Computer Sciences F3Q08 (Qtr End 12/31/07) Earnings Call Transcript

Feb. 6.08 | About: Computer Sciences (CSC)

Computer Sciences Corporation (NYSE:CSC)

F3Q08 Earnings Call

February 4, 2008 5:00 pm ET

Executives

Michael W. Laphin – President, Chief Executive Officer

Donald G. Debuck – Interim Chief Financial Officer

Analysts

Rod Bourgeois – Bernstein

Adam Frisch – UBS

Julio Quinteros – Goldman Sachs

Bryan Keane – Credit Suisse

George Price – Stifel Nicolaus

Greg Smith – Merrill Lynch

Eric Boyer – Wachovia

Tien-tsin Huang – JP Morgan Securties

[Jake Commity] – Morgan Stanley

Martha Moran – Thomas Weisel Partners, LLC

Operator

Hi and welcome to the Computer Science’s Corporation 2008 third quarter earnings conference call. Today’s conference is being recorded. Now at this time it is my pleasure to turn the conference over to the director of investor relations, Bill Lackey. Please go ahead.

Bill Lackey

Good afternoon everyone. Welcome to CSC’s third quarter fiscal 2008 earnings conference call. Our preliminary earnings were issued earlier this afternoon and I hope you’ve had an opportunity to review the press release. Mike Laphen Chairman and Chief Executive Officer will begin with some opening remarks and as was announced on Thursday Don Debuck Corporate Controller has been appointed interim Chief Financial Officer and Don will review the quarter’s financials. As usual this call is being webcast live at csc.com and we also welcome those joining us via that process. Further any information we cover that does not directly and exclusively relate to a historical fact constitutes forward-looking statements under federal securities laws. For a written description of the factors that could cause actual results to vary from these statements please refer to the section titled risk factors of CSC’s form 10-K for the year ended March 30, 2007.

On today’s call we will reference certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures are provided in the tables attached to the earnings press release and will be posted on the investor relation section of CSC’s website. The non-GAAP financial measures referred to during this call are not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Finally, we assume no obligation to update the information presented on this conference call. Now it’s my pleasure to turn the call over to Mike.

Michael W. Laphen

Good afternoon everyone. I’m pleased to have the opportunity to speak with you about CSC’s current business position as well as our strong third quarter financial results. As you probably know we recently announced the relocation of CSC’s corporate headquarters from El Segundo, California to Falls Church, Virginia. The co-location of key corporate staff functions including finance with CSC’s global operating headquarters in Falls Church will improve both communications and performance. Don Debuck who’s with me today has been appointed interim CFO while we conduct an evaluation of CFO candidates. This process has already begun. Mike Keane will assist Don with the transition. I’d like to thank Mike for his contributions during his tenure as CSC’s CFO.

Moving to the third quarter results the key performance metrics of profitability, revenue, cash and bookings were all solid. As our operating results indicate our core business profitability continues to reflect a favorable trend. Our earnings per share before special items was strong with a 31% increase over the year ago quarter and well above our guidance. Operating performance improved about 60 basis points in the third quarter over last year on an EBIT basis excluding special items. CSC’s total revenue for the quarter as reported was up over 14%. Growth and constant currency was 10%, this result was lead by our global commercial sector which achieved double digit growth. Europe provided a meaningful part of this growth reporting revenue up over 20%.

An integral key element of our strategic plan is to achieve market growth through the applications of business solutions within our six industry sectors. During the third quarter all six industry sectors had substantial revenue growth with five of the six delivering double digit growth. Within our health services sector we continued to make good progress on our NHS program. As part of the work for the NHS we have successfully implemented a picture archiving and communications program called [PAX]. Over 90 million digital x-rays and scans, a volume which grows every day are now stored at a CSC data storage center enabling hospital’s secure access to images remotely and making film storage a thing of the past. A little over three million images were added just last week. The resultant benefit in the quality of care and the lower of cost of the healthcare system are significant. This program is now complete and implemented on plan and without any major disruptions to hospital activity during the 49 installations. Our acquisition of First Consulting Group closed on January 11th and is now being integrated as the newest addition to CSC’s health services community.

Our free cash flow of $300 million for the quarter was up over last year and we remain on track to achieve our fiscal year free cash flow target. Don will provide more commentary on this later. We announced total awards of $2.3 billion for the third quarter which brings our total to $10.8 billion for the nine months. These amounts exclude our short term bookings which we do not currently announce. We are particularly pleased that our mid-size yield pipeline has grown significantly as a result of project accelerate and now stands at over $4 billion. For the remainder of the fiscal year we are pursuing numerous opportunities and anticipate another solid year of award totals. We are committed to the continued successful execution of our strategic plan and the resultant achievement of our financial goals. I look forward to continuing to keep you updated on our progress. Now I’ll turn the call over to Don for further details on our financial results.

