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How One CFO Left Links, Took Helm in Crisis

Michael Mancuso's cost-cutting moves since coming out of retirement to lead finance at Computer Sciences Corp. have included freezing the company's...
David KatzSeptember 30, 2009

At 66, Michael Mancuso didn’t have to prove himself to anybody. After a career that spanned 22 years with General Electric, 7 years with United Technologies, and 14 years with General Dynamics (13 of them as CFO), he might have contented himself with “chasing a little white ball around the grass.”

So what made him come out of retirement on December 1, 2008, in the teeth of a recession, to become CFO of Computer Sciences Corp.? After all, at that point CSC was a stumbling information-technology-services giant that had just settled a decade of unresolved tax years, was the target of a Securities and Exchange Commission probe involving the backdating of stock options, and had just relocated from Los Angeles to Falls Church, Virginia.

Of course, although he doesn’t mention it, the pay might have helped lure him off the links: in the first four months of the 2009 fiscal year — which for CSC ended April 3 — Mancuso earned $480,459. But there was also the pleasure of working with a free hand. Stepping into a slot where the company’s controller, Donald DeBuck, was acting as finance chief, and CEO Michael Laphen needed an experienced executive to step in and relieve him of some of the huge amount of day-to-day responsibilities he was assuming, Mancuso was welcomed with open arms. “There was immediate acceptance of my experience and background,” he says. “The board is very receptive and happy to have a seasoned CFO in the position at a very critical time.”

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The company, which reported revenues of $16.2 billion for the 12 months ended July 3, “really needed somebody to come in and quickly assess the situation and start effecting changes to allow the other folks to focus on the things they’re supposed to focus on, like attracting and acquiring new business,” says Mancuso.

 

MANCUSOMichael Mancuso, CFO, Computer Sciences Corp.

Things had become a tad unraveled, to say the least. Before Mancuso arrived, CSC had been forced to issue a number of financial restatements as a result of the tax-accounting issues — which, ironically, ended up adding to company earnings rather than diminishing them. It had also undergone an investigation concerning stock-option pricing that ultimately did not reveal any violations, and on July 19 the company received a favorable summary ruling on a shareholder suit on the issue that had been filed in 2006.

CSC had grown significantly in the years preceding that rough period, which lasted from 2006 to 2008, according to the finance chief. The company grew rapidly historically and grew internationally. “A lot of the problems they experienced were the result of rapid growth without the support and infrastructure growing along with the expansion of the company, which gave rise to a lot of accounting problems and issues that manifested themselves in that two-year period,” he says.

Still, the company maintains “a significant sweet spot,” according to Mancuso. That’s particularly so in a period in which the nation appears ready to set about integrating its medical records electronically, he believes. In an extensive interview with CFO.com on September 18, the finance chief discussed health reform, as well as CSC’s tax issues, his decision to freeze the company’s U.S. pension plan, and much more. An edited version of the conversation follows.

How has the tax issue played out?
In 2008 the company resolved 10 open years with the Internal Revenue Service and with a number of foreign jurisdictions as well. The actual settlement from a CSC standpoint resulted in about a $2.25 improvement to earnings per share as a result of the resolution of the open years.

How did the company manage to boost EPS as a result of failing to resolve 10 open years of audits?
Normally, any company takes a position in a tax return on certain deductions on the premise that they will be successful. However, the accounting rules require that if it’s more probable than not that you will have a tax liability, you must establish a reserve. The reserve is charged to income. But if you’re successful in resolving the issue with the taxing authorities either at the reserve amount or anything less, that reserve amount is adjusted back into income. So over the 10-year period, the company had taken a very conservative posture relative to the outcome of some of these tax positions and was successful in their negotiation.

The result was a return to income of the amount of overprovision. Now when you consider the size of the company and the fact that it was 10 years, it’s not too difficult to assume that $2.25 of earnings per share could be attributed to the settlement.

What’s your relationship with the tax department been like?
Certainly I’m fully supportive of the efforts of Diane Rohleder [the company’s senior vice president for tax] and her new team in making sure that she is provided with the necessary resources. That’s not only to preclude any repeat of the events of the past but to be proactive in the tax-planning area. So we’re investing in improved tax software. We’re actively looking at our tax organization around the world in our various operating components to make sure that we have the proper skill set.

