UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 2, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 1-4850

COMPUTER SCIENCES CORPORATION
 
(Exact name of Registrant as specified in its charter)
 


Nevada
 
95-2043126
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3170 Fairview Park Drive
 
 
Falls Church, Virginia
 
22042
(Address of principal executive offices)
 
(zip code)
 
 
 
Registrant's telephone number, including area code: (703) 876-1000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) x Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).  o  Yes  x No 
141,046,567 shares of Common Stock, $1.00 par value, were outstanding on January 23, 2015.
 
 


COMPUTER SCIENCES CORPORATION
 
TABLE OF CONTENTS
 
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Condensed Statements of Operations for the Quarters Ended and Nine Months Ended January 2, 2015 and December 27, 2013
 
 
 
 
Consolidated Condensed Statements of Comprehensive (Loss) Income for the Quarters Ended and Nine Months Ended January 2, 2015 and December 27, 2013
 
 
 
 
Consolidated Condensed Balance Sheets as of January 2, 2015 and March 28, 2014
 3
 
 
 
 
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended January 2, 2015 and December 27, 2013
 
 
 
 
Consolidated Condensed Statements of Changes in Equity for the Nine Months Ended January 2, 2015 and December 27, 2013
 
 
 
 
Notes to Consolidated Condensed Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits



i

PART I. ITEM 1. FINANCIAL STATEMENTS

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)

 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions, except per-share amounts)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,947

 
$
3,228

 
$
9,264

 
$
9,669

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,530


2,261


7,101


7,015

Selling, general and administrative (excludes SEC settlement related charges and restructuring costs)
 
356

 
318

 
1,046

 
920

Selling, general and administrative - SEC settlement related charges
 
195

 
—

 
195

 
—

Depreciation and amortization
 
238

 
251

 
762

 
753

Restructuring costs
 
12

 
11

 
15

 
33

Interest expense
 
37

 
38

 
112

 
112

Interest income
 
(4
)
 
(4
)
 
(14
)
 
(11
)
Other (income) expense, net
 
1

 
(5
)
 
6

 
16

Total costs and expenses
 
3,365

 
2,870

 
9,223

 
8,838

 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, before taxes
 
(418
)
 
358

 
41

 
831

Income tax (benefit) expense
 
(105
)
 
77

 
18

 
227

(Loss) income from continuing operations
 
(313
)
 
281

 
23

 
604

(Loss) income from discontinued operations, net of taxes
 
—

 
(5
)
 
(29
)
 
91

Net (loss) income
 
(313
)
 
276


(6
)
 
695

Less: net income attributable to noncontrolling interest, net of tax
 
1

 
5

 
11

 
18

Net (loss) income attributable to CSC common stockholders
 
$
(314
)
 
$
271

 
$
(17
)
 
$
677

 
 
 
 
 
 
 
 
 
Earnings (loss) per common share
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
1.88

 
$
0.08

 
$
3.96

Discontinued operations
 
—

 
(0.03
)
 
(0.20
)
 
0.61

 
 
$
(2.23
)
 
$
1.85

 
$
(0.12
)
 
$
4.57

Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
1.84

 
$
0.08

 
$
3.88

Discontinued operations
 
—

 
(0.03
)
 
(0.20
)
 
0.60

 
 
$
(2.23
)
 
$
1.81

 
$
(0.12
)
 
$
4.48


 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.23

 
$
0.20

 
$
0.69

 
$
0.60



See accompanying notes.

1

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)

 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(313
)
 
$
276

 
$
(6
)
 
$
695

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation
 
(90
)
 
(9
)
 
(189
)
 
(93
)
Foreign currency forward contracts
 
(2
)
 
—

 
(8
)
 
—

Pension and other post-retirement benefit plans
 
52

 
260

 
48

 
260

Other comprehensive (loss) income, net of taxes
 
(40
)
 
251

 
(149
)
 
167

 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
 
(353
)
 
527

 
(155
)
 
862

Less: comprehensive income attributable to noncontrolling interest, net of taxes
 
1

 
5

 
11

 
27

Comprehensive (loss) income attributable to CSC common stockholders
 
$
(354
)
 
$
522

 
$
(166
)
 
$
835



See accompanying notes.



2

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)


 
 
As of
(Amounts in millions, except share and per-share data)
 
January 2, 2015
 
March 28, 2014
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
2,393

 
$
2,443

Receivables, net of allowance for doubtful accounts of $42 (fiscal 2015) and $48 (fiscal 2014)
 
2,435

 
2,759

Prepaid expenses and other current assets
 
358

 
426

Total current assets
 
5,186

 
5,628

 
 
 
 
 
Property and equipment, net of accumulated depreciation of $3,689 (fiscal 2015) and $3,620 (fiscal 2014)
 
1,692

 
2,031

Software, net of accumulated amortization of $1,681 (fiscal 2015) and $1,680 (fiscal 2014)
 
776

 
650

Outsourcing contract costs, net of accumulated amortization of $1,003 (fiscal 2015) and $1,038 (fiscal 2014)
 
330

 
427

Goodwill, net
 
1,669

 
1,667

Other assets
 
1,000

 
986

Total Assets
 
$
10,653

 
$
11,389

 
 
 
 
 
LIABILITIES
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
554

 
$
681

Accounts payable
 
339

 
394

Accrued payroll and related costs
 
459

 
592

Accrued expenses and other current liabilities
 
1,186

 
1,094

Deferred revenue and advance contract payments
 
625

 
624

Income taxes payable and deferred income taxes
 
27

 
77

Total current liabilities
 
3,190

 
3,462

 
 
 
 
 
Long-term debt, net of current maturities
 
2,170

 
2,207

Income tax liabilities and deferred income taxes
 
547

 
557

Other long-term liabilities
 
1,391

 
1,219

 
 
 
 
 
EQUITY
 
 
 
 
Common stock, par value $1 per share; authorized 750,000,000; issued 150,565,444 (fiscal 2015) and 154,720,451 (fiscal 2014)
 
151

 
155

Additional paid-in capital
 
2,381

 
2,304

Earnings retained for use in business
 
1,101

 
1,592

Accumulated other comprehensive income
 
141

 
279

Less common stock in treasury, at cost, 9,573,574 (fiscal 2015) and 9,149,009 (fiscal 2014)
 
(444
)
 
(418
)
Total CSC stockholders’ equity
 
3,330

 
3,912

Noncontrolling interest in subsidiaries
 
25

 
32

Total Equity
 
3,355

 
3,944

Total Liabilities and Equity
 
$
10,653

 
$
11,389


See accompanying notes.

3

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(6
)
 
$
695

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
762

 
753

Pension & OPEB actuarial & settlement losses (gains)
 
463

 
(114
)
SEC settlement related charges
 
195

 
—

Stock-based compensation
 
54

 
53

Gain on dispositions
 
(22
)
 
(95
)
Excess tax benefit from stock based compensation
 
(15
)
 
(5
)
Unrealized foreign currency exchange gain
 
—

 
(19
)
Other non cash charges, net
 
22

 
35

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Decrease in assets
 
171

 
122

Decrease in liabilities
 
(481
)
 
(413
)
Net cash provided by operating activities
 
1,143

 
1,012

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(283
)
 
(287
)
Payments for outsourcing contract costs
 
(43
)
 
(55
)
Software purchased and developed
 
(145
)
 
(142
)
Payments for acquisitions, net of cash acquired
 
(35
)
 
(190
)
Business dispositions
 
(13
)
 
245

Proceeds from sale of assets
 
99

 
25

Other investing activities, net
 
21

 
27

Net cash used in investing activities
 
(399
)
 
(377
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under lines of credit and short-term debt
 
—

 
408

Repayment of borrowings under lines of credit
 
(32
)
 
—

Principal payments on long-term debt
 
(193
)
 
(424
)
Proceeds from stock options and other common stock transactions
 
151

 
112

Excess tax benefit from stock-based compensation
 
15

 
5

Repurchase of common stock
 
(518
)
 
(376
)
Dividend payments
 
(95
)
 
(89
)
Other financing activities, net
 
(7
)
 
(29
)
Net cash used in financing activities
 
(679
)
 
(393
)
Effect of exchange rate changes on cash and cash equivalents
 
(115
)
 
(12
)
Net (decrease) increase in cash and cash equivalents
 
(50
)
 
230

Cash and cash equivalents at beginning of year
 
2,443

 
2,054

Cash and cash equivalents at end of period
 
$
2,393

 
$
2,284


See accompanying notes.

4

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY (unaudited)


(Amounts in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Earnings
Retained for
Use in Business
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock in Treasury
Total
CSC Equity
Non-
Controlling Interest
Total Equity
Shares
Amount
Balance at March 28, 2014
154,721

$
155

$
2,304

$
1,592

$
279

$
(418
)
$
3,912

$
32

$
3,944

Net (loss) income
 
 
 
(17
)
 
 
(17
)
11

(6
)
Other comprehensive loss
 
 
 
 
(149
)
 
(149
)

(149
)
Stock-based compensation expense
 
 
53

 
 
 
53

 
53

Acquisition of treasury stock
 
 
 
 
 
(26
)
(26
)
 
(26
)
Stock option exercises and other common stock transactions
4,341

4

163

 
 
 
167

 
167

Share repurchase program
(8,496
)
(8
)
(139
)
(365
)
 
 
(512
)
 
(512
)
Cash dividends declared
 
 
 
(98
)
 
 
(98
)
 
(98
)
Noncontrolling interest distributions and other
 
 
 
(11
)
11

 
—

(18
)
(18
)
Balance at January 2, 2015
150,566

$
151

$
2,381

$
1,101

$
141

$
(444
)
$
3,330

$
25

$
3,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Earnings
Retained for
Use in Business
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock in Treasury
Total
CSC Equity
Non-
Controlling Interest
Total Equity
Shares
Amount
Balance at March 29, 2013
158,984

$
159

$
2,167

$
1,101

$
108

$
(401
)
$
3,134

$
26

$
3,160

Net income
 
 
 
677

 
 
677

18

695

Other comprehensive income
 
 
 
 
167

 
167



167

Stock-based compensation expense
 
 
52

 
 
 
52

 
52

Acquisition of treasury stock
 
 
 
 
 
(12
)
(12
)
 
(12
)
Stock option exercises and other common stock transactions
3,269

3

110

 
 
 
113

 
113

Share repurchase program
(7,279
)
(7
)
(108
)
(239
)
 
 
(354
)
 
(354
)
Cash dividends declared
 
 
 
(89
)
 
 
(89
)
 
(89
)
Adjustments from divestiture of business
 
 
 
 

 
—

9

9

Noncontrolling interest distributions and other
 
 
 
9

(9
)

—

(25
)
(25
)
Balance at December 27, 2013
154,974

$
155

$
2,221

$
1,459

$
266

$
(413
)
$
3,688

$
28

$
3,716


See accompanying notes.



5

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 1 - Basis of Presentation

Computer Sciences Corporation (CSC or the Company) has prepared the interim period unaudited Consolidated Condensed Financial Statements included herein, as of and for the quarters and nine months ended January 2, 2015 and December 27, 2013, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited Consolidated Condensed Financial Statements and the accompanying notes. The unaudited Consolidated Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014 (fiscal 2014). As further disclosed in Note 5, the Company has reached an understanding with the staff of the SEC pursuant to which the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year table selected financial data table, all as set forth in CSC's Form 10-K for the fiscal year ended March 28, 2014.

In the opinion of management, the unaudited Consolidated Condensed Financial Statements included herein reflect all adjustments necessary, including those of a normal recurring nature, to present fairly the financial position, the results of operations and the cash flows for such interim periods. The results of operations for such interim periods are not necessarily indicative of the Company's actual or expected results for the full year ending April 3, 2015 (fiscal 2015).

The Company reports its results based on a fiscal year convention that comprises four thirteen-week quarters. Every fifth year includes an additional week in the first quarter to prevent the fiscal year from moving from an approximate end of March date. As a result, the first quarter of fiscal 2015 was a fourteen-week quarter.

During the first quarter of fiscal 2015, the Company changed its accounting policy for the recognition of actuarial gains and losses for its defined benefit pension and other post-employment benefit plans (see Note 2). These changes have been reported through retrospective application of the new accounting methods to all periods presented. As a result, the unaudited Consolidated Condensed Statements of Operations, Comprehensive Income, Cash Flows, and Changes in Equity for the quarter and nine months ended December 27, 2013, the Consolidated Condensed Balance Sheet for the year ended March 28, 2014, and all related notes to such financial statements have been recast from those presented in the previously filed Form 10-Q and Form 10-K, respectively, to reflect this change (see Note 2).

Effective fiscal 2015, the Company changed its inter-company accounting policy. Previously, inter-company transactions between segments were generally reflected as inter-company revenue. Under the new policy, inter-company transactions are now generally treated as cost transfers. The new inter-company policy has been applied retrospectively, adjusting the segment results for all prior periods (see Note 15).

The Company's income from continuing operations, before taxes and noncontrolling interest, and diluted earnings (loss) per share (EPS) from continuing operations, included the following adjustments due to changes in estimated profitability on fixed price contracts accounted for under the percentage-of-completion method, for the quarters and nine months ended January 2, 2015 and December 27, 2013:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions, except per-share data)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Gross favorable
 
$
17

 
$
26

 
$
89

 
$
101

Gross unfavorable
 
(3
)
 
(12
)
 
(20
)
 
(38
)
Total net adjustments, before taxes and non-controlling interest
 
$
14

 
$
14

 
$
69

 
$
63

 
 
 
 
 
 
 
 
 
Impact on diluted EPS from continuing operations
 
$
0.06

 
$
0.06

 
$
0.27

 
$
0.26


Unbilled recoverable amounts under contracts in progress do not have an allowance for credit losses, and therefore, any adjustments to unbilled recoverable amounts under contracts in progress related to credit quality would be accounted for

6

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

as a reduction of revenue. Unbilled recoverable amounts under contracts in progress resulting from sales, primarily to the United States (U.S.) and other governments, that are expected to be collected after one year totaled $51 million and $46 million as of January 2, 2015 and March 28, 2014, respectively.

Depreciation expense was $145 million and $469 million for the quarter and nine months ended January 2, 2015, respectively, and $165 million and $498 million for the quarter and nine months ended December 27, 2013, respectively.

Note 2 - Defined Benefit Pension Plan Accounting Policy Changes

During the first quarter of fiscal 2015, the Company changed its accounting policy for the recognition of actuarial gains and losses for its defined benefit pension and other post-retirement benefit plans and the calculation of expected return on pension plan assets. Historically, the Company recognized actuarial gains and losses in excess of 10% of the greater of the market-related value of plan assets or the plans’ projected benefit obligations (the “corridor”) as a component of accumulated other comprehensive loss in its Consolidated Condensed Balance Sheets and, depending on the benefit plan, the Company amortized these gains and losses to earnings either over the remaining average service period for the active participants or over the average remaining life expectancy of the inactive participants. Additionally, for the Company’s U.S. plans and the Australian plan, the Company previously used a calculated value for the market-related valuation of pension plan assets, reflecting changes in the fair value of plan assets over a three-year and a one-year period, respectively. Under the Company’s new accounting policies, the Company recognizes changes in actuarial gains and losses and the changes in fair value of plan assets in earnings at the time of plan remeasurement, annually during the fourth quarter of each year, or if there is an interim remeasurement, as a component of net periodic (benefit)/cost (and the Company no longer applies a corridor and, therefore, no longer defers any gains or losses) . The new accounting policies result in the changes in actuarial gains and losses and the changes in fair value of plan assets being recognized in earnings in the year they occur, rather than amortized over time, and therefore recognized earlier than under the Company’s previous methods of accounting. The Company believes the new pension accounting policies are preferable as they recognize the effects of plan investment performance, interest rate changes, and changes in actuarial assumptions as a component of earnings in the year in which they occur rather than amortized over time, and additionally, conform all plans to a consistent policy for determining market-related value of plan assets. These changes have been reported through retrospective application of the new accounting methods to all periods presented. The remaining components of pension/post-retirement expense, primarily current period service and interest costs and expected return on plan assets, will continue to be recorded on a quarterly basis. The cumulative effect of the retrospective application of new accounting policies was a decrease of $1.5 billion in retained earnings and a corresponding decrease in accumulated other comprehensive losses as of the beginning of fiscal 2014.

In addition to the above mentioned accounting policy changes, the Company also changed the way in which it allocates the elements of net periodic pension (benefit) cost to its reportable segments to be aligned with changes in how the Company's chief operating decision maker evaluates segment performance. Historically, total net periodic pension (benefit) cost, including the amortization of deferred actuarial losses/(gains) and changes in fair value of plan assets, were reported within operating income, as defined by the Company, and fully allocated to reportable segments. Under the new allocation approach, net actuarial gains and losses as well as settlement gain and losses components of the net periodic pension (benefit) cost are excluded entirely from the Company’s definition of operating income and not allocated to the reportable segments. All of the other elements of net periodic pension (benefit)/cost, excluding actuarial gains and losses and settlement gains and losses, will continue to be included within operating income of the Company’s reportable segments. The Company has applied the change in the allocation approach retrospectively, adjusting segment reporting for all prior periods presented (see Note 15).


7

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The following tables present the effects of retrospectively applying the change in the pension accounting policies, on select line items of the accompanying unaudited Consolidated Condensed Financial Statements:

Impact on Consolidated Condensed Statements of Operations
 
 
Quarter ended January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions, except per-share amounts)
 
 
 
Increase/(Decrease)
Costs of services
 
$
2,299

 
$
2,530

 
$
231

Selling, general and administrative expenses
 
333

 
356

 
23

Loss from continuing operations, before taxes
 
(164
)
 
(418
)
 
(254
)
Taxes on income
 
6

 
(105
)
 
(111
)
Loss from continuing operations
 
(170
)
 
(313
)
 
(143
)
Net loss
 
(170
)
 
(313
)
 
(143
)
Net loss attributable to CSC common stockholders
 
(171
)
 
(314
)
 
(143
)
Basic EPS - Continuing operations
 
$
(1.22
)
 
$
(2.23
)
 
$
(1.01
)
Diluted EPS - Continuing operations
 
$
(1.22
)
 
$
(2.23
)
 
$
(1.01
)

 
 
Quarter ended December 27, 2013
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions, except per-share amounts)
 
 
 
Increase/(Decrease)
Costs of services
 
$
2,362

 
$
2,261

 
$
(101
)
Selling, general & administrative expenses
 
354

 
318

 
(36
)
Income from continuing operations, before taxes
 
221

 
358

 
137

Taxes on income
 
70

 
77

 
7

Income from continuing operations
 
151

 
281

 
130

Net income
 
146

 
276

 
130

Net income attributable to CSC common stockholders
 
141

 
271

 
130

Basic EPS - Continuing operations
 
$
0.99

 
$
1.88

 
$
0.89

Diluted EPS - Continuing operations
 
$
0.98

 
$
1.84

 
$
0.86

Diluted EPS - Discontinued operations
 
$
(0.04
)
 
$
(0.03
)
 
$
0.01



8

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
Nine months ended January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions, except per-share amounts)
 
 
 
Increase/(Decrease)
Costs of services
 
$
6,907

 
$
7,101

 
$
194

Selling, general and administrative expenses
 
1,028

 
1,046

 
18

Income from continuing operations, before taxes
 
253

 
41

 
(212
)
Taxes on income
 
118

 
18

 
(100
)
Income from continuing operations
 
135

 
23

 
(112
)
Net income
 
106

 
(6
)
 
(112
)
Net income (loss) attributable to CSC common stockholders
 
95

 
(17
)
 
(112
)
Basic EPS - Continuing operations
 
$
0.88

 
$
0.08

 
$
(0.80
)
Diluted EPS - Continuing operations
 
$
0.86

 
$
0.08

 
$
(0.78
)

 
 
Nine months ended December 27, 2013
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions, except per-share amounts)
 
 
 
Increase/(Decrease)
Costs of services
 
$
7,156

 
$
7,015

 
$
(141
)
Selling, general and administrative expenses
 
962

 
920

 
(42
)
Income from continuing operations, before taxes
 
648

 
831

 
183

Taxes on income
 
206

 
227

 
21

Income from continuing operations
 
442

 
604

 
162

Loss from discontinued operations, net of taxes
 
72

 
91

 
19

Net income
 
514

 
695

 
181

Net income attributable to noncontrolling interest, net of tax
 
14

 
18

 
4

Net income attributable to CSC common stockholders
 
500

 
677

 
177

Basic EPS - Continuing operations
 
$
2.88

 
$
3.96

 
$
1.08

Basic EPS - Discontinued Operations
 
$
0.49

 
$
0.61

 
$
0.12

Diluted EPS - Continuing operations
 
$
2.83

 
$
3.88

 
$
1.05

Diluted EPS - Discontinued operations
 
$
0.48

 
$
0.60

 
$
0.12



Impact on Consolidated Condensed Statements of Comprehensive (Loss) Income
 
 
Quarter ended January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net loss
 
$
(170
)
 
$
(313
)
 
$
(143
)
Foreign currency translation adjustments
 
(78
)
 
(90
)
 
(12
)
Pension and other post-retirement benefit plans, net of taxes
 
(103
)
 
52

 
155

Other comprehensive loss, net of taxes
 
(183
)
 
(40
)
 
143



9

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
Quarter ended December 27, 2013
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net income
 
$
146

 
$
276

 
$
130

Foreign currency translation adjustments
 
(3
)
 
(9
)
 
(6
)
Pension and other post-retirement benefit plans, net of taxes
 
399

 
260

 
(139
)
Other comprehensive income, net of taxes
 
396

 
251

 
(145
)
Comprehensive income
 
542

 
527

 
(15
)
Comprehensive income attributable to noncontrolling interest
 
5

 
5

 
—

Comprehensive income attributable to CSC common stockholders
 
537

 
522

 
(15
)

 
 
Nine months ended January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net income (loss)
 
$
106

 
$
(6
)
 
$
(112
)
Foreign currency translation adjustments
 
(168
)
 
(189
)
 
(21
)
Pension and other post-retirement benefit plans, net of taxes
 
(85
)
 
48

 
133

Other comprehensive loss, net of taxes
 
(261
)
 
(149
)
 
112


 
 
Nine months ended December 27, 2013
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net income
 
$
514

 
695

 
$
181

Foreign currency translation adjustments
 
(90
)
 
(93
)
 
(3
)
Pension and other post-retirement benefit plans, net of taxes
 
460

 
260

 
(200
)
Other comprehensive income, net of taxes
 
370

 
167

 
(203
)
Comprehensive income
 
884

 
862

 
(22
)
Comprehensive income attributable to noncontrolling interest
 
18

 
27

 
9

Comprehensive income attributable to CSC common stockholders
 
866

 
835

 
(31
)


Impact on Consolidated Condensed Balance Sheets
 
 
As of January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Earnings retained for use in business
 
$
2,402

 
$
1,101

 
$
(1,301
)
Accumulated other comprehensive (loss) income
 
(1,159
)
 
141

 
1,300

Noncontrolling interest in subsidiaries
 
24

 
25

 
1


10

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
 
As of March 28, 2014
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Earnings retained for use in business
 
$
2,770

 
$
1,592

 
$
(1,178
)
Accumulated other comprehensive (loss) income
 
(898
)
 
279

 
1,177

Noncontrolling interest in subsidiaries
 
31

 
32

 
1



Impact on Consolidated Condensed Statements of Cash Flows
 
 
Nine months ended January 2, 2015
 
 
Previous accounting methods
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net income (loss)
 
$
106

 
$
(6
)
 
$
(112
)
Pension & OPEB actuarial & settlement losses (gains)
 
—

 
463

 
463

Decrease in liabilities
 
(130
)
 
(481
)
 
(351
)

 
 
Nine months ended December 27, 2013
 
 
As previously reported
 
As Reported
 
Impact of change in accounting method
(Amounts in millions)
 
 
 
Increase/(Decrease)
Net income
 
$
514

 
$
695

 
$
181

Pension & OPEB actuarial & settlement losses (gains)
 
—

 
(114
)
 
(114
)
Gain on dispositions
 
(83
)
 
(95
)
 
(12
)
Decrease in liabilities
 
(358
)
 
(413
)
 
(55
)

Note 3 - Recent Accounting Pronouncements

New Accounting Standards

During the first nine months of fiscal 2015, the Company adopted the following Accounting Standard Update (ASU):

In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date” (ASU 2013-04). ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Effective March 29, 2014, CSC adopted the amendments in ASU 2013-04 and determined that they did not have a material effect on CSC’s Consolidated Condensed Financial Statements.


11

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Standards Issued But Not Yet Effective

The following ASUs were recently issued but have not yet been adopted by CSC:

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. ASU 2014-15 will be effective for CSC for fiscal 2017. CSC believes that the adoption of ASU 2014-15 will not have a material effect on CSC's Consolidated Condensed Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts”. The core principle of ASU 2014-09 is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which CSC expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable users of CSC’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. CSC will also be required to disclose information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. Early adoption is not allowed. ASU 2014-09 provides two methods of retrospective application. The first method would require CSC to apply ASU 2014-09 to each prior reporting period presented. The second method would require CSC to retrospectively apply with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. ASU 2014-09 will be effective for CSC beginning in fiscal 2018. CSC is currently evaluating the impact that the adoption of ASU 2014-09 may have on CSC’s Consolidated Condensed Financial Statements.
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08), which changes the requirements for reporting discontinued operations in Subtopic 205-20 “Presentation of Financial Statements - Discontinued Operations.” ASU 2014-08 changes the definition of discontinued operations by limiting discontinued operations reporting to disposals that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Under current GAAP, many disposals, some of which may be routine in nature and not representative of a substantive change in an entity’s strategy, are reported in discontinued operations. ASU 2014-08 requires expanded disclosures for discontinued operations designed to provide users of financial statements with more information about the assets, liabilities, revenues, expenses and cash flows related to discontinued operations. ASU 2014-08 also requires an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in ASU 2014-08 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, which for CSC is beginning of fiscal 2016. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. Adoption of this ASU is not expected to have a material effect on the Company's financial position.

In January 2014, the FASB issued ASU No. 2014-05, "Service Concession Arrangements (Topic 853) (a consensus of the FASB Emerging Issues Task Force)” (ASU 2014-05). ASU 2014-05 provides guidance on the accounting for service concession arrangements, which are arrangements between a public-sector entity grantor and an operating entity under which the operating entity operates the grantor’s infrastructure (e.g. airports, roads, or bridges). The operating entity also may provide the construction, upgrading, or maintenance services of the grantor’s infrastructure. ASU 2014-05 specifies that an operating entity should not account for a service concession arrangement that is within the scope of this ASU as a lease in accordance with Topic 840, "Leases." ASU 2014-05 also specifies that the infrastructure used in a service concession arrangement should not be recognized as property, plant, and equipment of the operating entity. The

12

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. ASU 2014-05 will be effective for CSC beginning in fiscal 2016. CSC believes that the adoption of ASU 2014-05 will not have a material effect on CSC's Consolidated Condensed Financial Statements.

Note 4 - Acquisitions and Divestitures

Fiscal 2015 Acquisition

On July 31, 2014, CSC acquired a privately held entity for $35 million in an all cash transaction. CSC acquired this entity primarily to enhance its cyber security, systems engineering, and software development service offerings in the federal intelligence sector. The purchase price was allocated to assets acquired and liabilities assumed based on preliminary estimates of fair value at the date of acquisition, as follows: $4 million to current assets, $9 million to an intangible asset other than goodwill, $9 million to current liabilities, and $31 million to goodwill. The intangible asset, which is associated with customer relationships and government programs, will be amortized over 15 years. The goodwill is associated with the Company's North American Public Sector (NPS) segment and is expected to be tax deductible. Pro forma financial information for this acquisition is not presented as the effects of the acquisition are not material to CSC's consolidated results. The allocation of purchase price is preliminary and is subject to additional information related to the liabilities that existed as of the acquisition date.

Fiscal 2014 Acquisitions

ServiceMesh Acquisition

On November 15, 2013, CSC acquired ServiceMesh Inc. (ServiceMesh or SMI), a privately-held cloud services management company, headquartered in Santa Monica, California, with operations in the United States, Australia and the United Kingdom, for total purchase consideration of $282 million. The acquisition enhances CSC's ability to help its clients migrate their applications into cloud computing environments and to automate the deployment and management of enterprise applications and platforms across private, public and hybrid cloud environments.

The purchase consideration included: 1) cash of $163 million paid at closing to and on behalf of the ServiceMesh shareholders, including $10 million paid to retire ServiceMesh's debt, and 2) additional consideration of $119 million contingent on the achievement of contractually agreed revenue targets. The Company incurred transaction costs of $4 million associated with this acquisition, which are included within selling, general and administrative expenses. The acquisition was funded from CSC's cash on hand at the time.

The amount of contingent consideration was based on a contractually defined multiple of ServiceMesh’s revenues during a specified period ending January 31, 2014. The Company determined the fair value of the contingent consideration payable using a probability-weighted approach, which at the end of the third quarter of fiscal 2014 was preliminarily estimated to be $137 million, representing the maximum amount of contingent consideration payable. During the fourth quarter, the Company reduced the fair value of the contingent consideration payable and goodwill by $18 million, based on additional facts and circumstances that existed as of the acquisition date but which were not known until the fourth quarter. These facts, had they been known, would have reduced the Company's original acquisition-date estimate of the fair value of contingent consideration to $119 million.

After the expiration of the contractual period, the final amount of the contingent consideration payable was determined to be $98 million, which was paid during the fourth quarter of fiscal 2014. The difference of $21 million, between the revised fair value of contingent consideration liability of $119 million and the actual amount paid of $98 million, was primarily due to the deferral of revenues related to certain software license sales to periods beyond the specified earn-out measurement period. This difference of $21 million was recorded as a reduction to selling, general and administrative expenses during the fourth quarter of fiscal 2014.

The results of ServiceMesh are included in the Company's consolidated financial statements within its GIS segment.


13

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The allocation of the purchase consideration to the assets acquired and liabilities assumed, including the fourth quarter adjustments to the estimated fair value of contingent consideration, is presented below:
 (Amounts in millions)
 
Estimated Fair Value
Accounts receivable and other current assets
 
$
3

Deferred tax assets
 
31

Intangible asset - developed technology
 
94

Intangible assets - customer relationships and trade names
 
10

Property and equipment and other non-current assets
 
2

Deferred revenue and other current liabilities
 
(4
)
Deferred tax liabilities
 
(38
)
     Total identifiable net assets acquired
 
98

     Goodwill
 
$
184

Total purchase consideration
 
$
282


As of the acquisition date, the fair value of trade receivables approximated book value and are considered fully recoverable. The Company’s purchase price allocation was finalized in the third quarter of fiscal 2015.

