized, a whole lot has come up.

Bryan Keane - Deutsche Bank AG, Research Division

Last question for me, what was iSOFT loss for fiscal year '13, and then what are you expecting for iSOFT to be in fiscal year '14?

Paul N. Saleh

I think it was about $70-some million loss in 2013. We're still working on some of the revenue recognition under software accounting for iSOFT, and so we'll update you sometime in the first quarter in terms of our progress there.

Operator

We'll take our next question from Edward Caso with Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

In prior quarters, you had included the restructuring charge. In your guidance this quarter, you appear to have taken it out. So I guess, I've spoken to many investors who were struggling on what the right compare is for this quarter. And then the next question is, you talked about further efforts in next year, in FY '14. Does your $3.30 to $3.50 guidance include further restructuring charges as far as the P&L is concerned, and about how much per quarter?

John Michael Lawrie

Yes, I would say as we -- I'll let Paul give you the normalization number. But as we look forward, I think we continue to see somewhere in the neighborhood of $30 million to $40 million of restructuring on a quarterly basis. And most of that is contained within the target of $3 that we just communicated to you. And on the normalization, Paul?

Paul N. Saleh

Yes, the best way to look at it and to answer that is what Mike mentioned, which was we would have taken $30 million to $40 million a quarter. What happened in the fourth quarter is we had the opportunity to accelerate some additional restructuring in the quarter. We had -- we were very successful, as we indicated, with our tax benefit, having a tax benefit from our tax planning. And if you look at the chart that was called the road map on EPS from non-GAAP basis, you will see that basically the dollar in tax benefit offset the shareholder settlement and restructuring that were taken -- the additional restructuring that were taken in the quarter. But if you were to normalize things, this typically would have taken $30 million to $40 million in restructuring. In addition to that, we have guided -- not guided, we had targeted a 28% tax rate for the quarter. We ended up having basically a positive credit from tax. And that's why we adjusted our results on a non-GAAP basis to exclude those certain items, because they would give you the better comparison to our $2.50 to $2.70 target we had previously given you. And so you'll see that we delivered $2.90 on that basis. So we were trying to normalize things by telling you that our EPS was $2.90 for the year.

John Michael Lawrie

If you just step back from all this, I think the real -- from my perspective, the real focus here is, one, there was a lot more cost and expense opportunities in this business. And as we dug into that, the conclusion I made is that we really wanted to get this business on a firm footing. This is a business that really never -- or at least over some period of time, really never got itself structured in a way that it could positively feel it could invest and that investment would generate incremental profitability going forward. So the pivot here was there was more cost savings than we had anticipated, and we've chronicled that pretty clearly here. And we've decided to use some of that to go back and really correct some of the deep plumbing and other structural inefficiencies in the business, so we could get the business set up to make some of the investments. I was uncomfortable, to be quite candid, trying to drive revenue growth when we didn't have a sustainable platform to drive that on. When I got here, we had a need out [ph] here of almost 99%, 90 -- so for every dollar that came in, $0.99 went out the back door. That just is not a sustainable business model. So now we're getting to a point where we're getting the infrastructure, we're getting a baseline, we're getting a foundation that we are developing more and more confidence in. And that's what we've communicated here today. And that allows us to make investments targeted in the areas that we think have the best long-term growth and profitability growth opportunities. So that's really what's playing out here as we move forward.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Just to be really clear here, I think earlier you said you took the restructuring charges expected in FY '14 and put them in the fourth quarter. But then, I think I just heard you say that you're going to continue to have $30 million to $40 million in sort of your normal run rate charges as well. So is that accurate? And is the $30 million to $40 million implicit in -- is that baked in your $3.30 to $3.50?

John Michael Lawrie

Yes, so let me say it again. We took some of the restructuring charges from 2014 and we moved that into the fourth quarter, that's correct. And as we go forward through 2014, I expect a normal run rate of $30 million to $40 million per quarter in restructuring. Now let's just take $40 million times 4, I do not expect that same level in 2014 because we took some of that in the fourth quarter of 2013. And it is largely contained within the target range for EPS that we've just communicated.

Paul N. Saleh

Yes, that's what I was going to say. Yes, it is in our targets.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

And last clarification, the tax rate assumption for FY '14, please?

Paul N. Saleh

Yes, it is 32%.

Operator

We'll go to our next question from David Grossman with Stifel.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

So I think most of my questions have been answered. So perhaps to close with this, maybe Mike and Paul, you could -- just looking at the elements of your plan for fiscal '14, perhaps you could share with us the elements of the plan where you're most confident and those elements of the plan where you're least confident as we think about the next 12 months.

John Michael Lawrie

Yes, I am most confident in our ability to continue to get the cost takeout that we've just talked about, and that's really the basis of our confidence in raising the target range for EPS. So we feel pretty comfortable with that. I think the area that I am least comfortable with would be what the real knock-on effects here of sequestration are in the NPS business. I do not have great insight into that. We're making an assumption here that things will continue to sort of stumble along in the same fashion that they have the last 6 months, but I don't have a clear indication of that. And if you do, I'd love you to share it with me. And I'd say, the third area would be the continuing volatility and up-and-down nature of the business in Europe. And it's one of the reasons that drove us to do some incremental restructuring in Europe to get that baseline more secure, so that we're better prepared to handle some of that volatility. So that's how I'd sort of break down the plan in terms of some of the risks and the areas we're particularly confident in.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

And just to be clear on Europe, can you just provide us some indication of how both the cash flows and the margin improvement in Europe plays out over fiscal '14 and how much visibility you have on that trend?

John Michael Lawrie

Yes, I don't have -- I'm not going to quote the exact numbers because we don't do that by region. But we've restructured and are continuing to restructure our business, particularly in the U.K., and we see us getting onto a much more profitable foundation in the U.K. Our business in France continues to be profitable, that's largely a consulting business. We've also restructured Germany to get a skill profile more consistent with the business that we see there. Things like cyber and cloud and other things are beginning to pick up in Germany. So I think as we sort of follow through on the restructuring that we announced today around Europe, we'll begin to see some improvement across that theater in terms of margin expansion and profitability. So it's slightly different by region, but basically the same story across the board. So I think -- again, I think we're trying to set this business up, get it on a very, very firm foundation. The good news is there were a lot cost savings that we could take. Thank God there was, because that's allowing us to fund internally many of the investments that we need to make. And we're encouraged by that progress and the prospects for the company to continue to expand its margins and its profitability, and begin to show some growth as we get to the second half of 2014.

So with that, I thank everyone for their interest. And operator, thank you very much.

Operator

And that concludes today's conference call. Thank you for your participation.

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