CSC 12.28.2012 Q3 10-Q

 


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 December 28, 2012

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 
153,483,884 shares of Common Stock, $1.00 par value, were outstanding on January 25, 2013.

 
 


COMPUTER SCIENCES CORPORATION
 
TABLE OF CONTENTS
 
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Condensed Statements of Operations for the Quarters and Nine Months Ended December 28, 2012 and December 30, 2011
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income for the Quarters and Nine Months Ended December 28, 2012 and December 30, 2011
 
 
 
 
Consolidated Condensed Balance Sheets as of December 28, 2012 and March 30, 2012
 3
 
 
 
 
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended December 28, 2012 and December 30, 2011
 
 
 
 
Consolidated Condensed Statements of Changes in Equity for the Nine Months Ended December 28, 2012 and December 30, 2011
 
 
 
 
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)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,781

 
$
3,687

 
$
11,434

 
$
11,527

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization, specified contract charge, settlement charge and restructuring costs ($18 and $101 for the third quarter and first nine months of fiscal 2013))
 
2,995


3,186


9,141


9,730

Cost of services – specified contract charge (excludes amount charged to revenue of $204 (fiscal 2012))
 
—

 
1,281

 
—

 
1,281

Cost of services – settlement charge (excludes amount charged to revenue of $42 (fiscal 2012))
 
—


—


—


227

Selling, general and administrative (excludes restructuring costs ($8 and $10 for the third quarter and first nine months of fiscal 2013))
 
278

 
272

 
864

 
838

Depreciation and amortization
 
270

 
301

 
806

 
868

Goodwill impairment
 
—

 
60

 
—

 
2,745

Restructuring costs
 
26

 
—

 
111

 
—

Interest expense
 
57

 
42

 
147

 
129

Interest income
 
(4
)
 
(8
)
 
(14
)
 
(32
)
Other expense (income), net
 
4

 
12

 
(1
)
 
1

Total costs and expenses
 
3,626

 
5,146

 
11,054

 
15,787

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before taxes
 
155

 
(1,459
)
 
380

 
(4,260
)
Taxes on income
 
32

 
(38
)
 
106

 
(78
)
Income (loss) from continuing operations
 
123

 
(1,421
)
 
274

 
(4,182
)
Income from discontinued operations, net of taxes
 
390

 
30

 
419

 
110

Net income (loss)
 
513

 
(1,391
)

693

 
(4,072
)
Less: net income (loss) attributable to noncontrolling interest, net of tax
 
3

 
(1
)
 
13

 
12

Net income (loss) attributable to CSC common shareholders
 
$
510

 
$
(1,390
)
 
$
680

 
$
(4,084
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.77

 
$
(9.15
)
 
$
1.68

 
$
(27.06
)
Discontinued operations
 
2.52

 
0.19

 
2.70

 
0.71

 
 
$
3.29

 
$
(8.96
)
 
$
4.38

 
$
(26.35
)
Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.77

 
$
(9.15
)
 
$
1.67

 
$
(27.06
)
Discontinued operations
 
2.50

 
0.19

 
2.69

 
0.71

 
 
$
3.27

 
$
(8.96
)
 
$
4.36

 
$
(26.35
)
 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

    


See accompanying notes.

1

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

 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
513

 
$
(1,391
)
 
$
693

 
$
(4,072
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
2

 
(79
)
 
(86
)
 
(180
)
Pension and other postretirement benefit plans
 
14

 
(1
)
 
49

 
(1
)
Other comprehensive income (loss), net of taxes
 
16

 
(80
)
 
(37
)
 
(181
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
529

 
(1,471
)
 
656

 
(4,253
)
Less: comprehensive income (loss) attributable to noncontrolling interest, net of taxes
 
3

 
(1
)
 
(5
)
 
12

Comprehensive income (loss) attributable to CSC common shareholders
 
$
526

 
$
(1,470
)
 
$
661

 
$
(4,265
)


See accompanying notes.



2

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)


 
 
As of
(Amounts in millions, except share and per-share data)
 
December 28, 2012
 
March 30, 2012
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
2,198

 
$
1,093

Receivables, net of allowance for doubtful accounts of $42 (2013) and $51 (2012)
 
2,939

 
3,257

Prepaid expenses and other current assets
 
481

 
533

Total current assets
 
5,618

 
4,883

 
 
 
 
 
Property and equipment, net of accumulated depreciation $3,649 (2013) and $3,703 (2012)
 
2,264

 
2,441

Software, net of accumulated amortization of $1,543 (2013) and $1,481 (2012)
 
628

 
649

Outsourcing contract costs, net of accumulated amortization of $958 (2013) and $1,240 (2012)
 
532

 
562

Goodwill
 
1,523

 
1,752

Other assets
 
695

 
902

Total Assets
 
$
11,260

 
$
11,189

 
 
 
 
 
LIABILITIES
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
231

 
$
1,254

Accounts payable
 
373

 
478

Accrued payroll and related costs
 
662

 
789

Accrued expenses and other current liabilities
 
1,275

 
1,339

Deferred revenue and advance contract payments
 
629

 
619

Income taxes payable and deferred income taxes
 
117

 
57

Total current liabilities
 
3,287

 
4,536

 
 
 
 
 
Long-term debt, net of current maturities
 
2,398

 
1,486

Income tax liabilities and deferred income taxes
 
360

 
357

Other long-term liabilities
 
1,898

 
1,976

 
 
 
 
 
EQUITY
 
 
 
 
Common stock, par value $1 per share; authorized 750,000,000 shares; issued 162,243,419 (2013) and 163,719,508 (2012)
 
162

 
164

Additional paid-in capital
 
2,171

 
2,168

Earnings retained for use in business
 
2,471

 
1,930

Accumulated other comprehensive loss
 
(1,112
)
 
(1,093
)
Less: common stock in treasury, at cost, 8,691,952 shares (2013) and 8,518,540 shares (2012)
 
(395
)
 
(390
)
Total CSC stockholders’ equity
 
3,297

 
2,779

Noncontrolling interest in subsidiaries
 
20

 
55

Total Equity
 
3,317

 
2,834

Total Liabilities and Equity
 
$
11,260

 
$
11,189


See accompanying notes.

3

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
693

 
$
(4,072
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization and other non-cash charges
 
842

 
933

Goodwill impairment
 
—

 
2,745

Specified contract charge
 
—

 
1,485

Settlement charge
 
—

 
269

Stock-based compensation
 
36

 
36

(Gain) loss on dispositions
 
(689
)
 
6

Provision for losses on accounts receivable
 
6

 
6

Excess tax benefit from stock based compensation
 
(1
)
 
—

Unrealized foreign currency exchange (gain) loss
 
(72
)
 
5

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Decrease in assets
 
131

 
109

Increase (decrease) in liabilities
 
132

 
(842
)
Net cash provided by operating activities
 
1,078

 
680

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(310
)
 
(433
)
Outsourcing contracts
 
(90
)
 
(142
)
Acquisitions, net of cash acquired
 
(34
)
 
(368
)
Business dispositions, net
 
958

 
—

Software purchased and developed
 
(121
)
 
(172
)
Other investing activities, net
 
71

 
27

Net cash provided by (used in) investing activities
 
474

 
(1,088
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Net borrowings of commercial paper
 
—

 
—

Borrowings under lines of credit
 
128

 
94

Repayment of borrowings under lines of credit
 
(156
)
 
(46
)
Borrowings on long-term debt, net of discount
 
949

 
—

Principal payments on long-term debt
 
(1,172
)
 
(433
)
Proceeds from stock options and other common stock transactions
 
4

 
15

Excess tax benefit from stock-based compensation
 
1

 
2

Repurchase of common stock and acquisition of treasury stock
 
(59
)
 
—

Dividend payments
 
(93
)
 
(93
)
Other financing activities, net
 
(35
)
 
(10
)
Net cash used in financing activities
 
(433
)
 
(471
)
Effect of exchange rate changes on cash and cash equivalents
 
(14
)
 
(60
)
Net increase (decrease) in cash and cash equivalents
 
1,105

 
(939
)
Cash and cash equivalents at beginning of year
 
1,093

 
1,837

Cash and cash equivalents at end of period
 
$
2,198

 
$
898


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 30, 2012
163,720

$
164

$
2,168

$
1,930

$
(1,093
)
$
(390
)
$
2,779

$
55

$
2,834

Net income
 
 
 
680

 
 
680

13

693

Other comprehensive loss
 
 
 
 
(19
)
 
(19
)
(18
)
(37
)
Stock-based compensation expense
 
 
35

 
 
 
35

 
35

Acquisition of treasury stock
 
 
 
 
 
(5
)
(5
)
 
(5
)
Stock option exercises and other common stock transactions
494

—

(4
)
 
 
 
(4
)
 
(4
)
Share repurchase program
(1,971
)
(2
)
(28
)
(46
)
 
 
(76
)
 
(76
)
Cash dividends declared
 
 
 
(93
)
 
 
(93
)
 
(93
)
Noncontrolling interest distributions and other
 
 
—

—

—

—

—

(30
)
(30
)
Balance at December 28, 2012
162,243

$
162

$
2,171

$
2,471

$
(1,112
)
$
(395
)
$
3,297

$
20

$
3,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 April 1, 2011
162,873

$
163

$
2,120

$
6,296

$
(690
)
$
(385
)
$
7,504

$
56

$
7,560

Net income (loss)
 
 
 
(4,084
)
 
 
(4,084
)
12

(4,072
)
Other comprehensive loss
 
 
 
 
(181
)
 
(181
)
 
(181
)
Stock-based compensation expense
 
 
36

 
 
 
36

 
36

Acquisition of treasury stock
 
 
 
 
 
(4
)
(4
)
 
(4
)
Stock option exercises and other common stock transactions
696

1

12

 
 
—

13

 
13

Cash dividends declared
 
 
 
(93
)
 
 
(93
)
 
(93
)
Noncontrolling interest distributions and other
 
 
 
(1
)
 
 
(1
)
$
(12
)
(13
)
Balance at December 30, 2011
163,569

$
164

$
2,168

$
2,118

$
(871
)
$
(389
)
$
3,190

$
56

$
3,246


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 quarter and nine months ended December 28, 2012, 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 (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 Consolidated Condensed Financial Statements and the accompanying notes. It is recommended that these Consolidated Condensed Financial Statements 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 30, 2012 (fiscal 2012). 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 results for the full year.