The tax rules are becoming more complex every day. In this economy, every taxing authority around the world is more aggressive about looking for revenue. Their tax audits are more frequent and more in-depth than they ever were, and the rules become ever-more complex. So tax compliance alone is an extremely important and critical issue now.

Overall, what kind of change do you think you’ve brought to the company, and how is it different from what it was last December when you took the helm?
My role was to try to stabilize the financial ship, if you will. The company had made a key hire, bringing in Diane, a blue-ribbon tax executive who had lots of experience and capability. I reset the investor-relations organization. The company had just reorganized into three large segments [engaged in governmental contracting, outsourcing, and consulting, respectively]. It was operating for 14 months with the controller acting in the CFO role through the restatement periods.

Basically everybody was all out, full throttle, just trying to keep the wheels on. They didn’t really have a lot of time to step back and really focus on planning and structuring for the future. They needed to keep the wolf away from the door and get through those restatements. So I came in as an experienced CFO, and basically tried to help the CEO, who had something close to 22 direct reports at the time. He was putting out all these fires, both internally and externally. There were troubles with some of our clients who were in economic difficulty, as well as regulatory problems, with all these restatements.

What he needed was an experienced executive to come in and alleviate a portion of his responsibilities so he could focus strategically and operationally on the things he needed to focus on. My role, basically, was to get the company properly organized in such things as our budgeting and forecasting processes, look at big-ticket items where we could make significant improvement in our cost structure, and eliminate financial risks to the company. I also needed to reenergize our investor-relations program. Without attributing great accolades to myself, I was able to immediately impact what was going on as a result of my experience and background.

How have you reenergized investor relations?
Early on, our CEO recognized the need to intensify our interaction with and provide more transparency to potential investors in terms of providing more insight into our financial performance and future opportunities. His mission was made more difficult by the fact that the company had been based on the West Coast and historically maintained a more passive investor-relations approach. Further complicating the initiative was the fact that the company had been in a defensive mode, having to deal with performance issues, restatements, a stock-option backdating inquiry, an acting CFO, and an IR executive based in Los Angeles even though corporate headquarters relocated to the metropolitan Washington, D.C., area.

As the new CFO responsible for IR, my first action was to convince a very senior CSC financial executive to lead our program from our East Coast corporate headquarters. This was a person with extensive knowledge of CSC and the IT industry. To support him, we hired an experienced IR professional. And thirdly, we reached out to the sell-side and buy-side equity analysts that follow our industry and began an aggressive program of sitting down face-to-face with them and their potential clients to let them get to know me, our CEO, and our senior leadership.

Since early 2009, we have had approximately 100 individual interactions — meetings, calls, conferences — and more are scheduled throughout the remainder of the year.

You joined the company in the teeth of the recession. What actions did you take from a cost perspective?
Well, I’ll give you a very glaring example. This company had a defined-benefit plan in addition to a defined-contribution plan, a 401(k). You’re probably aware that the existence of defined-benefit plans across Corporate America is in rapid decline if not headed for extinction.

Most companies that have defined-benefit programs invested their assets or funds in equities. And I needn’t tell you what happened to the stock market over the past 24 to 36 months. What was occurring was that the liability for the pension benefit that the company was obligated to pay was growing as a function of the length of service of the employees. At the same time, the return on the pension assets was declining rapidly as a function of the deterioration in the stock market.

The result was a growing liability that had to be funded and also amortized through the P&L. You’re using cash and you’re suffering earnings degradation through the impact of declining assets and growing liability.

One of the first things that I recommended to the management and the board — which they accepted — was that we could no longer afford our defined-benefit plan. We were able to freeze our defined-benefit plan in the United States, which capped the growth in the liability and mitigated the future impact of a growing P&L expense and a growing cash contribution to the defined-benefit plan. And that freed up a significant amount of future cash that we could use to invest in the company.

Now, to mitigate the effects of capping the earned benefit to the U.S. employee population, we took a big portion of our savings and enhanced our contribution to the 401(k). We literally doubled our match in the 401(k) program, which in today’s workforce is probably more meaningful. That’s because, unlike for our forefathers, in today’s world it’s unlikely that the younger employees will spend their length of service with any one company. The workforce is much more mobile, company-to-company, and the 401(k) program is more meaningful because they can take their contributions with them.