The amortizable lives associated with the intangible assets acquired are as follows:
Description
Estimated Useful Lives (Years)
Developed technology
9
Customer relationships
3
Trade names
4 - 6

The goodwill recognized in the acquisition is attributable to the intellectual capital, the acquired assembled work force, and expected cost synergies, none of which qualify for recognition as a separate intangible asset. The goodwill arising from the acquisition was preliminarily allocated to the Company's reportable segments based on the relative fair value of the expected incremental cash flows that the acquisition is expected to provide to each reporting unit within the Company's reportable segments. As of March 28, 2014, goodwill was allocated as follows: GBS: $28 million, GIS: $120 million, and NPS: $36 million. The goodwill is not deductible for tax purposes.

In connection with the ServiceMesh acquisition, the Company granted to certain ServiceMesh employees restricted stock units with a grant-date fair value of $41 million. These awards generally vest over a three-year period, associated with the continuing employment of the ServiceMesh employees, beginning from the date of acquisition, and are recorded as compensation expense ratably over the three-year period.

Infochimps Acquisition

On August 5, 2013, CSC acquired Infochimps, Inc. (Infochimps), a privately-held company, in an all-cash transaction for $27 million. The acquisition complements CSC’s existing Big Data business by providing a flexible, scalable, platform-as-a-service offering. The purchase price has been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition: $2 million to current and other long-term assets, $2 million to current and long-term liabilities, and $27 million to goodwill. As of the acquisition date, the fair value of trade receivables approximated book value and was considered fully recoverable. The goodwill is associated with the Company's GBS segment and is not tax-deductible.

Pro forma financial information for the fiscal 2014 acquisitions was not presented as the effects of the acquisitions were not material to CSC's consolidated results.


14

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Fiscal 2015 Divestiture

On July 31, 2014, CSC completed the sale of a German software business to a strategic investor for cash consideration of $3 million. This divestiture, which was a part of the GBS segment's healthcare group, resulted in a pre-tax loss of $22 million, representing the excess of the carrying value of the net assets of the business and transaction costs over the net proceeds. The divested assets and liabilities included: current assets of $54 million (including $21 million of cash); goodwill of $0; other noncurrent assets of $25 million; current liabilities of $33 million; and noncurrent liabilities of $23 million. The historical results of this business have been presented as discontinued operations in the Company's unaudited Consolidated Condensed Statement of Operations.

Fiscal 2014 Divestitures

On July 19, 2013, CSC's NPS segment completed the sale of its base operations, aviation and range services business unit, Applied Technology Division (ATD), to a strategic investor for cash consideration of approximately $178 million, plus a net working capital adjustment receivable of $6 million, for a pre-tax gain on disposal of $77 million. During the first quarter of fiscal 2015, NPS recorded a $1 million final net working capital adjustment, which reduced the total gain on sale of ATD.

On May 21, 2013, CSC completed the divestiture of its flood insurance-related business process outsourcing practice (flood insurance BPO) to a financial investor for cash consideration of $43 million plus a net working capital adjustment of $4 million, for a pre-tax gain on disposal of $25 million. During the fourth quarter of fiscal 2014, the Company received cash of $3 million, representing the final net working capital adjustment, and reduced the gain on disposal by $1 million. During the first quarter of fiscal 2015, CSC received an additional $2 million as a purchase price adjustment related to this divestiture, which was recorded as additional gain on sale on disposition.

Pursuant to the pension accounting policy change (see Note 2), the income from discontinued operations, net of taxes, for the third quarter and first nine months of fiscal 2014 increased by $0 million and $19 million, respectively, due to the reduced pension expense.

A summary of the results of the discontinued operations is presented below:
 
 
Quarter Ended
 
Nine Months Ended
 
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Operations
 
 
 
 
 
 
 
 
Revenue
 
$
—

 
$
7

 
$
10

 
$
227

 
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, before taxes
 
—

 
(2
)
 
(11
)
 
10

Tax expense
 
—

 
1

 
—

 
6

Net (loss) income from discontinued operations
 
$
—

 
$
(3
)
 
$
(11
)
 
$
4

 
 
 
 
 
 
 
 
 
Disposal
 
 
 
 
 
 
 
 
(Loss) gain on disposition, before taxes
 
$
—

 
$
(2
)
 
$
(21
)
 
$
102

Tax (benefit) expense
 
—

 
—

 
(3
)
 
15

(Loss) gain on disposition, net of taxes
 
$
—

 
$
(2
)
 
$
(18
)
 
$
87

 
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of taxes
 
$
—

 
$
(5
)
 
$
(29
)
 
$
91



15

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 5 - Investigations and Out of Period Adjustments
   
Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments

As previously disclosed, on January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation. That investigation covered a range of matters as previously disclosed by the Company, including certain of the Company’s prior disclosures and accounting determinations. On May 2, 2011, the Audit Committee of the Board of Directors of the Company (the Audit Committee) commenced an independent investigation. The Audit Committee retained independent counsel to represent the Company on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants and disclosure experts to assist with their work. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

As a result of findings by the Audit Committee’s independent investigation, the Company has previously acknowledged certain historic errors and irregularities relating to accounting entries arising from the Nordics region, Australia, and the Company’s contractual relationship with the NHS, self-reported these errors and irregularities to the SEC’s Division of Enforcement, and made adjustments to its financial statements that are related to prior periods as reported in its past filings. In addition, as previously disclosed, certain personnel in certain foreign operations were reprimanded, suspended, terminated and/or resigned and additional controls were implemented. Based on recommendations from the Audit Committee’s independent investigation, the Company also instituted comprehensive enhancements beginning in 2011 to its compliance, financial and disclosure controls, and to the function of internal audit. In doing so, the Company made significant changes to prevent the type of misconduct identified by the Audit Committee’s independent investigation from recurring. The Company previously took significant steps to enhance its compliance culture and to remediate any deficiencies through: (1) Company-wide communications concerning the Company’s key organizational values of ethics, compliance and integrity; (2) strengthening internal controls and processes to further ensure the accuracy and integrity of the Company’s financial reporting; (3) improving technical training for employees in finance and accounting roles; (4) a restructuring of the internal audit group and the outsourcing of many internal audit activities to Ernst & Young to enhance the quality and scalability of the Company’s overall internal audit function; (5) creating an independent investigations unit at the Company to investigate suspected violations of the law or the Company's Code of Conduct; (6) elevating the position of Chief Compliance and Ethics Officer to provide direct reporting to the Audit Committee; (7) creating a new position of Chief Accounting Officer responsible for developing accounting policies and reviewing complex technical accounting issues; and (8) revising policies and procedures concerning percentage-of-completion (POC) accounting to enhance the review and monitoring of long-term contracts, including those contracts similar to the contract with NHS.

The Company has been in continuing discussions with the SEC’s staff concerning a potential resolution of the SEC’s investigation. Many of those discussions have concerned the Company’s prior use in fiscal 2009-2012 of the terms of ongoing NHS contract negotiations in developing its assumptions and judgments with respect to the margin used in recognizing profit under the POC accounting method and in evaluating the recoverability of NHS contract assets as well as the Company’s prior disclosures concerning such matters.

As previously disclosed, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the antifraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second or third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter. The Board of Directors of the Company determined that the

16

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Company's previously issued consolidated financial statements for fiscal 2009-2012 (including the associated auditors' reports and the interim periods within those years) should no longer be relied upon.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.
As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government, but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation or cash flows.

Out of Period Adjustments Financial Impact Summary

The rollover impact on the pre-tax income (loss) from continuing operations of the recorded out of period adjustments in the first nine months of fiscal 2015, fiscal 2014 and fiscal 2013 is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
 
 
(Amounts in millions)
 
Fiscal 2013 Adjustments
 
Fiscal 2014 Adjustments
 
First Nine Months Fiscal 2015 Adjustments
 
Total Adjustments
Fiscal 2015
 
$
—

 
$
—

 
$
(12
)
 
$
(12
)
Fiscal 2014
 
—

 
(2
)
 
13

 
11

Fiscal 2013
 
6

 
4

 
(1
)
 
9

Prior fiscal years (unaudited)
 
(6
)
 
(2
)
 
—

 
(8
)

See Note 15 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarters ended January 2, 2015 and December 27, 2013, respectively.


17

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Fiscal 2015 Adjustments

During the quarter and nine months ended January 2, 2015, the Company identified and recorded net adjustments increasing pre-tax income from continuing operations by $4 million and $12 million, respectively, that should have been recorded in prior periods.

The $4 million increase in pre-tax income from continuing operations recorded during the third quarter of fiscal 2015 was primarily attributable to adjustments decreasing cost of services and increasing revenue that should have been recorded primarily in the first half of fiscal 2015. Out of period adjustments identified during the second and third quarters of fiscal 2015 that should have been recorded in prior fiscal years were not material. The Company also recorded a net tax benefit of $6 million, primarily the impact of discrete tax adjustments, in the current quarter. Adjustments recorded during the quarter ended January 2, 2015 increased net income attributable to CSC common stockholders by $10 million.

The $12 million increase in pre-tax income from continuing operations recorded during the first nine months of fiscal 2015 primarily included lower fiscal 2014 variable compensation partially offset by certain adjustments related to cost of services that were identified late in the 2014 year-end close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements. The Company also recorded a net tax benefit of $5 million, primarily the impact of discrete tax adjustments partially offset by the tax effects of out period adjustments, in the nine months ended January 2, 2015. Adjustments recorded during the nine months ended January 2, 2015, that should have been recorded in prior fiscal years, increased net income attributable to CSC common stockholders by $15 million.

The impact of out of period adjustments recorded during fiscal 2015 on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and nine months ended January 2, 2015, using the rollover method, is shown below:
 
 
Quarter Ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
2,947

 
$
(1
)
 
$
2,946

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,530

 
3

 
2,533

Selling, general and administrative
 
356

 
—

 
356

Depreciation and amortization
 
238

 
—

 
238

Restructuring costs
 
12

 
—

 
12

Interest expense
 
37

 
—

 
37

Interest income
 
(4
)
 
—

 
(4
)
Other expense, net
 
1

 
—

 
1

Income from continuing operations before taxes
 
(418
)
 
(4
)
 
(422
)
Taxes on income
 
(105
)
 
6

 
(99
)
Income (loss) from continuing operations
 
(313
)
 
(10
)
 
(323
)
Loss from discontinued operations, net of taxes
 
—

 
—

 
—

Net income (loss) attributable to CSC common stockholders
 
(314
)
 
(10
)
 
(324
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
(0.07
)
 
$
(2.30
)
Discontinued operations
 
—

 
—

 
—

Total
 
$
(2.23
)
 
$
(0.07
)
 
$
(2.30
)


18

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
Nine Months Ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
9,264

 
$
9

 
$
9,273

Costs of services (excludes depreciation and amortization and restructuring costs)
 
7,101

 
22

 
7,123

Selling, general and administrative
 
1,046

 
—

 
1,046

Depreciation and amortization
 
762

 
(1
)
 
761

Restructuring costs
 
15

 
—

 
15

Interest expense
 
112

 
—

 
112

Other expense, net
 
6

 
—

 
6

Income (loss) from continuing operations before taxes
 
41

 
(12
)
 
29

Taxes on income
 
18

 
5

 
23

Income from continuing operations
 
23

 
(17
)
 
6

Loss from discontinued operations, net of taxes
 
(29
)
 
2

 
(27
)
Net income (loss) attributable to CSC common stockholders
 
(17
)
 
(15
)
 
(32
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
0.08

 
$
(0.12
)
 
$
(0.04
)
Discontinued operations
 
(0.20
)
 
0.01

 
(0.19
)
Total
 
$
(0.12
)
 
$
(0.11
)
 
$
(0.23
)

For the nine months ended January 2, 2015, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll-over method is shown below:
(Amounts in million)
 
Increase/Decrease
 
January 2, 2015
Receivable, net of allowance for doubtful accounts
 
Increase
 
$
5

Property and Equipment
 
Decrease
 
1

Software, net of accumulated amortization
 
Decrease
 
2

Outsourcing contract costs, net of accumulated amortization
 
Increase
 
2

Other assets
 
Decrease
 
3

Accrued expenses and other current liabilities
 
Decrease
 
15

Deferred revenue and advance contract payments
 
Increase
 
4


The Company has determined that the impact of the consolidated out of period adjustments recorded in the nine months ended January 2, 2015 is immaterial to the consolidated results, financial position and cash flows for the third quarter and first nine months of fiscal 2015 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015.

Fiscal 2014 Adjustments

During the third quarter and through the first nine months of fiscal 2014, the Company recorded net pre-tax adjustments increasing income from continuing operations before taxes by $5 million and $3 million, respectively, that should have been recorded in prior fiscal years. The $5 million of pre-tax out of period adjustments consists of a $7 million increase to revenue (due to a $6 million adjustment to recognize revenue on previously delivered software products and services and a $1 million adjustment to recognize revenue on previously delivered outsourcing services), partially offset by a $2 million charge to cost of services (COS) (consisting of a $5 million increase to COS relating to previously delivered software products and services, offset by a $3 million decrease to COS as a result of a margin correction on long-term contracts accounted for under the POC method).


19

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Adjustments, net of tax, during the third quarter of fiscal 2014 that should have been recorded in prior fiscal years increased income from continuing operations by $4 million. Adjustments, net of tax, during the first nine months of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $18 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the third quarter was a $1 million increase to tax expense and for the first nine months of fiscal 2014 was a $9 million increase in tax expense. The tax effect on the pre-tax adjustments for the first nine months of fiscal 2014 resulted in a disproportionate increase in tax expense due to taxes on increases in income in taxable jurisdictions, and absence of tax benefits on decreases in income in jurisdictions with net operating loss carry forwards. The out of period adjustments to tax expense for the third quarter and first nine months of fiscal 2014 resulted in no change and an increase to income tax expense of $12 million, respectively. The out of period adjustments to tax expense for the nine months ended December 27, 2013, consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries recorded during the second quarter of fiscal 2014.

In addition, during the third quarter of fiscal 2014, the Company recorded $7 million of pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first six months of fiscal 2014. The $7 million of pre-tax out of period adjustments consists primarily of a reduction of $7 million to COS (attributable to a $5 million reduction to accrued expenses, a $3 million reduction of costs related to a reversal of previously recognized software products and services, a $4 million pension accrual expense reduction, all partially offset by a $3 million reduction of margin on long-term contracts accounted for under the POC method, and a $2 million adjustment to recognize costs on previously delivered software products and services). In addition to the reduction to COS, a net $1 million adjustment was recorded to increase revenue on previously delivered software products and services and a $1 million increase in selling, general and administrative (SG&A) expenses was recognized related to a write-off of prepaid facility charges. Adjustments, net of tax, during the third quarter of fiscal 2014 increased income from continuing operations by $9 million that should have been recorded in the first six months of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.

During the second quarter of fiscal 2014, the Company recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $11 million that should have been recorded in prior fiscal years. The $11 million of pre-tax out of period adjustments consists of a $9 million reversal of revenue (due to deferral of revenue for undelivered elements on software contracts lacking vendor specific objective evidence and margin corrections on contracts under POC accounting), a $1 million charge to cost of sales for reversal of previously deferred costs and a $1 million charge to SG&A expense reversing excess capitalization associated with internal systems development. Adjustments, net of tax, during the second quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $20 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the second quarter of fiscal 2014 was negligible. The out of period adjustments to tax expense for the second quarter of fiscal 2014 resulted in an increase to income tax expense of $9 million. The out of period adjustments to tax expense consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries.

In addition, during the second quarter of fiscal 2014, the Company recorded $17 million of pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2014. The $17 million of pre-tax out of period adjustments consists of (1) a $13 million charge to cost of sales consisting of $6 million in adjustments to prepaid and accrued balances, a $4 million reversal of previously deferred costs and a $3 million reduction in work in process due to margin corrections on contracts under POC accounting; (2) a $3 million charge to SG&A expense primarily due to reversal of excess capitalization associated with internal systems development, partially offset by other adjustments; and (3) a $1 million charge to depreciation expense to correct the useful life for certain leasehold improvements. Adjustments, net of tax, during the second quarter of fiscal 2014 decreased income from continuing operations by $11 million that should have been recorded in the first quarter of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.


20

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

During the first quarter of fiscal 2014, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $9 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes is comprised of the following:

•
net adjustments decreasing income from continuing operations before taxes by $13 million resulting primarily from revenues and costs in its GBS segment;
•
net adjustments increasing income from continuing operations before taxes by $8 million resulting from the correction of payroll expenses within its GBS segment; and
•
net adjustments increasing income from continuing operations before taxes by $14 million resulting primarily from adjustments identified by the Company late in the fiscal 2013 closing process.

Adjustments recorded during the first quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $2 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the adjustments described above, and $2 million of tax expense related to net adjustments that should have been recorded in prior periods.

During periods subsequent to December 27, 2013, the Company recorded out of period adjustments with a net pre-tax impact to income from continuing operations of $3 million, primarily in NPS, subsequent to December 27, 2013 that should have been recorded in the first nine months of fiscal 2014. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the first nine months of fiscal 2014 would have been higher by $3 million.

The impact of out of period adjustments recorded during fiscal 2014, and the first nine months of fiscal 2015, on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and first nine months ended December 27, 2013, using the rollover method, is shown below:
 
 
Quarter Ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,228

 
$
(5
)
 
$
3,223

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,261

 
8

 
2,269

Selling, general and administrative
 
318

 
(1
)
 
317

Depreciation and amortization
 
251

 
—

 
251

Restructuring costs
 
11

 
—

 
11

Interest expense
 
38

 
—

 
38

Interest income
 
(4
)
 
—

 
(4
)
Other (income) expense
 
(5
)
 
—

 
(5
)
Income from continuing operations before taxes
 
358

 
(12
)
 
346

Taxes on income
 
77

 
(4
)
 
73

Income from continuing operations
 
281

 
(8
)
 
273

Income from discontinued operations, net of taxes
 
(5
)
 
(3
)
 
(8
)
Net income attributable to CSC common stockholders
 
271

 
(11
)
 
260

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
1.84

 
$
(0.05
)
 
$
1.79

Discontinued operations
 
(0.03
)
 
(0.02
)
 
(0.05
)
Total
 
$
1.81

 
$
(0.07
)
 
$
1.74



21

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
Nine Months Ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
9,669

 
$
17

 
$
9,686

Costs of services (excludes depreciation and amortization and restructuring costs)
 
7,015

 
16

 
7,031

Selling, general and administrative
 
920

 
—

 
920

Depreciation and amortization
 
753

 
(1
)
 
752

Restructuring costs
 
33

 
2

 
35

Interest expense
 
112

 
—

 
112

Other (income) expense
 
16

 
—

 
16

Income from continuing operations before taxes
 
831

 
—

 
831

Taxes on income
 
227

 
(24
)
 
203

Income from continuing operations
 
604

 
24

 
628

Income from discontinued operations, net of taxes
 
91

 
—

 
91

Net income attributable to CSC common stockholders
 
677

 
24

 
701

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
3.88

 
$
0.16

 
$
4.04

Discontinued operations
 
0.60

 
—

 
0.60

Total
 
$
4.48

 
$
0.16

 
$
4.64


For the nine months ended December 27, 2013, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll-over method is shown below:
(Amounts in million)
 
Increase/Decrease
 
December 27, 2013
Receivable, net of allowance for doubtful accounts
 
Decrease
 
$
6

Prepaid expenses and other current assets
 
Increase
 
1

Property and Equipment
 
Decrease
 
1

Other assets
 
Increase
 
1

Accrued payroll and related costs
 
Decrease
 
9

Accrued expenses and other current liabilities
 
Decrease
 
18

Deferred revenue and advance contract payments
 
Increase
 
22


The Company determined that the impact of the consolidated out of period adjustments recorded in the third quarter of fiscal 2014 was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2014 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014.


22

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 6 - Earnings (Loss) Per Share

Basic earnings (loss) per common share (EPS) and diluted EPS are calculated as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions, except per-share amounts)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to CSC common stockholders
 
 
 
 
 
 
 
 
From continuing operations
 
$
(314
)
 
$
276

 
$
12

 
$
586

From discontinued operations
 
—

 
(5
)
 
(29
)
 
91

 
 
$
(314
)
 
$
271

 
$
(17
)
 
$
677

Common share information:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
140.637

 
146.735

 
143.141

 
148.212

Dilutive effect of stock options and equity awards
 
—

 
2.627

 
3.182

 
2.912

Shares for diluted earnings (loss) per share
 
140.637

 
149.362

 
146.323

 
151.124

 
 
 
 
 
 
 
 
 
Earnings (loss) per share – basic and diluted:
 
 
 
 
 
 
 
 
Basic EPS:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
1.88

 
$
0.08

 
$
3.96

Discontinued operations
 
—

 
(0.03
)
 
(0.20
)
 
0.61

Total
 
$
(2.23
)
 
$
1.85

 
$
(0.12
)
 
$
4.57

 
 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
1.84

 
$
0.08

 
$
3.88

Discontinued operations
 
—

 
(0.03
)
 
(0.20
)
 
0.60

Total
 
$
(2.23
)
 
$
1.81

 
$
(0.12
)
 
$
4.48


The computation of diluted earnings (loss) per share, for the quarter ended January 2, 2015, excluded 5,934,192 stock options and 2,019,663 restricted stock units (RSUs), whose effect, if included, would have been anti-dilutive due to the Company's net loss.

In addition, stock options and RSUs whose impact would have been anti-dilutive, were excluded from the diluted earnings (loss) per share computation. The number of shares related to such stock options was 1,218,655 and 1,074,109 for the quarter and nine months ended January 2, 2015, respectively, and 4,765,896 and 4,843,346 for the quarter and nine months ended December 27, 2013, respectively. The number of shares related to such RSUs was 1,666,952 and 101,058 for the quarter and nine months ended January 2, 2015, respectively, and 535,373 and 139,548 for the quarter and nine months ended December 27, 2013, respectively.




23

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 7 - Fair Value

Fair value measurements on a recurring basis

The following tables present the Company’s assets and liabilities, excluding pension assets, that are measured at fair value on a recurring basis as of January 2, 2015 and March 28, 2014:
 
 
As of January 2, 2015
 
 
 
 
Fair Value Hierarchy
(Amounts in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
289

 
$
289

 
$
—

 
$
—

Time deposits
 
551

 
551

 
—

 
—

Derivative instruments
 
13

 
—

 
13

 
—

Total assets
 
$
853

 
$
840

 
$
13

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative instruments
 
$
12

 
$
—

 
$
12

 
$
—

Total liabilities
 
$
12

 
$
—

 
$
12

 
$
—

    
 
 
As of March 28, 2014
 
 
 
 
Fair Value Hierarchy
(Amounts in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
717

 
$
717

 
$
—

 
$
—

Time deposits
 
693

 
693

 
—

 
—

Derivative instruments
 
5

 
—

 
5

 
—

Total assets
 
$
1,415

 
$
1,410

 
$
5

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative instruments
 
$
4

 
$
—

 
$
4

 
$
—

Total liabilities
 
$
4

 
$
—

 
$
4

 
$
—


The Company's money market funds, money market deposit accounts and time deposits are reported in cash and cash equivalents and short-term investments are included in prepaid expenses and other current assets. The balance sheet classifications of the Company's derivative instruments are presented in Note 8. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3.

Derivative instruments include foreign currency forward and option contracts, interest rate swap contracts and total return swaps (see Note 8). The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates, and is based on the month-end foreign currency exchange rates and forward points. The fair value of currency options is estimated based on valuation models that use the original strike price, movement and volatility in foreign currency exchange rates, and length of time to expiration as inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as inputs. Total return swaps are settled on the last day of every fiscal month. The inputs used to estimate the fair value of the Company's derivative instruments are classified as Level 2.
 

24

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Fair value measurements on a non-recurring basis

Assets and liabilities measured at fair value on a non-recurring basis include goodwill, tangible assets, intangible assets, and other contract related long-lived assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are remeasured when the estimated fair value of the corresponding asset or asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3). There were no significant impairments recorded during the quarters and nine months ended January 2, 2015 and December 27, 2013.

Financial instruments not measured at fair value

The carrying amounts of the Company’s financial instruments with short-term maturities are deemed to approximate their market values. The carrying amount of the Company’s long-term debt, excluding capital leases was $1,937 million and $1,874 million, and the estimated fair value was $2,076 million and $2,057 million, as of January 2, 2015 and March 28, 2014, respectively. The fair value of long-term debt is estimated based on the current interest rates offered to the Company for instruments with similar terms and remaining maturities and are classified as Level 2.

The Company is subject to counterparty risk in connection with its derivative instruments (see Note 8). With respect to its foreign currency derivatives, as of January 2, 2015 there were four counterparties with concentration of credit risk. Based on gross fair value of these foreign currency derivative instruments, the maximum amount of loss that the Company could incur is less than $1 million. With respect to its interest rate swaps, there were three counterparties with concentration of risk and the maximum amount of loss that the Company could incur was $16 million as of January 2, 2015.

The primary financial instruments other than derivatives (see Note 8) that potentially subject the Company to concentrations of credit risk are accounts receivable. The Company’s customer base includes Fortune 500 companies, the U.S. federal governmental and other governmental bodies and other significant, well-known companies operating in North America, Europe and the Pacific Rim. Credit risk with respect to accounts receivable is minimized because of the nature and diversification of the Company’s customer base. Furthermore, the Company continuously reviews its accounts receivable and records provisions for doubtful accounts as needed.

The Company’s credit risk is also affected by customers in bankruptcy proceedings; however, because most of these proceedings involve business reorganizations rather than liquidations and the nature of the Company’s services are often considered essential to the operational continuity of these customers, the Company is generally able to avoid or mitigate significant adverse financial impact in these cases. As of January 2, 2015, the Company had $16 million of accounts receivable, $11 million of related allowance for doubtful accounts, $1 million of other assets, and $4 million of accounts payable with customers involved in bankruptcy proceedings.

Note 8 - Derivative Instruments

The Company is exposed to certain market risks, including the effect of changes in interest rates and foreign currency exchange rates, and the value of notional investments underlying the Company's non-qualified deferred compensation plan. Changes in benchmark interest rates can impact the fair value of the Company's term notes, whereas changes in foreign currency exchange rates can impact the Company's foreign currency denominated monetary assets and liabilities and forecasted transactions in foreign currency. Market volatility of the notional investments underlying the Company's non-qualified deferred compensation plan can impact the Company's obligations under the plan. The Company uses derivative instruments to mitigate the impact of these market risks and not for trading or any speculative purpose.

The Company designates certain derivative instruments as hedges, for purposes of hedge accounting. For such derivative instruments, the Company documents its risk management objectives and strategy for undertaking hedging transactions, as well as all relationships between hedging and hedged risks. The derivative instruments designated for hedge accounting consist mainly of interest rate swaps and foreign currency forward contracts. Changes in the fair value measurements of the cash flow hedge derivative instruments are reflected as adjustments to other comprehensive income (OCI), while changes in fair value measurements of interest rate swaps are recorded in current period earnings.


25

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The derivative instruments not designated as hedges for purposes of hedge accounting include total return swaps and certain short-term foreign currency forward and option contracts. These instruments are recorded at their respective fair values and the change in their value is reported in current period earnings.

All cash flows associated with the Company's derivative instruments are classified as operating activities in the unaudited Consolidated Condensed Statement of Cash Flows.

The following table presents the fair values of derivative instruments included on the unaudited Consolidated Condensed Balance Sheets as of January 2, 2015 and March 28, 2014:
 
 
Derivative Assets
 
Derivative Liabilities
(Amounts in millions)
 
Balance sheet line item
 
As of January 2, 2015
 
As of March 28, 2014
 
Balance sheet line item
As of January 2, 2015
 
As of March 28, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
 
 
 
Interest rate
 
Other assets
 
$
13

 
$
3

 
Other long-term liabilities
$
—

 
$
—

Foreign Currency forward contracts
 
Prepaid expense and other current assets
 
—

 
—

 
Accrued expenses and other current liabilities
8

 
—

Total fair value of derivatives designated for hedge accounting
 
$
13

 
$
3

 
 
$
8

 
$
—

 
 
 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
 
 
 
Foreign Currency forward contracts
 
Prepaid expense and other current assets
 
$
—

 
$
2

 
Accrued expenses and other current liabilities
$
4

 
$
4

Total fair value of derivatives not designated for hedge accounting
 
$
—

 
$
2

 
 
$
4

 
$
4


Derivative instruments designated as hedges

Fair value hedges

Pursuant to its interest rate and risk management strategy, during the second quarter of fiscal 2014, the Company entered into multiple interest rate swap transactions to hedge the fair value of $275 million of the Company’s 4.45% term notes, due 2022, which effectively converted the debt into floating interest rate debt. For accounting purposes, these interest rate swap transactions were designated as fair value hedges and qualified for the short-cut method of hedge accounting, as defined under ASC Topic 815, “Derivatives and Hedging.” Accordingly, changes in the fair values of the interest rate swaps are reported in earnings and fully offset changes in the fair value of the underlying debt (see Note 9); therefore, no net gain or loss is recognized in the unaudited Consolidated Condensed Statement of Operations.

The following table presents the pre-tax gains (losses) related to the fair value hedges and the related hedged items for the quarters ended January 2, 2015 and December 27, 2013, respectively:
 
 
Derivative Instrument
 
Hedged Item
(Amounts in millions)
 
Statement of Operations line item
Gain (Loss) for the Quarter Ended
 
Balance Sheet line item
 
Gain (Loss) for the Quarter Ended
 
 
 
January 2, 2015
 
December 27, 2013
 
 
 
January 2, 2015
 
December 27, 2013
Interest rate swaps
 
Other Income (Expense)
$
6

 
$
(6
)
 
Debt
 
$
(6
)
 
$
6


26

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)


The following table presents the pre-tax gains (losses) related to the fair value hedges and the related hedged items, for the nine months ended January 2, 2015 and December 27, 2013, respectively:
 
 
Derivative Instrument
 
Hedged Item
(Amounts in millions)
 
Statement of Operations line item
Gain (Loss) for the Nine Months Ended
 
Balance Sheet line item
 
Gain (Loss) for the Nine Months Ended
 
 
 
January 2, 2015
 
December 27, 2013
 
 
 
January 2, 2015
 
December 27, 2013
Interest rate swaps
 
Other Income (Expense)
$
10

 
$
—

 
Debt
 
$
(10
)
 
$
—


Cash flow hedges

During the first quarter of fiscal 2015, the Company designated certain foreign currency forward contracts as cash flow hedges, to reduce risks related to certain Indian Rupee denominated intercompany obligations and forecasted transactions for a nine-month period through March 2015. As of January 2, 2015, the notional amount of foreign currency forward contracts designated as cash flow hedges was $339 million, and the related forecasted transactions extend through September 2016.