The Consolidated Condensed Statements of Operations for the quarter and the nine months ended December 30, 2011 have been recast from those presented in previously filed Forms 10-Q to reflect discontinued operations of the two businesses sold in fiscal 2013 (see Note 3).

Income from continuing operations, before taxes and non-controlling interest, and diluted earnings per share from continuing operations included the following adjustments due to changes in estimated profitability on long-term contracts accounted for under the percentage-of-completion method:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions, except per-share data)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
Gross favorable
 
$
26

 
$
—

 
$
90

 
$
47

Gross unfavorable (1)
 
(44
)
 
(81
)
 
(104
)
 
(179
)
Total net adjustments, before taxes and non-controlling interest
 
$
(18
)
 
$
(81
)
 
$
(14
)
 
$
(132
)
 
 
 
 
 
 
 
 
 
Impact on diluted EPS from continuing operations
 
$
(0.18
)
 
$
(0.43
)
 
$
(0.20
)
 
$
(0.80
)

(1) Fiscal 2012 does not include the contract charge related to the Company’s contract with the NHS of $1,485 million (see Note 17).

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 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 $53 million and $78 million as of December 28, 2012 and March 30, 2012, respectively.

Depreciation expense was $176 million and $538 million for the quarter and nine months ended December 28, 2012, respectively, and $201 million and $568 million for the quarter and nine months ended December 30, 2011, respectively.

The changes in accumulated other comprehensive loss are as follows:
(Amounts in millions)
 
Foreign Currency Translation Adjustments
 
Pension and Other Postretirement Benefit Plans
 
Accumulated Other Comprehensive Loss
Balance at March 30, 2012
 
$
160

 
$
(1,253
)
 
$
(1,093
)
Current-period other comprehensive (loss) income, net of taxes and non-controlling interest
 
(86
)
 
67

 
(19
)
Balance at December 28, 2012
 
$
74

 
$
(1,186
)
 
$
(1,112
)

6

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

Note 2 - Recent Accounting Pronouncements

New Accounting Standards

On June 16, 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The change did not have an effect on the Company's financial condition, results of operations, or cash flows. The Company adopted the amendments in the updates effective at the beginning of fiscal 2013 using the two-statement approach.

On September 15, 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which revises guidance on testing goodwill for impairment. The amendments in this ASU allow an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not, then performing the two-step impairment is unnecessary. However, if the entity concludes that fair value is more likely than not less than carrying value, then it is required to perform the first step of the two-step impairment test and calculate the fair value of the reporting unit to compare with the carrying value of the reporting unit as described in ASC 350-20-35-4. The entity may bypass the initial qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. The entity may resume performing the qualitative assessment in any subsequent period. The Company adopted the amendments in the update effective at the beginning of fiscal 2013 on a prospective basis, and they did not have a material effect on CSC's Consolidated Condensed Financial Statements.

Standards Issued But Not Yet Effective

On December 16, 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which was subsequently amended on January 31, 2013 when the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." Together these Updates provide guidance on disclosure of information pertaining to the offsetting (netting) of assets and liabilities in financial statements. The amendments in these ASUs affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 amends the existing disclosure requirements on offsetting in ASC 210-20-50 by requiring disclosures relating to gross amounts of recognized assets and liabilities, the amounts that are offset, net amounts presented in the balance sheet, and amounts subject to an enforceable master netting arrangement or similar agreement. The amendments in the update become effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of the amendments of these updates is not expected to have a material effect on CSC's Consolidated Condensed Financial Statements.

On July 27, 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of the amendments in this ASU is not expected to have a material effect on CSC's Consolidated Condensed Financial Statements.
 
Note 3 –
Acquisitions and Divestitures

Fiscal 2013 Acquisition

During the second quarter, CSC acquired a privately-held entity for $35 million in an all cash transaction. The entity was acquired primarily to enhance CSC's strategy of offering customers greater value through data expertise and intellectual property. The purchase price was allocated to net assets acquired based on preliminary estimates of fair value at the date of acquisition as: $4 million to current assets, $8 million to acquired intangible assets, $2 million to liabilities, and $25 million to goodwill. The goodwill is associated with the Company's North American Public Sector (NPS) segment and is expected to be tax deductible.


7

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

The financial results of the acquired business have been included in the Company’s Consolidated Condensed Financial Statements from the date of acquisition. Pro forma financial information for this acquisition is not presented as it is not material to CSC’s consolidated results.

Fiscal 2012 Acquisitions

iSOFT Acquisition

On July 29, 2011, CSC completed the acquisition of iSOFT Group Limited (iSOFT), a publicly-held company listed on the Australian Securities Exchange. iSOFT is a global healthcare information technology company providing advanced application solutions principally to secondary care providers across both the public and private sectors. The acquisition complements and strengthens CSC’s software products, healthcare integration and services portfolio, and its healthcare research and development capabilities. CSC acquired all of the outstanding shares in iSOFT for cash consideration of $200 million and the assumption of debt of $315 million, of which $298 million was repaid immediately after the acquisition.  

The financial results of iSOFT have been included in the Company’s Consolidated Condensed Financial Statements from the date of acquisition within its Business Solutions and Services (BSS) segment. For the quarter and nine months ended December 28, 2012, iSOFT contributed revenues of $56 million and $159 million, respectively, and a net operating loss of $24 million and $72 million, respectively. For the quarter and nine months ended December 30, 2011, iSOFT contributed revenues of $49 million and $81 million, respectively, and a net operating loss of $30 million and $58 million, respectively. The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of iSOFT had occurred at the beginning of fiscal 2011:
 
Nine Months Ended
 
 
As Reported
 
 
Pro Forma
(Amounts in millions, except per-share data)
 
December 30, 2011
 
 
December 30, 2011
Revenue
 
$
11,527

 
 
$
11,605

Net loss attributable to CSC common shareholders
 
(4,084
)
 
 
(4,153
)
Basic EPS
 
$
(26.35
)
 
 
$
(26.79
)
Diluted EPS
 
$
(26.35
)
 
 
$
(26.79
)

The pro forma financial information above is not indicative of the results that would have actually been obtained if the acquisition had occurred on April 3, 2010, or that may be obtained in the future. No effect has been given to cost reductions or operating synergies relating to the integration of iSOFT in the Company’s operations. The information for the nine months ended December 30, 2011 has been adjusted to exclude $37 million of goodwill impairment recorded by iSOFT in June 2011. Additionally, the nine months ended December 30, 2011 information has been adjusted to exclude transaction costs of $11 million.

AppLabs Acquisition

On September 13, 2011, CSC acquired AppLabs Technologies Private Limited (AppLabs), a company headquartered in India, which significantly enhances CSC’s capabilities in application testing services as well as shortening the time-to-market process. The AppLabs acquisition complements CSC’s expertise in financial services, healthcare, manufacturing, chemical, energy and natural resources, and technology and consumer verticals. CSC acquired 100% of the outstanding shares of AppLabs for cash consideration of $171 million.

The financial results of AppLabs have been included in the Company’s Consolidated Condensed Financial Statements from the date of acquisition within the Managed Services Sector (MSS) segment. For the quarter and nine months ended December 28, 2012, AppLabs contributed revenues of $23 million and $76 million, respectively, and net operating income of $2 million and $7 million, respectively. For the quarter and nine months ended December 30, 2011, AppLabs contributed revenues of $28 million and $34 million, respectively, and net operating income of $3 million and $4 million, respectively. Pro forma financial information is not presented as this acquisition is not material to CSC’s consolidated financial statements.

8

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


Other Acquisitions

Also during fiscal 2012, CSC acquired two privately-held entities for aggregate consideration of $28 million in cash plus additional consideration of up to $2 million contingent on achieving agreed-upon revenue targets for future periods through the end of May 2014. These entities were acquired to enhance CSC’s offerings in the healthcare information technology and financial services industries.