Donald G. Debuck

Thanks everyone for joining us today for our third quarter conference call. Financial highlights for the quarter include double digit revenue growth on both an as reported and constant currency basis with increases across each geographic region. Earnings per share before special items of $1.11 above our guidance and 31% higher than the same period last year and free cash flow of $300 million. Before moving on I’d like to remind everyone that unless indicated otherwise all data and comparisons will be on a restated basis and will exclude the impact of special items. Special items which consisted entirely of pre-tax restructuring charges this quarter and for the third quarter last year were $17.5 million and $42 million respectively.

So now let’s turn to revenues. Total revenues for the third quarter were $4.2 billion representing 14% growth as reported and 10% growth of constant currency. Acquisitions contributed approximately four points of growth to our revenues during the third quarter. Our North America public sector or NTS generated $1.4 billion of revenue or 8.6% growth compared to the same period last year. Results were driven by new program wins and increased tasking from our defense related customers. While civil revenues increased as a result of the Datatrac acquisition we completed last year, global commercial revenues were strong once again achieving double digit growth for the second consecutive quarter as reported as well as double digit growth at constant currency. Reported commercial revenues grew about 17.5% to more than $2.7 billion as a result of growth across all geographic regions at constant currency revenues increased about 10%.

Let me now walk you through each of the individual pieces of our global commercial operations. US commercial revenue was up 11.5% for the quarter. On a net basis US commercial growth was driven by the Convansys acquisition, an important component of our project accelerate initiative. Also showing growth were our financial services businesses and US consulting and system integration activities. The CNSI growth was mainly due to an increase in average bill rates continuing a trend of improvement in this important part of our portfolio.

The US domestic outsourcing business has been challenged by contract conclusions but recent wins are beginning to contribute. Our European business had one of its strongest quarters from a year-over-year growth perspective as revenue rose 20% as reported and 10% of constant currency. The expansion of the NHS contract as a result of the two additional clusters we took over last January accounted for six of the ten points of constant currency growth while new business wins and growth in our consulting and systems integration business in our west region accounted for the remaining four points of growth. Asia and Australia continue to perform well. Asia revenues grew 14% as reported and 8% at constant currency due to continued strength across most of our larger customer accounts. Australian revenues increased 25% as reported and 8% at constant currency. The growth was attributable to new business wins, increased project work and continued expansion in our Paxic IT recruitment business.

Next turning to awards, announced awards through the first three quarter of fiscal 2008 totaled $10.8 billion. We are maintaining the momentum in our federal signings after a record year last year. Through the first three quarters of fiscal 2008 our federal signs were up $1 billion compared to the same period a year ago. Our federal pipeline continues to look strong with $34 billion of opportunities scheduled to be awarded in the next 14 months. Our commercial signs improved from the prior quarter. We expect to see improvement in the future as a result of our pipeline of opportunities and our focuses efforts under our comprehensive growth strategies outlined under project accelerate.

Now moving down the income statement, cost of services as a percentage of revenue for the quarter was 79.4% a decrease of 30 basis points compared to the same quarter last year due to the benefits from cost saving initiatives and restructuring activities primarily in Europe. Selling, general and administrative expenses at 5.8% of revenues reflected a 40 basis profit improvement over the prior year. The improvement was driven by the effective restructuring activities as well as larger proposal expenses in Australia last year associated with a number of opportunities. Depreciation and amortization expense was 7.4% of revenue compared to 7.2% last year. The higher percentage was primarily due to higher investment outlays for new engagements in Europe. The net of these improvements translates to an EBIT margin improvement excluding special items impact of 60 basis points over the third quarter last year.

Our effective tax rate before special items for the quarter was 33.5% versus 31% last year. The increase in the effective rate for the third quarter of fiscal 2008 is due to the classification of tax related interest and penalties in income tax expense as a result of the adoption of 1040A on March 31, 2007 as well as higher tax related interest expense. This increase was partially offset by the re-measurement of taxes for tax matters relating to fiscal years 1995 to 1999. We continue to expect our full year effective rate before special items to be approximately 40%. In Summary diluted earnings per share before special items for the third quarter were $1.11 a $0.26 improvement compared to last year and above our previous guidance. The third quarter benefited from some timely matters both in operations and in the tax rate prepared in our guidance.

Let me now give you an update on three programs. First restructuring; the $17.5 million pre-tax restructuring charge reported in the third quarter was mostly comprised of work force reduction costs. Restructuring charges of $70 million have been incurred year-to-date with approximately $56 million estimated for the fourth quarter. So we expect to recognize approximately $126 million in restructuring charges this fiscal year. We remain on track to complete our recession program in the fourth quarter with a plan to reduce our total head count by an additional 450 employees with the majority of the reduction occurring in Europe.

Second our share repurchase program; our board authorized the share repurchase program of up to $2 billion in June of 2006. We completed the first phase and Accelerate share repurchase with $971 million with final settlement occurring in July 2007. In August 2007 we began the second phase under a defined 10B51 program which consists of daily open market purchases against a pricing grid. In the third quarter we repurchased approximately $5.9 million shares for $320 million. Year-to-date we’ve repurchased approximately $9 million shares at a cost of $489 million and in accordance with the pricing grid in the 10B51 plan our share repurchases have increased recently and at current prices we would complete our share repurchase program this fiscal year.