For the quarter ended January 2, 2015, the Company performed an assessment at the inception of the cash flow hedge transactions that determined all critical terms of the hedging instruments and hedged items match; therefore there is no ineffectiveness to be recorded and all changes in the hedging instruments’ fair value are recorded in accumulated OCI and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the quarter ended January 2, 2015, the Company did not discontinue any cash flow hedge for which it was probable that the hedged transaction would not occur. As of January 2, 2015, $4 million of the existing amount of losses related to the cash flow hedge reported in accumulated OCI are expected to be reclassified into earnings within the next 12 months.

The following table presents the pre-tax gains (losses) associated with the cash flow hedges, recognized in accumulated OCI, for the quarters ended January 2, 2015 and December 27, 2013, respectively:
(Amounts in millions)
 
Gain (Loss) recognized in Accumulated OCI (effective portion) for the Quarter Ended
 
Gain (Loss) reclassified into cost of services from Accumulated OCI (effective portion) for the Quarter Ended
 
Gain (loss) recognized in Other Income (Expense) (ineffective portion) for the Quarter Ended
 
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Foreign currency forward and option contracts
 
$
(2
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—


The following table presents the pre-tax gains (losses) associated with the cash flow hedges, recognized in accumulated OCI, for the nine months ended January 2, 2015 and December 27, 2013, respectively:
(Amounts in millions)
 
Gain (Loss) recognized in Accumulated OCI (effective portion) for the Nine Months Ended
 
Gain (Loss) reclassified into cost of services from Accumulated OCI (effective portion) for the Nine Months Ended
 
Gain (loss) recognized in Other Income (Expense) (ineffective portion) for the Nine Months Ended
 
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Foreign currency forward and option contracts
 
$
(8
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—


27

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)


Derivatives not designated for hedge accounting

Total return swaps

Beginning in the first quarter of fiscal 2015, the Company entered into total return swaps (TRS) derivative contracts to hedge market volatility of the notional investments underlying the Company's deferred compensation obligations. Changes in the fair value of these derivatives and changes in the associated hedged liabilities are recorded in cost of services and selling, general and administrative expenses. The TRS are entered into monthly and are settled on the last day of every fiscal month.

Foreign currency derivatives

The Company manages exposure to fluctuations in foreign currencies by using short-term foreign currency forward and option contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. For accounting purposes, these foreign currency option and forward contracts are not designated as hedges, as defined under ASC 815, “Derivatives and Hedging,” and all changes in their fair value are reported in current period earnings within the other income (expense) line of the unaudited Consolidated Statement of Operations. The notional amount of the foreign currency forward contracts outstanding as of January 2, 2015 and March 28, 2014 was $512 million and $816 million, respectively. The notional amount of option contracts outstanding as of January 2, 2015 and March 28, 2014 was $0 and $81 million, respectively.

The following table presents the pretax amounts affecting income related to derivatives not designated for hedge accounting for the quarters ended January 2, 2015 and December 27, 2013, respectively:
 
 
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
Statement of Operations line item
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Total return swaps
 
Cost of services and Selling, general & administrative expenses
 
$
3

 
$
—

 
$
7

 
$
—

Foreign currency forwards and options
 
Other Income (Expense)
 
—

 
2

 
(5
)
 
(14
)
Total
 
 
 
$
3

 
$
2

 
$
2

 
$
(14
)
        
Other risks

As discussed further in Note 7, the Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. The Company also enters into enforceable master netting arrangements with some of its counterparties. However for financial reporting purposes it is the Company’s policy to not offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counterparties. As of January 2, 2015 and March 28, 2014, there were no amounts that the Company elected to not offset. The Company's derivative contracts do not require it to hold or post collateral.



28

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 9 - Debt

The following is a summary of the Company's debt as of January 2, 2015 and March 28, 2014:
(Amounts in millions)
 
January 2, 2015
 
March 28, 2014
4.45% term notes, due September 2022
 
$
445

 
$
434

6.50% term notes, due March 2018
 
917

 
917

2.50% term notes, due September 2015
 
350

 
350

Note payable, due January 2016
 
389

 
413

Mandatorily redeemable preferred stock outstanding
 
61

 
61

Note payable of consolidated subsidiary
 
68

 
68

Capitalized lease liabilities
 
378

 
511

Borrowings for assets acquired under long-term financing
 
112

 
98

Other borrowings
 
4

 
36

Total debt
 
2,724

 
2,888

Less: short term debt and current maturities of long term debt
 
554

 
681

Total long-term debt
 
$
2,170

 
$
2,207


During the second quarter of fiscal 2015, CSC modified its existing $2.5 billion credit facility agreement by extending the maturity date from January 15, 2019 to January 15, 2020. There were no borrowings outstanding against the $2.5 billion credit facility as of January 2, 2015 and March 28, 2014. The Company also extended the maturity date of its £250 million or $389 million (at January 2, 2015 exchange rate) note payable from December 2014 to January 19, 2016, effective December 19, 2014.

The increase in balance of the 4.45% term notes reflects the year-to-date change in fair value of the interest rate swaps (see Note 8).

The Company was in compliance with all financial covenants associated with its credit facility agreement and note payable as of January 2, 2015 and March 28, 2014.

During the first quarter of fiscal 2015, CSC Asset Funding I LLC, which is a special purpose subsidiary of CSC Finance Co. LLC (CSC Finco) which is a wholly owned subsidiary of the Company, entered into a master loan and security agreement with a financial institution which provides for a $250 million committed Lease Credit Facility (Leasing Facility) to finance CSC Finco's capital expenditures for IT equipment and associated software in support of IT services provided to the Company's customers. The drawdown availability period for the Leasing Facility is eighteen months, and once drawn, converts into individual term notes of variable terms up to sixty months therefrom, depending on the nature of the underlying equipment being financed. There were no borrowings against the Lease Credit Facility as of January 2, 2015. CSC Finco was in compliance with all financial covenants associated with the leasing facility at January 2, 2015.

Note 10 - Pension and Other Post-Retirement Benefit Plans

The Company and its subsidiaries sponsor a number of pension and other post-retirement benefit plans. During the first quarter of fiscal 2015, the Company changed its accounting policies related to its defined benefit pension and other post-retirement benefit plans (see Note 2).


29

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The net periodic pension cost (benefit) for U.S. and non-U.S. pension plans included the following components:
 
 
Quarter Ended
 
 
U.S. Plans
 
Non-U.S. Plans
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Service cost
 
$
1

 
$
1

 
$
5

 
$
6

Interest cost
 
38

 
37

 
29

 
32

Expected return on assets
 
(61
)
 
(52
)
 
(44
)
 
(42
)
Amortization of transition obligation
 
—

 
—

 
—

 
1

Amortization of prior service (credit) cost
 
—

 
—

 
(2
)
 
—

Recognition of actuarial losses (gains)
 
374

 
—

 
26

 
(114
)
Contractual termination benefits
 
—

 
—

 
(1
)
 
—

Settlement loss
 
56

 
—

 
3

 
—

Net periodic pension cost (benefit)
 
$
408

 
$
(14
)
 
$
16

 
$
(117
)

 
 
Nine Months Ended
 
 
U.S. Plans
 
Non-U.S. Plans
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Service cost
 
$
3

 
$
4

 
$
17

 
$
19

Interest cost
 
114

 
112

 
90

 
94

Expected return on assets
 
(182
)
 
(162
)
 
(138
)
 
(121
)
Amortization of transition obligation
 
—

 
—

 
1

 
1

Amortization of prior service cost (credit)
 
—

 
2

 
(8
)
 
(2
)
Recognition of actuarial losses (gains)
 
375

 
—

 
26

 
(114
)
Contractual termination benefits
 
—

 
—

 
(8
)
 
3

Settlement loss (income)
 
58

 
(28
)
 
3

 
—

Net periodic pension cost (benefit)
 
$
368

 
$
(72
)
 
$
(17
)
 
$
(120
)

The net periodic pension cost, both for the third quarter and the first nine months of fiscal 2015, was primarily due to the recognition of actuarial and settlement losses arising from the interim remeasurement of certain defined benefit U.S. and Swiss pension plans.

During the third quarter of fiscal 2015, the Company offered lump sum settlements to the vested participants of certain of its U.S. defined benefit pension plans, who were no longer with the Company. The lump-sum settlement required interim remeasurement of the plans' assets and liabilities, as of the end of the third quarter of fiscal 2015, which resulted in a net loss of $430 million, comprising actuarial losses of $374 million and a settlement loss of $56 million. The actuarial and settlement losses were primarily a result of the adoption of the new mortality tables issued by the Society of Actuaries in October 2014. The economic benefit realized due to the lump sum payments was $98 million which is included in the net loss of $430 million.

The lump sum settlement resulted in reduction of the aggregate pension benefit obligation (PBO) of these U.S. defined benefit plans by $583 million, whereas the interim remeasurement resulted in an increase in PBO of $474 million. A weighted average discount rate of 4.13% was used to remeasure the plans; a decrease from 4.58% used in the prior fiscal year. The average funded status of the impacted U.S. pension plans, after remeasurement, was 87%. The weighted-average expected long-term rate of return on plan assets, after remeasurement, is 7.60% which is consistent with the rate used at the beginning of the fiscal year 2015.

During the third quarter, a defined benefit pension plan in Switzerland was subject to interim remeasurement due to the significant amount of settlement payments from the plan. The interim remeasurement of the plan assets and liabilities

30

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

resulted in an aggregate charge of $29 million, comprising actuarial losses of $26 million and a settlement loss of $3 million. A discount rate of 1.20% was used to remeasure the plans; a decrease from 2.10% in the prior fiscal year. As a result of the remeasurement, the plan's PBO decreased by $38 million and the funded status was 78%. The weighted-average expected long-term rate of return on plan assets, after remeasurement, is 3.60%, which is consistent with the rate used at the beginning of fiscal 2015.

During the first quarter of fiscal 2015, a curtailment loss of $2 million was recorded. This curtailment charge was associated with one of the U.S. pension plans and resulted from amortization of the prior service cost. The plan was remeasured on April 30, 2014 using a discount rate of 4.14%, a decrease from 4.23% at the prior fiscal year end, which resulted in an increase to the fair value of actuarial PBO of $1 million, increasing the plan’s unfunded obligations.

On July 31, 2014, CSC completed the sale of a German software business, which had a pension plan (see Note 4). The plan was remeasured as of the date of the sale, resulting in settlement costs totaling $3 million, which has been reported within discontinued operations.

On July 19, 2013, CSC completed the sale of ATD (See Note 4), which had a pension and a retiree medical plan. The plans were remeasured as of the date of the sale, resulting a in settlement benefit of $28 million associated with the pension plan and $8 million associated with the retiree medical plan, and a reduction to long-term liabilities of $28 million.

On December 20, 2013, two U.K. pension plans were remeasured due to a plan amendment arising from a change in index used to determine the level of pension increases, from the Retail Prices Index (RPI) to the Consumer Price Index (CPI). A weighted average discount rate of 4.65% was used to remeasure the plans; an increase from 4.31% in the prior fiscal year. The remeasurement resulted in recognition of actuarial gains of $114 million during the third quarter of fiscal 2014, and reduction of PBO decreased by $443 million.

The Company contributed $14 million and $60 million to the defined benefit pension plans during the third quarter and nine months ended January 2, 2015, respectively. The Company expects to contribute an additional $18 million during the remainder of fiscal 2015. Additional contributions may be required to meet funding levels or ongoing service costs of unfunded plans as required by Section 430 of the United States Internal Revenue Code, as amended (the Code) and the Pension Protection Act of 2006, or by local regulations. In the case of the U.S. defined benefit pension plans, the Company currently expects no additional contributions during remainder of fiscal 2015.

The components of net periodic benefit cost for other post-retirement benefit plans, reported on a global basis, included the following:
 
 
Quarter Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
Service cost
 
$
—

 
$
1

Interest cost
 
2

 
2

Expected return on assets
 
(2
)
 
(2
)
Amortization of prior service (credit) costs
 
(7
)
 
—

Recognition of actuarial losses
 
1

 
—

Net provision for post-retirement benefits
 
$
(6
)
 
$
1



31

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
Service cost
 
$
2

 
$
3

Interest cost
 
6

 
7

Expected return on assets
 
(5
)
 
(4
)
Amortization of prior service (credit)
 
(8
)
 
(2
)
Recognition of actuarial losses
 
1

 
—

Settlement (gain)
 
—

 
(8
)
Net provision for post-retirement benefits
 
$
(4
)
 
$
(4
)

On October 6, 2014, the Company amended its U.S. retiree medical health plans to provide coverage to eligible Medicare retirees through a private insurance marketplace. The insurance marketplace will allow retirees to choose the health insurance terms, cost and coverage that best fit their needs, while CSC will continue to provide financial support to the Medicare eligible participants in the form of a tax free contribution to a health reimbursement account. These amendments resulted in interim remeasurement of the retiree medical plans, which resulted in an actuarial loss of $1 million. A weighted average discount rate of 4.01% was used to remeasure the plans; a decrease from 4.32% in the prior fiscal year. As a result of the remeasurement, the benefit obligations decreased and the prior service credit increased by $99 million each. Subsequent to the remeasurement, the average funded status was 74%. The weighted-average expected long-term rate of return on plan assets is 7.50% as of October 6, 2014, after remeasurement, which is consistent with the rate at the beginning of the year, March 29, 2014.

The Company contributed $0 million and $3 million to the other post-retirement benefit plans during the quarter and nine months ended January 2, 2015, respectively. The Company does not expect to contribute any incremental amounts during the remainder of fiscal 2015.

Note 11 - Income Taxes

The Company's effective tax rate on income from continuing operations (ETR) was 25.1% and 43.9% for the quarter and nine months ended January 2, 2015, respectively, and 21.5% and 27.3% for the quarter and nine months ended December 27, 2013, respectively. The following are the primary drivers of the ETR for the nine months ended January 2, 2015 and December 27, 2013. For the tax impact of discontinued operations, see Note 4.

•
During the third quarter and nine months ended January 2, 2015, the ETR was impacted by a $462 million mark-to-market accounting loss related to CSC pension plans which was partially offset by a penalty of $190 million recorded as part of a settlement with the Securities and Exchange Commission. The impact of the pension mark-to-market and SEC penalty adjustments decreased the ETR by 2.9% for the third quarter and increased the ETR by 16.7% for the nine months ended January 2, 2015.

•
During the third quarter and nine months ended January 2, 2015, the ETR decreased due to the global mix of income.

•
During the third quarter and nine months ended January 2, 2015, the Company recorded $11 million and $15 million of income tax benefits, respectively, related to the reversal of certain state uncertain tax positions for which the statute of limitations has expired, which decreased the ETR by 2.7% and 36.5%, respectively.

•
During the third quarter and nine months ended December 27, 2013, the Company recorded an income tax benefit of approximately $6 million relating to the settlement of audits for certain of its Non-U.S. jurisdictions, which reduced the ETR by 1.7% and 0.7%, respectively.

•
During the third quarter and nine months ended December 27, 2013, the Company recorded a mark-to-market accounting gain of $114 million related to CSC pension plans in certain Non-U.S. jurisdictions with valuation allowances established on their deferred tax assets, which decreased the ETR by 10.0% and 4.3%, respectively.


32

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. A valuation allowance has been recorded against certain deferred tax assets due to uncertainties related to the ability to utilize these assets. The valuation allowance is based on historical earnings, estimates of taxable income by jurisdiction and the period over which the deferred tax assets will be recoverable. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors. As of January 2, 2015, total valuation allowances included approximately $360 million related to deferred tax assets, including tax loss carryforwards, in the United Kingdom. In evaluating positive and negative evidence through the end of the third quarter, including three-year cumulative historical losses on a US GAAP basis, management has concluded that such valuation allowances continue to be appropriate. Based on recent earnings in this jurisdiction and an expectation that the business may be able to demonstrate a pattern of sustained profitability by the end of the fourth quarter, management believes there is a reasonable possibility that, by the end of fiscal 2015, sufficient positive evidence may become available to reach a conclusion that a portion of the valuation allowance related to the United Kingdom will no longer be needed. As such, the Company may release a portion of its valuation allowance against its deferred taxes, which would result in the recognition of certain deferred tax assets and an income tax benefit for the period in which such release is recorded.

There were no material changes to uncertain tax positions as of the third quarter of fiscal 2015 compared to the fiscal 2014 year-end, except for $16 million of state uncertain tax positions for which the statute of limitations has expired.

The Internal Revenue Service (IRS) examined several issues for the fiscal years 2008 through 2010 that resulted in audit adjustments to the Company's federal income tax returns. The Company does not agree with many of the proposed adjustments and has filed an Appeals brief. As a result, the Company expects to reach a resolution no earlier than fiscal year 2016. The significant items subject to appeal primarily relate to foreign exchange losses and other U.S. international tax issues. In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more likely than not standard if such positions are not upheld. Conversely, the Company could settle positions with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in the liability for uncertain tax positions of up to $15 million, excluding interest, penalties, and tax carryforwards.

Note 12 - Stock Incentive Plans

For the quarters and nine months ended January 2, 2015 and December 27, 2013, the Company recognized stock-based compensation expense as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Cost of services
 
$
5

 
$
7

 
14

 
$
20

Selling, general and administrative
 
14

 
13

 
40

 
33

Total
 
$
19

 
$
20

 
$
54

 
$
53

Total, net of tax
 
$
12

 
$
13

 
$
35

 
$
34


Stock-based compensation for the first nine months of fiscal 2015 increased $1 million when compared to the same period of the prior year. The increase was due to $10 million of higher expense associated with the restricted stock units (RSUs) granted to the employees of ServiceMesh, which was acquired in the third quarter of fiscal 2014, and $11 million due to the fiscal 2015 option and RSU grants, impacted by the Company's higher stock price. These increases in expense were offset by $20 million of lower expense due to adjustments for forfeitures related to terminating employees.

The Company uses the Black-Scholes-Merton model in determining the fair value of stock options granted. The weighted average grant-date fair values of stock options granted during the nine months ended January 2, 2015 and December 27, 2013 were $18.32 and $16.35 per share, respectively. In calculating the compensation expense for its stock incentive plans, the Company used the following weighted-average assumptions:

33

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
Nine Months Ended
 
January 2, 2015
 
December 27, 2013
Risk-free interest rate
2.07
%
 
1.97
%
Expected volatility
33
%
 
34
%
Expected term (in years)
6.22

 
6.23

Dividend yield
1.50
%
 
1.52
%

For the nine months ended January 2, 2015 and December 27, 2013, the tax benefit realized from stock option exercises and RSU settlements was $41 million and $16 million, respectively, and the excess tax benefit was $15 million and $5 million, respectively.

Employee Incentives

The Company currently has two active stock incentive plans that authorize the issuance of stock options, restricted stock and other stock-based incentives to employees upon terms approved by the Compensation Committee of the Board of Directors. The Company issues authorized but previously unissued shares upon the exercise of stock options, the granting of restricted stock and the settlement of RSUs. As of January 2, 2015, 15,655,847 shares of CSC common stock were available for the grant of future stock options, equity awards or other stock-based incentives to employees under such stock incentive plans.

Stock Options

The Company’s standard vesting schedule for stock options is one-third of the total stock option award on each of the first three anniversaries of the grant date. Stock options are generally exercisable for a term of ten years from the grant date. Information concerning stock options granted under the Company's stock incentive plans is as follows:
 
As of January 2, 2015
 
Number
of Option Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(millions)
Outstanding as of March 28, 2014
9,829,611

 
$
43.30

 
5.73
 
$
167

Granted
1,331,361

 
60.88

 
 
 
 
Exercised
(3,507,145
)
 
44.81

 
 
 
62

Canceled/Forfeited
(808,695
)
 
41.39

 
 
 
 
Expired
(54,969
)
 
45.31

 
 
 
 
Outstanding as of January 2, 2015
6,790,163

 
46.18

 
5.92
 
116

Vested and expected to vest in the future as of January 2, 2015
6,622,324

 
45.92

 
5.84
 
115

Exercisable as of January 2, 2015
4,134,127

 
44.48

 
4.15
 
78


The total intrinsic value of options exercised during the nine months ended January 2, 2015 and December 27, 2013 was $62 million and $27 million, respectively. The cash received from stock options exercised during the nine months ended January 2, 2015 and December 27, 2013 was $151 million and $112 million, respectively.

As of January 2, 2015, there was $34 million of total unrecognized compensation expense related to unvested stock options, net of expected forfeitures. The cost is expected to be recognized over a weighted-average period of 1.85 years.


34

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Restricted Stock Units

Information concerning RSUs granted under stock incentive plans is as follows:
 
As of January 2, 2015
 
Number of
Shares
 
Weighted Average
Fair Value per share
Outstanding as of March 28, 2014
3,187,741

 
 
$
41.34

Granted
982,278

 
 
60.79

Released/Issued
(771,119
)
 
 
41.76

Canceled/Forfeited
(604,159
)
 
 
41.51

Outstanding as of January 2, 2015
2,794,741

 
 
48.02


As of January 2, 2015, there was $98 million of total unrecognized compensation expense related to unvested RSUs, net of expected forfeitures. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.00 years.

Non-employee Director Incentives

The Company has two stock incentive plans that authorize the issuance of stock options, restricted stock and other stock-based incentives to nonemployee directors upon terms approved by the Company’s Board of Directors. As of January 2, 2015, 175,300 shares of CSC common stock remained available for grant to non-employee directors as RSUs or other stock-based incentives.

Generally, RSU awards to non-employee directors vest in full as of the next annual meeting of the Company’s stockholders following the date they are granted and are issued at a price of $0. Information concerning RSUs granted to non-employee directors is as follows:
 
As of January 2, 2015
 
Number of
Shares
 
Weighted Average
Fair Value per share
Outstanding as of March 28, 2014
184,146

 
 
$
42.07

Granted
22,100

 
 
59.63

Released/Issued
(62,260
)
 
 
44.10

Canceled/Forfeited
—

 
 
—

Outstanding as of January 2, 2015
143,986

 
 
43.88


Note 13 - Stockholder's Equity

Stock Repurchase Program

In May 2014, the Company’s Board of Directors approved a new share repurchase program authorizing up to $1.5 billion in share repurchases of the Company's outstanding common stock, after completion of the prior $1 billion share repurchase program. CSC has been implementing these programs through purchases in compliance with SEC rules, market conditions and applicable federal and state legal requirements. The timing, volume, and nature of share repurchases are at the discretion of management and may be suspended or discontinued at any time. No end date was established for the current repurchase program.

The shares repurchased under the approved plan are retired immediately and included in the category of authorized but unissued shares. The excess of purchase price over par value of the common shares is allocated between additional paid-in capital and retained earnings.

During the third quarter and first nine months of fiscal 2015, 150,000 and 7,205,050 shares were purchased, respectively, through open market purchases for an aggregate consideration of $9 million and $437 million, respectively, at a weighted average price of $59.09 and $60.60 per share, respectively. The Company also paid $6 million during the first quarter of fiscal 2015 for shares purchased during the fourth quarter of fiscal 2014 that had not yet settled in cash by March 28, 2014.

During the second quarter of fiscal 2015, the Company entered into an accelerated share repurchase (ASR) agreement with a financial institution by advancing cash proceeds of $125 million. At inception, the ASR was initially settled by delivery of 1,258,651 shares to the Company, all of which were immediately retired. The actual number of shares required to be delivered to the Company was based on the trading prices of the Company's stock over a defined trading execution period under the agreement.

During the third quarter of fiscal 2015, after completion of the pricing period, the financial institution returned $50 million to the Company and delivered 31,830 additional shares. As a result, the Company has repurchased under the ASR, 1,290,481 shares for a net consideration of $75 million, at an average price of $58.12 per share.

During the third quarter and first nine months ending December 27, 2013, the Company repurchased 2,405,895 and 7,279,117 shares through open market purchases for an aggregate consideration of $125 million and $354 million, respectively, at a weighted average price of $51.96 and $48.58 per share, respectively. The approximate amount for which shares may yet be purchased under the share repurchase program at January 2, 2015 is $1.1 billion.

Accumulated Other Comprehensive Income (Loss)

The following tables show the activity in the components of other comprehensive income (loss), including the respective tax effects, and reclassification adjustments for the quarter and nine months ended January 2, 2015 and December 27, 2013, respectively:
For the quarter ended January 2, 2015
(Amounts in millions)
 
Before Tax Income (Loss)
 
Tax Expense
 
Net of Tax Income (Loss)
Foreign currency translation adjustments
 
$
(90
)
 
$
—

 
$
(90
)
Loss on foreign currency forward contracts
 
(2
)
 
—

 
(2
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
Prior service credit arising during the year
 
97

 
(39
)
 
58

Amortization of prior service costs
 
(9
)
 
3

 
(6
)
Total pension and other post-retirement benefit plans
 
88

 
(36
)
 
52

Total other comprehensive loss
 
$
(4
)
 
$
(36
)
 
$
(40
)

For the quarter ended December 27, 2013
(Amounts in millions)
 
Before Tax Income (Loss)
 
Tax Expense
 
Net of Tax Income (Loss)
Foreign currency translation adjustments
 
$
(9
)
 
$
—

 
$
(9
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
Prior service credit
 
260

 
—

 
260

Amortization of transition obligation
 
1

 
—

 
1

Amortization of prior service cost
 
(1
)
 
—

 
(1
)
Total pension and other post-retirement benefit plans
 
260

 
—

 
260

Total other comprehensive income
 
$
251

 
$
—

 
$
251



For the nine months ended January 2, 2015
(Amounts in millions)
 
Before Tax Income (Loss)
 
Tax Expense
 
Net of Tax Income (Loss)
Foreign currency translation adjustments
 
$
(188
)
 
$
(1
)
 
$
(189
)
Loss on foreign currency forward and option contracts
 
(8
)
 
—

 
(8
)
Pension and other post-retirement benefit plans:
 
 
 
 
 

Prior service credit arising during the year
 
97

 
(39
)
 
58

Amortization of transition obligation
 
1

 
—

 
1

Amortization of prior service costs
 
(14
)
 
3

 
(11
)
Total pension and other post-retirement benefit plans
 
84

 
(36
)
 
48

Total other comprehensive loss
 
$
(112
)
 
$
(37
)
 
$
(149
)


35

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

For the nine months ended December 27, 2013
(Amounts in millions)
 
Before Tax Income (Loss)
 
Tax Expense
 
Net of Tax Income (Loss)
Foreign currency translation adjustments
 
$
(91
)
 
$
(2
)
 
$
(93
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
Net actuarial gain
 
2

 
—

 
2

Prior service credit
 
260

 
—

 
260

Amortization of transition obligation
 
1

 
—

 
1

Amortization of prior service cost
 
(2
)
 
—

 
(2
)
Foreign currency exchange rate changes
 
(1
)
 
—

 
(1
)
Total pension and other post-retirement benefit plans
 
260

 
—

 
260

Total other comprehensive income
 
$
169

 
$
(2
)
 
$
167


The following tables show the changes in accumulated other comprehensive income (loss), for the nine months ended January 2, 2015 and December 27, 2013, respectively:
(Amounts in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedge
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Income (Loss)
Balance at March 28, 2014
 
$
(6
)
 
$
—

 
$
285

 
$
279

Current-period other comprehensive (loss) income, net of taxes
 
(189
)
 
(8
)
 
58

 
(139
)
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 
—

 
—

 
1

 
1

Balance at January 2, 2015
 
$
(195
)
 
$
(8
)
 
$
344

 
$
141


(Amounts in millions)
 
Foreign Currency Translation Adjustments
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Income (Loss)
Balance at March 29, 2013
 
$
74

 
$
34

 
$
108

Current-period other comprehensive (loss) income, net of taxes
 
(93
)
 
261

 
168

Amounts reclassified from accumulated other comprehensive loss, net of taxes
 
—

 
(10
)
 
(10
)
Balance at December 27, 2013
 
$
(19
)
 
$
285

 
$
266


Note 14 - Cash Flows

Cash payments for interest on indebtedness and cash payments for taxes on income are as follows:
 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
Interest
 
$
88

 
$
87

Taxes on income, net of refunds
 
122

 
95


Non-cash investing activities include the following:
 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
Capital expenditures in accounts payable and accrued expenses
 
$
42

 
$
48

Capital expenditures through capital lease obligations
 
10

 
96

Assets acquired under long-term financing
 
74

 
5


Non-cash investing activities for the nine months ended December 27, 2013 also included contingent consideration of $137 million for the Company's acquisition of ServiceMesh (see Note 4). Non-cash financing activities for the quarters ended January 2, 2015 and December 27, 2013 included common share dividends declared but not yet paid of $32 million and $29 million, respectively.

Note 15 - Segment Information

The Company’s reportable segments are as follows:

•
Global Business Services (GBS) - GBS provides end-to-end applications services; consulting; big data services; and industry-aligned software and solutions to enterprise clients around the world. GBS manages and industrializes clients' application ecosystem through its Applications Services offering. The Company has formed a number of strategic partnerships with leading technology companies such as HCL Technologies and SAP to deliver world-class solutions to its customers. These partnerships will enable clients to modernize and move enterprise workloads to next generation cloud infrastructure, while leveraging the benefits of mobility, social networking and big data. The GBS consulting business assists clients in achieving greater value from current IT assets as well as aiding in the direction of future IT investments. GBS software and solutions include vertically-aligned solutions and process-based intellectual property. Clients include major global enterprises in the insurance, banking, healthcare, life sciences, manufacturing and a host of diversified industries. Key competitive differentiators for GBS include its global scale, depth of industry expertise, strong partnerships with leading technology companies, vendor and product independence and end-to-end capabilities. Changing business issues such as globalization, fast-developing economies, government regulation, and growing concerns around risk, security, and compliance drive demand for these GBS offerings.