The financial results of the acquired businesses have been included in the Company’s Consolidated Condensed Financial Statements from the dates of acquisition. Pro forma financial information is not presented as these acquisitions, both individually and in the aggregate, are not material to CSC’s consolidated financial statements.

Divestitures

During the third quarter of fiscal 2013, CSC completed the divestiture of its credit services business and its Italian consulting and system integration business. Both of these businesses were a part of the Company's BSS segment and the divestitures reflect the Company's ongoing service portfolio optimization initiative to focus on next-generation technology services.

The Company received cash proceeds of $1 billion upon sale of its credit services business and paid $35 million ($43 million including the cash on the divested entity's books) in relation to the divestment of the Italian consulting and system integration business. These two divestitures resulted in a total pre-tax gain of $699 million (after-tax gain of $376 million), representing the excess of the proceeds over the carrying value of the net assets of the divested businesses, net of transaction costs of $8 million. The divested assets and liabilities included current assets of $102 million, property and equipment and other long-lived assets of $5 million, goodwill of $241 million, and liabilities of $47 million. Both divestitures are reported in the Company's Consolidated Condensed Statements of Operations as income from discontinued operations, net of taxes.

A summary of the results of the discontinued operations is presented below:
 
 
Quarter Ended
 
Nine Months Ended
 
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
Operations
 
 
 
 
 
 
 
 
Revenue
 
$
70

 
$
77

 
$
228

 
$
236

Income from discontinued operations, before taxes
 
23

 
21

 
74

 
69

Tax expense (benefit)
 
9

 
(7
)
 
31

 
(40
)
Net income from discontinued operations
 
$
14

 
$
28

 
$
43

 
$
109

 
 
 
 
 
 
 
 
 
Disposal
 
 
 
 
 
 
 
 
Gain on disposition, before taxes
 
$
699

 
$
—

 
$
699

 
$
—

Tax expense (benefit)
 
323

 
(2
)
 
323

 
(1
)
Gain on disposition, net of taxes
 
$
376

 
$
2

 
$
376

 
$
1

 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes
 
$
390

 
$
30

 
$
419

 
$
110


The tax benefit for the three months ended December 30, 2011 was the result of applying the annual effective tax rate to discontinued operations, which was in excess of the U.S. domestic tax rate applicable to such discontinued operations in prior quarters. For the nine months ended December 30, 2011, discontinued operations reflects a tax benefit of approximately $82 million due to the change in tax status of one of the Company's foreign subsidiaries. This change in tax status resulted in a deemed liquidation for U.S. tax purposes and triggered various deductions which resulted in an income tax benefit. This benefit is allocable to discontinued operations as such foreign subsidiary was disposed of during the current fiscal year.

9

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


In fiscal 2013, the main driver between the book and tax gain on the sale of the credit services business is related to goodwill of approximately $241 million that is not deductible for tax purposes. In addition, there was a significant tax benefit that was realized on the divestment of the Italian consulting and system integration business.

In the third quarter of fiscal 2013, the Company also entered into a definitive agreement to sell Paxus, its Australian information technology staffing business unit. This divestiture did not qualify to be presented as discontinued operations because of CSC's significant continuing business relationship with the divested entity. As of December 28, 2012, the assets and liabilities of Paxus have been classified as held for sale in the Company's Consolidated Condensed Balance Sheet, as follows: $37 million included in current assets, $1 million included in non-current assets, and $17 million included in current liabilities. The divestiture of Paxus was completed on January 25, 2013 (see Note 20).

Note 4 –
Investigations and Out of Period Adjustments
   
Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments

Background

As previously disclosed, in fiscal 2011, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in our MSS segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in this investigation. On January 28, 2011, the Company was notified by the SEC’s Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC’s Division of Enforcement as well as matters under investigation by the Audit Committee of the Board of Directors, as further described below. The Company is cooperating in the SEC’s investigation.

On May 2, 2011, the Audit Committee commenced an independent investigation into the matters relating to the MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC’s Division of Enforcement and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants to assist with their work. Independent counsel also represents CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with the investigation by the SEC’s Division of Enforcement.

The Audit Committee’s investigation was expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation and (iii) certain of the Company’s accounting practices that involve the percentage of completion accounting method, including the Company’s contract with the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. 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. The SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with the NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are investigating these matters and are continuing to cooperate with the SEC's Division of Enforcement in its investigation.

As previously disclosed, in fiscal 2012, and in the first quarter of fiscal 2013, the Company had identified but not yet recorded certain additional items related to the NHS contract that could have an effect on the amount and the allocation of the prior period adjustments. During the second quarter of fiscal 2013, based on its analysis of these items, the Company recorded net credits of $9 million in pre-tax out of period adjustments impacting prior fiscal years. These adjustments resulted primarily from accounting errors identified by the Company related to costs incurred under the

10

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

contract. During the third quarter of fiscal 2013, additional accounting errors were identified related to the Company's use of the percentage of completion accounting method on its NHS contract. Such adjustments, which were self-correcting, had no rollover impact on income (loss) from continuing operations before taxes during the first nine months of fiscal 2013. Based on information provided by the independent counsel, the Company believes that a small portion of such adjustments should be characterized as intentional accounting irregularities.
 
The following is the cumulative rollover impact on income (loss) from continuing operations before taxes of the out of period adjustments related to the Company's NHS contract:
 
 
Increase/(Decrease)
(Amounts in millions)
 
Fiscal 2012 Adjustments
 
First Nine Months Fiscal 2013 Adjustments
 
Total Adjustments
Fiscal 2013
 
$
—

 
$
(9
)
 
$
(9
)
Fiscal 2012
 
25

 
10

 
35

Fiscal 2011
 
(7
)
 
(15
)
 
(22
)
Fiscal 2010
 
(4
)
 
18

 
14

Prior fiscal years (unaudited)
 
(14
)
 
(4
)
 
(18
)

The Company believes the SEC has expanded its investigation into the foregoing areas as well as into certain related disclosure matters. The SEC's investigative activities are ongoing. In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company's conclusions relating to materiality of such adjustments, and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigation being conducted by the SEC's Division of Enforcement and the review of the Company's financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors or irregularities or other areas of review. As a result, CSC has incurred and will continue to incur significant legal and accounting expenditures, and a significant amount of the Company's senior management's time that otherwise would have been focused on the growth of the Company has been focused on these matters. The Company is unable to predict how long the SEC's Division of Enforcement's investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against the Company. In addition, CSC is unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of its financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC's investigation, even if ultimately resolved favorably for the Company, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows.

Any out of period adjustments identified, including items that self corrected within a fiscal year, by the Company to date are described in this Note 4.


11

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

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments (including the out of period adjustments related to the NHS contract) in the first nine months of fiscal 2013, fiscal 2012 and fiscal 2011 is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
 
 
(Amounts in millions)
 
Fiscal 2011 Adjustments
 
Fiscal 2012 Adjustments
 
First Nine Months Fiscal 2013 Adjustments
 
Total Adjustments
Fiscal 2013
 
$
—

 
$
—

 
$
(4
)
 
$
(4
)
Fiscal 2012
 
—

 
79

 
10

 
89

Fiscal 2011
 
52

 
(29
)
 
(17
)
 
6

Fiscal 2010
 
(48
)
 
(9
)
 
15

 
(42
)
Prior fiscal years (unaudited)
 
(4
)
 
(41
)
 
(4
)
 
(49
)

Fiscal 2013 Financial Impact Summary

During the third quarter and through the first nine months of fiscal 2013, the Company identified and recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $3 million and increasing income from continuing operations before taxes by $4 million, respectively, that should have been recorded in prior fiscal years ($3 million and $13 million, net of tax and including discrete tax benefits). In addition, during the third quarter of fiscal 2013, the Company recorded $3 million of net pre-tax adjustments increasing income from continuing operations before taxes and $2 million of net pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the second and first quarters of fiscal 2013, respectively.

The $3 million pre-tax out of period adjustments recorded in the third quarter of fiscal 2013 resulted primarily from correcting the useful lives of property and equipment that were inconsistent with established CSC accounting conventions. This error occurred in connection with a BSS contract in France.

As noted above, during the third quarter of fiscal 2013, the Company identified additional prior period errors related to the use of the percentage of completion accounting method on its NHS contract. Such errors, which were self-correcting, have no impact on income from continuing operations before taxes for fiscal 2013. Had such adjustments been recorded in fiscal 2012, income from continuing operations before taxes would have increased by $22 million. For fiscal 2011, income from continuing operations before taxes would have decreased by $3 million. For fiscal 2010, there would have been no impact on income from continuing operations before taxes. For fiscal 2009 and prior periods, income from continuing operations before taxes would have decreased by $19 million.

As previously reported, during the second quarter and through the first six months of fiscal 2013, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $8 million and $7 million, respectively, that should have been recorded in prior fiscal years ($10 million and $13 million, net of tax). In addition, during the second quarter of fiscal 2013, the Company recorded $2 million of net pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2013 and had no impact on prior fiscal years.