And third, last week’s announcement of the relocation of our head quarttrs will result in charges we will be classifying as special items. At this point we do not have an estimate of the amount until we get through the discussions with the employees and understand how many will accept the relocation offers.

Moving on to our balance sheet. We ended the third quarter with approximately $600 million in cash and cash equivalent up $100 million from the prior quarter. The higher cash balance was primarily attributable to higher advance contract payments as a result of a significant cash payment from the NHS contract late in the quarter. DSL was 100 days an improvement of three days compared to last quarter but one day higher than the same period last year. Our debt to total capital ratio at the end of the quarter stood at approximately 36% an increase of a little more than 1 percentage point compared to the prior quarter. The higher debt to capital ratio is a result of a higher debt load and a reduction in equity attributable to our share repurchase program. We expect this ratio to increase a bit in the near term as a result of the First Consulting acquisition and plan to use our cash flow to reduce this balance over time.

Within NPS the status of the sixteen requests for actual adjustment and subsequent conversion to interest bearing claims remain essentially unchanged from our last call. We continue to evaluate our response to the recent government opposition to one of the two sets of claims and as we’ve indicated we have until February 2, 2008 to initiate litigation in the Armed Services Board of Contract Appeals or until November 15, 2008 to initiate litigation in the US Court of Federal Claims. We do intend to pursue collection of our claim and we do not anticipate collecting any of the identified $900 million in government contract claims before the end of this fiscal year.

Now on to cash flow; given the trends of our business our cash flow tends to have significant intra-quarter volatility within each fiscal year. In addition we’ve mentioned in prior calls that a significant amount of cash from the NHS contract was received at the end of last year lowering this year’s expected cash in-flow. With that said free cash flow for the quarter was a $302 million in-flow compared to a $236 million in-flow for the same period last year. The net cash provided by operations of $590 million in the third quarter is $120 million higher than the same period last year and is running ahead of our internal expectations. The main driver this quarter was an increase in advanced contract payments which we mentioned earlier due to a significant cash payment from NHS. The net cash outflow for investing activities in the third quarter was lower this year due to the acquisition of Datatrac last year.

We continue to expect our ratio of pre-cash flow to net income over a two year period to remain at 80% to 90% and let me take a moment to provide some clarity around this ratio. Net income as referred to in this ratio is before special items and free cash flow for the purposes of this ratio exclude the cash outflows associated with restructuring. So last year as a result of a large milestone payment we received from NHS at the end of the year. This free cash flow to net income ratio was approximately 130%. This year again, due to the large payment from NHS at the end of last year, we expect our ratio to be approximately 50%. Taken together over a two year period we expect that ratio to be approximately 80% to 90% implying free cash flow excluding restructuring for fiscal 2008 of approximately $300 million.

Let me now provide you with an update on an acquisition we announced recently. On January 14th we closed the acquisition of First Consulting Group for $13.00 per share or approximately $365 million. This acquisition furthers our project a ccelerate strategy by enhancing our capabilities in the healthcare vertical and expanding our global delivery including a new world sourcing location in Vietnam. It also adds approximately 1200 employees and lower cost regions bringing our total off shore headcount to more than 18,000. I’d also like to provide you with an update on our settlement with Sears. As we mentioned on our last call we reached an agreement regarding the termination of the outsourcing agreement between the company and Sears. Under the terms of the settlement Sears agreed to pay the company $75 million which we received on January 8th. As we’ve previously indicated the settlement will not have a material impact on our income statement.

Before concluding my remarks let me provide you with some additional guidance for the full fiscal year. We continue to expect full year revenues in the range of $16.2 to $16.5 billion or growth of 9% to 11% over the prior year implying fourth quarter revenue of $4.2 to $4.5 billion. We are narrowing our expected full year earnings per share guidance by a nickel on both ends so we now expect full year earnings per share to be in the $375 to $385 range implying fourth quarter earnings per share excluding special items from $1.33 to $1.43. Finally I’d like to point out that the sum of our quarterly earnings per share will not add up to the total of the full year. This occurrence is a phenomenon that can happen when we get significant changes in the share base and net income that is not distributed evenly. As a result, the sum of our four quarters of earnings per share may differ from our yearend total may differ by as much as $0.04 of EPS.

In closing, the key take away’s from the quarter include first, we delivered double digit revenue growth on both an as reported and constant currency basis with solid contributions from each geographic region. Second our restructuring is on plan and we should continue to see the benefits from our cost saving initiatives. Finally free cash flow of $302 million was an increase of $65 million from the prior year and we remain on track to meet our full year target. At this time I would like to turn the call back over to Bill.

Bill Lackey

Operator we’re ready to take our first question now please. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause just a moment to assemble the question roster. Our first question will come from Rod Bourgeois with Bernstein.

