Fitch Downgrades Computer Sciences' IDR to 'A-'; Outlook Stable

Fitch Ratings has downgraded Computer Sciences Corp. (NYSE:CSC) and removed the company from Rating Watch Negative as follows: --Issuer Default Rating (IDR) to 'A-' from 'A'; --Senior unsecured debt to 'A-' from 'A'; --Bank credit facility to 'A-' from 'A'; --Commercial paper (CP) to 'F2' from 'F1'. Approximately $3 billion of debt is affected by Fitch's action as of Dec. 29, 2006, including the undrawn $1 billion bank credit facility. Fitch originally placed CSC on Rating Watch Negative on Dec. 13, 2006. CSC's Rating Outlook is Stable. The rating downgrades primarily reflect CSC's: --Continued weakness in commercial contract signings that has weighed on overall revenue growth as the commercial segment accounted for 64% of total revenue in the latest 12 months (LTM) ended Dec. 29, 2006. Trailing 12-month commercial signings have declined on a year-over-year (y/y) basis for nine consecutive quarters ended Dec. 31, 2006. CSC's commercial book-to-bill ratio has remained below 1 times (x) since the fiscal fourth quarter ended April 1, 2005, which Fitch primarily attributes to an increasingly competitive operating environment driven by the resurgence of Electronic Data Systems (IDR rated 'BBB-' with a Positive Outlook by Fitch). --Pressured cash flow, including the first reported negative cash flow from operations in five years in the first quarter of fiscal 2007. In the first nine months of fiscal 2007, CSC reported negative free cash flow of $197 million, down from negative $119 million in the year-ago period as a result of cash restructuring payments, increased cash taxes due to full utilization of previous U.S. federal net operating losses and increased interest expense and working capital requirements, despite lower capital expenditures from declining commercial outsourcing contract signings. The ratings also incorporate the possibility of additional shareholder-friendly actions. Fitch believes there is potential for debt-financed share buybacks in fiscal 2008 if the company's $1 billion of outstanding requests for equitable adjustment on two U.S. Federal contracts remain unresolved since free cash flow without the adjustment is likely to be insufficient to finance the previously announced stock buyback of $1 billion. The removal of CSC from Rating Watch Negative is based on the company's fulfillment of all financial reporting requirements necessary to maintain covenant compliance with its credit facility agreement and bond indenture following the filing of its 10-Qs for the quarters ended Sept. 29, 2006 and Dec. 31, 2006. The previous filing delay was the result of CSC's internal investigation into its historical stock option grant practices. The investigation concluded in late-February 2007, leading to a non-cash, cumulative, pre-tax restatement for previously unrecognized stock-based compensation expense of $68 million. The ratings continue to be supported by CSC's recurring revenue base from long-term contracts, consistent but pressured free cash flow, strong U.S. Federal government business, gradually improving operating margin attributable to cost savings from its ongoing restructuring program, long-standing market position in the information technology (IT) services industry, geographic and industrial diversity of revenues and high quality customer base. Liquidity remains adequate as of Dec. 31, 2006 and is primarily supported by $726 million of cash and equivalents and an undrawn $1 billion unsecured revolving credit agreement expiring August 2011. Also supporting liquidity is consistent, but pressured free cash flow, which was approximately $253 million for the LTM ended Dec. 31, 2006, down from $374 million in the corresponding year-ago period, although a majority of this decline was associated with cash restructuring payments which are expected to decline in fiscal 2008. The bank agreement has various covenants, including minimum interest coverage and maximum leverage of 3x. In addition, the company could potentially monetize its credit reporting business by exercising a put to Equifax. Total debt as of Dec. 31, 2006 was approximately $2 billion, consisting primarily of four tranches of senior unsecured notes, $497 million of commercial paper and capital leases. Approximate debt maturities are as follows: $300 million of 3.5% term notes due April 2008, $200 million of 6.25% term notes due March 2009, $500 million of 7.375% term notes due June 2011, and $300 million of 5% term notes due February 2013. Estimated leverage (total debt/operating EBITDA) as of Dec. 31, 2006 was approximately 0.9x, up from 0.7x as of Dec. 31, 2005. Although adjusted leverage of 1.7x is relatively unchanged since fiscal 2004, Fitch believes this could be pressured in the intermediate term due to debt-financed share repurchases or acquisitions. Free cash flow to total debt declined to nearly 13% in the LTM ended Dec. 31, 2006, down from approximately 23% in fiscal 2006. Interest coverage declined to 16x for the LTM ended Dec. 31, 2006, down from nearly 19x in the year-ago period. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.