The $8 million pre-tax out of period adjustments recorded in the second quarter of fiscal 2013 consisted primarily of $9 million of net adjustments increasing income from continuing operations before taxes related to the Company's investigation of the use of percentage of completion accounting on the NHS contract. Such adjustments result primarily from accounting errors identified by the Company related to costs incurred under the NHS contract.

As previously reported, based on information then known by the Company, the out of period adjustments recorded in the first quarter of fiscal 2013 were comprised of $6 million of net adjustments reducing income from continuing operations before taxes identified by the Company late in the fiscal 2012 closing process, and due to the immaterial amounts involved, were not included in the Company's consolidated fiscal 2012 financial statements. Also in the first quarter of fiscal 2013, the Company identified and recorded $5 million of net pre-tax adjustments increasing income from continuing operations that should have been recorded in prior fiscal years. The $5 million of net pre-tax adjustments consisted

12

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

primarily of charges related to a $2 million software revenue recognition correction and a $2 million adjustment to prepaid expenses offset by credits primarily related to corrections of $10 million to reduce accrued expenses related to the restructuring costs recorded by the Company in fiscal 2012.

The Company also recorded a $2 million tax benefit in the first quarter of fiscal 2013 related to prior periods. The $2 million tax benefit was attributable to the adjustment of the deferred tax liability related to intellectual property assets.

The select line items of the Consolidated Statement of Operations for the quarter and nine months ended December 28, 2012 impacted by the consolidated out of period adjustments under the rollover method are shown below.
 
 
Quarter Ended December 28, 2012
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,781

 
$
1

 
$
3,782

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,995

 
2

 
2,997

Selling, general and administrative
 
278

 
1

 
279

Depreciation and amortization
 
270

 
(4
)
 
266

Restructuring costs
 
26

 
2

 
28

Interest expense
 
57

 
(1
)
 
56

Other (income) expense
 
4

 
(1
)
 
3

Income from continuing operations before taxes
 
155

 
2

 
157

Taxes on income
 
32

 
3

 
35

Income from continuing operations
 
123

 
(1
)
 
122

Income from discontinued operations, net of taxes
 
390

 
—

 
390

Income attributable to CSC common shareholders
 
510

 
(1
)
 
509

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
0.77

 
$
(0.01
)
 
$
0.76

Discontinued operations
 
2.50

 
—

 
2.50

Total
 
$
3.27

 
$
(0.01
)
 
$
3.26


 
 
Nine Months Ended December 28, 2012
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
11,434

 
$
10

 
$
11,444

Costs of services (excludes depreciation and amortization and restructuring costs)
 
9,141

 
12

 
9,153

Selling, general and administrative
 
864

 
(1
)
 
863

Depreciation and amortization
 
806

 
(2
)
 
804

Restructuring costs
 
111

 
5

 
116

Interest expense
 
147

 
—

 
147

Other (income) expense
 
(1
)
 
—

 
(1
)
Income from continuing operations before taxes
 
380

 
(4
)
 
376

Taxes on income
 
106

 
9

 
115

Income from continuing operations
 
274

 
(13
)
 
261

Income from discontinued operations, net of taxes
 
419

 
—

 
419

Income attributable to CSC common shareholders
 
680

 
(13
)
 
667

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
1.67

 
$
(0.08
)
 
$
1.59

Discontinued operations
 
2.69

 
—

 
2.69

Total
 
$
4.36

 
$
(0.08
)
 
$
4.28


13

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


The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the nine months ended December 28, 2012 are related to the following consolidated balance sheet line items:

•
Accounts receivable ($1 million decrease);
•
Prepaid expenses ($8 million increase);
•
Property and equipment ($4 million decrease);
•
Deferred revenue ($9 million increase); and
•
Accrued expenses and other current liabilities ($10 million decrease).

The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2013 is immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2013, first nine months of fiscal 2013 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2013.

Effect of Adjustments on Prior Year Financial Statements

As previously disclosed, during fiscal 2012, the Company recorded various pre-tax adjustments that should have been recorded in prior fiscal years. The aggregate fiscal 2012 adjustments reduced income from continuing operations before taxes by $79 million ($63 million net of tax) and were comprised of $13 million of charges relating to operations in the Nordic region, $23 million of charges relating to the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's BSS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s MSS and BSS segments, with $37 million and $26 million of adjustments within MSS and BSS, respectively.

During the third quarter and through the first nine months of fiscal 2012, based on information then known by the Company, the Company recorded, primarily in the Nordic Region and Australia, net pre-tax adjustments reducing income from continuing operations before taxes by $3 million and $31 million ($1 million and $23 million, net of tax), respectively, that should have been recorded in prior fiscal years.

Nordic Region Adjustments

The Nordic pre-tax adjustments recorded in the third quarter and first nine months of fiscal 2012, based on information then known by the Company, totaled $2 million and $10 million, respectively, and were primarily attributable to an understatement of amortization expense resulting from the use of incorrect useful lives for purchased software licenses. The Company attributes these Nordic adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct (other than a $1 million operating lease adjustment, which was a refinement of an error previously corrected and reported in fiscal 2011).

Australia

In the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities were identified. Based on the information then known by the Company, the Company recorded $1 million and $20 million of pre-tax adjustments reducing income from continuing operations during the third quarter and the nine months ended December 30, 2011, respectively. Such adjustments have been categorized as either intentional accounting irregularities (“intentional irregularities”) or other accounting errors (“Other Errors”). Other Errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation.

14

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


The impact of the Australia adjustments recorded during the first nine months of fiscal 2012 on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
(Amounts in millions)
 
FY08 &
Prior (unaudited)
 
FY09 (unaudited)
 
FY10
 
FY11
 
Total
Intentional irregularities
 
$
10

 
$
(7
)
 
$
(4
)
 
$
—

 
$
(1
)
Other Errors
 
(5
)
 
(16
)
 
5

 
(3
)
 
(19
)
 
 
$
5

 
$
(23
)
 
$
1

 
$
(3
)
 
$
(20
)

The principal intentional irregularities relate to excess reserves of $8 million established in fiscal 2008 to manage earnings, which reserves were reversed in fiscal 2009, while the unintentional errors include an incorrect accounting conclusion on a sale leaseback transaction in fiscal 2009 that triggered an impairment of $9 million and the inappropriate capitalization of transition costs of $3 million in fiscal 2011. In addition, included in the adjustments discussed above, the Company identified and recorded a $1 million pre-tax adjustment reducing income from continuing operations related to its review of the accounting treatment with respect to revenue recognition for one of its Australia customer contracts.

NHS Adjustments

As noted above, during fiscal 2012 and through the first nine months of fiscal 2013, the Company has identified certain accounting errors related to the Company's use of the percentage of completion accounting method on its NHS contract. The impact of such errors would be to increase income from continuing operations before taxes by $47 million and $43 million for the third quarter and first nine months of fiscal 2012, respectively.

Other Adjustments

Based on information then known by the Company, the Company identified certain out of period adjustments related to MSS operations outside of the Nordics and Australia regions, which decreased income from continuing operations by $2 million and $1 million for the third quarter and for the first nine months, respectively, of fiscal 2012. The Company attributes these adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct.
The following table summarizes the cumulative effect on net loss attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2011, fiscal 2012 and the nine months ended December 28, 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.
 
 
Increase/(Decrease)
(Amounts in millions)
 
Quarter Ended December 30, 2011
 
Nine Months Ended December 30, 2011
Nordic adjustments
 
$
2

 
$
12

Australia adjustments
 
2

 
22

NHS adjustments
 
47

 
43

Other adjustments
 
—

 
(3
)
Effect on loss from continuing operations before taxes
 
51

 
74

Taxes on income
 
(12
)
 
(2
)
Effect on net loss attributable to CSC common shareholders
 
$
39

 
$
72


The select line items of the Consolidated Condensed Statements of Operations for the quarter and nine months ended December 30, 2011 impacted by the out of period adjustments, including those recorded in the first nine months of fiscal 2013, under the rollover method are shown below.

15

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

 
 
Quarter Ended December 30, 2011
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,687

 
$
45

 
$
3,732

Costs of services (excludes depreciation and amortization)
 
3,186

 
(20
)
 
3,166

Selling, general and administrative
 
272

 
4

 
276

Depreciation and amortization
 
301

 
7

 
308

Interest expense
 
42

 
—

 
42

Other (income) expense
 
12

 
3

 
15

Income from continuing operations before taxes
 
(1,459
)
 
51

 
(1,408
)
Taxes on income
 
(38
)
 
12

 
(26
)
Income from continuing operations
 
(1,421
)
 
39

 
(1,382
)
Loss from discontinued operations, net of taxes
 
30

 
—

 
30

Net income attributable to CSC common shareholders
 
(1,390
)
 
39

 
(1,351
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(9.15
)
 
$
0.25

 
$
(8.90
)
Discontinued operations
 
0.19

 
—

 
0.19

Total
 
$
(8.96
)
 
$
0.25

 
$
(8.71
)

 
 
Nine Months Ended December 30, 2011
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
11,527

 
$
40

 
$
11,567

Costs of services (excludes depreciation and amortization)
 
9,730

 
(32
)
 
9,698

Selling, general and administrative
 
838

 
2

 
840

Depreciation and amortization
 
868

 
(2
)
 
866

Interest expense
 
129

 
(3
)
 
126

Other (income) expense
 
1

 
1

 
2

Income from continuing operations before taxes
 
(4,260
)
 
74

 
(4,186
)
Taxes on income
 
(78
)
 
2

 
(76
)
Income from continuing operations
 
(4,182
)
 
72

 
(4,110
)
Loss from discontinued operations, net of taxes
 
110

 
—

 
110

Net income attributable to CSC common shareholders
 
(4,084
)
 
72

 
(4,012
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(27.06
)
 
$
0.46

 
$
(26.60
)
Discontinued operations
 
0.71

 
—

 
0.71

Total
 
$
(26.35
)
 
$
0.46

 
$
(25.89
)

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company through the nine months ended December 30, 2011 are related to the following consolidated balance sheet line items:

•
Accounts receivable ($48 million decrease);
•
Prepaid expenses and other current assets ($40 million increase);
•
Property and equipment ($26 million decrease);
•
Accrued expense ($42 million increase); and
•
Deferred revenue ($2 million decrease).