•
Global Infrastructure Services (GIS) – GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cloud services, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers next-generation hybrid Cloud infrastructure solutions to clients. The company integrates public cloud offerings from Amazon Web Services, IBM, Microsoft, and VMware, with its industry-leading private cloud solution, BizCloud. The CSC Agility Platform enables enterprises to manage, monitor, and automate applications over heterogeneous and hybrid clouds. The GIS portfolio of standard offerings delivers measurable results while reducing business risk and operational costs for clients. Collaboration with key alliance partners helps CSC to determine the best technology road map for clients and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions.

•
North American Public Sector (NPS) – NPS delivers IT, mission, and operations-related services to the Department of Defense and civil agencies of the U.S. federal government, as well as other foreign, state and local government agencies. Commensurate with the Company's strategy of leading the next generation of IT services, NPS is

36

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

leveraging our commercial best practices and next-generation offerings to bring more cost-effective IT solutions to government agencies which are seeking efficiency through innovation. This approach is designed to yield lower implementation and operational costs as well as a higher standard of delivery excellence. Demand for NPS offerings are driven by evolving government priorities such as: 1) migration to next-generation IT solutions, which includes hybrid cloud infrastructure, application modernization and orchestration, 2) mission intelligence driven by big data solutions, 3) health IT and informatics, and 4) cyber security.

Effective fiscal 2015, the Company changed its inter-company accounting policy. Previously, inter-company transactions were generally reflected as inter-company revenue. Under the new policy, inter-company transactions are now generally treated as cost transfers. The new inter-company policy has been applied retrospectively, adjusting the segment results for all prior periods presented (see Note 1). In addition, segment results for all prior periods presented have been recast to reflect the change in the Company's pension accounting policies (see Note 2).

The following table summarizes operating results by reportable segment:
(Amounts in millions)
 
GBS
 
GIS
 
NPS
 
Corporate
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended January 2, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
965

 
$
984

 
$
998

 
$
—

 
$
—

 
$
2,947

Operating income (loss)
 
128

 
72

 
145

 
(13
)
 
—

 
332

Depreciation and amortization
 
37

 
163

 
33

 
5

 
—

 
238

 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended December 27, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,093

 
$
1,145

 
$
990

 
$
—

 
$
—

 
$
3,228

Operating income (loss)
 
140

 
91

 
122

 
(15
)
 
—

 
338

Depreciation and amortization
 
34

 
177

 
36

 
4

 
—

 
251


(Amounts in millions)
 
GBS
 
GIS
 
NPS
 
Corporate
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended January 2, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,056

 
$
3,151

 
$
3,057

 
$
—

 
$
—

 
$
9,264

Operating income (loss)
 
366

 
211

 
456

 
(48
)
 
—

 
985

Depreciation and amortization
 
116

 
529

 
104

 
13

 
—

 
762

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended December 27, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,169

 
$
3,405

 
$
3,095

 
$
—

 
$
—

 
$
9,669

Operating income (loss)
 
373

 
290

 
412

 
(44
)
 
—

 
1,031

Depreciation and amortization
 
112

 
520

 
110

 
11

 
—

 
753


Operating income (loss) provides useful information to the Company’s management for assessment of the Company’s performance and results of operations, and is one of the financial measures utilized to determine executive compensation. As mentioned in Note 2, in conjunction with the change in its pension accounting policies, the net actuarial gains and losses component of the net periodic pension benefit/cost are excluded from the Company’s definition of operating income and not allocated to the reportable segments, but instead recorded at the corporate level. All of the other elements of net periodic pension benefit/cost continue to be included within operating income of the Company’s reportable segments. The Company has applied the change in the allocation approach retrospectively, adjusting all prior periods.


37

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

A reconciliation of consolidated operating income to income from continuing operations before taxes is as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Operating income (1)
 
$
332

 
$
338

 
$
985

 
$
1,031

Corporate G&A
 
(59
)
 
(65
)
 
(182
)
 
(197
)
Pension & OPEB actuarial & settlement (losses) gains
 
(462
)
 
114

 
(463
)
 
114

SEC settlement related charges (2)
 
(195
)
 
—

 
(195
)
 
—

Interest expense
 
(37
)
 
(38
)
 
(112
)
 
(112
)
Interest income
 
4

 
4

 
14

 
11

Other income (expense), net
 
(1
)
 
5

 
(6
)
 
(16
)
(Loss) income from continuing operations before taxes
 
$
(418
)
 
$
358

 
$
41

 
$
831


(1) The impact of the change in pension accounting policy was an increase in operating income of $208 million and $251 million for the third quarter and first nine months of fiscal 2015, respectively, and an increase in operating income of $22 million and $68 million for the third quarter and first nine months of fiscal 2014, respectively.
(2) This item relates to the SEC investigation settlement (see Note 5).

During the third quarter and the first nine months of fiscal 2015 and fiscal 2014, the Company recorded certain pre-tax out of period adjustments which should have been recorded in prior fiscal periods (see Note 5). The following tables summarize the effect of the pre-tax out of period adjustments on the GBS, GIS, and NPS segment results for the quarters and nine months ended January 2, 2015 and December 27, 2013, as if the adjustments had been recorded in the appropriate period:
 
 
GBS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
As Adjusted
Quarter ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
965

 
$
(1
)
 
$
964

Operating income
 
128

 
(4
)
 
124

Depreciation and amortization
 
37

 
—

 
37

 
 
 
 
 
 
 
Quarter ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
1,093

 
$
(6
)
 
$
1,087

Operating income
 
140

 
(7
)
 
133

Depreciation and amortization
 
34

 
—

 
34


 
 
GBS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Nine months ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
3,056

 
$
3

 
$
3,059

Operating income
 
366

 
5

 
371

Depreciation and amortization
 
116

 
(1
)
 
115

 
 
 
 
 
 
 
Nine months ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
3,169

 
$
24

 
$
3,193

Operating income
 
373

 
22

 
395

Depreciation and amortization
 
112

 
1

 
113



38

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
GIS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
As Adjusted
Quarter ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
984

 
$
—

 
$
984

Operating income
 
72

 
—

 
72

Depreciation and amortization
 
163

 
—

 
163

 
 
 
 
 
 
 
Quarter ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
1,145

 
$
(2
)
 
$
1,143

Operating income
 
91

 
(6
)
 
85

Depreciation and amortization
 
177

 
—

 
177



 
 
GIS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Nine months ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
3,151

 
$
2

 
$
3,153

Operating income
 
211

 
3

 
214

Depreciation and amortization
 
529

 
—

 
529

 
 
 
 
 
 
 
Nine months ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
3,405

 
$
(2
)
 
$
3,403

Operating income
 
290

 
(5
)
 
285

Depreciation and amortization
 
520

 
(1
)
 
519


 
 
NPS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
As Adjusted
Quarter ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
998

 
$
—

 
$
998

Operating income
 
145

 
—

 
145

Depreciation and amortization
 
33

 
—

 
33

 
 
 
 
 
 
 
Quarter ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
990

 
$
2

 
$
992

Operating income
 
122

 
1

 
123

Depreciation and amortization
 
36

 
—

 
36



39

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 
 
NPS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Nine months ended January 2, 2015
 
 
 
 
 
 
Revenues
 
$
3,057

 
$
5

 
$
3,062

Operating income
 
456

 
(5
)
 
451

Depreciation and amortization
 
104

 
—

 
104

 
 
 
 
 
 
 
Nine months ended December 27, 2013
 
 
 
 
 
 
Revenues
 
$
3,095

 
$
(5
)
 
$
3,090

Operating income
 
412

 
—

 
412

Depreciation and amortization
 
110

 
—

 
110


Note 16 - Goodwill and Other Intangible Assets

Goodwill

The following table summarizes the changes in the carrying amount of goodwill by segment for the nine months ended January 2, 2015:

(Amounts in millions)
 
GBS
 
GIS
 
NPS
 
Total
Goodwill, gross
 
$
1,370

 
$
2,273

 
$
788

 
$
4,431

Accumulated impairment losses
 
(690
)
 
(2,074
)
 
—

 
(2,764
)
Balance as of March 28, 2014, net
 
680

 
199

 
788

 
1,667

 
 
 
 
 
 
 
 
 
Additions
 
—

 
—

 
31

 
31

Deductions
 
(2
)
 
—

 
—

 
(2
)
Foreign currency translation
 
(27
)
 
—

 
—

 
(27
)
 
 
 
 
 
 
 
 
 
Goodwill, gross
 
1,341

 
2,273

 
819

 
4,433

Accumulated impairment losses
 
(690
)
 
(2,074
)
 
—

 
(2,764
)
Balance as of January 2, 2015, net
 
$
651

 
$
199

 
$
819

 
$
1,669


The fiscal 2015 addition to goodwill is due to the second quarter NPS acquisition described in Note 4. The foreign currency translation amount reflects the impact of currency movements on non-U.S. dollar-denominated goodwill balances.

As of the beginning of fiscal 2015, a reassignment of goodwill occurred because of changes to the way in which GBS segment leadership began to regularly review the operating results within the GBS segment and because of the availability of discrete financial information. Goodwill was reassigned using a relative fair value allocation approach. CSC performed a quantitative and qualitative goodwill impairment assessment for the changed reporting units and determined that there was no indication that goodwill was impaired for those reporting units as of the end of the first quarter of fiscal 2015.

The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For the Company’s annual goodwill impairment assessment as of July 5, 2014, the Company first assessed qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude that it was more likely than not that the fair value of any of its reporting units was below their carrying amounts. The Company determined that, based on its qualitative assessment of such factors for all reporting units, no reporting units met the more-likely-than-not threshold; accordingly, the Company did not perform further analysis.

At the end of the third quarter of fiscal 2015, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require performing Step 1 of the traditional two-step goodwill impairment test. The Company determined that there were no such indicators and, as a result, it was unnecessary to perform an interim impairment test as of January 2, 2015.

Other Intangible Assets

A summary of amortizing intangible assets is as follows:
 
 
As of January 2, 2015
(Amounts in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Outsourcing contract costs
 
$
1,333

 
$
1,003

 
$
330

Software
 
2,457

 
1,681

 
776

Customer and other intangible assets
 
478

 
323

 
155

Total intangible assets
 
$
4,268

 
$
3,007

 
$
1,261


 
 
As of March 28, 2014
(Amounts in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Outsourcing contract costs
 
$
1,465

 
$
1,038

 
$
427

Software
 
2,330

 
1,680

 
650

Customer and other intangible assets
 
588

 
315

 
273

Total intangible assets
 
$
4,383

 
$
3,033

 
$
1,350


Amortization related to intangible assets was $103 million and $97 million for the quarters ended January 2, 2015 and December 27, 2013, respectively, including reductions of revenue for amortization of outsourcing contract cost premiums of $8 million and $9 million and for amortization of contract related intangible assets of $2 million and $2 million, respectively. Amortization expense related to capitalized software was $53 million and $44 million for the quarters ended January 2, 2015 and December 27, 2013, respectively.

Amortization related to intangible assets was $325 million and $289 million for the nine months ended January 2, 2015, and December 27, 2013, respectively, including reductions of revenue for amortization of outsourcing contract cost premiums of $25 million and $26 million and for amortization of contract related intangible assets of $7 million and $8 million, respectively. Amortization expense related to capitalized software was $163 million and $134 million for the nine months ended January 2, 2015 and December 27, 2013, respectively.

Estimated amortization expense related to intangible assets as of January 2, 2015, for the remainder of fiscal 2015 is $112 million, and for each of the fiscal years 2016, 2017, 2018 and 2019, is as follows: $325 million, $256 million, $205 million and $176 million, respectively.

During the first nine months of fiscal 2015, CSC sold certain intangible assets to a third party for total consideration of $43 million of which cash consideration was received of $17 million. As a result, CSC recorded a gain on sale of $43 million as a reduction of cost of sales in its GIS segment. As of January 2, 2015, CSC had $26 million of outstanding receivables related to these sales, which will be paid in quarterly installments.


40

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Note 17 - Restructuring Costs

The Company recorded $12 million and $11 million of restructuring costs for the quarters ended January 2, 2015 and December 27, 2013, respectively. For the nine months ended January 2, 2015 and December 27, 2013, the Company recorded $15 million and $33 million of restructuring costs, respectively. The costs recorded during the quarter and nine months ended January 2, 2015 were in connection with actions under the Fiscal 2015 Plan and Fiscal 2013 Plan, as described below. The costs recorded during the quarter and nine months ended December 27, 2013 were in connection with actions under both the Fiscal 2013 and Fiscal 2012 plans, as described below.

Fiscal 2015 Plan

In June 2014, the Company initiated restructuring actions (the Fiscal 2015 Plan) across its business segments. The objectives of the Fiscal 2015 Plan are to further reduce headcount in order to align resources to support business needs. Management expects that further actions will be taken during fiscal 2015, which could result in additional charges.

The composition of the restructuring liability for the Fiscal 2015 Plan as of January 2, 2015 is as follows:
(Amounts in millions)
 
Restructuring liability as of March 28, 2014
 
Costs expensed in fiscal 2015
 
Less: costs not affecting restructuring liability (1)
 
Cash paid
 
Other
 
Restructuring liability as of January 2, 2015
Workforce reductions
 
$
—

 
$
25

 
$
—

 
$
(11
)
 
$
(1
)
 
$
13


(1) 
Charges primarily consist of pension benefit augmentations and are recorded as a pension liability.

Fiscal 2013 Plan

In September 2012, the Company initiated restructuring actions (the Fiscal 2013 Plan) across its business segments. The objectives of the Fiscal 2013 Plan were to (i) further increase the use of lower cost off-shore resources, (ii) reduce headcount in order to align resources to support business needs, including the assessment of management span of control and layers, and (iii) optimize utilization of facilities. Actions under the Fiscal 2013 Plan commenced in September 2012 and continued through the end of fiscal 2014. The expense reduction in the first nine months of fiscal 2015 was due to cancellation of a portion of a restructuring plan in a region, as well as revisions on plans that were executed at lower than expected costs.

The composition of the restructuring liability for the Fiscal 2013 Plan as of January 2, 2015 is as follows:
(Amounts in millions)
 
Restructuring liability as of March 28, 2014
 
Costs expensed in fiscal 2015
 
Less: costs not affecting restructuring liability (1)
 
Cash paid
 
Other(2)
 
Restructuring liability as of January 2, 2015
Workforce reductions
 
$
70

 
$
(12
)
 
$
7

 
$
(53
)
 
$
(2
)
 
$
10

Facilities costs
 
13

 
2

 
—

 
(7
)
 
—

 
$
8

 
 
$
83

 
$
(10
)
 
$
7

 
$
(60
)
 
$
(2
)
 
$
18


(1) 
Charges consist of pension benefit augmentations and are recorded as a pension liability.
(2) 
Foreign currency translation adjustments.

Fiscal 2012 Plan

In March 2012, the Company initiated restructuring actions (the Fiscal 2012 Plan) primarily impacting its GIS segment. The objectives of the Fiscal 2012 Plan were to (i) align the Company's workforce across various geographies with business needs, (ii) increase use of lower cost off-shore resources, and (iii) optimize utilization of facilities. Actions under the Fiscal 2012 Plan commenced in March 2012 and were carried out in fiscal 2013 and fiscal 2014. There were no restructuring costs for the Fiscal 2012 Plan accrued during the first nine months of fiscal 2015.


41

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The composition of the restructuring liability for the Fiscal 2012 Plan as of January 2, 2015 is as follows:
(Amounts in millions)
 
Restructuring liability as of March 28, 2014
 
Costs expensed in fiscal 2015
 
Cash paid
 
Other(1)
 
Restructuring liability as of January 2, 2015
Facilities costs
 
2

 
—

 
(2
)
 
1

 
1

Total
 
$
2

 
$
—

 
$
(2
)
 
$
1

 
$
1


(1) 
Foreign currency translation adjustments.

Of the total $32 million restructuring liability as of January 2, 2015, $31 million is a short-term liability and is included in accrued expenses and other current liabilities, and $1 million is included in other long-term liabilities.

The composition of restructuring expenses for the third quarter and first nine months of fiscal 2015 and fiscal 2014 by segment is as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
GBS
 
$
10

 
$
7

 
$
12

 
$
25

GIS
 
1

 
4

 
2

 
10

NPS
 
—

 
—

 
—

 
—

Corporate
 
1

 
—

 
1

 
(2
)
Total
 
$
12

 
$
11

 
$
15

 
$
33


The composition of restructuring expenses for the third quarter and first nine months of fiscal 2015 and fiscal 2014 by financial statement line item is as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Cost of services
 
$
8

 
$
4

 
$
9

 
$
28

Selling, general and administrative
 
4

 
7

 
6

 
5


Note 18 - Contract with the U.K. National Health Service

Revised Project Agreement

The Company and the NHS are parties to a contract under which the Company has developed and deployed an integrated electronic patient records system. The NHS contract was amended in April 2009 and the parties entered into variation agreements subsequent to the 2009 amendment agreeing to various operational terms and conditions. The 2009 amendment included mutual releases of all claims existing at the time of the amendment.

On August 31, 2012, the Company and the NHS entered into a binding interim agreement which was approved by all required U.K. government officials ("interim agreement contract change note" or "IACCN"). The IACCN amended the terms of the parties' then current contract under which the Company has developed and deployed an integrated patient records system using the Company's Lorenzo Regional Care software product. On March 28, 2013, the Company and the NHS signed a letter agreement that modified certain financial terms of the IACCN and provided for a change compensation payment by the NHS to the Company on that date in the amount of £10 million ($15 million) net of value added tax in full and final satisfaction of all costs and claims by CSC arising from changes to the Lorenzo software product that CSC delivered up to a certain version of the product. On October 4, 2013, the Company and the NHS finalized a full restatement of the contract through a "revised project agreement" (RPA). The RPA embodies and incorporates the principal terms of the IACCN and such letter agreement, makes certain other changes with respect the Company’s non-Lorenzo product deployments and consolidates the three regional contracts which comprised the Company's NHS contract into a single agreement. The RPA has been approved by all required U.K. government officials. Pursuant to the RPA, the parties have agreed to a mutual release of certain accrued claims under the contract through the date of the RPA, October 4, 2013.

Principal Components of the IACCN and the RPA

The key terms first agreed in the IACCN (and now embodied in the RPA) with respect to the delivery of the Lorenzo product and associated services are as follows:


42

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

1.
Under contract terms existing prior to the IACCN, the NHS was committed to purchase the Lorenzo product for multiple trusts. In addition, the Company was the exclusive supplier of such software products and related services to two out of the three regions of the U.K. covered by the existing contract. Under the IACCN (and as now embodied in the RPA), the parties agreed that the NHS is no longer subject to any trust volume commitment for the Lorenzo product, and the Company agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity. As a result, the individual trusts can choose third-party software vendors other than CSC to provide a software solution. CSC and the NHS have also agreed to a process for trusts which wish to take the Lorenzo products within the NME regions to obtain central funding from the U.K. Department of Health for implementation of the Lorenzo products. In addition, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through a separate competitive process.

2.
The IACCN (and as now embodied in the RPA), created pricing and payment terms for the Lorenzo product and new terms under which trusts in the contract's NME region that choose the Lorenzo product can access central funds for its deployment, subject to business case justification and the overall availability of such funding. While the funding is provided by the NHS, there is a far greater degree of interaction with the trusts under the terms agreed in the IACCN (and as now embodied in the RPA), as the Company works with each individual trust to build a business case and seek NHS approval and central funding to proceed.

3.
Under the IACCN (and as now embodied in the RPA), the Lorenzo product was redefined for pricing purposes, with Lorenzo Regional Care comprising the "Base Product," consisting of seven deployment units (or modules) and the "Additional Product," consisting of three other modules. The parties agreed that six of the Base Product's modules had completed the necessary NHS assurances and were ready to deploy to further trusts as of August 31, 2012. The remaining module of the Base Product was similarly accepted by the NHS as complete and ready to deploy to further trusts in early September 2012. Although the NHS assurance of the Base Product's seven modules is complete and the Company and the NHS are committed to complete the assurance of the Additional Product modules, neither the NHS nor any trust is obligated to purchase or deploy any of those modules.

4.
New trusts taking deployments of the Lorenzo product will receive ongoing managed services from the Company for a period of five years from the date such deployment is complete, provided deployment is complete or substantially complete by July 7, 2016. The services include hosting of the software and trust data at the Company's data center as well as support and maintenance, including regulatory updates and other changes over the term of the contract. Under contract terms existing prior to the IACCN, all services were to expire upon the end of the contract term of July 7, 2016, subject to an optional one year extension and an exit transition period.

The IACCN did not materially alter the terms relating to the deployment of non-Lorenzo products. However, the RPA reflects certain terms not included in the IACCN relating to the Company’s continued deployment, hosting and maintenance services for non-Lorenzo products and services as follows:

1.
The RPA provides that the NHS will no longer be subject to commitments to purchase additional volumes of non-Lorenzo products and will instead have a committed repurposed fund of the same value in the approximate amount of £47.5 million ($75 million) as of the October 4, 2013 RPA effective date. The NHS may, but has no obligation to, use the repurposed fund to purchase a wide range of services and solutions from CSC under the RPA other than new deployments of Lorenzo products. Except as noted in point 2 below, the existing estate of deployed non-Lorenzo products are not affected by the RPA.

2.
The RPA also provides that the NHS may, subject to certain notice requirements and to the payment of certain decommissioning fees to CSC, require that certain services be removed, or decommissioned, from the scope of the contract and that the related service charges be adjusted accordingly. The NHS’s right to decommission services does not apply to Lorenzo services deployed after the October 4, 2013 RPA effective date or to ambulance services. The basis for decommissioning shall be either the complete closure of an NHS trust (or other NHS service recipient) or the cessation of relevant clinical services by a trust (or other NHS service recipient) (a “natural decommissioning”), or an NHS trust (or other NHS service recipient) determining that it no longer requires a particular service for any other reason (a “voluntary decommissioning”). The NHS is subject, during the remaining term of the contract, to an aggregate monetary limit on the ability to effect any voluntary decommissionings, which at the October 4, 2013 RPA effective date was approximately £19.6 million ($31 million). The NHS is also subject, during the remaining term of

43

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

the contract, to aggregate monetary limits on the ability to effect any voluntary decommissionings with respect to individual modules of certain products, which limits at the October 4, 2013 RPA effective date, ranged from approximately £0.2 million to £4.4 million ($0.3 million to $6.9 million) (depending on the affected module in question).

Accounting

Prior to the IACCN, the NHS contract has been accounted for using the percentage-of-completion method based on management's best estimates of total contract revenue and costs. Based on then existing circumstances, CSC revised its estimate of revenues and costs at completion during the third quarter of fiscal 2012 to include only those revenues reasonably assured of collection. As a result of that change, the Company recorded a $1.5 billion contract charge in that quarter, resulting in no material remaining net assets. See additional disclosures in Notes 5 and 19 related to the settlement with the SEC.

The terms of the IACCN (and as now embodied in the RPA) represented a significant modification to the prior agreement, including a significant reduction in additional product development and elimination of any commitment by the NHS to future Lorenzo deployments and the Company's exclusivity rights in two of the three contract regions. The Company concluded that it will account for the terms of the IACCN (and as now embodied in the RPA) as a new contract and will recognize revenue as a services arrangement. Revenue recognition for each trust deployment will begin at the start of the trust's hosting period. Payments from the NHS for deployment of systems will be deferred and recognized over the service period. Direct costs incurred for deployment activities will be deferred and amortized to expense over the service period as well. The total up-front consideration of £78 million ($120 million), including the £68 million ($105 million) net settlement payment and a £10 million ($15 million) escrow release, is primarily attributed to future Lorenzo deployments and will be deferred and recognized as revenue ratably over the term of the contract ending July 2016. The £10 million ($15 million) payment received on March 28, 2013, as well as future consideration not noted above, when and if earned, will be deferred and amortized over the longer of the term of the contract or the estimated performance period. As of January 2, 2015, the amount of deferred costs and deferred revenues was $18 million and $166 million, respectively.

Note 19 - Commitments and Contingencies

Commitments

In the normal course of business, the Company may provide certain clients, principally governmental entities, with financial performance guarantees, which are generally backed by stand-by letters of credit or surety bonds. In general, the Company would only be liable for the amounts of these guarantees in the event that nonperformance by the Company permits termination of the related contract by the Company’s client. As of January 2, 2015, the Company had $21 million of outstanding surety bonds and $78 million of outstanding letters of credit relating to these performance guarantees. The Company believes it is in compliance with its performance obligations under all service contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on its consolidated results of operations or financial position.

The Company also uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations towards these policies. As of January 2, 2015, the Company had $59 million of outstanding stand-by letters of credit.


44

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

The following table summarizes the expiration of the Company’s financial guarantees and stand-by letters of credit outstanding as of January 2, 2015:
(Amounts in millions)
 
Fiscal 2015
 
Fiscal 2016
 
Fiscal 2017 and thereafter
 
Total
Surety bonds
 
$
1

 
$
20

 
$
—

 
$
21

Letters of credit
 
9

 
41

 
28

 
78

Stand-by letters of credit
 
25

 
22

 
12

 
59

Total
 
$
35

 
$
83

 
$
40

 
$
158


The Company generally indemnifies licensees of its proprietary software products against claims brought by third parties alleging infringement of their intellectual property rights (including rights in patents (with or without geographic limitations), copyright, trademarks and trade secrets). CSC’s indemnification of its licensees relates to costs arising from court awards, negotiated settlements and the related legal and internal costs of those licensees. The Company maintains the right, at its own costs, to modify or replace software in order to eliminate any infringement. Historically, CSC has not incurred any significant costs related to licensee software indemnification.
 
Contingencies

The Company has a contract with the NHS to develop and deploy an integrated patient records system as a part of the U.K. Government's NHS IT program. On August 31, 2012, the Company and NHS entered into a binding interim agreement contract change note, or IACCN, which amended the terms of the then current contract and formed the basis on which the parties finalized a full restatement of the contract. On March 28, 2013, the Company and the NHS signed a letter agreement that modified certain terms of the IACCN. On October 4, 2013, the Company and NHS finalized a full restatement of the contract through a revised project agreement (RPA). The RPA embodies and incorporates the principal terms of the IACCN and such letter agreement, makes certain other changes with respect the Company’s non-Lorenzo product deployments and consolidates the three regional contracts which comprised the Company's NHS contract into a single agreement. See Note 18 for further information relating to the foregoing matters.

As previously disclosed, on January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation. That investigation covered a range of matters as previously disclosed by the Company, including certain of the Company’s prior disclosures and accounting determinations. On May 2, 2011, the Audit Committee commenced an independent investigation. The Audit Committee retained independent counsel to represent the Company on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants and disclosure experts to assist with their work. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

As a result of findings by the Audit Committee’s independent investigation, the Company has previously acknowledged certain historic errors and irregularities relating to accounting entries arising from the Nordics region, Australia, and the Company’s contractual relationship with the NHS, self-reported these errors and irregularities to the SEC’s Division of Enforcement, and made adjustments to its financial statements that are related to prior periods as reported in its past filings. In addition, as previously disclosed, certain personnel in certain foreign operations were reprimanded, suspended, terminated and/or resigned and additional controls were implemented. Based on recommendations from the Audit Committee’s independent investigation, the Company also instituted comprehensive enhancements beginning in 2011 to its compliance, financial and disclosure controls, and to the function of internal audit. In doing so, the Company made significant changes to prevent the type of misconduct identified by the Audit Committee’s independent investigation from recurring. The Company previously took significant steps to enhance its compliance culture and to remediate any deficiencies through: (1) Company-wide communications concerning the Company’s key organizational values of ethics, compliance and integrity; (2) strengthening internal controls and processes to further ensure the accuracy and integrity of the Company’s financial reporting; (3) improving technical training for employees in finance and accounting roles; (4) a restructuring of the internal audit group and the outsourcing of many internal audit activities to Ernst & Young to enhance the quality and scalability of the Company’s overall internal audit function; (5) creating an independent investigations unit

45

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

at the Company to investigate suspected violations of the law or the Company's Code of Conduct; (6) elevating the position of Chief Compliance and Ethics Officer to provide direct reporting to the Audit Committee; (7) creating a new position of Chief Accounting Officer responsible for developing accounting policies and reviewing complex technical accounting issues; and (8) revising policies and procedures concerning POC accounting to enhance the review and monitoring of long-term contracts, including those contracts similar to the contract with NHS.

The Company has been in continuing discussions with the SEC’s staff concerning a potential resolution of the SEC’s investigation. Many of those discussions have concerned the Company’s prior use in fiscal 2009-2012 of the terms of ongoing NHS contract negotiations in developing its assumptions and judgments with respect to the margin used in recognizing profit under the POC accounting method and in evaluating the recoverability of NHS contract assets as well as the Company’s prior disclosures concerning such matters.

As previously disclosed, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the antifraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second or third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter. The Board of Directors of the Company determined that the Company's previously issued consolidated financial statements for fiscal 2009-2012 (including the associated auditors' reports and the interim periods within those years) should no longer be relied upon.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.
As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government,

46

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation or cash flows.

See Note 5 for further information.

On March 1, 2012, the Company was competitively awarded the Maryland Medicaid Enterprise Restructuring Project (“MERP”) contract by the State of Maryland (the State) to modernize the Medicaid Management Information System ("MMIS"), a database of Medicaid recipients and providers used to manage Medicaid reimbursement claims. The MERP contract is predominately fixed price. Also, since awarded, federal government-mandated Medicaid information technology standards have been in considerable flux. The State has directed the Company to include additional functionality in the design to incorporate new federal mandates and guidance promulgated after the base scope of the Contract was finalized. Further, the State has declined to approve contract modifications to compensate the Company for the additional work.

As a result of the State’s refusal to amend the MERP contract and equitably adjust the compensation to be paid to the Company and, in accordance with prescribed State statutes and regulations, the Company timely filed a certified contract claim with the State in the total estimated amount of approximately $61 million on September 27, 2013 (Contract Claim #1). On February 14, 2014, the Company filed Contract Claim #1A, which amends Contract Claim #1, to a claim of approximately $34 million. The Company believes it has valid and reasonable factual and legal bases for Contract Claims #1 and 1A and that the circumstances that have led or will lead to the Company’s additional costs set forth in Contract Claims #1 and 1A were unforeseen as of the operative proposal submission dates and are not the result of deficiencies in CSC’s performance. However, the Company’s position is subject to the ongoing evaluation of new facts and information which may come to the Company’s attention should an appeal of the State's denial of Contract Claims #1 and 1A be litigated before the Maryland State Board of Contract Appeals (the State Board).