Rod Bourgeois – Bernstein

I wanted to just get a little more detail on the cash flow outlook here. If my numbers are correct and they may not be here, you need to post over $600 million in the March quarter to hit your guidance and I’m wondering if that’s feasible on a pro forma basis and if it is what will the actual free cash flow for the year look like, if you’re able to achieve the pro forma guidance for the year? So what I’m asking about is what will the Q4 pro forma cash flow be in order to hit your guidance? And the what will the actual free cash flow for the year be if you hit your guidance?

Donald G. Debuck

Well again you’re you know, the free cash flow numbers as we’ve indicated before, we talked about our number being $300 million for the year excluding the restructuring.

Rod Bourgeois – Bernstein

Right so you’d need to do about $674 million in Q4 in order to hit that number. Correct?

Donald G. Debuck

Right.

Rod Bourgeois – Bernstein

Okay and then what will the actual cash flow be?

Donald G. Debuck

And just a data point on that you know, we’ve had very strong fourth quarters the last two years.

Rod Bourgeois – Bernstein

Right and can you give us an idea, I mean last year the wild card was NHS and you admittedly had a back end loaded milestone in order to achieve last year’s cash flow target and then the pre-payment was helpful in allowing you to achieve that. What are the milestones in Q4 that are important in order to enable the $674 million to be realized in Q4?

Donald G. Debuck

I would say it’s a combination of, you know we have profiles with the NHS but it’s nothing as significant as it was last year and we just tend to have always on our fourth quarter basis a very strong cash flow performance. It’s just the way it’s always been. We have the most billable days in that period and everybody’s anxious to bring in the cash associated with their yearend and I would point out that last year’s fourth quarter number was almost $800 million. So you know, we don’t see this year’s fourth quarter number as an issue especially if you isolate last year’s NHS payment.

Rod Bourgeois – Bernstein

Okay. So there’s not one sort of lumpy event in Q4, there’s a whole series of things but it’s more of a normal Q4 for you guys in terms of cash flow progression.

Donald G. Debuck

I would say it is more of a normal cash flow progression. Again, the nature of our contract with NHS does have cash payments that in essence then are drawn down over time and then you know, significant payments. But we do not anticipate anything of the magnitude like we had last year.

Rod Bourgeois – Bernstein

Okay and then I know it’s early but you’re keeping this 80% to 90% free cash flow to net income target. Should we expect that type of a target to remain in place after the March quarter as you move into the next year, given the benefits of the restructuring efforts that you’re putting in place this year? I’m assuming they will create some payoff next year and that that type of a target is still feasible in the future? Is that the way to think about this?

Donald G. Debuck

We are in the planning stages now for next year so we really don’t want to be giving any comments about guidance for next year yet. You know we’ve laid out that 80% to 90% normalized over a two year period. I don’t have any indications right now that it would be different. The one thing that is a bit of a wild card that we’ve indicated if you read our public filings is what may end up with respect to cash tax payments.

Rod Bourgeois – Bernstein

Right. Okay. And it’s unclear whether the cash tax payments is essentially back tax payments, will happen this year or in next year and that’s part of the reason it’s a wild card. Is that the issue?

Donald G. Debuck

We are making higher cash tax payments this year than we had planned in essence you know, we have the $75 million we got from Sears but in addition we made an incremental $100 million cash tax payment here early this quarter in January that was not really part of our plan in essence to stop some of the interest clock. So we are making higher cash tax payments this year than the previous year but that’s still baked into out 80% to 90%.

Rod Bourgeois – Bernstein

Got it and then one final just question on how we think about the financials here. There’s a lot of restructuring items that are involved in the cash flow and the earnings figures that you guys are discussing on this call. Should we expect those one time items to subside as we move into fiscal 2009? Are you going to end the one time items discussion after the March quarter here?

Donald G. Debuck

The restructuring of the two year program associated with the restructuring of the work force that’s primarily in Europe will be concluding. But, I did note that the headquarters relocation which will not be anywhere near the kind of magnitude of that other restructuring will meet the definition for a special item.

Rod Bourgeois – Bernstein

Right but that’s the only item in terms of restructuring that will be excluded as we move into fiscal 2009 of all those numbers?

Donald G. Debuck

Right.

Rod Bourgeois – Bernstein

Alright and does that also mean that the restructuring activity that you guys are planning in the turn around is largely done as of the March quarter?

Donald G. Debuck

Yes.

Operator

It is Adam Frisch with UBS.

Adam Frisch – UBS

A couple of quick questions, is Mike Keane still with the company? And if so, why wouldn’t he be on this call right now?

Donald G. Debuck

He is still with the company but we just decided that since he will not be staying with the company long term that we wanted people on this call who were long term, projected long term employees.