The Company determined that the impact of the consolidated out of period adjustments recorded in the third quarter of fiscal 2012 was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2012

16

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

and prior periods. Consequently, the cumulative effect of these adjustments was recorded during the third quarter of fiscal 2012.

Note 5 –
Earnings (Loss) Per Share

Basic earnings (loss) per common share (EPS) and diluted earnings (loss) per share are calculated as follows:

 
 
Quarter Ended
(Amounts in millions, except per-share amounts)
 
December 28, 2012
 
December 30, 2011
 
 
 
 
 
Net income (loss) attributable to CSC common shareholders
 
 
 
 
From continuing operations
 
$
120

 
$
(1,420
)
From discontinued operations
 
390

 
30

 
 
$
510

 
$
(1,390
)
Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
155.039

 
155.061

Dilutive effect of stock options and equity awards
 
1.045

 
—

Shares for diluted earnings per share
 
156.084

 
155.061

 
 
 
 
 
Earnings (loss) per share – basic and diluted:
 
 
 
 
Basic EPS:
 
 
 
 
Continuing operations
 
$
0.77

 
$
(9.15
)
Discontinued operations
 
2.52

 
0.19

Total
 
$
3.29

 
$
(8.96
)
 
 
 
 
 
Diluted EPS:
 
 
 
 
Continuing operations
 
$
0.77

 
$
(9.15
)
Discontinued operations
 
2.50

 
0.19

Total
 
$
3.27

 
$
(8.96
)

17

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

 
 
Nine Months Ended
(Amounts in millions, except per-share amounts)
 
December 28, 2012
 
December 30, 2011
 
 
 
 
 
Net income (loss) attributable to CSC common shareholders:
 
 
 
 
From continuing operations
 
$
261

 
$
(4,194
)
From discontinued operations
 
419

 
110

 
 
$
680

 
$
(4,084
)
Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
155.209

 
154.983

Dilutive effect of stock options and equity awards
 
0.639

 
—

Shares for diluted EPS
 
155.848

 
154.983

 
 
 
 
 
Earnings (loss) per share – basic and diluted:
 
 
 
 
Basic EPS:
 
 
 
 
Continuing operations
 
$
1.68

 
$
(27.06
)
Discontinued operations
 
2.70

 
0.71

Total
 
$
4.38

 
$
(26.35
)
 
 
 
 
 
Diluted EPS:
 
 
 
 
Continuing operations
 
$
1.67

 
$
(27.06
)
Discontinued operations
 
2.69

 
0.71

Total
 
$
4.36

 
$
(26.35
)

The computation of diluted earnings (loss) per share excluded options to purchase 24,193 shares of common stock and 766,188 restricted stock units, for the quarter ended December 30, 2011, and options to purchase 826,872 shares of common stock and 1,322,903 restricted stock units for the nine months ended December 30, 2011 whose effect, if included, would have been anti-dilutive due to the Company's net loss. In addition, stock options whose exercise price exceeded the average market price of the Company’s common stock and therefore were anti-dilutive, were excluded from the diluted earnings (loss) per share computation. The number of shares related to such stock options was 14,211,065 and 17,843,771 for the quarter and nine months ended December 28, 2012, respectively, and 18,336,991 and 17,211,569 for the quarter and nine months ended December 30, 2011, respectively.

Note 6 –
Fair Value

Fair value measurements on a recurring basis

The following table presents the Company’s assets and liabilities, excluding pension assets, that are measured at fair value on a recurring basis as of December 28, 2012 and March 30, 2012:

18

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

 
 
As of
 
 
December 28, 2012
 
 
 
 
Fair Value Hierarchy
(Amounts in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
1,381

 
$
1,381

 
$
—

 
$
—

Time deposits
 
199

 
199

 
—

 
—

Short term investments
 
5

 
5

 
—

 
—

Derivative assets
 
4

 
—

 
4

 
—

Total assets
 
$
1,589

 
$
1,585

 
$
4

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
2

 
$
—

 
$
2

 
$
—

Total liabilities
 
$
2

 
$
—

 
$
2

 
$
—


 
 
As of
 
 
March 30, 2012
 
 
 
 
Fair Value Hierarchy
(Amounts in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
299

 
$
299

 
$
—

 
$
—

Time deposits
 
102

 
102

 
—

 
—

Short term investments
 
6

 
6

 
—

 
—

Derivative assets
 
12

 
—

 
12

 
—

Total assets
 
$
419

 
$
407

 
$
12

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
14

 
$
—

 
$
14

 
$
—

Total liabilities
 
$
14

 
$
—

 
$
14

 
$
—


The Company's money market funds and deposit accounts and time deposits are reported in cash and cash equivalents; short-term investments and derivative assets are included in prepaid expenses and other current assets; and derivative liabilities are included in other accrued expenses. Gains and losses from changes in the fair value of derivative assets and liabilities are included in earnings and reported in other (income) expense. There were no transfers between Level 1 and Level 2.

Derivative assets and liabilities include foreign currency forward contracts and currency options. 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 year-end foreign currency exchange rates and forward points. The fair value of currency options is estimated based on external valuation models that use the original strike price, movement and volatility in foreign currency exchange rates, and length of time to expiration as inputs.

Fair value measurements on a non-recurring basis

Assets and liabilities measured at fair value on a nonrecurring 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 nine months ended December 28, 2012.

19

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


Financial Instruments

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 $2,012 million and $1,073 million, and the estimated fair value was $2,237 million and $1,190 million, as of December 28, 2012, and March 30, 2012, 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. CSC's company-owned life insurance policies are recorded at their cash surrender value.

The primary financial instruments other than derivatives (see Note 7) 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 and other governments 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 December 28, 2012, the Company had $16 million of accounts receivable, $11 million of related allowance for doubtful accounts, and $1 million of other assets with customers involved in bankruptcy proceedings.

Note 7 –
Foreign Currency Derivative Instruments

As a large global organization, the Company faces exposure to adverse movements in foreign currency exchange rates. During the ordinary course of business, the Company enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. The Company generally manages these transactions by incurring costs to service such contracts in the same currency in which revenue is received. Short-term contract financing requirements are met by borrowing in the same currency. By generally matching revenues, costs and borrowings to the same currency, the Company has been able to substantially mitigate foreign currency risk to earnings. However, as business practices evolve, the Company is increasing its use of offshore support and is therefore becoming more exposed to currency fluctuations.

The Company established policies and procedures to manage the exposure to fluctuations in foreign currency by using short-term foreign currency forward and option contracts to hedge certain foreign currency assets and liabilities, including intercompany loans and certain revenues denominated in non-functional currencies. For accounting purposes, these foreign currency contracts are not designated as hedges, as defined under ASC 815, “Derivatives and Hedging,” and all changes in fair value are reported as part of other (income) expense. The Company uses these instruments as economic hedges and not for speculative or trading purposes.

The notional amount of the foreign currency forward contracts outstanding as of December 28, 2012 and March 30, 2012 was $1,219 million and $2,138 million, respectively. The notional amount of option contracts outstanding as of December 28, 2012 and March 30, 2012 was $128 million and $785 million, respectively.

The estimated fair values of the foreign currency derivative assets and liabilities were $4 million and $2 million, respectively, as of December 28, 2012, and $12 million and $14 million, respectively, as of March 30, 2012 (see Note 6).

As a result of the use of derivative instruments, the Company is subject to counterparty credit risk. To mitigate this risk, the Company enters into forward and option contracts with several financial institutions and regularly reviews its credit exposure and the creditworthiness of the counterparties. As of December 28, 2012, there were seven counterparties with concentration of credit risk. The maximum amount of loss, based on gross fair value of the foreign currency derivative instruments that the Company could incur, is $4 million.