On February 19, 2014, the State provided a recommended decision denying Contract Claims #1 and 1A to the Company. The February 19, 2014 recommended decision was not a final agency determination on the claims. On April 29, 2014, the State provided a final decision, dated April 25, 2014, denying the claims to the Company. On May 28, 2014, the Company filed a Notice of Appeal with the State Board, which has exclusive initial jurisdiction of State contract claims concerning breach, performance, modification, or termination of contracts procured under Title II of Maryland's General Procurement Law. The appeal is currently pending before the State Board.

On August 22, 2014, the State unilaterally suspended performance under the Contract for 90 days. On September 12, 2014, the State modified its August 22nd suspension of the Contract and authorized CSC, during the remainder of the 90-day suspension, to assign up to nine full-time-equivalent staff to perform various analyses of cost and schedule. On November 20, 2014, the State sent a letter extending the Suspension until January 5, 2015, and on January 2, 2015, the State again extended the Suspension until February 20, 2015.

As the result of the 90-day suspension, as extended, and other actions and inactions by the State in performance of its obligations under and management of the Contract, the Company filed a second set of Claims with the State Board (Claims #2A-D). Claim #2A, in the amount of $77 million, asserts that the Company's contractual undertaking did not include an agreement to receive reduced and delayed payments, and the State's unilateral imposition of such reductions and delays, together with the other factors result in a material change to the Contract entitling the Company to compensation for all costs incurred to date, including all liabilities incurred, and fee, as well as expected profit under the full contract. Alternatively, Claim #2B, in the amount of $65 million, asserts that the Maryland General Assembly's reduction to the appropriations for the MERP Project for fiscal 2015 effectively cancels the MERP Contract, entitling the Company to recover all costs incurred to date including all liabilities incurred, and a reasonable allowance for profit on costs and liabilities. Similarly, Claims #2C, also in the amount of $65 million, asserts that the State's actions, inactions, and decisions amount to a constructive termination for convenience entitling the Company to recover all costs incurred to date including, all liabilities incurred, and reasonable allowance for profit on costs and liabilities. Claim #2D is a claim for suspension costs during the 90-day period of $3 million, including labor costs, facilities costs and other costs needed to remain ready to re-start program. Due to the new claims, management assessed the adequacy of contract reserves and concluded that such reserves were adequate.


47

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

On October 27, 2014, the United States District Court for the Southern District of New York unsealed a qui tam complaint that had been filed under seal over two years prior in a case entitled United States of America and State of New York ex rel. Vincent Forcier v. Computer Sciences Corporation and The City of New York, Case No. 1:12-cv-01750-DAB. The original complaint was brought by Vincent Forcier, a former employee of Computer Sciences Corporation, as a private party qui tam relator on behalf of the United States and the State of New York. The relator’s amended complaint, dated November 15, 2012, which remained under seal until October 27, 2014, alleged civil violations of the federal False Claims Act, 31 U.S.C. § 3729 et seq., and New York State’s False Claims Act, NY. Finance L, Art. 13, § 187 et seq., arising out of certain coding methods employed with respect to claims submitted by the Company to Medicaid for reimbursements as fiscal agent on behalf of its client, New York City’s Early Intervention Program (EIP). EIP is a federal program promulgated by the Individuals with Disabilities in Education Act, 20 U.S.C. § 1401 et seq. (IDEA), that provides early intervention services for infants and toddlers who have, or are likely to have, developmental delays.

Prior to the unsealing of the complaint on October 27, 2014, the United States Attorney’s Office for the Southern District of New York investigated the allegations in the qui tam relator’s complaint. That investigation included requests for information to the Company concerning the Company’s databases, software programs, and related documents regarding EIP claims submitted by the Company on behalf of New York City. The Company produced documents and information that the government requested and cooperated fully with the government’s investigation regarding this matter at all times. In addition, the Company conducted its own investigation of the matter, and openly shared its findings and worked constructively with all parties to resolve the matter. At the conclusion of its investigation, the Company concluded that it had not violated the law in any respect.

On October 27, 2014, the United States Attorney’s Office for the Southern District of New York and the Attorney General for the State of New York filed complaints-in-intervention on behalf of the United States and the State of New York, respectively. The complaints allege that, from 2008 to 2012, the Company and New York City used the automatic defaulting capabilities of a computerized billing system that the Company developed for New York City’s EIP in order to orchestrate a billing fraud against Medicaid. The New York Attorney General’s complaint also alleges that the Company did not comply with Medicaid requirements regarding submission of claims to private insurance and failed to reimburse Medicaid in certain instances where insurance had paid a portion of the claim. The lawsuits seek damages under the False Claims Act and common law theories in an amount equal to three times the sum of an unspecified amount of damages the United States and New York State allegedly sustained, plus civil penalties together with attorneys’ fees and costs. The Company believes that the allegations are without merit and intends to vigorously defend itself.

Publicity surrounding the foregoing could have an adverse impact on the Company’s reputation, financial condition, results of operations or cash flows. The Company is unable to estimate with confidence or certainty any possible loss or range of loss associated with these matters at this time.

In addition to the matters noted above, the Company is currently party to a number of disputes which involve or may involve litigation. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated under ASC 450. The Company believes it has appropriately recognized liabilities for any such matters. Regarding other matters that may involve actual or threatened disputes or litigation, the Company, in accordance with the applicable reporting requirements, provides disclosure of such matters for which the likelihood of material loss is at least reasonably possible.

The Company also considered the requirements regarding estimates used in the disclosure of contingencies under ASC Subtopic 275-10, Risks and Uncertainties. Based on that guidance, the Company determined that supplemental accrual and disclosure was not required for a change in estimate that involve contingencies because the Company determined that it was not reasonably possible that a change in estimate will occur in the near term. The Company reviews contingencies during each interim period and adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.


48

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter and Nine Months of Fiscal 2015 versus
Third Quarter and Nine Months of Fiscal 2014

All statements and assumptions in this quarterly report on Form 10-Q and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking information contained in these statements include, among other things, statements with respect to the Company's financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, management's assessment of estimates related to profitability of its long-term contracts and estimates related to impairment of contract-specific assets, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of the Company's control, which could cause actual results to differ materially from the results described in such statements. These forward looking statements should be read in conjunction with the Company's Annual Report on Form 10-K, for the year ended March 28, 2014. The reader should also specifically consider the various risks discussed in the Risk Factors section included elsewhere herein.

Forward-looking statements in this quarterly report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached or incorporated by reference speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

General

The following discussion and analysis provides information management believes relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (CSC or the Company). The discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included herein and the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014. The following discusses the Company's financial condition and results of operations as of and for the quarter and nine months ended January 2, 2015, and the comparable periods of the prior fiscal year.

Reportable Segments

CSC is a global leader of information technology (IT) and professional services and solutions. The Company's mission is to enable superior returns on its clients' technology investments through best-in-class industry solutions, domain expertise and global scale.

The Company’s reportable segments are as follows:

•
Global Business Services (GBS) – GBS provides end-to-end applications services, consulting, big data, and industry-aligned software and solutions to enterprise clients around the world. GBS manages and industrializes clients' application ecosystem through its Applications Services offering. The company has formed a number of strategic partnerships with leading technology companies such as HCL Technologies and SAP to deliver world-class solutions to its customers . These partnerships will enable clients to modernize and move enterprise workloads to next generation cloud infrastructure, while leveraging the benefits of mobility, social networking and big data. The GBS consulting business assists clients in achieving greater value from current IT assets as well as aiding in the direction of future IT investments. GBS software and solutions include vertically-aligned solutions and process-based intellectual property. Clients include major global enterprises in the insurance, banking, healthcare, life sciences, manufacturing and a host of diversified industries. Key competitive differentiators for GBS include its global scale, depth of industry expertise, strong partnerships with leading technology companies, vendor and product independence and end-to-end capabilities. Changing business issues such as globalization, fast-developing

49

economies, government regulation, and growing concerns around risk, security, and compliance drive demand for these GBS offerings.

•
Global Infrastructure Services (GIS) – GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cloud services, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers next-generation hybrid Cloud infrastructure solutions to clients. The company integrates public cloud offerings from Amazon Web Services, IBM, Microsoft, and VMware, with its industry-leading private cloud solution, BizCloud. The CSC Agility Platform enables enterprises to manage, monitor, and automate applications over heterogeneous and hybrid clouds. The GIS portfolio of standard offerings delivers measurable results while reducing business risk and operational costs for clients. Collaboration with key alliance partners helps CSC to determine the best technology road map for clients and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions.

•
North American Public Sector (NPS) – NPS delivers IT, mission, and operations-related services to the Department of Defense and civil agencies of the U.S. federal government, as well as other foreign, state and local government agencies. Commensurate with the Company's strategy of leading the next generation of IT services, NPS is leveraging our commercial best practices and next-generation offerings to bring more cost-effective IT solutions to government agencies which are seeking efficiency through innovation. This approach is designed to yield lower implementation and operational costs as well as a higher standard of delivery excellence. Demand for NPS offerings are driven by evolving government priorities such as: 1) migration to next-generation IT solutions, which includes hybrid cloud infrastructure, application modernization and orchestration, 2) mission intelligence driven by big data solutions, 3) health IT and informatics, and 4) cyber security.



50

Overview

The key operating results for the third quarter and first nine months of fiscal 2015 include:

•
Revenues for the third quarter of fiscal 2015 decreased $281 million, or 8.7%, to $2,947 million, and on a constant currency basis(1), decreased $210 million, or 6.5%, as compared to the third quarter of fiscal 2014. For the first nine months of fiscal 2015, revenues decreased $405 million, or 4.2%, to $9,264 million, and on a constant currency basis, revenues decreased $410 million, or 4.2%, as compared to the first nine months of fiscal 2014.

•
Operating income(2) for the third quarter of fiscal 2015 was $332 million as compared to $338 million for the third quarter of fiscal 2014. Operating income margin was 11.3% and 10.5% for the third quarter of fiscal 2015 and fiscal 2014, respectively. For the first nine months, operating income decreased to $985 million as compared to operating income of $1,031 million for the first nine months of fiscal 2014. The operating income margin decreased to 10.6% from 10.7% for the comparable period of fiscal 2014.

•
Earnings before interest and taxes(3) (EBIT) for the third quarter of fiscal 2015 was $272 million compared to $278 million for the third quarter of fiscal 2014. EBIT margin improved to 9.2% from last year's third quarter margin of 8.6%. EBIT decreased to $797 million as compared to EBIT of $818 million for the first nine months of fiscal 2014. EBIT margin was 8.6% compared to 8.5% in the prior year.

 
(1)
Selected references are made on a “constant currency basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a “constant currency basis” are non-GAAP measures calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar.

(2)
Operating income is a non-U.S. Generally Accepted Accounting Principles (GAAP) measure used by management to assess performance at the segments and on a consolidated basis. The Company’s definition of such measure may differ from that used by other companies. CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment general and administrative (G&A) expense, excluding corporate G&A, actuarial and settlement charges related to CSC's pension and other post-employment benefit (OPEB) plans, and SEC settlement related charges. Operating margin is defined as operating income as a percentage of revenue. Management compensates for the limitations of this non-GAAP measure by also reviewing income from continuing operations before taxes, which includes costs excluded from the operating income definition such as corporate G&A, pension adjustments, which include mark-to-market adjustment to pension expense and pension settlement gains and losses, and SEC settlement related charges, interest and other income (expense). A reconciliation of consolidated operating income to income from continuing operations before taxes is as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Operating income
 
$
332

 
$
338

 
$
985

 
$
1,031

Corporate G&A
 
(59
)
 
(65
)
 
(182
)
 
(197
)
Pension & OPEB actuarial & settlement (losses) gains
 
(462
)
 
114

 
(463
)
 
114

SEC settlement related charges
 
(195
)
 
—

 
(195
)
 
—

Interest expense
 
(37
)
 
(38
)
 
(112
)
 
(112
)
Interest income
 
4

 
4

 
14

 
11

Other income (expense), net
 
(1
)
 
5

 
(6
)
 
(16
)
(Loss) income from continuing operations before taxes
 
$
(418
)
 
$
358

 
$
41

 
$
831


(3)
Earnings before interest and taxes (EBIT) is a non-GAAP measure that provides useful information to investors regarding the Company's results of operations as it provides another measure of the Company's profitability, and is considered an important measure by financial analysts covering CSC and its peers. The Company’s definition of such measure may differ from that used by other companies. CSC defines EBIT as income from continuing operations less actuarial and settlement charges related to CSC's pension other post-employment benefit (OPEB) plans, the SEC settlement related charges, interest expense, interest income and income tax (benefit) expense. EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to income from continuing operations is as follows:

51

 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Earnings before interest and taxes
 
$
272

 
$
278

 
$
797

 
$
818

Pension & OPEB actuarial & settlement (losses) gains
 
(462
)
 
114

 
(463
)
 
114

SEC settlement related charges
 
(195
)
 
—

 
(195
)
 
—

Interest expense
 
(37
)
 
(38
)
 
(112
)
 
(112
)
Interest income
 
4

 
4

 
14

 
11

Income tax benefit (expense)
 
105

 
(77
)
 
(18
)
 
(227
)
(Loss) income from continuing operations
 
$
(313
)
 
$
281

 
$
23

 
$
604


•
(Loss) income from continuing operations before taxes was $(418) million for the third quarter of fiscal 2015, as compared to $358 million in the third quarter of fiscal 2014. Income from continuing operations before taxes was $41 million for the nine months ended January 2, 2015, compared to $831 million in the first nine months of fiscal 2014, a decrease of $790 million. The reduction in income from continuing operations, for both the third quarter and first nine-months of fiscal 2015 , was primarily due to recognition in the third quarter of pension actuarial and settlement losses of $462 million, and the SEC settlement related charges of $195 million.(4)  

•
(Loss) income from discontinued operations, net of taxes, was $0 million for the third quarter of fiscal 2015, as compared to $(5) million in the same period of fiscal 2014. (Loss) income from discontinued operations, net of taxes, was $(29) million for the first nine months of fiscal 2015, as compared to income of $91 million in the same period of fiscal 2014.

•
Net (loss) income attributable to CSC common stockholders was $(314) million for the third quarter of fiscal 2015, as compared to $271 million in the same period of fiscal 2014. Net (loss) income attributable to CSC common stockholders was $(17) million for the first nine months of fiscal 2015, compared with $677 million in the same period of fiscal 2014.(4) 

•
Diluted earnings (loss) per share (EPS) from continuing operations, for the third quarter of fiscal 2015 was $(2.23) as compared to $1.84 for the same period in the prior fiscal year, and was $0.08 for the first nine months of fiscal 2015 as compared to $3.88 in fiscal 2014.

•
Diluted EPS from discontinued operations, for the third quarter of fiscal 2015 was $0.00 as compared to $(0.03) for the same period in the prior fiscal year, and was $(0.20) for the first nine months of fiscal 2015 as compared to $0.60 in fiscal 2014.
 

(4) 
Non-GAAP results are financial measures calculated by excluding certain significant items, which management believes are not indicative of the Company's operating performance. A reconciliation of non-GAAP results to reported results is as follows:

52

 
 
Quarter ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As reported
 
Pension & OPEB actuarial & settlement losses
 
SEC Settlement related charges
 
Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
2,530

 
$
(418
)
 
$
—

 
$
2,112

 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes SEC settlement related charges and restructuring costs)
 
$
356

 
$
(44
)
 
$
—

 
$
312

 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, before taxes
 
$
(418
)
 
$
(462
)
 
$
(195
)
 
$
239

Income tax (benefit) expense
 
(105
)
 
(171
)
 
(1
)
 
67

(Loss) income from continuing operations
 
$
(313
)
 
$
(291
)
 
$
(194
)
 
$
172

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(313
)
 
$
(291
)
 
$
(194
)
 
$
172

Less: Net income (loss) attributable to noncontrolling interest, net of tax
 
1

 
(2
)
 
—

 
3

Net (loss) income attributable to CSC common stockholders
 
$
(314
)
 
$
(289
)
 
$
(194
)
 
$
169

 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
25.1
%
 
37.0
%
 
0.5
%
 
28.0
%
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
(2.23
)
 
$
(2.05
)
 
$
(1.38
)
 
$
1.20

Diluted EPS from continuing operations
 
$
(2.23
)
 
$
(2.02
)
 
$
(1.36
)
 
$
1.18

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
Basic EPS
 
140.637

 
140.637

 
140.637

 
140.637

Diluted EPS
 
140.637

 
142.852

 
142.852

 
142.852


* The net periodic pension cost within income from continuing operations includes $18 million of actual return on plan assets, whereas the net periodic
pension cost within non-GAAP income from continuing operations includes $64 million of expected long-term return on pension assets of defined
benefit plans subject to interim remeasurement.

 
 
Nine months ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As reported
 
Pension & OPEB actuarial & settlement losses
 
SEC Settlement related charges
 
Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
7,101

 
$
(418
)
 
$
—

 
$
6,683

 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes SEC settlement related charges and restructuring costs)
 
$
1,046

 
$
(45
)
 
$
—

 
$
1,001

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, before taxes
 
$
41

 
$
(463
)
 
$
(195
)
 
$
699

Income tax expense (benefit)
 
18

 
(171
)
 
(1
)
 
190

Income (loss) from continuing operations
 
$
23

 
$
(292
)
 
$
(194
)
 
$
509

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(6
)
 
$
(292
)
 
$
(194
)
 
$
480

Less: Net income (loss) attributable to noncontrolling interest, net of tax
 
11

 
(2
)
 
—

 
13

Net (loss) income attributable to CSC common stockholders
 
$
(17
)
 
$
(290
)
 
$
(194
)
 
$
467

 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
43.9
%
 
36.9
%
 
0.5
%
 
27.2
%
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.08

 
$
(2.03
)
 
$
(1.36
)
 
$
3.47

Diluted EPS from continuing operations
 
$
0.08

 
$
(1.98
)
 
$
(1.33
)
 
$
3.39

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
Basic EPS
 
143.141

 
143.141

 
143.141

 
143.141

Diluted EPS
 
146.323

 
146.323

 
146.323

 
146.323


* The net periodic pension cost within income from continuing operations includes $145 million of actual return on plan assets, whereas the net periodic
pension cost within non-GAAP income from continuing operations includes $191 million of expected long-term return on pension assets of defined
benefit plans subject to interim remeasurement.


53

 
 
Quarter ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As reported
 
Pension actuarial gains
 
Non-GAAP results
Income from continuing operations, before taxes
 
$
358

 
$
114

 
$
244

Income tax expense
 
77

 
—

 
77

Income from continuing operations
 
$
281

 
$
114

 
$
167

 
 
 
 
 
 
 
Net income
 
$
276

 
$
114

 
$
162

Less: net income attributable to noncontrolling interest, net of tax
 
5

 
—

 
5

Net income attributable to CSC common stockholders
 
$
271

 
$
114

 
$
157

 
 
 
 
 
 
 
Effective Tax Rate
 
21.5
%
 
—
%
 
31.6
%
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
1.88

 
$
0.78

 
$
1.10

Diluted EPS from continuing operations
 
$
1.84

 
$
0.76

 
$
1.08

 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
Basic EPS
 
146.735

 
146.735

 
146.735

Diluted EPS
 
149.362

 
149.362

 
149.362


* The net periodic pension cost within income from continuing operations includes $(30) million of actual return on plan assets, whereas the
net periodic pension cost within non-GAAP income from continuing operations includes $35 million of expected long-term return on pension
assets of defined benefit plans subject to interim remeasurement.

 
 
Nine months ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As reported
 
Pension actuarial gains
 
Non-GAAP results
Income from continuing operations, before taxes
 
$
831

 
$
114

 
$
717

Income tax expense
 
227

 
—

 
227

Income from continuing operations
 
$
604

 
$
114

 
$
490

 
 
 
 
 
 
 
Net income
 
$
695

 
$
114

 
$
581

Less: net income attributable to noncontrolling interest, net of tax
 
18

 
—

 
18

Net income attributable to CSC common stockholders
 
$
677

 
$
114

 
$
563

 
 
 
 
 
 
 
Effective Tax Rate
 
27.3
%
 
—
%
 
31.7
%
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
3.96

 
$
0.77

 
$
3.18

Diluted EPS from continuing operations
 
$
3.88

 
$
0.75

 
$
3.12

 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
Basic EPS
 
148.212

 
148.212

 
148.212

Diluted EPS
 
151.124

 
151.124

 
151.124


* The net periodic pension cost within income from continuing operations includes $37 million of actual return on plan assets, whereas the
net periodic pension cost within non-GAAP income from continuing operations includes $103 million of expected long-term return on pension
assets of defined benefit plans subject to interim remeasurement.



54

•
The Company announced total contract awards(5) of $2.7 billion for the third quarter of fiscal 2015, including $1.2 billion for GBS, $1.0 billion for GIS and $0.5 billion for NPS. Total contract awards for the third quarter of fiscal 2014 were $3.3 billion, including $2.0 billion for GBS, $0.7 billion for GIS and $0.6 billion for NPS.

•
Days Sales Outstanding (DSO)(6) was 75 days at January 2, 2015, an improvement from 76 days at the end of the third quarter of the prior fiscal year.

•
Net debt-to-total capitalization ratio(7) was 5.4% at January 2, 2015, a decrease of 1.1% percentage points from 6.5% at March 28, 2014.

•
Cash provided by operating activities was $1,143 million for the first nine months of fiscal 2015, as compared to $1,012 million for the same period in the prior year. Cash used in investing activities was $399 million for the first nine months of fiscal 2015, as compared to $377 million for the same period in the prior year. Cash used in financing activities was $679 million for the first nine months of fiscal 2015, as compared to $393 million for the same period in the prior year.

•
Free cash flow(8) of $599 million for the first nine months of fiscal 2015 increased $198 million as compared to $401 million for the first nine months of fiscal 2014.

 

(5) 
Business awards for GBS & GIS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. For NPS, announced award values for competitive indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. Announced values for non-competitive IDIQ awards represent management’s estimate at the award date. Segment awards may not add to total awards due to rounding.

(6) 
DSO is calculated as total receivables at the fiscal period end divided by revenue-per-day. Revenue-per-day equals total revenues divided by the number of days in the fiscal period. Total receivables includes unbilled receivables but excludes income tax receivables and long-term receivables.

(7) 
Net debt-to-total capitalization ratio is defined as total current and long-term debt less total cash and cash equivalents divided by total debt and equity, including noncontrolling interest.
 
(8) 
Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. CSC defines free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities) and (3) payments on capital leases and other long-term asset financings.

CSC’s free cash flow measure does not distinguish operating cash flows from investing cash flows as they are required to be presented in accordance with GAAP, and should not be considered a substitute for operating and investing cash flows as determined in accordance with GAAP. Free cash flow is one of the factors CSC management uses in reviewing the overall performance of the business. Management compensates for the limitations of this non-GAAP measure by also reviewing the GAAP measures of operating, investing and financing cash flows as well as debt levels measured by the debt-to-total capitalization ratio.

A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
Net cash provided by operating activities
 
$
653

 
$
529

 
$
1,143

 
$
1,012

Net cash (used in) provided by investing activities
 
(101
)
 
(301
)
 
(399
)
 
(377
)
Acquisitions, net of cash acquired
 
—

 
163

 
35

 
190

Business dispositions
 
—

 
(13
)
 
13

 
(245
)
Short-term investments
 
—

 
—

 
—

 
(5
)
Payments on capital leases and other long-term asset financings
 
(54
)
 
(54
)
 
(193
)
 
(174
)
Free cash flow
 
$
498

 
$
324

 
$
599

 
$
401



55

Results of Operations

Basis of Presentation

Results of operations for the quarter and first nine months of fiscal 2015 were impacted by the following events:

•
During the first quarter of fiscal 2015, the Company changed its accounting policy for the recognition of actuarial gains and losses for its defined benefit pension and other post-retirement benefit plans and the calculation of expected return on pension plan assets. Under the Company’s new accounting policies, the Company recognizes actuarial gains and losses and the changes in fair value of plan assets in earnings at the time of plan remeasurement, typically annually during the fourth quarter of each year as a component of net periodic benefit expense.

In addition, the Company also changed the way in which it allocates the elements of net periodic pension (benefit) cost to its reportable segments to be aligned with changes in how the Company's chief operating decision maker evaluates segment performance. Under the new allocation approach, net actuarial gains and losses and net settlement gains and losses components of the net periodic pension (benefit) cost (mark-to-market adjustments) are excluded entirely from the Company’s definition of operating income and not allocated to the reportable segments. All of the other elements of net periodic pension (benefit) cost, excluding mark-to-market adjustments, continue to be included within operating income of the Company’s reportable segments.

For further details and for the impact of change in the pension accounting method, see Note 2 to the unaudited Consolidated Condensed Financial Statements. The Company has applied the changes in the accounting policy and the changes in the allocation approach retrospectively, adjusting segment reporting for all prior periods presented (see Note 15 to the unaudited Consolidated Condensed Financial Statements).

•
The Company reports its results based on a fiscal year convention that comprises four thirteen-week quarters. Every fifth year includes an additional week in the first quarter of the fiscal year to prevent the fiscal year from moving from an approximate end of March date. As a result, the first quarter of fiscal 2015 had an extra week. For the additional week, the revenue impact consisted of two components. The first component of $39 million represents the amortization of fixed fee contracts, primarily in the GIS segment. This amount will normalize in subsequent quarters and will have no impact on total revenue for the fiscal year. The second is a variable component, which represents volume-based revenue and is influenced by several factors such as business mix, timing of vacations and number of holidays in the period. The variable revenue component is difficult to estimate and ranges from a very low amount to approximately $80 million, and is immaterial to full year results. Despite the variable component of extra-week revenue, CSC's costs during the extra week were largely fixed. At the upper end of the revenue range, CSC believes that cost ratios and operating margin on the incremental revenue would not be dissimilar to CSC's overall business. However, at lower levels of incremental revenue, cost ratios may have been higher and operating margin lower than CSC's overall business.
 
•
Effective fiscal 2015, the Company changed its inter-company accounting policy. Previously, inter-company transactions between segments were generally reflected as inter-company revenue. Under the new policy, inter-company transactions are now generally treated as cost transfers. The new inter-company policy has been applied retrospectively, adjusting the segment results for all prior periods. See Note 15 of the unaudited Consolidated Condensed Financial Statements.


56

Revenues

Revenues for the GBS, GIS and NPS segments for the quarters and nine months ended January 2, 2015 and December 27, 2013, are as follows:
 
 
Quarter Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
Change
 
Percent
Change
GBS
 
$
965

 
$
1,093

 
$
(128
)
 
(11.7
)%
GIS
 
984

 
1,145

 
(161
)
 
(14.1
)
NPS
 
998

 
990

 
8

 
0.8

Total Revenue
 
$
2,947

 
$
3,228

 
$
(281
)
 
(8.7
)%

 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
Change
 
Percent Change
GBS
 
$
3,056

 
$
3,169

 
$
(113
)
 
(3.6
)%
GIS
 
3,151

 
3,405

 
(254
)
 
(7.5
)
NPS
 
3,057

 
3,095

 
(38
)
 
(1.2
)
Total Revenue
 
$
9,264

 
$
9,669

 
$
(405
)
 
(4.2
)%

The major factors affecting the percent change in revenues for the quarter and nine months ended January 2, 2015 are presented as follows:
 
 
Quarter Ended
 
 
Acquisitions
 
Approximate Impact of Currency Fluctuations
 
Net Internal
Growth
 
Total
GBS
 
—
%
 
(3.2
)%
 
(8.5
)%
 
(11.7
)%
GIS
 
0.1

 
(3.2
)
 
(11.0
)
 
(14.1
)
NPS
 
0.7

 
—

 
0.1

 
0.8

Cumulative Net Percentage
 
0.2

 
(2.2
)
 
(6.7
)
 
(8.7
)

 
 
Nine Months Ended
 
 
Acquisitions
 
Approximate Impact of Currency Fluctuations
 
Net Internal
Growth
 
Total
GBS
 
—
%
 
0.1
%
 
(3.7
)%
 
(3.6
)%
GIS
 
0.7

 
—

 
(8.2
)
 
(7.5
)
NPS
 
0.4

 
—

 
(1.6
)
 
(1.2
)
Cumulative Net Percentage
 
0.4

 
—

 
(4.6
)
 
(4.2
)

Global Business Services

GBS segment revenue for the third quarter of fiscal 2015 decreased $128 million or 11.7%, compared to the same period of fiscal 2014. In constant currency, third quarter revenue decreased $93 million or 8.5%. For the first nine months, GBS revenue decreased $113 million or 3.6%, as compared to the same period of fiscal 2014, and decreased $117 million, or 3.7%, in constant currency. The unfavorable foreign currency impact for the third quarter was primarily due to strengthening of the U.S. dollar against the euro, the Australian dollar, and the British pound. The favorable foreign currency impact for the first nine months was mainly due to movement in the U.S. dollar against the British pound, partially offset by movement in the U.S. dollar against the Australian dollar and the euro.

The decrease in GBS' revenue, in constant currency, for both the third quarter and first nine months, was due to reduced revenue within its consulting, applications and Industry Software & Solutions (IS&S) groups. Reduced applications revenue resulted from contracts that either concluded or were winding down, which more than offset revenue from new contracts. Consulting revenue decreases, for both the third quarter and the nine month period, was due to continued repositioning of the business and certain contract conclusions. The repositioning of the consulting business, which was first initiated in the U.K. region, is starting to show signs of improvement. The decrease in IS&S' third quarter revenue was due to $17 million of revenue recognized on long-term software development contracts, in third quarter fiscal 2014, which did not repeat in the third quarter of fiscal 2015. The decrease in IS&S' nine month revenue was partially offset by $23 million of fiscal 2014 adverse adjustments that did not repeat in fiscal 2015.

GBS had contract awards of $1.2 billion in the third quarter and $3.6 billion in the first nine months of fiscal 2015, as compared to awards of $2.0 billion in the third quarter and $4.5 billion in the first nine months of fiscal 2014.

Global Infrastructure Services

GIS segment revenues for the third quarter of fiscal 2015 decreased $161 million, or 14.1%, compared to the same period of fiscal 2014. In constant currency, third quarter revenues decreased $125 million, or 10.9%. For the first nine months, GIS revenue decreased $254 million, or 7.5%, as compared to the same period of fiscal 2014, and decreased $255 million, or 7.5%, in constant currency. The unfavorable foreign currency impact for the third quarter was primarily due to strengthening of the U.S. dollar against the euro, the Australian dollar, the British pound, and the Danish kroner.
 