Adam Frisch – UBS

Okay. And then the other question I had is it just seems weird that this company has been real consistent in terms of, obviously quarterly fluctuations and all that not withstanding but you guys have been pretty consistent year-in-and-year-out in terms of not having a whole lot of volatility. I was just wondering what happened in the quarter to make the results so much different from what you were talking about only a few weeks ago on the combined first and second quarter call. Why guidance would be so much different? Why the results would be different in the guidance, why the tax rate was different and things like that? And why did things change so quickly in terms of the third quarter being a lot stronger than we thought it would be and the fourth quarter being weaker than we thought? What changed so quickly in the last five weeks in order for that to happen?

Donald G. Debuck

We got the benefit of some timing issues on the operations side. We we’re able to close some license sales in our product business that we had targeted for the fourth quarter. We we’re able to close those late in the third quarter and so that’s a good thing, it de-risks the fourth quarter. As well as we concluded some negotiations with a commercial customer for some payments for some work already performed. And then in addition the mix of our income by tax jurisdiction this quarter gave us a little bit lower tax rate than we had modeled.

Adam Frisch – UBS

When do you expect this company, it’s just gotten to be such a complicated story between the call in December and this one with all these fluctuations. When do you expect a return to somewhat of a normal situation for CSC? Would that be the first quarter of 2009?

Donald G. Debuck

Well I think we try and report our results accurately.

Adam Frisch – UBS

I’m not talking about accuracy or inaccuracy, I’m just talking about there are a lot of things in the last three quarters that were kind of one timers, some more complicated that others. When do all those kind of things end and the company goes back to being kind of to a fair degree of normalcy?

Michael J. Covey

Adam this is Mike, you know there’s a couple of things, obviously the restatements cause a lot of volatility in the preceding quarters. As Don said, the restructuring will come to a conclusion in Q4, so as we move into fiscal year 2009 that distortion will be out of the numbers. So I think it’s fair to say that when we get into fiscal year 2009 it will be clean perspective. I think at this point other than some of the restructuring charges that we have included in there, most of the other things or I can say all the other things are behind of us. Now we did highlight that we have a bit of volatility that has been introduced as part of 1040A and we’re dealing with that on a quarter by quarter basis. That’s something we can’t make go away, that’s just reality based on the new accounting structure.

Operator

Is from Julio Quinteros with Goldman Sachs.

Julio Quinteros – Goldman Sachs

Real quickly can you just walk us through the integrations plans for your two recent acquisitions? And in particular can you just go into a little bit of detail on the expected changes that we should see on the commercial side as it relates to continuing to leverage our offshore piece and how the first acquisition also fits into that?

Donald G. Debuck

Sure let me deal with the most recent one first, that’s First Consulting Group and that will be integrated into the vertical that we’re standing up which is the healthcare sector. So that combined with out existing business, healthcare business doubles the size of that business and will operate beginning next fiscal year, April 1st next fiscal year as a go to market healthcare vertical. The Covansys is included as one of our lot Covansys and conjunction with our Legacy CSC India resources have been integrated together. They compete on a go to market basis with the Indian Pure Place, they also support internally the remaining go to market organizations that require offshore resources.

Julio Quinteros – Goldman Sachs

And to date can you give us any sense on how much traction there has been in leveraging the old Covansys platform and driving new business sales.

Donald G. Debuck

I don’t have an exact number for you, Covansys continues to grow substantially for us and it is it’s being integrated very successfully and supporting existing clients and we’re capturing business that we might not have otherwise captured had it not been for the additional capabilities that Covansys brought along.

Julio Quinteros – Goldman Sachs

Okay and finally just as a point of clarification what drove the benefits in the other income line? It looked like it was a little bit higher than what we were looking for there. What was actually included in that line item?

Donald G. Debuck

The substantial majority of that is relates to the foreign exchange on the inter-company notes that we had that were part of the restatement. We noted those that we had those in the restatement and in essence we instituted a hedging program beginning around the early November on that. So that was really, that was part of our forecast for the quarter.

Operator

Is from Bryan Keane with Credit Suisse.

Bryan Keane – Credit Suisse

I guess just two questions first Mike on commercial bookings, federal seems to be doing, still doing well but commercial bookings although it’s up sequentially quarter-over-quarter it’s a little bit weaker that what it’s or it has been in the past. Can you talk a little bit, you sound confident the pipeline in commercial can you talk a little bit about what you’re seeing and where your confidence comes from in commercial?

Michael J. Covey

Yes the commercial bookings particularly in the big deal level is not as robust as we would have liked to seen for the quarter but we have a very good pipeline of opportunities that we’re currently pursuing particularly in the outsourcing market. And as I said we’re very pleased with the traction that we’ve gotten in the midsize deal market and have a considerable pipeline there as well. You know in conjunction I think if you listen to CTI and the other third party providers, I think you would here from them that there is a definite up kick in the activity around the companies pursuing outsourcing. So you know, from our perspective it’s a bit of a lag but as we look out it looks pretty good.

Bryan Keane – Credit Suisse

Okay and then my second question, we’re hearing a lot out of the press of some push out of Lorenzo and some of the push out of the schedule for deployment. I think it was scheduled for June. Can you just clarify Lorenzo and its schedule and if there is any push out what it is and what that will do to cash flow and revenues and earnings?