20

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

Note 8 –
Debt

The following is a summary of the Company's debt as of December 28, 2012 and March 30, 2012:
(Amounts in millions)
 
December 28, 2012
 
March 30, 2012
4.45% term notes, due September 2022
 
$
349

 
$
—

6.50% term notes, due March 2018
 
997

 
997

2.50% term notes, due September 2015
 
350

 
—

5.50% term notes, due March 2013
 
—

 
699

5.00% term notes, due February 2013
 
—

 
300

Four-Year Term Loan Credit Facility
 
250

 
—

Capitalized lease liabilities
 
564

 
574

Borrowings for assets acquired under long-term financing
 
102

 
84

Other borrowings
 
17

 
86

Total debt
 
2,629

 
2,740

Less: short-term debt and current maturities of long-term debt
 
231

 
1,254

Total long-term debt
 
$
2,398

 
$
1,486


On September 18, 2012, the Company issued $700 million of senior unsecured and unsubordinated notes (new term notes) comprised of $350 million 2.50% Senior Notes due September 15, 2015 and $350 million 4.45% Senior Notes due September 15, 2022. The new term notes were recorded net of debt discount of $1 million. The Company also incurred deferred debt issuance costs of $5 million, which along with the debt discount will be amortized over the respective terms of the new term notes using the effective interest method. The new term notes are senior unsecured and unsubordinated obligations and rank equally with all other existing and future senior unsecured and unsubordinated indebtedness, including any borrowings under the existing $1.5 billion credit facility, and senior to all future subordinated debt. Interest is payable semi-annually on September 15 and March 15 beginning March 15, 2013. The proceeds from the new term notes were used to redeem a portion of the 5.50% term notes, due March 2013, and the 5.00% term notes, due February 2013, as described below.

In addition, on September 18, 2012, the Company entered into a four-year, unsecured, delayed-draw $250 million term loan credit facility (new facility) maturing on September 18, 2016. Under the new facility, the Company has an option to request an increase in the commitment up to a maximum amount of $350 million. Interest on borrowings under the new facility is based on prime rate or LIBOR plus a daily margin, and is payable quarterly. Quarterly principal repayments of 2.5% of borrowings commence December 31, 2013. Costs associated with establishing the new facility of $1 million have been deferred and will be amortized over the term of the agreement. On October 17, 2012, the Company borrowed $250 million under the new facility and used the proceeds to redeem a portion of the 5.50% and 5.00% term notes due in the fourth quarter of 2013, as described below.

On September 12, 2012, the Company delivered a notice of early redemption with respect to the Company’s outstanding $700 million 5.50% Senior Notes due March 2013 and $300 million 5.00% Senior Notes due February 2013. On October 19, 2012, the Company used the proceeds received from the issuance of new term notes and the $250 million drawn from the new facility to fund the early redemption of the 5.00% and 5.50% term notes due February 2013 and March 2013, respectively, resulting in the recognition of a $19 million loss recorded to interest expense during the third quarter of fiscal 2013.

Both the new term notes and the new facility agreement contain representations, warranties, and covenants customary for arrangements of these types, as well as customary events of default, including a cross-default to payment defaults on principal payments aggregating $125 million or to other events if the effect is to accelerate or permit acceleration of such debt.

During the first quarter of fiscal 2013, the Company issued commercial paper with an average maturity of less than one month at a weighted average interest rate of 0.72%. The commercial paper is backed by the Company's existing $1.5

21

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

billion credit facility that matures on March 18, 2015. The Company did not issue commercial paper during the second and third quarters of fiscal 2013. As of both December 28, 2012 and March 30, 2012, the Company had no borrowings outstanding against commercial paper.
Both the new $250 million term loan credit facility and existing $1.5 billion credit facility require the Company to maintain certain financial covenants. The Company was in compliance with all financial covenants as of December 28, 2012.

Note 9 –
Pension and Other Benefit Plans

The Company and its subsidiaries offer a number of pension and postretirement benefits, life insurance benefits, deferred compensation, and other plans. The components of net periodic pension cost 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)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
Service cost
 
$
3

 
$
3

 
$
8

 
$
6

Interest cost
 
39

 
41

 
34

 
31

Expected return on assets
 
(38
)
 
(37
)
 
(34
)
 
(32
)
Amortization of unrecognized net loss and other
 
10

 
9

 
5

 
4

Contractual termination benefits
 
—

 
—

 
1

 
—

Net periodic pension cost
 
$
14

 
$
16

 
$
14

 
$
9


 
 
Nine Months Ended
 
 
U.S. Plans
 
Non-U.S. Plans
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
Service cost
 
$
8

 
$
7

 
$
22

 
$
20

Interest cost
 
117

 
123

 
94

 
95

Expected return on assets
 
(114
)
 
(109
)
 
(95
)
 
(96
)
Amortization of unrecognized net loss and other
 
31

 
26

 
15

 
12

Contractual termination benefits
 
—

 
—

 
7

 
—

Net periodic pension cost
 
$
42

 
$
47

 
$
43

 
$
31


During the quarter and nine months ended December 28, 2012, the Company recorded additional contractual termination benefits for a certain U.K. pension plan of $1 million and $7 million, respectively. These restructuring costs represent revisions of estimates related to the Fiscal 2012 Plan and new restructuring costs under the Fiscal 2013 Plan (see Note 16). These contractual termination benefits are reflected in the projected benefit obligation at the end of the quarter and recognized in net periodic pension cost as of the third quarter.

During the second quarter of fiscal 2013, a pension plan in Norway was amended to change the index used to benchmark pension payment increases. The plan was remeasured at July 1, 2012, the effective date of the amendment, resulting in a reduction to the projected benefit obligation by $28 million, improving the plan's funded status. The plan's fiscal 2013 expense was also remeasured for the remaining nine months of the fiscal year using a new discount rate of 4%.

The Company contributed $93 million and $210 million to the defined benefit pension plans during the quarter and nine months ended December 28, 2012, respectively. In aggregate, the Company expects to contribute approximately $658 million during fiscal 2013. The Company made a discretionary contribution of $400 million to one of its U.S. pension plans during the fourth quarter of fiscal 2013. The impact of the contribution should reduce future net periodic pension cost. In addition to this discretionary contribution, additional contributions may be required to meet funding levels as required by

22

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

Section 430 of the U.S. Internal Revenue Code, as amended by the Pension Protection Act of 2006, the amount of which will be determined based upon actuarial valuations that will be performed in the fourth quarter of fiscal 2013.

During the second quarter of fiscal 2013, the U.S. Internal Revenue Service (IRS) issued guidance for the Moving Ahead for Progress in the 21st Century Act ("MAP-21"), which was passed by Congress earlier in the year. MAP-21 established funding stabilization provisions, which starting in calendar year 2012 allows plan sponsors to defer contributions to their pension plans. The Company evaluated the provisions of the new law and did not defer contributions in calendar year 2012.

The components of net periodic benefit cost for postretirement benefit plans, reported on a global basis, included the following:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Service cost
 
$
1

 
$
—

Interest cost
 
3

 
2

Expected return on assets
 
(1
)
 
—

Amortization of unrecognized net loss and other
 
3

 
2

Net provision for postretirement benefits
 
$
6

 
$
4


 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Service cost
 
$
3

 
$
2

Interest cost
 
9

 
8

Expected return on assets
 
(4
)
 
(4
)
Amortization of unrecognized net loss and other
 
10

 
6

Net provision for postretirement benefits
 
$
18

 
$
12


The Company contributed $0 million and $4 million to the postretirement benefit plans during the quarter and nine months ended December 28, 2012, respectively. The Company expects to contribute approximately $8 million to the postretirement benefit plans during fiscal 2013.

The Company received a $1 million subsidy during the nine months ended December 28, 2012 in connection with the U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003.

Note 10 –
Income Taxes

The Company's effective tax rate (ETR) was 20.6% and 27.9% for the quarter and nine months ended December 28, 2012, respectively, and 2.6% and 1.8% for the quarter and nine months ended December 30, 2011, respectively. The following are the primary drivers of the ETR for the nine months ended December 28, 2012 and December 30, 2011. For the tax impact of discontinued operations, see Note 3.

•
During the third quarter and nine months ended December 28, 2012 there was a decrease in valuation allowances in non-U.S. jurisdictions due to (i) a shift in the global mix of income which impacted the ETR by 7.1% and 2.9%, respectively and (ii) expected capital gains from the sale of certain other assets which impacted the ETR by 5.6% and 2.3%, respectively.
•
During the second quarter of fiscal 2013, the Company released $6.4 million of its liability for uncertain tax positions related to prior year research and development credits which reduced the ETR for the nine months ended December 28, 2012 by 1.7%.
•
During the third quarter of fiscal 2012, the Company recorded a $1,485 million charge related to the NHS contract. The Company established a full valuation allowance against the net operating losses in the U.K. and did not record a tax benefit for the NHS charge. The NHS charge had a significant impact on the ETR for the third

23

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

quarter and nine months ended December 30, 2011 and was one of the primary drivers of the difference between the ETR and statutory tax rate of 35%.
•
During the third quarter of fiscal 2012, as a result of the charge related to the NHS contract, the Company established a valuation allowance of approximately $65 million against the prior year ending net deferred tax assets of the U.K. operating entities. The valuation allowance had an unfavorable impact on the ETR for the third quarter and nine months ended December 30, 2011 of 4.5% and 1.5%, respectively.
•
During the second quarter of fiscal 2012, the Company settled various tax examinations and recognized income tax benefits related to audit settlements and the expiration of the statute of limitations of approximately $112 million which reduced the ETR for the nine months ended December 30, 2011 by 2.6%.
•
During the second quarter of fiscal 2012, the Company recorded a $2.7 billion goodwill impairment charge, which was mostly not deductible for tax purposes. During the third quarter of fiscal 2012, the Company recorded an additional goodwill impairment charge of $60 million, which was also not deductible for tax purposes. The goodwill impairment charge had a significant impact on the ETR for the third quarter and nine months ended December 30, 2011 and was one of the primary drivers of the difference between the ETR and statutory tax rate of 35%.
•
During the first quarter of fiscal 2012, the Company elected to change the tax status of one of its foreign subsidiaries. This change in tax status resulted in a deemed liquidation for U.S. tax purposes and triggered various deductions which resulted in an income tax benefit of approximately $32 million in continuing operations (the balance of the benefit is now shown in discontinued operations) and reduced the ETR for the nine months ended December 30, 2011 by 0.7%.