GIS' revenues for the third quarter of fiscal 2015, excluding the effect of foreign currency movements and acquisition revenue, decreased $126 million, or 11.0%. The decrease in GIS' revenue at constant currency for the third quarter was a result of reduced revenue of $69 million from contracts that terminated or concluded, and reduced revenue of $88 million due to price-downs and contract modifications. These revenue decreases were partially offset by an increase in revenues of $35 million from new contracts and growth in the Cloud business.

GIS' revenues for the first nine months of fiscal 2015, excluding the effect of foreign currency movements and acquisition revenue, decreased $280 million, or 8.2%. The decrease in GIS' revenue at constant currency for the first nine months was a result of reduced revenue of $157 million from contracts that terminated or concluded, and reduced revenue of $269 million due to price-downs and contract modifications. These revenue decreases were partially offset by revenues of $74 million from new contracts and growth in the Cloud business and a net increase in revenues of $72 million from existing contracts. The fiscal 2014 acquisition of ServiceMesh, Inc. provided revenue of $25 million during the first nine months of fiscal 2015.

GIS had contract awards of $1.0 billion in the third quarter and $2.8 billion in the first nine months of fiscal 2015, as compared to $0.7 billion and $2.4 billion in the comparable periods of fiscal 2014, respectively.

North American Public Sector

NPS segment revenues were derived from the following sources:
 
 
Quarter Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
Change
 
Percent
Change
Department of Defense
 
$
521

 
$
607

 
$
(86
)
 
(14.2
)%
Civil Agencies
 
397

 
338

 
59

 
17.5

Other (1)
 
80

 
45

 
35

 
77.8

Total
 
$
998

 
$
990

 
$
8

 
0.8
 %

 
 
Nine Months Ended
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
Change
 
Percent
Change
Department of Defense
 
$
1,634

 
1,840

 
(206
)
 
(11.2
)%
Civil Agencies
 
1,169

 
1,112

 
57

 
5.1
 %
Other (1)
 
254

 
143

 
111

 
77.6
 %
Total
 
$
3,057

 
3,095

 
(38
)
 
(1.2
)%

(1) Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment.

NPS revenue for the third quarter of fiscal 2015 increased $8 million, or 0.8%, and decreased $38 million, or 1.2%, for the first nine months of fiscal 2015, as compared to the same periods of fiscal 2014.

For the third quarter, revenues from DOD contracts decreased $86 million, or 14.2%. These revenue decreases were comprised of reduced revenues of $20 million on certain contracts that had either concluded or were winding down, and a net decrease of $67 million due to reduced tasking on other existing contracts. Revenue from Civil Agencies contracts increased $59 million, or 17.5%, primarily due to a net increase in tasking of $51 million on existing contracts and an increase of $15 million on new contracts, partially offset by reduced revenue of $8 million on certain contracts that had either concluded or were winding down. Revenues from Other contracts increased $35 million, or 77.8%, primarily due to commencement of revenue recognition of $29 million on a state contract that was previously being deferred under software revenue accounting guidance. NPS third quarter revenue trend was favorably impacted by $8 million of adjustments on contracts accounted for under percentage-of-completion method.

For the first nine months, revenue from DOD contracts declined $206 million, or 11.2%. The revenue decreases were comprised of reduced revenues of $59 million on certain contracts that either had concluded or were winding down, and a decrease of $148 million, due to a net reduced tasking on other existing contracts. Revenue from Other contracts increased $111 million, or 77.6%, primarily due to commencement of revenue recognition of $91 million on a state contract that was previously being deferred under software revenue accounting guidance. Revenue from Civil Agencies contracts increased $57 million, or 5.1%, due to $40 million of revenue from new contracts, and a net increase of $65 million due to increased tasking on other existing contracts, partially offset by reduced revenue of $49 million on programs that had concluded or were winding down. NPS nine-month revenue trend was favorably impacted by $18 million of adjustments on contracts accounted for under percentage-of-completion method.

NPS had contract awards of $0.5 billion during the third quarter and $1.9 billion during the first nine months of fiscal 2015, as compared to $0.6 billion, and $3.4 billion, during the third quarter and the first nine months of fiscal 2014, respectively. The Company expects the trend of reduced contract scopes, including reduced tasking, to continue in the near term.


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Costs and Expenses

The Company’s total costs and expenses were as follows:
 
 
Quarter Ended
 
 
Amount
 
Percentage of Revenue
 
Percentage
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
of Revenue Change
Costs of services (excludes depreciation & amortization and restructuring costs)(1)
 
$
2,530

 
$
2,261

 
86.0
%
 
70.0
 %
 
16.0
%
Selling, general and administrative (excludes SEC settlement related charges and restructuring costs)(2)
 
356

 
318

 
12.1

 
9.9

 
2.2

Selling, general and administrative - SEC settlement related charges
 
195

 
—

 
6.6

 
—

 
6.6

Depreciation and amortization
 
238

 
251

 
8.1

 
7.8

 
0.3

Restructuring costs
 
12

 
11

 
0.4

 
0.3

 
0.1

Interest expense, net
 
33

 
34

 
1.1

 
1.1

 
—

Other (income) expense, net
 
1

 
(5
)
 
—

 
(0.2
)
 
0.2

Total
 
$
3,365

 
$
2,870

 
114.2
%
 
88.9
 %
 
25.4
%
(1) Cost of services includes $418 million of actuarial and pension settlement losses and $80 million of actuarial gains for the third quarter of fiscal 2015 and 2014, respectively. See Note 10 of the Consolidated Condensed Financial Statements for further discussion.

(2) Selling, general and administrative includes $44 million of actuarial and pension settlement losses and $34 million of actuarial gains for the third quarter of fiscal 2015 and 2014, respectively. See Note 10 of the Consolidated Condensed Financial Statements for further discussion.

 
 
Nine Months Ended
 
 
Amount
 
Percentage of Revenue
 
Percentage
(Amounts in millions)
 
January 2, 2015
 
December 27, 2013
 
January 2, 2015
 
December 27, 2013
 
of Revenue Change
Costs of services (excludes depreciation & amortization and restructuring costs)(1)
 
$
7,101

 
$
7,015

 
76.6
%
 
72.6
%
 
4.0
 %
Selling, general and administrative (excludes SEC settlement related charges and restructuring costs)(2)
 
1,046

 
920

 
11.3

 
9.5

 
1.8

Selling, general and administrative - SEC settlement related charges
 
195

 
—

 
2.1

 
—

 
2.1

Depreciation and amortization
 
762

 
753

 
8.2

 
7.8

 
0.4

Restructuring costs
 
15

 
33

 
0.2

 
0.3

 
(0.1
)
Interest expense, net
 
98

 
101

 
1.1

 
1.0

 
0.1

Other (income) expense, net
 
6

 
16

 
0.1

 
0.2

 
(0.1
)
Total
 
$
9,223

 
$
8,838

 
99.6
%
 
91.4
%
 
8.2
 %
(1) Cost of services includes $418 million of actuarial and pension settlement losses and $80 million of actuarial gains for the first nine months of fiscal 2015 and 2014, respectively. See Note 10 of the Consolidated Condensed Financial Statements for further discussion.

(2) Selling, general and administrative includes $45 million of actuarial and pension settlement losses and $34 million of actuarial gains for the first nine months of fiscal 2015 and 2014, respectively. See Note 10 of the Consolidated Condensed Financial Statements for further discussion.


Costs of Services

Costs of services (COS), excludes depreciation and amortization, and restructuring charges of $8 million and $4 million for the third quarter of fiscal 2015 and 2014, respectively, and $9 million and $28 million for the first nine months of fiscal 2015, respectively. COS as a percentage of revenue increased 16.0 and 4.0 percentage points, for the third quarter and first nine months of fiscal 2015, respectively, as compared to similar periods of the prior fiscal year.


58

The increase in the COS ratio, for both the third quarter and the first nine months, is attributable to the year-over-year unfavorable impact of recognition of actuarial gains (losses) and pension settlement losses. During the third quarter of fiscal 2015, the Company recognized in COS $418 million of actuarial and pension settlement losses, resulting from remeasurement of pension assets and liabilities associated with certain U.S. defined benefit pension plans and a Swiss defined benefit pension plan. Comparatively, during the third quarter of fiscal 2014, the Company had recognized $80 million of actuarial gains, resulting from remeasurement of pension assets and liabilities associated with its U.K. pension plans. For further discussion, see Note 10 to the unaudited Consolidated Condensed Financial Statements.

Excluding the impact of the pension adjustments, the COS ratio decreased 0.8 and 1.3 percentage points, for the third quarter and first nine months of fiscal 2015, respectively.

The decrease in the COS ratio, excluding the impact of the pension adjustments described above, for both the third quarter and the first nine months, was largely due to lower year-over-year headcount resulting from management's restructuring efforts that were directed to align resources to support business needs, and other initiatives to reduce overhead costs. The reduction in the COS ratio due to these activities more than offset the impact of decreased revenues. The reduction in direct cost and overhead included savings from moving work to lower cost centers, rationalizing vendors, negotiating savings with third parties, and rationalizing facility and data centers.

In addition, the COS ratio for the nine month period benefited from the gain of $43 million on sale of certain assets. The COS ratio, for both the third quarter and first nine months of fiscal 2015, was adversely impacted by the year-over-year trend in adjustments on contracts accounted for under percentage-of-completion method. The third quarter and first nine months of fiscal 2015 had $8 million and $12 million of less favorable cost adjustments, respectively, and $9 million and $18 million of more favorable revenue adjustments, respectively.

Selling, General and Administrative

Selling, general and administrative (SG&A) expense, excluded the SEC settlement related charges of $195 million, and restructuring charges of $4 million and $7 million, for the third quarter of fiscal 2015 and 2014, respectively, and $6 million and $5 million for the first nine months of fiscal 2015, respectively. SG&A as a percentage of revenue, increased 2.2 and 1.8 percentage points, for the third quarter and first nine months of fiscal 2015, respectively, as compared to similar periods in the prior fiscal year.

The increase in the SG&A ratio, for both the third quarter and the first nine months, is attributable to the year-over-year unfavorable impact of recognition of actuarial gains (losses) and pension settlement losses. During the third quarter of fiscal 2015, the Company recognized in SG&A expense $44 million of actuarial and pension settlement losses resulting from remeasurement of pension assets and liabilities associated with certain U.S. defined benefit pension plans and a Swiss defined benefit pension plan. Comparatively, during the third quarter of fiscal 2014, the Company had recognized $34 million of actuarial gains, resulting from remeasurement of pension assets and liabilities associated with its U.K. defined benefit pension plans (see Note 10 to the Consolidated Condensed Financial Statements).

Excluding the impact of the pension adjustments described above, the SG&A ratio decreased 0.3 percentage points for the third quarter and increased 0.9 percentage points for the first nine months of fiscal 2015.

The lower SG&A ratio for the third quarter of fiscal 2015 was primarily due to reduced overheads in all segments, including lower headcount and reduced facility costs. The higher SG&A ratio for the first nine months of fiscal 2015 was due to lower revenues and increase in selling expenses due to investments in sales coverage and sales support for the Company's GIS and GBS offerings. Additionally, selling expenses increased due to redirecting of certain account-focused executives, who were previously engaged in contract delivery activities and included within COS, to focus on sales activities effective the second quarter of fiscal 2014. Further, for both the third quarter and first nine months of fiscal 2015, there was increased NPS spending on bid and proposal activity.

Corporate G&A for the third quarter of fiscal 2015 was $59 million, as compared to $65 million during the same period of the prior fiscal year. For the first nine months, Corporate G&A was $182 million, as compared to $197 million, during the same period of the prior fiscal year. The decrease in Corporate G&A, for both the third quarter and the nine-month period, was due to management's overhead reduction initiatives.


59

Selling, general and administrative - SEC settlement related charges

As discussed in Note 5 to the unaudited Consolidated Condensed Financial Statements, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the anti-fraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second or third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.
As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government, but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation or cash flows.

Depreciation and Amortization

Depreciation and amortization (D&A) as a percentage of revenue increased 0.3 and 0.4 percentage points for the third quarter and first nine months of fiscal 2015, respectively, as compared to the same periods of fiscal 2014.

The higher D&A ratio, for both the third quarter and first nine months of fiscal 2015, was due to lower revenues and higher depreciation of $15 million of certain contract related assets, and amortization expense of $8 million related to the intangible assets acquired through the fiscal 2014 acquisition of ServiceMesh.


60

Restructuring Costs

Total restructuring costs recorded during the third quarter and nine months ended January 2, 2015 were $12 million and $15 million, respectively, as compared to $11 million and $33 million in the comparable period of the prior fiscal year. For the third quarter there were no pension benefit augmentations included in total restructuring costs, as compared to $2 million in the comparable period of fiscal 2014. For the first nine months of fiscal 2015, pension benefit augmentations of $(7) million were included in total restructuring costs, as compared to $3 million in the comparable period of fiscal 2014. These amounts are owed to certain employees in accordance with legal or contractual obligations and will be paid out over several years as part of normal pension distributions.

The fiscal 2015 third quarter restructuring expense included costs related to further reduce headcount in order to align resources to support business needs in Europe and in the U.S., related to the Fiscal 2015 restructuring plan. These costs were offset by reductions related to the Fiscal 2013 plan, which were due to cancellation of a portion of a restructuring plan in a region, as well as revisions on plans that were executed at lower-than-expected costs.

Interest Expense and Interest Income

There were no significant year-over-year changes in interest expense and interest income. Interest expense for the third quarter and first nine months of fiscal 2015 was $37 million and $112 million, respectively, as compared to $38 million and $112 million during the same periods of the prior fiscal year. Interest income for the third quarter and first nine months of fiscal 2015 was $4 million and $14 million, respectively, as compared to $4 million and $11 million, respectively, during the same periods of the prior fiscal year.

Other (Income) Expense, Net

Other (income) expense, net comprises gains and losses due to the impact of movement in foreign currency exchange rates on the Company's foreign currency denominated assets and liabilities and the related economic hedges, equity in earnings of unconsolidated affiliates, and other miscellaneous gains and losses from the sale of non-operating assets. For the Company's economic hedges, the offset to the foreign currency (income) expense, is within COS.

Other (income) expense, net for the third quarter and first nine months of fiscal 2015 was $1 million and $6 million, respectively, as compared to a $(5) million and $16 million, respectively, during the same periods of the prior fiscal year. The $6 million increase in other expense, net for the third quarter of fiscal 2015 as compared to the same period of the prior fiscal year was primarily due to unfavorable movement in foreign currency exchange rates used to fair value the Company's foreign currency option and forward contracts and the related foreign currency denominated assets and liabilities. Other expense, net during the first nine months of fiscal 2015 decreased by $10 million as compared to the same period in the prior fiscal year primarily due to favorable movement in exchange rates during the first nine months of fiscal 2015 between the U.S. dollar and the Indian Rupee, which favorably impacted the Company's foreign currency economic hedges.

Taxes

The Company's effective tax rate from continuing operations (ETR) was 25.1% and 43.9% for the quarter and nine months ended January 2, 2015, respectively, and 21.5% and 27.3% for the quarter and nine months ended December 27, 2013, respectively. The following are the primary drivers of the ETR for the nine months ended January 2, 2015 and December 27, 2013. For the tax impact of discontinued operations, see Note 4.

•
During the third quarter and nine months ended January 2, 2015, the ETR was impacted by a $462 million mark-to-market accounting loss related to CSC pension plans which was partially offset by a penalty of $190 million recorded as part of a settlement with the Securities and Exchange Commission. The impact of the pension mark-to-market and SEC penalty adjustments decreased the ETR by 2.9% for the third quarter and increased the ETR by 16.7% for the nine months ended January 2, 2015.

•
During the third quarter and nine months ended January 2, 2015, the ETR decreased due to the global mix of income.


61

•
During the third quarter and nine months ended January 2, 2015, the Company recorded $11 million and $15 million of income tax benefit, respectively, related to a reversal of certain state uncertain tax positions for which the statute of limitations has expired, which decreased the ETR by 2.7% and 36.5%, respectively.

•
During the third quarter and nine months ended December 27, 2013, the Company recorded an income tax benefit of approximately $6 million relating to the settlement of audits for certain of its Non-U.S. jurisdictions, which reduced the ETR by 1.7% and 0.7%, respectively.

•
During the third quarter and nine months ended December 27, 2013, the Company recorded a mark-to-market accounting gain of $114 million related to CSC pension plans in certain Non-U.S. jurisdictions with valuation allowances established on their deferred tax assets, which decreased the ETR by 10.0% and 4.3%, respectively.

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. A valuation allowance has been recorded against certain deferred tax assets due to uncertainties related to the ability to utilize these assets. The valuation allowance is based on historical earnings, estimates of taxable income by jurisdiction and the period over which the deferred tax assets will be recoverable. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors. As of January 2, 2015, total valuation allowances included approximately $360 million related to deferred tax assets, including tax loss carryforwards, in the United Kingdom. In evaluating positive and negative evidence through the end of the third quarter, including three-year cumulative historical losses on a US GAAP basis, management has concluded that such valuation allowances continue to be appropriate. Based on recent earnings in this jurisdiction and an expectation that the business may be able to demonstrate a pattern of sustained profitability by the end of the fourth quarter, management believes there is a reasonable possibility that, by the end of fiscal 2015, sufficient positive evidence may become available to reach a conclusion that a portion of the valuation allowance related to the United Kingdom will no longer be needed. As such, the Company may release a portion of its valuation allowance against its deferred taxes, which would result in the recognition of certain deferred tax assets and an income tax benefit for the period in which such release is recorded.

There were no material changes to uncertain tax positions as of the third quarter of fiscal 2015 compared to the fiscal 2014 year-end, except for $16 million of state uncertain tax positions for which the statute of limitations has expired.

In May 2013, Finance Bill 2013 received the assent of the President of India and has been enacted as the 2013 Finance Act. There are various provisions in the 2013 Finance Act that may impact our India operations, including a tax on the buy-back of shares and an increase in the dividend distribution tax from 16.2% to 17.0%. The Company uses the lower undistributed tax rate to measure deferred taxes on inside basis differences, including undistributed earnings, of our India operations as these earnings are permanently reinvested. While the Company has no plans to do so, events may occur in the future that could effectively force management to change its intent not to repatriate our India earnings. If the Company changes its intent and repatriates such earnings, a dividend distribution tax will be incurred for distributions from India. These additional taxes will be recorded as tax expense in the period in which the dividend is declared.

The Finance Act of 2012 (the 2012 Finance Act) was signed into law in India on May 28, 2012. The Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized. The 2012 Finance Act has been challenged in the Indian courts. However, there is no assurance that such challenge will be successful. CSC has engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations. The Indian tax authorities may seek to apply the provisions of the 2012 Finance Act to these prior transactions and seek to tax CSC directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. The Company believes that the 2012 Finance Act does not apply to these prior acquisitions and that it has strong defenses against any claims that might be raised by the Indian tax authorities.

Income from Discontinued Operations

The income from discontinued operations represents the results of certain businesses, which have been divested during fiscal 2014 or fiscal 2015, and gains and loss from businesses divested (see Note 4 to the unaudited Consolidated Condensed Financial Statements).

62


The (loss) income from discontinued operations, net of taxes, was $0 million and $(29) million for the quarter and nine months ended January 2, 2015, as compared to $(5) million and $91 million for the quarter and nine months ended December 27, 2013, primarily due to the gain on sale of the Flood BPO business, within the GBS segment, during the first quarter of fiscal 2014 and the gain on sale of ATD, within the NPS segment, during the second quarter of fiscal 2014, which did not recur in fiscal 2015. The loss during the first nine months of fiscal 2015 is from the small software business in Europe, which was sold during the second quarter.

Earnings (Loss) Per Share and Share Base

Earnings (loss) per share (EPS) for the third quarter and first nine months of fiscal 2015, on a diluted basis, was $(2.23) and $(0.12), respectively, a decrease of $4.04 and $4.60 from the comparable periods of fiscal 2014. The decrease in EPS was primarily the result of a decrease in net (loss) income attributable to CSC common shareholders of $585 million and $694 million for the quarter and nine months ended January 2, 2015 as compared to the respective periods in fiscal 2014.

The decrease in net (loss) income attributable to CSC common shareholders was primarily due to a decrease of revenue of $281 million and $405 million, an increase in pension adjustments of $576 million and $577 million, and a decrease in tax expense of $182 million and $209 million due to lower income from continuing operations before taxes for the third quarter and nine months of fiscal 2015 compared to the respective periods of fiscal 2014. In addition, CSC incurred the SEC settlement charge of $195 million in the third quarter of fiscal 2015 that was not present for the comparable period in fiscal 2014.

Investigations and Out of Period Adjustments
   
Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments

As previously disclosed, on January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation. That investigation covered a range of matters as previously disclosed by the Company, including certain of the Company’s prior disclosures and accounting determinations. On May 2, 2011, the Audit Committee of the Board of Directors of the Company (the Audit Committee) commenced an independent investigation. The Audit Committee retained independent counsel to represent the Company on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants and disclosure experts to assist with their work. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

As a result of findings by the Audit Committee’s independent investigation, the Company has previously acknowledged certain historic errors and irregularities relating to accounting entries arising from the Nordics region, Australia, and the Company’s contractual relationship with the NHS, self-reported these errors and irregularities to the SEC’s Division of Enforcement, and made adjustments to its financial statements that are related to prior periods as reported in its past filings. In addition, as previously disclosed, certain personnel in certain foreign operations were reprimanded, suspended, terminated and/or resigned and additional controls were implemented. Based on recommendations from the Audit Committee’s independent investigation, the Company also instituted comprehensive enhancements beginning in 2011 to its compliance, financial and disclosure controls, and to the function of internal audit. In doing so, the Company made significant changes to prevent the type of misconduct identified by the Audit Committee’s independent investigation from recurring. The Company previously took significant steps to enhance its compliance culture and to remediate any deficiencies through: (1) Company-wide communications concerning the Company’s key organizational values of ethics, compliance and integrity; (2) strengthening internal controls and processes to further ensure the accuracy and integrity of the Company’s financial reporting; (3) improving technical training for employees in finance and accounting roles; (4) a restructuring of the internal audit group and the outsourcing of many internal audit activities to Ernst & Young to enhance the quality and scalability of the Company’s overall internal audit function; (5) creating an independent investigations unit at the Company to investigate suspected violations of the law or the Company's Code of Conduct; (6) elevating the position of Chief Compliance and Ethics Officer to provide direct reporting to the Audit Committee; (7) creating a new

63

position of Chief Accounting Officer responsible for developing accounting policies and reviewing complex technical accounting issues; and (8) revising policies and procedures concerning percentage-of-completion (POC) accounting to enhance the review and monitoring of long-term contracts, including those contracts similar to the contract with NHS.

The Company has been in continuing discussions with the SEC’s staff concerning a potential resolution of the SEC’s investigation. Many of those discussions have concerned the Company’s prior use in fiscal 2009-2012 of the terms of ongoing NHS contract negotiations in developing its assumptions and judgments with respect to the margin used in recognizing profit under the POC accounting method and in evaluating the recoverability of NHS contract assets as well as the Company’s prior disclosures concerning such matters.

As previously disclosed, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the antifraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second or third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter. The Board of Directors of the Company determined that the Company's previously issued consolidated financial statements for fiscal 2009-2012 (including the associated auditors' reports and the interim periods within those years) should no longer be relied upon.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.
As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government, but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation or cash flows.

Out of Period Adjustments Financial Impact Summary


64

The rollover impact on the pre-tax income (loss) from continuing operations of the recorded out of period adjustments in the first nine months of fiscal 2015, fiscal 2014 and fiscal 2013 is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
 
 
(Amounts in millions)
 
Fiscal 2013 Adjustments
 
Fiscal 2014 Adjustments
 
First Nine Months Fiscal 2015 Adjustments
 
Total Adjustments
Fiscal 2015
 
$
—

 
$
—

 
$
(12
)
 
$
(12
)
Fiscal 2014
 
—

 
(2
)
 
13

 
11

Fiscal 2013
 
6

 
4

 
(1
)
 
9

Prior fiscal years (unaudited)
 
(6
)
 
(2
)
 
—

 
(8
)

See Note 15 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarters ended January 2, 2015 and December 27, 2013, respectively.

Fiscal 2015 Adjustments

During the quarter and nine months ended January 2, 2015, the Company identified and recorded net adjustments increasing pre-tax income from continuing operations by $4 million and $12 million, respectively, that should have been recorded in prior periods.

The $4 million increase in pre-tax income from continuing operations recorded during the third quarter of fiscal 2015 was primarily attributable to adjustments decreasing cost of services and increasing revenue that should have been recorded primarily in the first half of fiscal 2015. Out of period adjustments identified during the second and third quarters of fiscal 2015 that should have been recorded in prior fiscal years were not material. The Company also recorded a net tax benefit of $6 million, primarily the impact of discrete tax adjustments, in the current quarter. Adjustments recorded during the quarter ended January 2, 2015 increased net income attributable to CSC common stockholders by $10 million.

The $12 million increase in pre-tax income from continuing operations recorded during the first nine months of fiscal 2015 primarily included lower fiscal 2014 variable compensation partially offset by certain adjustments related to cost of services that were identified late in the 2014 year-end close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements. The Company also recorded a net tax benefit of $5 million, primarily the impact of discrete tax adjustments partially offset by the tax effects of out period adjustments, in the nine months ended January 2, 2015. Adjustments recorded during the nine months ended January 2, 2015, that should have been recorded in prior fiscal years, increased net income attributable to CSC common stockholders by $15 million.

The impact of out of period adjustments recorded during fiscal 2015 on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and nine months ended January 2, 2015, using the rollover method, is shown below:

65

 
 
Quarter Ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
2,947

 
$
(1
)
 
$
2,946

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,530

 
3

 
2,533

Selling, general and administrative
 
356

 
—

 
356

Depreciation and amortization
 
238

 
—

 
238

Restructuring costs
 
12

 
—

 
12

Interest expense
 
37

 
—

 
37

Interest income
 
(4
)
 
—

 
(4
)
Other expense, net
 
1

 
—

 
1

Income from continuing operations before taxes
 
(418
)
 
(4
)
 
(422
)
Taxes on income
 
(105
)
 
6

 
(99
)
Income (loss) from continuing operations
 
(313
)
 
(10
)
 
(323
)
Loss from discontinued operations, net of taxes
 
—

 
—

 
—

Net income (loss) attributable to CSC common stockholders
 
(314
)
 
(10
)
 
(324
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(2.23
)
 
$
(0.07
)
 
$
(2.30
)
Discontinued operations
 
—

 
—

 
—

Total
 
$
(2.23
)
 
$
(0.07
)
 
$
(2.30
)


66

 
 
Nine Months Ended January 2, 2015
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
9,264

 
$
9

 
$
9,273

Costs of services (excludes depreciation and amortization and restructuring costs)
 
7,101

 
22

 
7,123

Selling, general and administrative
 
1,046

 
—

 
1,046

Depreciation and amortization
 
762

 
(1
)
 
761

Restructuring costs
 
15

 
—

 
15

Interest expense
 
112

 
—

 
112

Other expense, net
 
6

 
—

 
6

Income (loss) from continuing operations before taxes
 
41

 
(12
)
 
29

Taxes on income
 
18

 
5

 
23

Income from continuing operations
 
23

 
(17
)
 
6

Loss from discontinued operations, net of taxes
 
(29
)
 
2

 
(27
)
Net income (loss) attributable to CSC common stockholders
 
(17
)
 
(15
)
 
(32
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
0.08

 
$
(0.12
)
 
$
(0.04
)
Discontinued operations
 
(0.20
)
 
0.01

 
(0.19
)
Total
 
$
(0.12
)
 
$
(0.11
)
 
$
(0.23
)

For the nine months ended January 2, 2015, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll-over method is shown below:
(Amounts in million)
 
Increase/Decrease
 
January 2, 2015
Receivable, net of allowance for doubtful accounts
 
Increase
 
$
5

Property and Equipment
 
Decrease
 
1

Software, net of accumulated amortization
 
Decrease
 
2

Outsourcing contract costs, net of accumulated amortization
 
Increase
 
2

Other assets
 
Decrease
 
3

Accrued expenses and other current liabilities
 
Decrease
 
15

Deferred revenue and advance contract payments
 
Increase
 
4


The Company has determined that the impact of the consolidated out of period adjustments recorded in the nine months ended January 2, 2015 is immaterial to the consolidated results, financial position and cash flows for the third quarter and first nine months of fiscal 2015 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015.

Fiscal 2014 Adjustments
During the third quarter and through the first nine months of fiscal 2014, the Company recorded net pre-tax adjustments increasing income from continuing operations before taxes by $5 million and $3 million, respectively, that should have been recorded in prior fiscal years. The $5 million of pre-tax out of period adjustments consists of a $7 million increase to revenue (due to a $6 million adjustment to recognize revenue on previously delivered software products and services and a $1 million adjustment to recognize revenue on previously delivered outsourcing services), partially offset by a $2 million charge to cost of services (COS) (consisting of a $5 million increase to COS relating to previously delivered software products and services, offset by a $3 million decrease to COS as a result of a margin correction on long-term contracts accounted for under the POC method).

Adjustments, net of tax, during the third quarter of fiscal 2014 that should have been recorded in prior fiscal years increased income from continuing operations by $4 million. Adjustments, net of tax, during the first nine months of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $18 million.

67

The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the third quarter was a $1 million increase to tax expense and for the first nine months of fiscal 2014 was a $9 million increase in tax expense. The tax effect on the pre-tax adjustments for the first nine months of fiscal 2014 resulted in a disproportionate increase in tax expense due to taxes on increases in income in taxable jurisdictions, and absence of tax benefits on decreases in income in jurisdictions with net operating loss carry forwards. The out of period adjustments to tax expense for the third quarter and first nine months of fiscal 2014 resulted in no change and an increase to income tax expense of $12 million, respectively. The out of period adjustments to tax expense for the nine months ended December 27, 2013, consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries recorded during the second quarter of fiscal 2014.