Michael J. Covey

Well let me put it in perspective. First of all we continue to feel the legacy product and that continues to feed our revenue and profit and we expect that to continue well into next year as well. Phase one of Lorenzo is scheduled for a very late May delivery. So that’s consistent with what we have been talking about for some time. We are in discussions with the health authority in terms of implementation approaches and schedules and I think that discussion gets vertabated into misperceptions. So at this point in time we don’t see any significant change from our internal projections for NHS next year. It is however dependant on that delivery in May, which we are on target to meet.

Bryan Keane – Credit Suisse

Okay so I guess ne-net on for Lorenzo it looks like it’s still on schedule but there’s some discussions on how you would phase in that product over time?

Michael J. Covey

Yes. Exactly. The initial approach that the national health authority was looking for is what I’ll call big bang approach, hit one hospital with the full functionality and move on to the next hospital with the full functionality. The approach that we’re discussing now is a phase implementation where we would hit more hospitals faster with the phase one functionality there by getting the benefit of Lorenzo on a much broader footprint than it might have been on the other way, other alternative or original approach.

Bryan Keane – Credit Suisse

And that wouldn’t change internal projections?

Michael J. Covey

Not at this point. We’ve not finalized the discussion so I don’t want to lock that into cement but it doesn’t look like it will.

Operator

It is George Price with Stifel Nicolaus & Co.

George Price – Stifel Nicolaus

I just wanted to go over a couple of things to make sure I was understanding this right, first of all you mentioned the 40% as reported tax rate but do you have a fiscal 2008 performa tax rate for purposes of guidance to match it up to EPS?

Donald G. Debuck

I’m sorry I’m not sure I understand your question.

George Price – Stifel Nicolaus

Well I mean I guess you know what’s the tax rate behind your EPS guidance for the fiscal year?

Donald G. Debuck

Before special items 40%.

George Price – Stifel Nicolaus

Alright I’m sorry before special items. Okay thanks. Now with the, and I’m still not clear as to what exactly drove the tax rate so low in the quarter vis-à-vis 40% tax rate guidance? And also if you know, you had this benefit in the quarter, giving you a higher EPS which I’m assuming pro-forma EPS for purposes of guidance in the quarter is $1.11 right?

Donald G. Debuck

The $1.11 is the EPS excluding special items.

George Price – Stifel Nicolaus

Right so that’s puts to your revised guidance, right? The narrowed revised guidance?

Donald G. Debuck

Right.

George Price – Stifel Nicolaus

Okay so is there going to be a big tax rate pop then in the last quarter? In terms of the tax rate, I’m just wondering why you’re getting an EPS benefit in the quarter vis-a-vis prior expectations that the top end of EPS is coming down $0.05?

Donald G. Debuck

The, and again Mike has mentioned about the 1040A and the volatility that it creates in the tax rate. We had in the third quarter; we got a benefit from the re-measurement of taxes for tax matters relating to fiscal year 1995 to 1999. That gave us about a benefit in the third quarter. So that’s what’s called a discreet effect that you take in the period that it happens and so next quarter, fourth quarter we’ll expect a higher tax rate and be back for the year-to-date more of an effective 40% across the year.

George Price – Stifel Nicolaus

Okay, shifting over to cash flow, now the Sears, the $75 million payment, that was, I think you guys talked about that when you did the clean up for the two quarters in December, correct? So that was that had been factored into to cash flow guidance?

Donald G. Debuck

Yes.

George Price – Stifel Nicolaus

Okay. What was the restructuring impact of free cash flow in the quarter?

Donald G. Debuck

Restructuring, give me one second. It’s about $34 million cash restructuring payments in the third quarter.

George Price – Stifel Nicolaus

Okay. Can you comment on how large the NHS payment was? And you had DSO’s kind of up a little bit or I guess maybe not down as much as you think despite a pretty large payment, how do I reconcile that?

Donald G. Debuck

Well again the payments from NHS do not affect the DSO calculations because in essence classified on the balance sheet as an advance contract payment. So it doesn’t go against, to reduce the receivable balance. I mean it would if we’ve got outstanding receivables that are part of that payment but if it’s an advanced payment it goes in a different spot on the balance sheet so it does not impact the DSO calculation that we use externally.

George Price – Stifel Nicolaus

Okay. Fair enough. My mistake. How about the NHS payment then? How big was that?

Donald G. Debuck

I think it was about $120 million but don’t quote me.

George Price – Stifel Nicolaus

Okay. Last question, the accruals seems to be pretty high looking at it on a day’s cost basis. Can you give us a little color as to what’s driving that?

Donald G. Debuck

We would just have normal activity associated with that and build up of accrued bonuses as we go through the fiscal year and those kinds of things. I’m not aware of anything off the top of my head that would be abnormal.

George Price – Stifel Nicolaus

Okay.

Donald G. Debuck

If you have a specific line item that you’re looking at maybe I can help you or else we can follow up with Bill later.