Also, in a defined-contribution plan, you know what your obligation is as a company. In a defined-benefit plan, you are a victim of the returns on your assets. With a growing liability, you can’t put the assets under the mattress in a fixed-income investment that’s earning 1% or 2% a year in today’s interest-rate markets and expect that you’re going to offset the growth in the liability. So you have to take some risks with your assets, and you don’t want to risk principal. You can’t put it in fixed income because there’s not enough return to cover the growing liability. That means that you have to keep putting in more cash. And then you’re taking dollars away from your ability to invest and grow the company and get a return to shareholders.

What we tried to do was balance the equation for all the interested parties, protect the shareholders from the growing liability, and, at the same time, not ignore the impact that was being felt by the employees. We’ve taken a significant amount of risk out of our future by capping the defined-benefit program in the United States.

How much cash did you save by freezing the pension fund, net of the amount you contributed to the 401(k)?
For the future years’ cost, if you assumed that the stock market wouldn’t have a continued decline but very modest growth, our pension contributions would have grown to $300 to $400 million a year for the next several years and growing. So by capping the liability in future years, we eliminated projected growth in cost and cash to the tune of literally hundreds of millions of dollars.

How much was your 401(k) match, and what did you increase that to?
Previously, we matched 50% of the employee’s first 3% [of salary] contribution. We doubled it, and we now match 50% of the employee’s first 6% contribution.

Did you run into any employee-relations problems because of this action?
I won’t tell you that there weren’t some employees that didn’t feel that the action was warranted. There were a handful of employee concerns. But generally speaking — and I’m not exaggerating here — the employee population understood and appreciated the need for the action and accepted the fact that the company took the lion’s share of the savings and plowed it back into the 401(k) program.

What other moves have you made to deal with the recession?
We are looking at our floor space, or footprint. A good portion of our business is done in consulting, and a large share of our employees is on the road constantly, visiting customer facilities. So we looked, in a macro sense, at square footage per employee and at trying to improve the amount of office space that we keep available.

Since we have facilities around the world, we’re talking about big square footages and significant opportunities. It’s an ongoing activity as leases come up for renewal and as we win new business around the world. Before we go out and acquire space, we assess what is already available. Given the situation in the economy, we try to make sure that, in new leases and the renewals of our existing leases, we optimize the rental cost by working with our landlords. It’s something we do every day.

One of the things we did here at corporate is to eliminate the executive car program, recognizing that in this day and age it was a nice perk but a very expensive perk — and something that we felt we could live without. The people who can most afford a car were getting a free ride, so to speak. We guesstimate that we’ll save about $25 million over five years by eliminating the perk.

Have you had to lay off many people?
We have not had substantial layoffs. We have had some layoffs, but they have been focused in various businesses based on their particular backlogs. Actually, we’ve grown slightly in population in the first four or five months of this fiscal year.

How has the recession affected CSC?
We anticipate that our top-line gross will be flat this year. That’s generally a function of what’s happening in the economy and the effect on our corporate clients. To put that in perspective, when we gave our guidance to the investors relative to our expected performance this fiscal year, we guided them to roughly flat sales but a 6% improvement in earnings per share.

After our first quarter of this year, however, we found that some of the improvements and actions we had taken in the tax area had significantly reduced our tax rate from what we had anticipated it to be. If you pare out the benefit we got from the tax resolution we talked about earlier, our basic earnings per share last fiscal year were $4.06. And this year our initial guidance on flat revenue was a 6% improvement in EPS to a range of between $4.20 and $4.30. So we felt that from the cost reductions and the actions that we were going to take we could improve the bottom line by about 6% with no improvement in the top line.

After the first quarter we realized through some significant effort, again in the tax area, that we could increase our tax rate from what we had anticipated to a much lower tax rate — and that improved our EPS by roughly another 60 cents. So we changed our guidance for the year: instead of $4.20 to $4.30 per share, we increased it to $4.80 to $5.00 per share.