In addition, during the third quarter of fiscal 2014, the Company recorded $7 million of pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first six months of fiscal 2014. The $7 million of pre-tax out of period adjustments consists primarily of a reduction of $7 million to COS (attributable to a $5 million reduction to accrued expenses, a $3 million reduction of costs related to a reversal of previously recognized software products and services, a $4 million pension accrual expense reduction, all partially offset by a $3 million reduction of margin on long-term contracts accounted for under the POC method, and a $2 million adjustment to recognize costs on previously delivered software products and services). In addition to the reduction to COS, a net $1 million adjustment was recorded to increase revenue on previously delivered software products and services and a $1 million increase in selling, general and administrative (SG&A) expenses was recognized related to a write-off of prepaid facility charges. Adjustments, net of tax, during the third quarter of fiscal 2014 increased income from continuing operations by $9 million that should have been recorded in the first six months of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.

During the second quarter of fiscal 2014, the Company recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $11 million that should have been recorded in prior fiscal years. The $11 million of pre-tax out of period adjustments consists of a $9 million reversal of revenue (due to deferral of revenue for undelivered elements on software contracts lacking vendor specific objective evidence and margin corrections on contracts under POC accounting), a $1 million charge to cost of sales for reversal of previously deferred costs and a $1 million charge to SG&A expense reversing excess capitalization associated with internal systems development. Adjustments, net of tax, during the second quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $20 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the second quarter of fiscal 2014 was negligible. The out of period adjustments to tax expense for the second quarter of fiscal 2014 resulted in an increase to income tax expense of $9 million. The out of period adjustments to tax expense consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries.

In addition, during the second quarter of fiscal 2014, the Company recorded $17 million of pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2014. The $17 million of pre-tax out of period adjustments consists of (1) a $13 million charge to cost of sales consisting of $6 million in adjustments to prepaid and accrued balances, a $4 million reversal of previously deferred costs and a $3 million reduction in work in process due to margin corrections on contracts under POC accounting; (2) a $3 million charge to SG&A expense primarily due to reversal of excess capitalization associated with internal systems development, partially offset by other adjustments; and (3) a $1 million charge to depreciation expense to correct the useful life for certain leasehold improvements. Adjustments, net of tax, during the second quarter of fiscal 2014 decreased income from continuing operations by $11 million that should have been recorded in the first quarter of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments.


68

During the first quarter of fiscal 2014, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $9 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes is comprised of the following:

•
net adjustments decreasing income from continuing operations before taxes by $13 million resulting primarily from revenues and costs in its GBS segment;
•
net adjustments increasing income from continuing operations before taxes by $8 million resulting from the correction of payroll expenses within its GBS segment; and
•
net adjustments increasing income from continuing operations before taxes by $14 million resulting primarily from adjustments identified by the Company late in the fiscal 2013 closing process.

Adjustments recorded during the first quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $2 million. The difference between the pre-tax and after tax impact is attributable to the tax effect of the adjustments described above, and $2 million of tax expense related to net adjustments that should have been recorded in prior periods.

During periods subsequent to December 27, 2013, the Company recorded out of period adjustments with a net pre-tax impact to income from continuing operations of $3 million, primarily in NPS, subsequent to December 27, 2013 that should have been recorded in the first nine months of fiscal 2014. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the first nine months of fiscal 2014 would have been higher by $3 million.

The impact of out of period adjustments recorded during fiscal 2014, and the first nine months of fiscal 2015, on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter and first nine months ended December 27, 2013, using the rollover method, is shown below:
 
 
Quarter Ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,228

 
$
(5
)
 
$
3,223

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,261

 
8

 
2,269

Selling, general and administrative
 
318

 
(1
)
 
317

Depreciation and amortization
 
251

 
—

 
251

Restructuring costs
 
11

 
—

 
11

Interest expense
 
38

 
—

 
38

Interest income
 
(4
)
 
—

 
(4
)
Other (income) expense
 
(5
)
 
—

 
(5
)
Income from continuing operations before taxes
 
358

 
(12
)
 
346

Taxes on income
 
77

 
(4
)
 
73

Income from continuing operations
 
281

 
(8
)
 
273

Income from discontinued operations, net of taxes
 
(5
)
 
(3
)
 
(8
)
Net income attributable to CSC common stockholders
 
271

 
(11
)
 
260

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
1.84

 
$
(0.05
)
 
$
1.79

Discontinued operations
 
(0.03
)
 
(0.02
)
 
(0.05
)
Total
 
$
1.81

 
$
(0.07
)
 
$
1.74



69

 
 
Nine Months Ended December 27, 2013
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
9,669

 
$
17

 
$
9,686

Costs of services (excludes depreciation and amortization and restructuring costs)
 
7,015

 
16

 
7,031

Selling, general and administrative
 
920

 
—

 
920

Depreciation and amortization
 
753

 
(1
)
 
752

Restructuring costs
 
33

 
2

 
35

Interest expense
 
112

 
—

 
112

Other (income) expense
 
16

 
—

 
16

Income from continuing operations before taxes
 
831

 
—

 
831

Taxes on income
 
227

 
(24
)
 
203

Income from continuing operations
 
604

 
24

 
628

Income from discontinued operations, net of taxes
 
91

 
—

 
91

Net income attributable to CSC common stockholders
 
677

 
24

 
701

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
3.88

 
$
0.16

 
$
4.04

Discontinued operations
 
0.60

 
—

 
0.60

Total
 
$
4.48

 
$
0.16

 
$
4.64


For the nine months ended December 27, 2013, the out of period impact on the unaudited Consolidated Condensed Balance Sheet of the adjustments included in income from continuing operations before taxes under the roll-over method is shown below:
(Amounts in million)
 
Increase/Decrease
 
December 27, 2013
Receivable, net of allowance for doubtful accounts
 
Decrease
 
$
6

Prepaid expenses and other current assets
 
Increase
 
1

Property and Equipment
 
Decrease
 
1

Other assets
 
Increase
 
1

Accrued payroll and related costs
 
Decrease
 
9

Accrued expenses and other current liabilities
 
Decrease
 
18

Deferred revenue and advance contract payments
 
Increase
 
22


The Company determined that the impact of the consolidated out of period adjustments recorded in the third quarter of fiscal 2014 was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2014 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014.

Cash Flows

 
 
Nine Months Ended
Amounts in millions
 
January 2, 2015
 
December 27, 2013
Net cash provided by operating activities
 
$
1,143

 
$
1,012

Net cash used in investing activities
 
(399
)
 
(377
)
Net cash used in financing activities
 
(679
)
 
(393
)
Effect of exchange rate changes on cash and cash equivalents
 
(115
)
 
(12
)
Net (decrease) increase in cash and cash equivalents
 
(50
)
 
230

Cash and cash equivalents at beginning of year
 
2,443

 
2,054

Cash and cash equivalents at the end of period
 
$
2,393

 
$
2,284



70

Net cash provided by operating activities for the first nine months of fiscal 2015 was $1,143 million, an increase of $131 million compared to the first nine months of fiscal 2014. The increase in net operating cash flow was a combination of lower payroll payments due to lower headcount, lower restructuring payments of $56 million, and lower vendor payments. Partially offsetting these increases were higher tax payments of $27 million.

Net cash used in investing activities for the first nine months of fiscal 2015 was $399 million, an increase in outflow of $22 million compared to the first nine months of fiscal 2014. The year-over-year increase in outflow was primarily due to lower net proceeds from fiscal 2014 business divestitures of $258 million, partially offset by lower payments for acquisitions of $155 million, and $87 million of higher net proceeds from sales of contract assets to customers. The lower net proceeds from business divestitures primarily related to the Company's fiscal 2014 sale of NPS' Applied Technology Division, and its flood-insurance-related business process outsourcing business. The lower payments for acquisitions primarily related to CSC's fiscal 2014 acquisitions of ServiceMesh Inc. and Infochimps (see Note 4 to the unaudited Consolidated Condensed Financial Statements).

Net cash used in financing activities in the first nine months of fiscal 2015 was $679 million, an increase in outflow of $286 million compared to the first nine months of fiscal 2014. The increase in outflow was primarily due to lower net proceeds from borrowings of $440 million and higher share repurchases of $142 million as compared to the prior year. These increased outflows were partially offset by lower repayments of capital leases and other borrowings for asset financing of $231 million, and higher proceeds from exercise of stock options of $39 million.

Contractual Obligations

The Company has contractual obligations for long-term debt, capital lease obligations, operating lease obligations, minimum purchase obligations, unrecognized tax positions, and other obligations as summarized in the Off Balance Sheet Arrangements and Contractual Obligations section of the Company's Annual Report on Form 10-K for the year ended March 28, 2014. There have been no material changes since March 28, 2014.

Liquidity and Capital Resources

Cash and cash equivalents were $2.4 billion at January 2, 2015 and at March 28, 2014. At January 2, 2015, the Company had approximately $1.2 billion of cash and cash equivalents held in foreign subsidiaries outside of the U.S. It is generally management's intent to permanently reinvest earnings of its foreign operations. Should the Company repatriate any portion of this cash as taxable dividends, it would be required to accrue and pay additional U.S. income taxes. The Company has no current plans and does not anticipate repatriating cash to the U.S. as taxable dividends. However, if these funds are needed for CSC's U.S. operations, the Company may repatriate some of the cash to the U.S. operations through settlement of inter-company loans or return of capital distributions in a tax efficient manner. The cash held outside of the U.S. can be used by the Company to fund strategic acquisitions off-shore such as the fiscal 2012 acquisitions of iSOFT and Applabs.

At the end of the third quarter of fiscal 2015, CSC’s ratio of net debt to total capitalization was 5.4%, as compared to 6.5% at the end of fiscal 2014. The decrease in the ratio was due primarily to a decrease in net debt.


71

The following table summarizes the Company’s capitalization ratios as of the end of the third quarter of fiscal 2015 and 2014:
 
 
As of
(Amounts in millions)
 
January 2, 2015
 
March 28, 2014
Total debt
 
$
2,724

 
$
2,888

Cash and cash equivalents
 
2,393

 
2,443

Net debt
 
$
331

 
$
445

 
 
 
 
 
Total debt
 
$
2,724

 
$
2,888

Equity
 
3,355

 
3,944

Total capitalization
 
$
6,079

 
$
6,832

 
 
 
 
 
Debt-to-total capitalization
 
44.8
%
 
42.3
%
Net debt-to-total capitalization
 
5.4
%
 
6.5
%

At January 2, 2015, the Company had $554 million of current maturities of long-term debt, $2.2 billion of long-term debt, and no amounts drawn under either of the Company's $2.5 billion committed revolving credit facility or of CSC Finance Co. LLC's (CSC Finco) $250 million Lease Credit Facility.

During the second quarter of fiscal 2015, CSC modified its existing $2.5 billion credit facility agreement by extending the maturity date from January 15, 2019 to January 15, 2020. Also, the Company extended the maturity date of its £250 million ($389 million) note payable from December 19, 2014 to January 19, 2016, effective December 19, 2014. The Company was in compliance with all financial covenants applicable to the credit facility agreement and note payable as of January 2, 2015 and March 28, 2014.

During the first quarter of fiscal 2015, CSC Asset Funding I LLC, which is a special purpose subsidiary of CSC Finco which is a wholly owned subsidiary of the Company, entered into a master loan and security agreement with a financial institution on behalf of a syndicate of banks which provides for a $250 million committed Lease Credit Facility (Leasing Facility) to finance CSC Finco's capital expenditures of IT equipment and associated software in support of IT services provided to the Company's customers. The draw down availability period for the Leasing Facility is eighteen months, and once drawn, converts into individual term notes of variable terms up to sixty months therefrom, depending on the nature of the underlying equipment being financed. There were no borrowings against the Leasing Facility as of January 2, 2015, and CSC Finco was in compliance with all financial covenants under the Leasing Facility as of January 2, 2015.

In May 2014, the Company's Board of Directors approved a new share repurchase program authorizing up to $1.5 billion in share repurchases of the Company's outstanding common stock, after completion of a prior repurchase program. The timing, volume, and nature of future share repurchases are at the discretion of management, and may be suspended or discontinued at any time. No end date has been established for the repurchase program. During the first nine months of fiscal 2015, the Company repurchased 7,205,050 shares through open market purchases for aggregate consideration of $437 million at a weighted average price of $60.60 per share.

During the second quarter of fiscal 2015, the Company entered into an accelerated share repurchase (ASR) agreement with a financial institution by advancing cash proceeds of $125 million. At inception, the ASR was initially settled by delivery of 1,258,651 shares to the Company, all of which were immediately retired. The actual number of shares required to be delivered to the Company was based on the trading prices of the Company's stock over a defined trading execution period under the agreement. Under certain circumstances, portions of the original amounts advanced to the financial counterparty could be returned to the Company. Subsequent to the end of the second quarter, after completion of the pricing period, the financial institution returned $50 million to the Company and delivered 31,830 additional shares. As a result, the Company repurchased under the ASR, 1,290,481 shares for a consideration of $75 million, at an average price of $58.12 per share. In the aggregate, combining both open market repurchases and ASR repurchases, the Company repurchased 181,830 shares and 8,495,531 during the third quarter and the first nine months of fiscal 2015, respectively, for total consideration of $9 million and $512 million, respectively.


72

During the first nine months of fiscal 2015, the Company declared quarterly cash dividends to its common stockholders aggregating to $0.69 per share, or approximately $98 million. The Company has sufficient liquidity and expects to continue paying quarterly cash dividends although such payments are subject to continued approval by the Company's Board of Directors. On May 8, 2014, the Company's Board of Directors approved an increase in quarterly cash dividends to common stockholders, to $0.23 per share.

The Company’s total liquidity is comprised of cash and cash equivalents plus any borrowing available under its revolving credit facility. As of January 2, 2015, the Company’s total liquidity was $4.9 billion, consisting of $2.4 billion of cash and cash equivalents and the full $2.5 billion available under the Company's revolving credit facility. In addition, the Company had access to CSC Finco's undrawn $250 million Leasing Facility at CSC Finco to fund capital expenditures. In the opinion of management, CSC will be able to meet its liquidity and cash needs for the foreseeable future through the combination of cash flows from operating activities, available cash balances, and available borrowings under the Company's undrawn revolving credit facility and CSC Finco's Leasing Facility. If these resources need to be augmented, additional cash requirements would likely be financed by the issuance of debt and/or equity securities. However, there can be no assurances that the Company will be able to obtain debt financing on acceptable terms in the future.

The Company’s exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon the Company’s performance as well as customer acceptance. Continuing uncertainty in the global economic conditions may also affect the Company’s business as customers and suppliers may decide to downsize, defer or cancel contracts, which could negatively affect operating cash flow.

S&P and Fitch, two of the three major ratings agencies that rate the Company's debt, took their most recent rating actions during the fourth quarter of fiscal 2014. S&P raised its underlying rating of the Company's credit from BBB to BBB+ with no change to the assessment of “stable”. Fitch raised the outlook from "stable" to "positive" with no change to the underlying rating.

The most recent ratings and outlooks issued by Moody's, S&P and Fitch are described in the table below:
Rating Agency
Rating
Outlook
Short Term Ratings *
Fitch
BBB
Positive
-
Moody's
Baa2
Stable
-
S&P
BBB+
Stable
-

* The Company elected to suspend its commercial paper program; as a result, the rating agencies withdrew their
short-term ratings (S&P's rating was withdrawn on April 14, 2014). The Company believes that it can re-activate
its commercial paper program at any time it is needed.

Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to the Company by each agency may be subject to revision at any time. Accordingly, CSC is not able to predict whether its current credit ratings will remain as disclosed above. Factors that can affect the Company's credit ratings include changes in its operating performance, its financial position outcome of ongoing litigation as well as regulatory action such as the SEC investigation, and changes in its business strategy. If further changes in the Company's credit ratings were to occur, they could impact, among other things, its future borrowing costs and access to capital markets.

Contract with the U.K. National Health Service

Revised Project Agreement

The Company and the NHS are parties to a contract under which the Company has developed and deployed an integrated electronic patient records system. The NHS contract was amended in April 2009 and the parties entered into variation agreements subsequent to the 2009 amendment agreeing to various operational terms and conditions. The 2009 amendment included mutual releases of all claims existing at the time of the amendment.

On August 31, 2012, the Company and the NHS entered into a binding interim agreement which was approved by all required U.K. government officials (interim agreement contract change note or IACCN). The IACCN amended the terms of the parties' then current contract under which the Company has developed and deployed an integrated patient records

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system using the Company's Lorenzo Regional Care software product. On March 28, 2013, the Company and the NHS signed a letter agreement that modified certain financial terms of the IACCN and provided for a change compensation payment by the NHS to the Company on that date in the amount of £10 million ($15 million) net of value added tax in full and final satisfaction of all costs and claims by CSC arising from changes to the Lorenzo software product that CSC delivered up to a certain version of the product. On October 4, 2013, the Company and the NHS finalized a full restatement of the contract through a "revised project agreement" (RPA). The RPA embodies and incorporates the principal terms of the IACCN and such letter agreement, makes certain other changes with respect the Company’s non-Lorenzo product deployments and consolidates the three regional contracts which comprised the Company's NHS contract into a single agreement. The RPA has been approved by all required U.K. government officials. Pursuant to the RPA, the parties have agreed to a mutual release of certain accrued claims under the contract through the date of the RPA, October 4, 2013.

Principal Components of the IACCN and the RPA

The key terms first agreed in the IACCN (and now embodied in the RPA) with respect to the delivery of the Lorenzo product and associated services are as follows:

1.
Under contract terms existing prior to the IACCN, the NHS was committed to purchase the Lorenzo product for multiple trusts. In addition, the Company was the exclusive supplier of such software products and related services to two out of the three regions of the U.K. covered by the existing contract. Under the IACCN (as now embodied in the RPA), the parties agreed that the NHS is no longer subject to any trust volume commitment for the Lorenzo product, and the Company agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity. As a result, the individual trusts can choose third-party software vendors other than CSC to provide a software solution. CSC and the NHS have also agreed to a process for trusts which wish to take the Lorenzo products within the NME regions to obtain central funding from the U.K. Department of Health for implementation of the Lorenzo products. In addition, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through a separate competitive process.

2.
The IACCN (as now embodied in the RPA), created pricing and payment terms for the Lorenzo product and new terms under which trusts in the contract's NME region that choose the Lorenzo product can access central funds for its deployment, subject to business case justification and the overall availability of such funding. While the funding is provided by the NHS, there is a far greater degree of interaction with the trusts under the terms agreed in the IACCN (as now embodied in the RPA), as the Company works with each individual trust to build a business case and seek NHS approval and central funding to proceed.

3.
Under the IACCN (as now embodied in the RPA), the Lorenzo product was redefined for pricing purposes, with Lorenzo Regional Care comprising the "Base Product," consisting of seven deployment units (or modules) and the "Additional Product," consisting of three other modules. The parties agreed that six of the Base Product's modules had completed the necessary NHS assurances and were ready to deploy to further trusts as of August 31, 2012. The remaining module of the Base Product was similarly accepted by the NHS as complete and ready to deploy to further trusts in early September 2012. Although the NHS assurance of the Base Product's seven modules is complete and the Company and the NHS are committed to complete the assurance of the Additional Product modules, neither the NHS nor any trust is obligated to purchase or deploy any of those modules.

4.
New trusts taking deployments of the Lorenzo product will receive ongoing managed services from the Company for a period of five years from the date such deployment is complete, provided deployment is complete or substantially complete by July 7, 2016. The services include hosting of the software and trust data at the Company's data center as well as support and maintenance, including regulatory updates and other changes over the term of the contract. Under contract terms existing prior to the IACCN, all services were to expire upon the end of the contract term of July 7, 2016, subject to an optional one year extension and an exit transition period.

The IACCN did not materially alter the terms relating to the deployment of non-Lorenzo products. However, the RPA reflects certain terms not included in the IACCN relating to the Company’s continued deployment, hosting and maintenance services for non-Lorenzo products and services as follows:

1.
The RPA provides that the NHS will no longer be subject to commitments to purchase additional volumes of non-Lorenzo products and will instead have a committed repurposed fund of the same value in the approximate amount of

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£47.5 million ($75 million) as of the October 4, 2013 RPA effective date. The NHS may, but has no obligation to, use the repurposed fund to purchase a wide range of services and solutions from CSC under the RPA other than new deployments of Lorenzo products. Except as noted in point 2 below, the existing estate of deployed non-Lorenzo products are not affected by the RPA.

2.
The RPA also provides that the NHS may, subject to certain notice requirements and to the payment of certain decommissioning fees to CSC, require that certain services be removed, or decommissioned, from the scope of the contract and that the related service charges be adjusted accordingly. The NHS’s right to decommission services does not apply to Lorenzo services deployed after the October 4, 2013 RPA effective date or to ambulance services. The basis for decommissioning shall be either the complete closure of an NHS trust (or other NHS service recipient) or the cessation of relevant clinical services by a trust (or other NHS service recipient) (a “natural decommissioning”), or an NHS trust (or other NHS service recipient) determining that it no longer requires a particular service for any other reason (a “voluntary decommissioning”). The NHS is subject, during the remaining term of the contract, to an aggregate monetary limit on the ability to effect any voluntary decommissionings, which at the October 4, 2013 RPA effective date was approximately £19.6 million ($31 million). The NHS is also subject, during the remaining term of the contract, to aggregate monetary limits on the ability to effect any voluntary decommissionings with respect to individual modules of certain products, which limits at the October 4, 2013 RPA effective date, ranged from approximately £0.2 million to £4.4 million ($0.3 million to $6.9 million) (depending on the affected module in question).

Accounting

Prior to the IACCN, the NHS contract has been accounted for using the percentage-of-completion method based on management's best estimates of total contract revenue and costs. Based on then existing circumstances, CSC revised its estimate of revenues and costs at completion during the third quarter of fiscal 2012 to include only those revenues reasonably assured of collection. As a result of that change, the Company recorded a $1.5 billion contract charge in that quarter, resulting in no material remaining net assets. See additional disclosures in Notes 5 and 19 to the unaudited Consolidated Condensed Financial Statements related to the settlement with the SEC.

The terms of the IACCN (as now embodied in the RPA) represented a significant modification to the prior agreement, including a significant reduction in additional product development and elimination of any commitment by the NHS to future Lorenzo deployments and the Company's exclusivity rights in two of the three contract regions. The Company concluded that it will account for the terms of the IACCN (as now embodied in the RPA) as a new contract and will recognize revenue as a services arrangement. Revenue recognition for each trust deployment will begin at the start of the trust's hosting period. Payments from the NHS for deployment of systems will be deferred and recognized over the service period. Direct costs incurred for deployment activities will be deferred and amortized to expense over the service period as well. The total up-front consideration of £78 million ($120 million), including the £68 million ($105 million) net settlement payment and a £10 million ($15 million) escrow release, is primarily attributed to future Lorenzo deployments and will be deferred and recognized as revenue ratably over the term of the contract ending July 2016. The £10 million ($15 million) payment received on March 28, 2013, as well as future consideration not noted above, when and if earned, will be deferred and amortized over the longer of the term of the contract or the estimated performance period. As of January 2, 2015, the amount of deferred costs and deferred revenues was $18 million and $166 million, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING ESTIMATES

Recent accounting pronouncements and the anticipated impact to the Company are described in the notes to the unaudited Consolidated Condensed Financial Statements included in this Form 10-Q as well as in the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014.

The Company has identified several critical accounting estimates which are described in "Management's Discussion and Analysis" of the Company's Annual Report on Form 10-K for fiscal 2014. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the Consolidated Condensed Financial Statements. The Company's critical accounting estimates relate to: revenue recognition and cost estimation and recoverability on long term, fixed-price contracts; revenue recognition on software license sales that require significant customization; estimates used to determine deferred income taxes; capitalization of outsourcing contract costs and software development costs; assumptions related to purchase accounting and goodwill; assumptions to determine retirement benefits costs and liabilities; and assumptions and estimates used to analyze contingencies and

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litigation. Modifications to contract scope, schedule, and price may be required on development contracts accounted for on a percentage-of-completion basis and other contracts with the U.S. federal government. Accounting for such changes prior to formal contract modification requires evaluation of the characteristics and circumstances of the effort completed and assessment of probability of recovery. If recovery is deemed probable, the Company may, as appropriate, either defer the costs until the parties have agreed on the contract change or recognize the costs and related revenue as current period contract performance. The Company routinely negotiates such contract modifications. For all these estimates, the Company cautions that future events may not develop as forecast, and the best estimates routinely require adjustment. During fiscal 2015, there have been no changes to the Company's critical accounting estimates described in the Company's Annual Report on Form 10-K for fiscal 2014.

PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the Company's market risk associated with interest rates and foreign currencies, see "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014. For the quarter ended January 2, 2015, there have been no material changes to the sources and effects of the Company's market risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

“Disclosure controls and procedures” are the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

Under the direction of the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated its disclosure controls and procedures as of January 2, 2015 to ensure (i) that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of January 2, 2015.

Changes in Internal Controls

“Internal control over financial reporting” is a process designed by, or under the supervision of, the issuer's principal executive and financial officers, and effected by the issuer's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

(1)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorization of management and directors of the issuer; and

(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the consolidated financial statements.


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During the fiscal quarter ended January 2, 2015, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The information required by this Item is set forth in Note 19, Commitments & Contingencies, to the unaudited Consolidated Condensed Financial Statements under the caption “Contingencies”, contained in Part I - Item 1 of this Current Report on Form 10-Q. Such information is incorporated herein by reference and made a part hereof.

Item 1A.
Risk Factors

Past performance may not be a reliable indicator of future financial performance. Future performance and historical trends may be adversely affected by the following factors, as well as other variables, and should not be relied upon to project future period results.

1.
Our business may be adversely impacted as a result of changes in demand, both globally and in individual market segments, for consulting, industry software & solutions, application services and next-generation cloud offerings. In addition, worldwide economic weakness and uncertainty could adversely affect our revenue and expenses.

Current weakness in worldwide economic conditions and political uncertainty may adversely impact our customers' demand for our services in the markets in which we compete, including our customers' demand for consulting, industry software & solutions, application services and next-generation cloud offerings
and other IT services. Our government customers' demand may also be affected by budgetary and political uncertainties, changing priorities, military conflicts and other events.

2.
We are the subject of an ongoing SEC investigation. Although the Company has reached an understanding with the staff of the SEC regarding a settlement of the SEC investigation, final resolution of the SEC investigation is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC and formal authorization by the SEC. Failure to reach final settlement on the expected terms or to obtain the necessary approvals of the proposed settlement could have an adverse impact on our reputation, business, financial condition, results of operation or cash flows.

As previously disclosed, on January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation. That investigation covered a range of matters as previously disclosed by the Company, including certain of the Company’s prior disclosures and accounting determinations. On May 2, 2011, the Audit Committee of the Board of Directors of the Company (the “Audit Committee”) commenced an independent investigation. The Audit Committee retained independent counsel to represent the Company on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants and disclosure experts to assist with their work. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

As a result of findings by the Audit Committee’s independent investigation, the Company has previously acknowledged certain historic errors and irregularities relating to accounting entries arising from the Nordics region, Australia, and the Company’s contractual relationship with the U.K. National Health Service (the “NHS”), self-reported these errors and irregularities to the SEC’s Division of Enforcement, and made adjustments to its financial statements that are related to prior periods as reported in its past filings. In addition, as previously disclosed, certain personnel in certain foreign operations were reprimanded, suspended, terminated and/or resigned and additional controls were implemented. Based on recommendations from the Audit Committee’s independent investigation, the Company also instituted comprehensive enhancements beginning in 2011 to its compliance, financial and disclosure controls, and to the function of internal audit. In

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doing so, the Company made significant changes to prevent the type of misconduct identified by the Audit Committee’s independent investigation from recurring. The Company previously took significant steps to enhance its compliance culture and to remediate any deficiencies through: (1) Company-wide communications concerning the Company’s key organizational values of ethics, compliance and integrity; (2) strengthening internal controls and processes to further ensure the accuracy and integrity of the Company’s financial reporting; (3) improving technical training for employees in finance and accounting roles; (4) a restructuring of the internal audit group and the outsourcing of many internal audit activities to Ernst & Young to enhance the quality and scalability of the Company’s overall internal audit function; (5) creating an independent investigations unit at the Company to investigate suspected violations of the law or the Company's Code of Conduct; (6) elevating the position of Chief Compliance and Ethics Officer to provide direct reporting to the Audit Committee; (7) creating a new position of Chief Accounting Officer responsible for developing accounting policies and reviewing complex technical accounting issues; and (8) revising policies and procedures concerning percentage-of-completion (“POC”) accounting to enhance the review and monitoring of long-term contracts, including those contracts similar to the contract with NHS.

The Company has been in continuing discussions with the SEC’s staff concerning a potential resolution of the SEC’s investigation. Many of those discussions have concerned the Company’s prior use in fiscal 2009-2012 of the terms of ongoing NHS contract negotiations in developing its assumptions and judgments with respect to the margin used in recognizing profit under the POC accounting method and in evaluating the recoverability of NHS contract assets as well as the Company’s prior disclosures concerning such matters.

As previously disclosed, the Company has reached an understanding with the staff of the SEC regarding a settlement. Based on that understanding, the SEC will file an administrative enforcement action alleging violations of the anti-fraud, reporting, and books-and-records provisions of the U.S. securities laws. The Company would neither admit nor deny the allegations, but would agree to cease-and-desist from committing or causing any violations or future violations of those provisions.

Pursuant to this understanding, the Company intends to restate its financial statements for fiscal 2012 and its summary financial results for fiscal 2011 and fiscal 2010 reflected in the five-year selected financial data table, all as set forth in CSC’s Form 10-K for the fiscal year ended March 28, 2014. The restatement will have no impact on the Company’s financial statements for fiscal 2013 or fiscal 2014 or the first, second, and third quarters of fiscal 2015. Subject to formal SEC authorization of the proposed settlement, CSC intends to file its Form 10-K/A for the fiscal year ended March 28, 2014 reflecting the restatement as soon as practicable thereafter. The Board of Directors of the Company determined that the Company's previously issued consolidated financial statements for fiscal 2009-2012 (including the associated auditors' reports and the interim periods within those years) should no longer be relied upon.

The restatement will reflect the Company's acknowledgment that there were accounting errors in fiscal 2009-2012 with respect to certain assumptions under the POC accounting method for the NHS contract. As part of the restatement, the Company will revise those assumptions based upon uncertainty with respect to a range of possible final outcomes under the NHS contract. As a result, the Company will revise the accounting based on the impracticality of estimating a specific level of profit during this period in order to reflect a profit margin of zero under the POC accounting rules. The result is that approximately $130 million of operating profit is no longer recognized in prior years, thereby reducing the impairment charge previously recorded in fiscal 2012 by approximately that same amount.