George Price – Stifel Nicolaus

We can follow up off line. Thanks very much.

Operator

Is from Greg Smith with Merrill Lynch.

Greg Smith – Merrill Lynch

I just wanted to be sure I got the number right, the anticipated special items in 4Q, is that $50 million?

Donald G. Debuck

Yes.

Greg Smith – Merrill Lynch

Okay so if we’re trying to do GAAP we could use $50 million.

Donald G. Debuck

Okay

Greg Smith – Merrill Lynch

Okay and then the timing of the headquarter charges that you anticipate, it sounds like that is defiantly going to be in fiscal 2009?

Donald G. Debuck

No probably the, there’s like an intersection of three pieces of GAAP that have to come into play here and there may be some that we may actually have to start in the fourth quarter if there are things such as a retention incentive, they would have to be accrued gradually over the period of performance. So there might actually some that will have to come on into the fourth quarter but we’re not at the point yet of having quantified any of that.

Greg Smith – Merrill Lynch

Okay and then as far as the free cash flow in 3Q you mentioned you know some stuff getting pulled in from 4Q was that just the NHS payment or was there anything else?

Donald G. Debuck

No there was nothing else that was abnormal like that.

Greg Smith – Merrill Lynch

Okay and then final question just what are you hearing from clients in this environment? A lot of volatility out there, are they even more focused on cost cutting and therefore that’s accelerating some areas of the business, systems integration and consulting side what’s going on? Just some kind of color from your customers would be helpful?

Michael J. Covey

Well I think there’s a bit more concern than there has been the last time we talked from the client base. I think what we expect to see is more emphasize on outsourcing and more emphasize on off shoring. We’ve seen a couple of new awards or projects have slowed a bit while the clients take a hard look at their situation and see where they think the economy’s going. So at this point in time you know, I think it’s like the broader picture, everybody is very cautious and sort of a wait and see attitude. So it’s not had a dramatic impact but you know, we can see some hesitation on the spend side.

Operator

Is from Eric Boyer with Wachovia.

Eric Boyer – Wachovia Securities

A question on NHS, would CSC every entertain the thought of taking on any additional NHS clusters if one of the remaining providers dropped out in light of [inaudible] renegotiations with NHS?

Michael J. Covey

You know that to hypothetical for me to even get my head around. But that would be a whole lot of depends. So I don’t think I could make a judgment on that at this point in time.

Eric Boyer – Wachovia Securities

Alright. And you also talked about financial services growth could you just talk about what was driving that?

Michael J. Covey

That was pretty much across the board. We had some expansion with a number of different customers which we’re not at liberty to announce just yet. So it was pretty good across the base, there are some discreet projects as we’ve gone into the Q4 that as I said have been slowed down a bit. But coming through Q3 it was moving very well.

Eric Boyer – Wachovia Securities

And just any initial thoughts on the present budget that came out earlier?

Michael J. Covey

No not really. I think you know from our standpoint on the our federal business you know, as I’ve indicated before we have such a broad platform across so many agencies that no matter where they choose to spend the money we’ll be there to help them assist with that.

Operator

Is from Tien-tsin Huang with JP Morgan

Tien-tsin Huang – JP Morgan Securties

I know there are a lots of moving parts, I just wanted to check does your prior EBIT margin guidance of 7 to 7.5% for the full year, does that still apply?

Donald G. Debuck

We are not changing that at this point.

Tien-tsin Huang – JP Morgan Securties

Okay so we can still assume that. How about longer term? Sounds like you’re getting some nice, your on your expansion higher incremental margins, any thoughts or updated thoughts on longer term EBIT margins?

Donald G. Debuck

I think we’ll give you those updated thoughts when we get through our budget process so that would happen in our next call.

Tien-tsin Huang – JP Morgan Securties

Okay thanks. And then on the project base work consulting systems integrations did you give the bookings growth in the quarter?

Donald G. Debuck

No we don’t. Those smaller engagements we don’t track bookings growth, we don’t announce those bookings growth.

Michael J. Covey

Yes I just make a comment on that you know, we will be looking at that as we go into a new fiscal year because we don’t announce short term commercial bookings and it’s becoming more and more of a significant number for us as we do some of these midsize deals and as we do more and more of the solution and services businesses that is a bit different than the outsourcing obviously. So we hope to be able to give you more clarity around that as we go forward into the next fiscal year.

Tien-tsin Huang – JP Morgan Securties

Great and I think it would be helpful.

Michael J. Covey

Well it will give you a total picture. Right now you don’t have a total picture and that does not help you and so as that as we expect that to become a larger portion of our revenue base I think it’s important that we give you a little clarity on that.

Tien-tsin Huang – JP Morgan Securties

Terrific. Last question I have is on NHS also, not sure if I heard this correctly but did growth actually accelerate in the quarter? It sounded like it counted for 6 points of growth and I think that’s a little bit more than what we’ve seen in the past?

Donald G. Debuck

Again we picked up the two additional clusters.