There were no material changes to uncertain tax positions as of the third quarter of fiscal 2013 compared to year-end of fiscal 2012.

It is reasonably possible that during the next twelve months the Company's liability for uncertain tax positions may change by a significant amount. The IRS is examining the Company's federal income tax returns for fiscal years 2008 through 2010, and the Company expects to reach a settlement during fiscal year 2014. The significant items subject to examination primarily include foreign income inclusions under subpart F and related foreign tax credits. 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 $90 million, excluding interest, penalties, and tax carryforwards.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (Act) was enacted and extended several expired or expiring temporary business tax provisions, including the active financing income exception, the controlled foreign corporation look through rule, and the research and development credit. Pursuant to ASC 740, the effects of new legislation are recognized in the period of enactment. Therefore, the impact of the Act will be recorded in the fourth quarter and is expected to have a significant impact on the ETR.

Note 11 –
Stock Incentive Plans

As of December 28, 2012, the Company had outstanding stock-based incentive awards issued pursuant to various shareholder-approved plans. For the quarter and nine months ended December 28, 2012 and December 30, 2011, the Company recognized stock-based compensation expense as follows:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Cost of services
 
$
5

 
$
3

Selling, general and administrative
 
11

 
11

Total
 
$
16

 
$
14

Total, net of tax
 
$
10

 
$
9


24

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


 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Cost of services
 
$
11

 
$
8

Selling, general and administrative
 
25

 
28

Total
 
$
36

 
$
36

Total, net of tax
 
$
23

 
$
22


The Company’s overall stock-based compensation granting practice has not changed year over year, except that starting with fiscal 2012's long-term incentive program, restricted stock units (RSUs) represent a larger portion of total stock-based compensation awards than in the past. Adjustments for actual and expected achievement of the specified performance criteria for certain performance-based RSUs decreased stock-based compensation expense recognized for the nine months ended December 28, 2012 by $3 million, which is predominantly represented by participants in selling, general and administrative positions. An adjustment to reflect actual forfeiture experience for the prior fiscal year decreased stock-based compensation expense recognized for the nine months ended December 28, 2012 and December 30, 2011 by $3 million and $5 million, respectively.

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 December 28, 2012 and December 30, 2011 were $7.27, and $10.18 per share, respectively. In calculating the compensation expense for its stock incentive plans, the Company used the following weighted average assumptions:
 
Nine Months Ended
 
December 28, 2012
 
December 30, 2011
Risk-free interest rate
1.14
%
 
1.80
%
Expected volatility
36
%
 
31
%
Expected term (in years)
6.59
 
6.11
Dividend yield
2.88
%
 
1.79
%

During the nine months ended December 28, 2012 and December 30, 2011, the Company's actual tax benefit realized for tax deductions from exercising stock options and RSU releases was $3 million and $6 million, respectively, and an excess tax benefit of $1 million and $2 million, respectively, related to all of its stock incentive plans.

Employee Incentives

The Company has three 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 of the Company (Compensation Committee). The Company issues authorized but previously unissued shares upon the exercise of stock options, the granting of restricted stock and the redemption of RSUs. As of December 28, 2012, 11,061,469 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:

25

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

 
As of December 28, 2012
 
Number
of Option Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(millions)
Outstanding as of March 30, 2012
17,733,562

 
$
46.13

 
5.08
 
$
1

Granted
3,644,573

 
27.14

 
 
 
 
Exercised
(189,457
)
 
30.48

 
 
 
 
Canceled/Forfeited
(626,915
)
 
37.16

 
 
 
 
Expired
(3,451,852
)
 
44.91

 
 
 
 
Outstanding as of December 28, 2012
17,109,911

 
42.83

 
5.72
 
45

Vested and expected to vest in the future as of December 28, 2012
16,778,977

 
43.10

 
5.65
 
42

Exercisable as of December 28, 2012
12,034,893

 
47.44

 
4.33
 
3


The total intrinsic value of options exercised during the nine months ended December 28, 2012 and December 30, 2011, was $1 million and $5 million, respectively. The total intrinsic value of stock options is based on the difference between the fair market value of the Company’s common stock less the applicable exercise price. The cash received from stock options exercised during the nine months ended December 28, 2012 and December 30, 2011 was $4 million and $15 million, respectively.

As of December 28, 2012, there was $33 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 1.97 years.

Other Equity Awards

Other Equity Awards include RSUs that generally vest over periods of three to five years. RSUs consist of shares of common stock of the Company issued at a price of $0. Upon the vesting date, RSUs are automatically redeemed for shares of CSC common stock and dividend equivalents. If, prior to the redemption in full of the RSU, the employee’s status as a full-time employee is terminated, then the RSU is automatically canceled on the employment termination date and any unvested shares are forfeited.

A portion of the Other Equity Awards granted during the quarter ended December 28, 2012 consisted of performance-based RSUs. The number of units that ultimately vest pursuant to such awards is dependent upon the Company’s achievement of certain specified performance criteria generally over a three-year period. Awards are redeemed for shares of CSC common stock and dividend equivalents upon the filing with the SEC of the Annual Report on Form 10-K for the last fiscal year of the performance period. Compensation expense during the performance period is estimated at each reporting date using management’s expectation of the probable achievement of the specified performance criteria and is adjusted to the extent the expected achievement changes. In the table below, such awards are reflected at the number of shares to be redeemed upon achievement of target performance measures.

During the nine months ended December 28, 2012, certain executives were awarded service-based RSUs for which the shares are redeemable over the ten anniversaries following the executive’s termination, provided the executive (i) remains a full-time employee of the Company until reaching the earlier of (a) age 65 or (b) age 55 or over with at least ten years of service and (ii) after termination complies with certain non-competition covenants during the ten-year period.


26

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

Information concerning Other Equity Awards granted under stock incentive plans is as follows:
 
As of December 28, 2012
 
Number of
Shares
 
Weighted Average
Fair Value per share
Outstanding as of March 30, 2012
1,740,925

 
$
40.29

Granted
1,698,839

 
25.86

Released/Issued
(254,238
)
 
40.18

Canceled/Forfeited
(578,840
)
 
39.68

Outstanding as of December 28, 2012
2,606,686

 
31.04


As of December 28, 2012, there was $42 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 2.29 years.

Nonemployee 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 December 28, 2012, 72,400 shares of CSC common stock remained available for grant to nonemployee directors as RSUs or other stock-based incentives.

Generally, RSU awards to nonemployee 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 nonemployee directors is as follows:
 
As of December 28, 2012
 
Number of
Shares
 
Weighted Average
Fair Value per share
Outstanding as of March 30, 2012
196,361

 
$
42.81

Granted
42,800

 
30.30

Released/Issued
(50,716
)
 
43.30

Canceled/Forfeited
—

 
—

Outstanding as of December 28, 2012
188,445

 
39.85


When a holder of RSUs ceases to be a director of the Company, the RSUs are automatically redeemed for shares of CSC common stock and dividend equivalents with respect to such shares. The number of shares to be delivered upon redemption is equal to the number of RSUs that are vested at the time the holder ceases to be a director. At the holder’s election, the RSUs may be redeemed (i) in their entirety, upon the day the holder ceases to be a director, or (ii) in substantially equal amounts upon the first five, ten or fifteen anniversaries of such termination of service.

Note 12 –
Share Repurchase Program

In December 2010, the Company’s board of directors approved a share repurchase program authorizing up to $1 billion in share repurchases of the Company’s outstanding common stock. CSC expects to implement the program through purchases in compliance with Securities and Exchange Commission rules, 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 repurchase program. Prior to the third quarter of fiscal 2013, $935 million was available for the repurchase of shares under the program.

During the quarter ended December 28, 2012, the Company utilized proceeds received from the sale of its credit services business (see Note 3) to purchase 1,971,200 shares through open market purchases for an aggregate consideration of

27

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

$77 million, at a weighted average price of $39.04 per share. Of the aggregate consideration of $77 million, $18 million was recorded as an accrued liability for shares purchased but not yet settled in cash by December 28, 2012.