Further, as part of the settlement discussions, the SEC’s staff has advised the Company that it has concluded that the Company should have recorded the previously disclosed impairment charge related to the NHS contract in fiscal 2011 instead of fiscal 2012. The Company’s restatement accordingly will reflect an impairment charge of approximately $1.16 billion in fiscal 2011, reducing the impairment charge previously recognized in fiscal 2012. Due to this modification, the Company also will move $2.51 billion of the previously disclosed fiscal 2012 goodwill impairment charge of approximately $2.75 billion to fiscal 2011.

The anticipated result of the restatement is to reduce net income by approximately $50 million in fiscal 2010 and approximately $3.69 billion in fiscal 2011 and to increase net income in fiscal 2012 by approximately $3.90 billion.

As part of the Company’s understanding with the staff of the SEC regarding terms of the settlement, the Company also has agreed to pay a penalty of $190 million and to implement a review of its compliance

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policies through an independent compliance consultant. The Company has recorded a pre-tax charge of approximately $195 million for the penalty and related expenses in its third quarter of fiscal 2015.

Final resolution of these matters is subject to the preparation and negotiation of documentation satisfactory to the Company and the SEC, including formal authorization by the SEC. If we do not reach final settlement on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing or terms of any such further discussions or resolution or the outcome of any subsequent litigation with the government, but any such resolution or outcome could have an adverse impact on the Company's reputation, business, financial condition, results of operation or cash flows.

See Note 5 to the unaudited Consolidated Condensed Financial Statements for further discussion concerning these matters.

3.
On October 4, 2013, we entered into a binding revised project agreement (RPA) with the NHS, which consolidates the three regional contracts which comprised the Company's NHS contract into a single agreement. Under the RPA, the NHS is not subject to any trust volume commitment for Lorenzo products and the Company has agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity. The RPA effected certain changes with respect to the Company’s non-Lorenzo products.

CSC and the NHS are parties to a contract under which the Company is developing and deploying an integrated electronic patient records system. On August 31, 2012, after a series of negotiations, CSC and NHS entered into an interim agreement contract change note (IACCN), which was approved by all required U.K. government officials, and which amended the terms of the parties' then current contract. On March 28, 2013, the Company and the NHS signed a letter agreement that modified certain financial terms of the IACCN. On October 4, 2013, the Company and the NHS finalized a full restatement of the contract through the RPA. The RPA embodies and incorporates the principal terms of the IACCN and the letter agreement, makes certain other changes with respect the Company’s non-Lorenzo product deployments and consolidates the three regional contracts which comprised the Company's NHS contract into a single agreement. The RPA has been approved by all required U.K. government officials.

Under terms first agreed in the IACCN (as now embodied in the RPA), the NHS is not subject to any trust volume commitment for Lorenzo, and the Company has agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity. As a result, the individual trusts can choose third-party software vendors other than CSC to provide a software solution. CSC and the NHS have also agreed to a streamlined approach for trusts which wish to take the Lorenzo products within the NME regions to obtain central funding, subject to business case justification and overall availability of such funding, from the U.K. Department of Health for implementation of the Lorenzo products. In addition, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through a separate competitive process.

The RPA reflects certain terms not included in the IACCN relating to the Company’s continued deployment of non-Lorenzo products and services, including that the NHS will no longer be subject to commitments to purchase additional volumes of non-Lorenzo products and will instead have a committed repurposed fund of the same value which the NHS may use to purchase a wide range of services and solutions from CSC under the RPA other than new deployments of Lorenzo products. Further, the RPA also provides that the NHS may, subject to certain notice requirements and to the payment of certain decommissioning fees to CSC, require that certain services and service modules be removed, or decommissioned, from the scope of the contract and that the related service charges be adjusted accordingly. The NHS’s right to decommission services does not apply to Lorenzo services deployed after the October 4, 2013 RPA effective date or to ambulance services. The basis for decommissioning shall be either the complete closure of an NHS trust (or other NHS service recipient) or the cessation of relevant clinical services by a trust (or other NHS service recipient) (a “natural decommissioning”), or an NHS trust (or other NHS service recipient) determining that it no longer requires a particular service for any other reason (a “voluntary decommissioning”). The NHS’s ability to effect voluntary decommissioning is subject to certain aggregate life of contract monetary limits.

See Note 18 to the unaudited Consolidated Condensed Financial Statements for further discussion concerning the foregoing matters.

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4.
Contracts with the U.S. federal government and related agencies account for a significant portion of our revenue and earnings.

Our NPS segment generated approximately 32% of our revenue for fiscal 2014, primarily from sales to the U.S. federal government. Consequently, we closely monitor federal budget, legislative and contracting trends and activities and continually examine our strategies to take these into consideration. The U.S. federal government continues to face significant fiscal and economic challenges such as financial deficits and the debt ceiling limit. The Administration and Congress make decisions in a constrained fiscal environment largely imposed by the Budget Control Act of 2011 (Budget Act). The Budget Act established limits on discretionary spending that began with U.S. federal government fiscal year (GFY) 2012 (a U.S. federal government fiscal year starts on October 1 and ends on September 30). The Bipartisan Budget Act of 2013 (BBA) that was signed into law on December 26, 2013 did not significantly alter the spending constraints established by the Budget Act. The BBA is significant, however, in that it represents the first bipartisan budget passed by a divided Congress in 27 years and eliminates the need for Congress to pass another budget until September 2015.

The Budget Act provided for additional automatic spending reductions, known as sequestration, which went into effect on March 1, 2013, and further reduced planned government spending. The BBA extended the sequestration into GFY 2023. While the defense budget sustained the largest single reduction, civil agencies and programs also were impacted significantly by sequestration cuts. In light of the Budget Act, the BBA and other deficit reduction pressures, it is likely that discretionary spending by the federal government will remain constrained for a number of years. As a result of sequestration, our U.S. federal government customers are more cautious with contract awards and spending, resulting in longer procurement cycles, smaller award values and an inclination towards extension of existing customer contracts, and we expect this behavior to continue. We are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we have experienced reduced funding on some of our programs, and may see further reductions, we do not expect the cancellation of any of our major programs.

The U.S. federal government has established a limit on the level of federal debt that the U.S. federal government can have outstanding, often referred to as the debt ceiling. On February 15, 2014, legislation was signed that suspends the U.S. debt limit ceiling through March 2015. However, significant long-term issues remain with respect to federal budgetary and spending matters and these current resolutions only have temporary effect. Any future changes to the fiscal policies of the U.S. federal government may decrease overall government funding, result in delays in the procurement of our products and services due to lack of funding, cause the U.S. federal government and government agencies to reduce their purchases under existing contracts, or cause them to exercise their rights to terminate contracts at-will or to abstain from exercising options to renew contracts, any of which would have an adverse effect on our business, financial condition, results of operations and/or cash flows.

5.
Our ability to continue to develop and expand our service offerings to address emerging business demands and technological trends will impact our future growth. If we are not successful in meeting these business challenges, our results of operations and cash flows will be materially and adversely affected.

Our ability to implement solutions for our customers incorporating new developments and improvements in technology which translate into productivity improvements for our customers and to develop service offerings that meet current and prospective customers' needs are critical to our success. The markets we serve are highly competitive. Our competitors may develop solutions or services that make our offerings obsolete. Our ability to develop and implement up to date solutions utilizing new technologies which meet evolving customer needs in cloud, consulting, industry software and solutions and application services markets will impact our future revenue growth and earnings.

6.
Our primary markets, consulting, industry software and solutions, application services, and next-generation cloud, are highly competitive markets. If we are unable to compete in these highly competitive markets, our results of operations will be materially and adversely affected.

Our competitors include large, technically competent and well capitalized companies, some of which have emerged as a result of industry consolidation, as well as “pure play” companies that have a single product

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focus. The competition created by these companies may place downward pressure on operating margins in our industry, particularly for technology outsourcing contract extensions or renewals. As a result, we may not be able to maintain our current operating margins, or achieve favorable operating margins, for technology outsourcing contracts extended or renewed in the future.

Any reductions in margins will require that we effectively manage our cost structure. If we fail to effectively manage our cost structure during periods with declining margins, our results of operations will be adversely affected.

7.
Our ability to raise additional capital for future needs will impact our ability to compete in the markets we serve.    

Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may review the ratings assigned to us due to developments that are beyond our control, including as a result of new standards requiring the agencies to reassess rating practices and methodologies.

If changes in our credit ratings were to occur, it could result in higher interest costs under certain of our credit facilities. It would also cause our future borrowing costs to increase and limit our access to capital markets. Any downgrades could negatively impact the perception of the Company by lenders and other third parties. In addition, certain of the Company's major contracts provide customers with a right of termination in certain circumstances in the event of a rating downgrade below investment grade.

8.
Achieving our growth objectives may prove unsuccessful. We may be unable to identify future attractive acquisitions and strategic partnerships, which may adversely affect our growth. In addition, our ability to consummate or integrate acquisitions we consummate and implement our strategic partnerships may materially and adversely affect our profitability if we fail to achieve anticipated revenue improvements and cost reductions.

We intend to identify strategic acquisitions that will allow us to expand our operations. However, we may be unable to identify attractive candidates or complete acquisitions on terms favorable to us. In addition, our ability to successfully integrate the operations we acquire and leverage these operations to generate revenue and earnings growth will significantly impact future revenue and earnings as well as investor returns. Integrating acquired operations is a significant challenge and there is no assurance that the Company will be able to manage such integrations successfully. Failure to successfully integrate acquired operations may adversely affect our cost structure, thereby reducing our margins and return on investment.

We have also entered into, and intend to identify and enter into additional strategic partnerships with other industry participants that will allow us to expand our business. However, we may be unable to identify attractive strategic partnership candidates or complete such partnerships on terms favorable to us. In addition, if we are unable to successfully implement our partnership strategies or our strategic partners do not fulfill their obligations or otherwise prove advantageous to our business, our investments in such partnerships and our anticipated business expansion could be adversely affected.

9.
We could suffer additional losses due to asset impairment charges.

We test our goodwill for impairment during the second quarter of every year, and on an interim date should events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with ASC 350 "Goodwill and Other Intangible Assets". If the fair value of a reporting unit is revised downward due to declines in business performance or other factors, an impairment under ASC 350 could result and a non-cash charge could be required.

We also test certain equipment and deferred cost balances associated with contracts when the contract is materially underperforming or is expected to materially underperform in the future, as compared to the original bid model or budget. If the projected cash flows of a particular contract are not adequate to recover the unamortized cost balance of the asset group, the balance is adjusted in the tested period based on the contract's fair value. Either of these impairments could materially affect our reported net earnings.


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10.
If our customers experience financial difficulties or request out-of-scope work, we may not be able to collect our receivables, which would materially and adversely affect our profitability.

Over the course of a long-term contract, our customers' financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the U.S. federal government and state governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its critical missions. While we may resort to other methods to pursue our claims or collect our receivables, these methods are expensive and time consuming and successful collection is not guaranteed. Failure to collect our receivables or prevail on our claims would have an adverse effect on our profitability.

11.
If we are unable to accurately estimate the cost of services and the time line for completion of contracts, the profitability of our contracts may be materially and adversely affected.

Our commercial and federal government contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost to provide the services. To generate an acceptable return on our investment in these contracts, we must be able to accurately estimate our costs to provide the services required by the contract and to complete the contracts in a timely manner. In addition, revenues from some of our contracts are recognized using the percentage-of-completion method, which requires estimates of total costs at completion, fees earned on the contract, or both. This estimation process, particularly due to the technical nature of the services being performed and the long-term nature of certain contracts, is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. If we fail to accurately estimate our costs or the time required to complete a contract, the profitability of our contracts may be materially and adversely affected.

12.
We are defendants in pending litigation that may have a material and adverse impact on our profitability.

As noted in Part II, Item 1, Legal Proceedings and Note 19 to the unaudited Consolidated Condensed Financial Statements, we are currently party to a number of disputes which involve or may involve litigation. We are not able to predict the ultimate outcome of these disputes or the actual impact of these matters on our profitability. If we agree to settle these matters or judgments are secured against us, we may incur liabilities which may have a material and adverse impact on our liquidity and earnings.

13.
Our contracts with U.S. government agencies are subject to regulations, audits and cost adjustments by the U.S. government, which could materially and adversely affect our operations.

We are engaged in providing services under contracts with U.S. government agencies. These contracts are subject to extensive legal and regulatory requirements and, from time to time, such agencies audit or investigate whether our operations are being conducted in accordance with these requirements. These audits or investigations may include a review of our performance on contracts, pricing practices, cost structure and compliance with applicable laws and regulations. U.S. government audits or investigations of us, whether related to the Company's federal government contracts or conducted for other reasons, including, without limitation, the proposed settlement of the SEC investigation described herein, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. In addition, we could suffer serious reputational harm. If any of these should occur, our reputation may be adversely impacted and our relationship with the agencies we work with may be damaged, resulting in a material and adverse effect on our profitability.

14.
Our ability to provide our customers with competitive services is dependent on our ability to attract and retain qualified personnel.

Our ability to grow and provide our customers with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills necessary to serve our customers. As we noted above, the markets we serve are highly competitive and competition for skilled employees in the technology outsourcing and consulting and systems integration markets is intense for both on-shore and offshore locales. The loss of personnel could impair our ability to perform under certain of our contracts, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

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15.
Our ability to perform services for certain of our government clients is dependent on our ability to maintain necessary security clearances.

Select U.S. and non-U.S. government clients require CSC to maintain security clearances for certain of our facilities used in the performance of classified contracts. Employees who perform under certain government contracts are required to possess appropriate personnel security clearances for access to classified information granted by the respective government. The competition for qualified personnel who possess security clearance is very strong in certain public sector markets. In the event that a government customer were to revoke the facility and/or personnel clearances of all or substantially all of the employees performing work under a classified contract, such revocation could be grounds for termination of the contract by the government customer. Similarly, if the Company is unable to hire sufficient qualified and cleared personnel to meet contractual commitments, a contract could be terminated for non-performance. Under either circumstance, such termination, depending on the contract value, could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

16.
Our international operations are exposed to risks, including fluctuations in exchange rates, which may be beyond our control.

For fiscal 2014, approximately 40.2% of our recognized revenues were denominated in currencies other than the U.S. dollar. The exposure to currencies other than the U.S. dollar may impact our results as they are expressed in U.S. dollars. In particular, the uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations and the related European financial restructuring efforts may cause the value of the euro to fluctuate. Currency variations also contribute to variations in sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro with another currency, sales in that country or in Europe generally may be adversely affected until stable exchange rates are established. While currency risk, including exposure to fluctuations in currency exchange rates, is partially mitigated largely by matching costs with revenues in a given currency, our exposure to fluctuations in other currencies against the U.S. dollar increases as revenue in currencies other than the U.S. dollar increase and as more of the services we provide are shifted to lower cost regions of the world. We believe that the percentage of our revenue denominated in currencies other than the U.S. dollar will continue to represent a significant portion of our revenue. Also, we believe that our ability to match revenue and expenses in a given currency will decrease as more work is performed at offshore locations.

We operate in approximately seventy countries and our operations in these countries are subject to the local legal and political environments. Our operations are subject to, among other things, employment, tax, statutory reporting, trade restriction and other regulations. Notwithstanding our best efforts, we may not be in compliance with all regulations in the countries in which we operate and may be subject to penalties and/or fines as a result. These penalties or fines may materially and adversely impact our profitability.

17.
We may be exposed to negative publicity and other potential risks if we are unable to maintain effective internal controls over financial reporting.

We are required under the Sarbanes-Oxley Act of 2002 to include a report of management on the Company's internal controls that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, the public accounting firm auditing our financial statements must report on the effectiveness of our internal control over financial reporting. If we are unable to conclude that we have effective internal control over financial reporting or, if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting as of each fiscal year end, we may be exposed to negative publicity. The resulting negative publicity may materially and adversely affect our business and stock price.

18.
In the course of providing services to customers, we may inadvertently infringe on the intellectual property rights of others and be exposed to claims for damages.

The solutions we provide to our customers may inadvertently infringe on the intellectual property rights of third parties resulting in claims for damages against us or our customers. Our contracts generally indemnify our clients from claims for intellectual property infringement for the services and equipment we provide under our

83

contracts. The expense and time of defending against these claims may have a material and adverse impact on our profitability. Additionally, the publicity we may receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our ability to develop new business.

19.
Our contracts generally contain provisions under which a customer may terminate the contract prior to completion. Early contract terminations may materially and adversely affect our revenues and profitability.

Our contracts typically contain provisions by which customers may terminate the contract prior to completion of the term of the contract. These contracts generally allow the customer to terminate the contract for convenience upon providing written notice. If a contract is terminated for convenience, we seek, either by defined contract schedules or through negotiations, recovery of our property, plant, equipment, outsourcing costs, investments, and other intangibles. However, there is no assurance we will be able to fully recover our investments. We may not be able to replace the revenue and earnings from these contracts in the short-term. In the long-term, our reputation may be harmed by the publicity generated from contract terminations.

The U.S. federal government may terminate our government contracts either at its convenience or for default based on factors set forth in the Federal Acquisition Regulation. Similarly, where we are a subcontractor to a prime contractor with the U.S. federal government, termination of the prime contract typically will lead to termination of our subcontract. Upon termination for convenience of a fixed-price type contract, our U.S. federal government contracts normally entitle us to receive the purchase price for delivered items, reimbursement for contractual commitments and allowable costs for work-in-process, and a reasonable allowance for profit, although there can also be financial impact resulting from the negotiated contract settlement.

Upon termination for convenience of a U.S. federal government cost reimbursable or time and materials contract, we normally are entitled to reimbursement of allowable costs plus a fee. Allowable costs generally include the cost to terminate agreements with suppliers and subcontractors. The amount of the fee recovered, if any, generally is related to the portion of the work completed prior to termination and is determined by negotiation.

A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. Our contracts and the services we provide under our contracts are often highly complex and may include numerous mutual performance obligations and conditions as well as terms permitting each party to issue default notices unilaterally which, assuming the notices are validated as proper under the contract and the default is not remedied within the applicable cure period, may entitle the non-defaulting party to terminate the contract. During the course of a contractual relationship one or both parties may issue default notices; however, given the nature of our services and our relationships with our customers, the parties routinely resolve these issues on commercially reasonable terms. If we are not able to negotiate a commercially reasonable resolution in a particular situation and termination rights are asserted, protracted litigation could ensue.

In addition, certain of our U.S. federal government contracts span one or more base years and multiple option years. The U.S. federal government generally has the right not to exercise option periods and may not exercise an option period for various reasons, effectively terminating the contract when the period of performance expires. Any decision by the U.S. federal government not to exercise an option or to terminate a major contract could adversely impact our revenue, profitability and financial condition. There have been no U.S. federal government terminations or renegotiations that materially impacted the Company's consolidated financial position, results of operations or cash flows in fiscal years 2014, 2013, and 2012.

20.
Our ability to compete in certain markets we serve is dependent on our ability to continue to expand our capacity in certain offshore locations. However, as our presence in these locations increases, we are exposed to risks inherent to these locations which may adversely impact our revenue and profitability.

A significant portion of our application outsourcing and software development activities have been shifted to India, and we plan to continue to expand our presence there and in other lower cost locations. As such, we are exposed to the risks inherent to operating in India including (1) a highly competitive labor market for skilled workers which may result in significant increases in labor costs as well as shortages of qualified workers in the future, and (2) the possibility that the U.S. federal government or the European Union may enact legislation that provides significant disincentives for customers to locate certain of their operations offshore which would

84

reduce the demand for the services we provide in India and may adversely impact our cost structure and profitability. In addition, India has experienced civil unrest and acts of terrorism and has been involved in confrontations with Pakistan. If India continues to experience this civil unrest or if its conflicts with Pakistan escalate, our operations in India could be adversely affected.

The Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged violations of the FCPA or other anti-bribery violations is expensive and could consume significant time and attention of our senior management.

21.
Our performance on contracts, including those on which we have partnered with third parties, may be adversely affected if we or the third parties fail to deliver on commitments.

Our contracts are increasingly complex and, in some instances, require that we partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' delivery schedules. If we or our partners fail to deliver services or products on time, our ability to complete the contract may be adversely affected, which may have a material and adverse impact on our revenue and profitability.

22.
Security breaches or service interruptions could expose us to liability or impair our reputation, which could cause significant financial loss.

As a provider of information technology services to private and public sector customers operating in a number of regulated industries and countries, we store and process increasingly large amounts of sensitive data of our clients, including personal information and information relating to sensitive government functions. At the same time, the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. We collect and store certain personal and financial information from customers and employees. Security breaches could expose us to a risk of loss of this information, regulatory scrutiny, actions and penalties, extensive contractual liability litigation, reputational harm, and a loss of confidence that could potentially have an adverse impact on future business with current and potential customers.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential information from customers and employees. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruption in our operations. We may be required to expend capital and other resources to protect against such security breaches or cyber attacks or to alleviate problems caused by such breaches or attacks. Our security measures are designed to protect against security breaches and cyber attacks, but our failure to prevent such security breaches and cyber attacks could subject us to liability, decrease our profitability and damage our reputation.

Increasing data privacy and information security obligations could also impose additional regulatory pressures on our customers’ businesses, and indirectly, on our operations. In response, some of our customers have sought, and may continue to seek, to contractually impose certain strict data privacy and information security obligations on us and some of our customer contracts may not contractually limit our liability for the loss of

85

confidential information. If we are unable to adequately address these concerns, our business and results of operations could suffer. Compliance with new privacy and security laws, requirements and regulations, where required or undertaken by us, may result in cost increases due to potential systems changes, the development of additional administrative processes and increased enforcement actions and fines and penalties. While we strive to comply with all applicable data protection laws and regulations as well as our own posted privacy policies, any failure or perceived failure to comply or any misappropriation, loss or other unauthorized disclosure of sensitive or confidential information may result in proceedings or actions against us by government or other entities, private lawsuits against us such as class actions or the loss of customers, which could potentially have an adverse effect on our business, reputation and results of operations.

23.
Changes in the Company's tax rates could affect our future results.

Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or by changes in tax laws or their interpretation. We are subject to the continuous examination of its income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our financial condition and operating results.

24.
We may be adversely affected by disruptions in the credit markets, including disruptions that reduce our customers' access to credit and increase the costs to our customers of obtaining credit.

The credit markets have historically been volatile and therefore it is not possible for the Company to predict the ability of our clients and customers to access short-term financing and other forms of capital. If a disruption in the credit markets were to occur, it could also pose a risk to our business if customers and suppliers are unable to obtain financing to meet payment or delivery obligations to the Company. In addition, customers may decide to downsize, defer or cancel contracts which could negatively affect our revenue.

25.
Our hedging program is subject to counterparty default risk.

We enter into foreign currency forward contracts and options, and interest rate swaps with a number of counterparties. As of January 2, 2015, we had outstanding foreign currency forward contracts with a notional value of $512 million, and interest rate swap transactions of $275 million and no outstanding option contracts. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur significant losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.

26.
We derive significant revenue and profit from contracts awarded through competitive bidding processes, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to bid on such projects effectively.

We derive significant revenue and profit from government contracts that are awarded through competitive bidding processes. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding imposes substantial costs and presents a number of risks, including:

•
the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us;
•
the need to estimate accurately the resources and costs that will be required to service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; 
•
the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding, and the risk that such protests or challenges could result in the requirement to resubmit bids, and in the termination, reduction, or modification of the awarded contracts; and
•
the opportunity cost of not bidding on and winning other contracts we might otherwise pursue.

86


Within our NPS segment, we are also seeing an increasing number of bid protests from unsuccessful bidders on new program awards. Bid protests could result in litigation expenses to the company, contract modifications or the award decision being overturned and loss of the contract award. Even where a bid protest does not result in the loss of an award, the resolution can extend the time until the contract activity can begin, and delay earnings.

27.
Catastrophic events or climate conditions may disrupt our business.

The Company and its customers are subject to various federal, state, local and foreign government requirements relating to the protection of the environment. Our revenues and results of operations may be adversely affected by the passage of climate change and other environmental legislation and regulations. For example, new legislation or regulations may result in increased costs directly relating to our compliance or indirectly to the extent that such requirements increase prices charged to us by vendors because of increased compliance costs. At this point, we are unable to determine the impact that climate change and other environmental legislation and regulations could have on our overall business.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None
(b) None
(c) Purchases of Equity Securities

The following table provides information on a monthly basis for the quarter ended January 2, 2015 with respect to the Company’s purchase of equity securities:

Period
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs
 
Approximate
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or Programs (2)
October 4, 2014 to October 31, 2014
 
517

 
$58.62
 
—
 
$1,122,113,808
November 1, 2014 to November 28, 2014
 
260,260

 
$60.21
 
150,000
 
$1,113,250,728
November 29, 2014 to January 2, 2015
 
13,351

 
$61.64
 
—
 
$1,113,250,728

(1)
The Company accepted 124,128 shares of its common stock in the quarter ended January 2, 2015 from employees in lieu of cash due to the Company in connection with the settlement of shares of common stock related to vested RSUs. Such shares of common stock are stated at cost and held as treasury shares to be used for general corporate purposes.

The Company accepted 0 shares of its common stock in the quarter ended January 2, 2015 from employees in lieu of cash due to the Company in connection with the exercise of stock options. Such shares of common stock are stated at cost and held as treasury shares to be used for general corporate purposes.

(2)
During the first quarter of fiscal 2015, the Company's Board of Directors approved a new share repurchase program authorizing up to $1.5 billion in share repurchases of the Company's outstanding common stock. CSC has been implementing these programs through purchases made in open market transactions in compliance with SEC Rule 10b-18 and Rule 10b5-1, subject to market conditions, and applicable state and federal legal requirements. Share repurchases will be funded with available cash. The timing, volume, and nature of share repurchases will be at the discretion of management, and may be suspended or discontinued at any time. CSC’s Board of Directors has not established an end date for the repurchase program. The approximate amount for which shares may yet be purchased under this program at January 2, 2015 is $1.1 billion.

The Company repurchased 150,000 shares of its common stock in the fiscal quarter ended January 2, 2015 pursuant to the share repurchase program. Not included in the schedule above is 31,380 additional shares delivered to Company after completion of ASR (see Note 13 to the Consolidated Condensed Financial Statements).


87

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

Item 6. Exhibits
The following exhibits are filed with this report.

Exhibit
Number
Description of Exhibit
2.1
Scheme Implementation Agreement by and among Computer Sciences Corporation, CSC Computer Sciences Australia Holdings Pty Limited, and iSOFT Group Limited (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K (filed on April 5, 2011) (file number 11739300))
3.1
Amended and Restated Articles of Incorporation filed with the Nevada Secretary of State on August 9, 2010 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2010 (filed August 11, 2010) (file number 101007138))
3.2
Amended and Restated Bylaws dated as of February 7, 2012 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 2012 (filed May 29, 2012) (file number 12874585))
3.3
Certificate of Amendment to Section 1 of Article III of the Amended and Restated Bylaws, dated August 13, 2014 (incorporated by reference to Exhibit 3.2.1 to the Company's Current Report on Form 8-K (filed August 14, 2014) (file number 141040586))
4.1
Indenture dated as of March 3, 2008, for the 5.50% senior notes due 2013 and the 6.50% senior notes due 2018 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (filed September 15, 2008) (file number 081071955))
4.2
Indenture dated as of September 18, 2012, for the 2.500% senior notes due 2015 and the 4.450% senior notes due 2022 by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (filed September 19, 2012) (file number 121100352))
4.3
First Supplemental Indenture dated as of September 18, 2012, by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, and attaching a specimen form of the 2.500% Senior Notes due 2015 and the 4.450% Senior Notes due 2022 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K (filed September 19, 2012) (file number 121100352))
4.4
2.500% Senior Note due 2015 (in global form), dated September 18, 2012, among the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K (filed September 19, 2012) (file number 121100352))
4.5
4.450% Senior Note due 2022 (in global form), dated September 18, 2012, among the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K (filed September 19, 2012) (file number 121100352))
31.1
Section 302 Certification of the Chief Executive Officer
31.2
Section 302 Certification of the Chief Financial Officer
32.1
Section 906 Certification of Chief Executive Officer
32.2
Section 906 Certification of Chief Financial Officer
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
 
 
 
 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
COMPUTER SCIENCES CORPORATION
 
 
 
 
Dated:
February 10, 2015
By:
/s/ Diane E. Wilfong
 
 
Name:
Diane E. Wilfong
 
 
Title:
Vice President and Controller
 
 
 
(Principal Accounting Officer)
 


89




Exhibit 31.1

CERTIFICATION

I, J. Michael Lawrie, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Computer Sciences Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.





 
 
 
 
 
 
 Date:  
February 10, 2015
 
 
/s/ J. Michael Lawrie
 
 
 
 
J. Michael Lawrie President and Chief Executive Officer






Exhibit 31.2

CERTIFICATION

I, Paul N. Saleh, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Computer Sciences Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a- 15(e) and 15d- (15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a- 15(f) and 15d- 15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



 

 
 
 
 
 
 Date:  
February 10, 2015
 
 
/s/ Paul N. Saleh
 
 
 
 
Paul N. Saleh
Executive Vice President and Chief Financial Officer






Exhibit 32.1
 
CERTIFICATION OF CEO PERSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


Pursuant to 18 U.S.C. Section 1350, I J. Michael Lawrie, President and Chief Executive Officer of Computer Sciences Corporation (the "Company") hereby certify that: 

1.
The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2015 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



 
 
 
Computer Sciences Corporation
 
 
 
 
Dated:
February 10, 2015
 
/s/ J. Michael Lawrie
 
 
 
J. Michael Lawrie
President and Chief Executive Officer

This certification should accompany the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.







Exhibit 32.2

CERTIFICATION OF CFO PERSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


Pursuant to 18 U.S.C. Section 1350, I Paul N. Saleh, Executive Vice President and Chief Financial Officer of Computer Sciences Corporation (the "Company") hereby certify that: 

1.
The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2015 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
 
 
 
Computer Sciences Corporation
 
 
 
 
Dated:
February 10, 2015
 
/s/ Paul N. Saleh
 
 
 
Paul N. Saleh
Executive Vice President and Chief Financial Officer

This certification should accompany the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.


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