As a result of the cost reductions, including the limitation of the pension liability, when revenue starts to grow again we will have a much leaner cost structure both this year and prospectively. We’ve gotten leaner and meaner and better positioned ourselves to take advantage of the revenue growth when the economy rebounds, which we think it’s starting to.

What plans do you have to grow revenue?
Well, you can’t ignore the economy. Corporate spending is dictated by the general overall health and well-being of our corporate clients. But you should think about CSC in three buckets. We have a North American public sector that roughly represents about 35% to 40% of the company. And a good portion of that work, about $6 billion, is with the federal government. Although it’s not recession-proof, it’s more impervious to economic fluctuations than commercial businesses. We’re involved in a lot of defense work in services — not hardware — that we’re mission-critical in. So we’re relatively comfortable with that size revenue sustaining itself.

We believe that, from a defense standpoint, although our federal government may not grow as rapidly as it’s grown in the past, it will not decline. So we’re OK in North America and in the defense side of things. Another 35% to 40% of our business is in managed services — outsourcing contracts, if you will — and applications development. We see our pipeline as relatively strong in that area in terms of opportunities. Corporate America and companies around the world are interested in reducing costs, and one of the ways that they can reduce costs dramatically is to outsource their IT functions. So, prospectively, that looks very good to us.

The third area of our business is what we call BS&S, business systems and services: consulting to financial institutions, banks; the installation of large software systems like SAP systems, and so on. That area has been most affected by the economy. We’re seeing signs that the purse strings are starting to loosen up and clients around the world are more interested in now talking about and planning for software projects that had been put on the back burner during the most difficult periods of the past 12 months. We see light at the end of the tunnel there.

We are also very big in health care. We are a part of the structure that is implementing the largest electronic health-care system in the world in the U.K., the National Health Service contract. Basically it’s the E-Med contract for the U.K. government. The U.K. government’s role in health care is already defined. They will own it and they will implement every aspect of E-health care. All the general practitioners, the hospitals, the service providers, etc., will be linked into a common electronic medical-care treatment and management system.

The United States has yet to come to grips with the role of government in health care, which is the debate that is raging right now in Congress. When that debate is resolved and the role of government is defined — whether it is a government-sponsored system or a semiprivate system or a whatever system — the concept of E-health care in the United States is a given. We believe that CSC will be at the front of the line.

What outcome are you rooting for in the health-reform debate?
We’re solution-agnostic, meaning that we’ll be a large player regardless of what constituency prevails. I’m not a betting man, but sentiment today would suggest that some kind of quasi-government function may wind up with a sizable role in at least leading the parade toward electronic medicine in the United States, as opposed to relying on insurance companies or private industry to lead the parade.

Somebody’s going to have to strike up the band. They may pass the baton at some point in the future, but I’d have to bet that the government will have a significant start-up role getting the system organized, and it then could step away. But regardless, we will be a player. We’re not waiting. We’re actively involved in dialogues with large hospital co-ops and other groups, making them aware of what we bring to the party, assisting them in getting ready for whatever approach is adopted.

Has the company done any lobbying on the subject in Washington?
We pay attention to the debate that’s going on and provide information to various congressional committees and constituencies. We’re not lobbyists per se.

What have been your greatest challenge and your greatest disappointment in terms of coming back from retirement to a major CFO job?
My greatest challenge was convincing my wife that this was a good thing to do, given that we had essentially sold our home in Virginia and were in the process of relocating. I upset some long-term plans that had been in the mill in going back to work. But I say that facetiously; she’s fully onboard. I get a great deal of job satisfaction out of being able to make a difference. The stock over the past seven or eight or nine months has improved dramatically. I’m not suggesting that that’s because of me, but the company has over the past several quarters been able to demonstrate that they can achieve what they say they can achieve. We have been void of distractions and accounting issues. With our performance, you know, it’s hard not to enjoy what you’re doing.

Not too long from now, in a few years, I’ll ride off into the sunset and go back to chasing a little white ball around the grass and smile and look back with pride on whatever element of the success of the enterprise that I was able to contribute. It’s a great position to be in. I don’t have to worry about my career. I don’t have to worry about my next job. I’m long enough in the tooth that that doesn’t matter.

 

 

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