Restructuring Expected as Higher Costs Hit Tech Firm.

IN the wake of Computer Sciences Corp. issuing a severe earnings warning last month, some industry analysts are predicting that a major restructuring of the El Segundo-based computer services giant is imminent.

For a company like CSC, a little bad news is to be expected in an economic downturn when information technology budgets are getting slashed. But the severity of CSC's fourth-quarter earnings warning prompted analysts to question internal operations, not just softening external demand.

"Going forward, the Street is looking for CSC to announce a comprehensive restructuring plan," said SG Cowen Securities Corp. analyst Moshe Katri. "I'm hearing from major shareholders about a possible management shakeup."

Investors responded to the earnings warning with fear, sending CSC's share price plummeting $21.40, or 40 percent, to $32.70 per share at the close of wading on March 16, the day the profit warning was issued.

After stumbling further, to a 52-week low of $28.99 per share on April 4, CSC stock rebounded a bit and was lingering around $34 per share as of last week.

CSC management declined to be interviewed last week, saying that information about the company and its condition was disclosed in the earnings warning statement and was discussed in a March 19 conference call.

In the statement, CSC said that its earnings for the fourth quarter ended March 30 would be between $60 million and $63 million, or 35 cents to 37 cents per share.

That compares starkly to the company's earlier estimate of about $162 million, or 92 cents to 95 cents a share.

CSC cited lower demand for its computer services and new cost pressures in its outsourcing business as causes for the shortfall. Weaker-than-expected software sales and customers defaulting on bills also contributed to the shortfall.

The company, one of L.A.'s largest tech companies and the third largest computer services firm behind IBM Corp. and Electronic Data Systems Corp., gets about 40 percent of its revenue from running corporate and government computer departments. The remainder comes from software sales, consulting and computer system development.

CSC reported net income of $65.6 million (38 cents per share) for its fiscal third quarter ended Dec. 29, 2000, compared to $82.3 million (48 cents per share) in the like year-earlier quarter.

Its third-quarter revenues were $2.6 billion, up from $2.4 billion in the like year-earlier quarter.

It has major contracts with some of the world's largest corporations, including General Dynamics Corp., United Technologies Corp., AT&T Corp., JP Morgan & Co. and Enron Corp.

In the statement, CSC also said it would lay off 700 to 900 workers, or about 1 percent of its workforce, and take a charge of about $150 million as part of an ongoing restructuring.

CEO Van Honeycutt is not expecting the picture to brighten any time soon. Systems integration work and global consulting will not recover until the third or fourth quarter of next year, he said in the conference call.

"Make no mistake," Honeycutt said in the call. "Information technology is an important element of the global economy, and its productivity will come back."

Merrill Lynch Global Securities analyst Stephen McClellan, who called the shortfall "unexpected and unacceptable," said internal issues contributed to the miss.

"They had cost overruns on fixed price contracts," McClellan said, meaning that some projects, like software development and implementation of IT services, have been costing CSC more than anticipated.

"I think they will have strong restructuring measures," McClellan said. "There will probably be a few management changes, hut I doubt there will be any top-level shifts."

Katri compared CSC to EDS's condition two years ago.

"EDS had competitive issues. It was not winning major contracts and it had turmoil in senior management," Katri said. "CSC is very similar now, and it feels as if they're very ready for a turnaround."

Indeed, analysts like CSC in the long run.

"Many of the earnings problems from past quarters are all impacting on this quarter," McClellan said. "It's not going to be similar in future quarters. They'll still be slow or disappointing, and the eamings pressure will be evident, but not as massive. CSC is still a pretty solid company."

CSC said it will release its year-end earnings in early May.

                        Computer Sciences Corp.
YEAR (Mar. 31)                  2000   1999
Revenue (billions)              $9.4   $8.1
Operating Expenses (billions)    8.8    7.6
Operating Income (millions)    611.4  534.9
Net Income (millions)          402.9  355.5
Earnings Per Share             $2.37  $2.11

SUMMARY

Business: Computer services

Headquarters: El Segundo

CEO: Van Honeycutt

Market Cap: $5.8 billion

Dividend Yield: N/A [*]

Total Liabilities: $3.4 billion

P/E Ratio: 13.65

Long-Term Debt: $1.1 billion

(*.) Computer Sciences Corp. does not pay dividends.

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