Tien-tsin Huang – JP Morgan Securties

Right that’s fully reflected now in the run rate and we can base off of that?

Donald G. Debuck

In essence that anniversaries in January so yes.

Donald G. Debuck

Next question please operator.

Operator

Is from Jake Commity with Morgan Stanley.

[Jake Commity] – Morgan Stanley

Can you tell what the cash restructuring charge is going to be in the fourth quarter?

Donald G. Debuck

We would project now that to be just under $7 million.

[Jake Commity] – Morgan Stanley

Okay and how much is left to go under the $1 billion repurchase plan?

Donald G. Debuck

I don’t have the exact figure here but if we would expect it to at current purchases against the pricing grid that that would complete the fiscal year. Probably in March some time.

[Jake Commity] – Morgan Stanley

Okay so have you done something like about half of it? Does that seem about right?

Donald G. Debuck

No. No. We are far more than that.

[Jake Commity] – Morgan Stanley

You’re far past the half of the billing.

Donald G. Debuck

Yes.

[Jake Commity] – Morgan Stanley

Okay and is did I hear that right that the Sears $75 million payment is included in your cash flow guidance?

Donald G. Debuck

In essence it is as well as $100 million outflow for incremental cash tax payments.

[Jake Commity] – Morgan Stanley

Okay.

Donald G. Debuck

So that a net down 25 and we kept the guidance the same.

[Jake Commity] – Morgan Stanley

So I mean I calculate you know somewhere in the neighborhood of about a billion dollars of cash needs over the next you know near term. You’ve got a bond maturing, you’ve got to pay for the acquisition, you still have some share repurchases and cash restructuring. Can you just kind of walk us through how you plan to fund that over the near to medium term?

Donald G. Debuck

You know we’ve got a substantial amount of commercial paper outstanding and we would be looking to turn some of that, we’ve got the $300 million as you know, debt coming due and again we traditionally have our very strong fourth quarter cash flows so we’ll be looking at evaluating that and possibly taking out some other, swapping some of the commercial paper for some other debt.

[Jake Commity] – Morgan Stanley

Okay so potentially turning out some of that CP and refinancing that?

Donald G. Debuck

Essentially.

[Jake Commity] – Morgan Stanley

Okay. Thanks that’s very helpful.

Donald G. Debuck

Operator we have time for two more questions. Please

Operator

Very good. Our next is Martha Moran with Thomas Weisel Partners.

Martha Moran – Thomas Weisel Partners, LLC

You talked about some of the benefits of restructuring that you saw during the quarter and I was wondering if you could give us a sense of whether or not we are at a run rate? And what do the year-over-year incremental benefit could be in 09 versus fiscal 08 in terms of margin impact?

Donald G. Debuck

We don’t have that necessarily broken out that way and I think as I indicated that several more significant out flow of people coming out in the fourth quarter as we get through the appropriate knowledge transfers etc, so it’s probably better for us to give you an update on that next quarter after we’ve gone through our planning exercise for the next fiscal year.

Martha Moran – Thomas Weisel Partners

Okay. Is it possible to just give us a sense of whether we’re at a run rate now or is there still more benefit that we’ll be seeing incrementally though the quarter?

Donald G. Debuck

Without having numbers in front of me I would just as soon wait and answer that question next time.

Martha Moran – Thomas Weisel Partners

Okay. And just a housekeeping question do you have the end of quarter diluted share count on you?

Donald G. Debuck

We can get follow up with Bill and get back to you on that.

Martha Moran – Thomas Weisel Partners

Okay. Great thank you.

Donald G. Debuck

Operator time for a last question please.

Operator

Very good it is George Price with Stifel Nicolaus.

George Price – Stifel Nicolaus

There was one clarification that I wanted to ask if I could, the 600 basis points of NHS that was I think mentioned in an earlier question, the last quarters benefit from taking on the two new regions and then I missed this but you said after that there was some new business, maybe from your western region that accounted for 400 basis points across or did I miss that?

Donald G. Debuck

No you captured that right. That’s the what we call our consulting systems integration business throughout other parts of Europe accounted for four points of the growth.

George Price – Stifel Nicolas

That was for Western Europe not western region as in just in the UK.

Donald G. Debuck

Right. I was trying to analyze total Europe that accrued 20% as reported and 10% in constant currency. And then essence of that 10 points of constant currency about six points of it was from the NHS, really the result of the two additional clusters and the other four points were really growth in the consulting and systems integration business as well as some new business wins.

George Price – Stifel Nicolas

Okay so that 400 points is more than internal organic numbers?

Donald G. Debuck

Right. Again, new business wins and the growth in the CNSI business.

Donald G. Debuck

Okay operator I think that, let’s turn the call over to Mike Laphen for a couple of closing comments.

Michael Laphen

Okay well first of all let me thank everybody for participating on the call this evening. We look forward to having follow up discussion with you at the end of next quarter as we wrap up our fiscal year and get to share those results with you. So thank you very much.

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