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

As of the end of the third fiscal quarter 2013, $858 million is available for the repurchase of shares.

Note 13 –
Cash Flows

Cash payments for interest on indebtedness and cash payments for taxes on income are as follows:
 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Interest
 
$
127

 
$
104

Taxes on income, net of refunds
 
107

 
115


Non-cash investing activities include the following:
 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Capital expenditures in accounts payable and accrued expenses
 
$
28

 
$
40

Capital expenditures through capital lease obligations
 
124

 
199

Assets acquired under long-term financing
 
19

 
25


Non-cash financing activities included common share dividends declared but not yet paid of $31 million for both the nine months ended December 28, 2012 and December 30, 2011, respectively.

Note 14 –
Segment Information

CSC provides information technology (IT) and business process outsourcing, consulting, systems integration and other IT services to its customers. The Company targets the delivery of these services within three broad lines of business or sectors: North American Public Sector, Managed Services Sector, and Business Solutions and Services.

The Company’s reportable segments are as follows:

•
North American Public Sector (NPS) – The NPS segment provides services to the U.S. federal government and its agencies, civil departments and branches of military, and operates principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.

•
Managed Services Sector (MSS) – The MSS segment provides large-scale and mid-size outsourcing solutions and services to customers globally.

•
Business Solutions and Services (BSS) – The BSS segment provides industry specific consulting and systems integration services, business process outsourcing, and intellectual property-based software solutions.

The following table summarizes operating results by reportable segment. BSS results for fiscal 2012 have been adjusted from amounts previously reported to reflect the removal of revenue and costs associated with discontinued operations.


28

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

(Amounts in millions)
 
NPS
 
MSS
 
BSS(2)
 
Corporate
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,340

 
$
1,620

 
$
853

 
$
3

 
$
(35
)
 
$
3,781

Operating income (loss)
 
137

 
125

 
36

 
(30
)
 
—

 
268

Depreciation and amortization
 
40

 
195

 
32

 
3

 
—

 
270

 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended December 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,379

 
$
1,670

 
$
663

 
$
3

 
$
(28
)
 
$
3,687

Operating income (loss)
 
65

 
108

 
(1,459
)
 
(21
)
 
—

 
(1,307
)
Depreciation and amortization
 
43

 
215

 
44

 
(1
)
 
—

 
301


(Amounts in millions)
 
NPS(1)
 
MSS
 
BSS(2)
 
Corporate
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,083

 
$
4,838

 
$
2,601

 
$
9

 
$
(97
)
 
$
11,434

Operating income (loss)
 
388

 
308

 
65

 
(63
)
 
—

 
698

Depreciation and amortization
 
121

 
568

 
107

 
10

 
—

 
806

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended December 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,299

 
$
4,908

 
$
2,410

 
$
9

 
$
(99
)
 
$
11,527

Operating income (loss)
 
51

 
162

 
(1,417
)
 
(47
)
 
—

 
(1,251
)
Depreciation and amortization
 
119

 
622

 
114

 
13

 
—

 
868


(1) 
The nine months ended December 30, 2011 amounts include $42 million reduction of revenue and $269 million reduction in operating income as a result of the settlement of claims with the U.S. government (see Note 18).
(2) 
The third quarter and nine months ended December 30, 2011 amounts include $204 million reduction of revenue and $1,485 million reduction in operating income as a result of the charge associated with the NHS contract (see Note 17).

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.

Reconciliation of consolidated operating income (loss) to income (loss) from continuing operations before taxes is as follows:
 
 
Quarter Ended
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
Operating income (loss)
 
$
268

 
$
(1,307
)
 
$
698

 
$
(1,251
)
Corporate G&A
 
(56
)
 
(46
)
 
(186
)
 
(166
)
Interest expense
 
(57
)
 
(42
)
 
(147
)
 
(129
)
Interest income
 
4

 
8

 
14

 
32

Goodwill impairment
 
—

 
(60
)
 
—

 
(2,745
)
Other (expense) income, net
 
(4
)
 
(12
)
 
1

 
(1
)
Income (loss) from continuing operations before taxes
 
$
155

 
$
(1,459
)
 
$
380

 
$
(4,260
)
 
During the quarter and nine months ended December 28, 2012 and December 30, 2011, the Company recorded certain pre-tax out of period adjustments which should have been recorded in prior fiscal years (see Note 4). The following tables summarize the effect of the pre-tax out of period adjustments on the NPS, MSS and BSS segment results for the quarter and nine months ended December 28, 2012 and December 30, 2011, as if the adjustments had been recorded in the appropriate period.

29

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

 
 
NPS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Quarter ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
1,340

 
$
—

 
$
1,340

Operating income
 
137

 
—

 
137

Depreciation and amortization
 
40

 
—

 
40

 
 
 
 
 
 
 
Quarter ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
1,379

 
$
(4
)
 
$
1,375

Operating income
 
65

 
(5
)
 
60

Depreciation and amortization
 
43

 
—

 
43


 
 
NPS
(Amounts in millions)
 
As Reported

 
Increase/
(Decrease)
 
Adjusted
Nine months ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
4,083

 
$
—

 
$
4,083

Operating income
 
388

 
6

 
394

Depreciation and amortization
 
121

 
—

 
121

 
 
 
 
 
 
 
Nine months ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
4,299

 
$
(4
)
 
$
4,295

Operating income
 
51

 
(2
)
 
49

Depreciation and amortization
 
119

 
—

 
119



 
 
MSS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Quarter ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
1,620

 
$
1

 
$
1,621

Operating income
 
125

 
1

 
126

Depreciation and amortization
 
195

 
—

 
195

 
 
 
 
 
 
 
Quarter ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
1,670

 
$
(4
)
 
$
1,666

Operating income
 
108

 
12

 
120

Depreciation and amortization
 
215

 
(1
)
 
214



30

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

 
 
MSS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Nine months ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
4,838

 
$
1

 
$
4,839

Operating income
 
308

 
2

 
310

Depreciation and amortization
 
568

 
—

 
568

 
 
 
 
 
 
 
Nine months ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
4,908

 
$
—

 
$
4,908

Operating income
 
162

 
29

 
191

Depreciation and amortization
 
622

 
(2
)
 
620


 
 
BSS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Quarter ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
853

 
$
—

 
$
853

Operating income
 
36

 
1

 
37

Depreciation and amortization
 
32

 
(4
)
 
28

 
 
 
 
 
 
 
Quarter ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
663

 
$
53

 
$
716

Operating loss
 
(1,459
)
 
48

 
(1,411
)
Depreciation and amortization
 
44

 
—

 
44


 
 
BSS
(Amounts in millions)
 
As Reported
 
Increase/
(Decrease)
 
Adjusted
Nine months ended December 28, 2012
 
 
 
 
 
 
Revenues
 
$
2,601

 
$
9

 
$
2,610

Operating income
 
65

 
(10
)
 
55

Depreciation and amortization
 
107

 
(2
)
 
105

 
 
 
 
 
 
 
Nine months ended December 30, 2011
 
 
 
 
 
 
Revenues
 
$
2,410

 
$
44

 
$
2,454

Operating loss
 
(1,417
)
 
45

 
(1,372
)
Depreciation and amortization
 
114

 
—

 
114


Further out of period adjustments were identified in subsequent quarters of fiscal 2012 and in the first nine months of fiscal 2013 that had an impact on fiscal 2012. The impact of such adjustments on fiscal 2012 attributable to the NPS segment would be to increase revenue by $5 million and increase operating income by $10 million. The impact of such adjustments on fiscal 2012 attributable to the MSS segment would be to increase revenue by $6 million and increase operating income by $33 million. The impact of such adjustments on fiscal 2012 attributable to the BSS segment would be to increase revenue by $42 million and decrease operating loss by $45 million.


31

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

Note 15 –
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 December 28, 2012:

(Amounts in millions)
 
NPS
 
MSS
 
BSS
 
Total
Goodwill, gross
 
$
768

 
$
2,221

 
$
1,527

 
$
4,516

Accumulated impairment losses
 
—

 
(2,074
)
 
(690
)
 
(2,764
)
Balance as of March 30, 2012, net
 
768

 
147

 
837

 
1,752

 
 
 
 
 
 
 
 
 
Additions
 
25

 
—

 
—

 
25

Deductions
 
—

 
—

 
(241
)
 
(241
)
Foreign currency translation
 
—

 
(10
)
 
(3
)
 
(13
)
Other reclassifications
 
—

 
(11
)
 
11

 
—

 
 
 
 
 
 
 
 
 
Goodwill, gross
 
793

 
2,200

 
1,294

 
4,287

Accumulated impairment losses
 
—

 
(2,074
)
 
(690
)
 
(2,764
)
Balance as of December 28, 2012, net
 
$
793

 
$
126

 
$
604

 
$
1,523


The addition to goodwill relates to an acquisition in the NPS segment (see Note 3). The deduction relates to the divestiture of a business in the BSS segment (see Note 3). The foreign currency translation amount relates to the impact of currency movements on non-U.S. dollar denominated goodwill balances.

The Company had a change in reporting units within its BSS segment at the beginning of fiscal 2013 as it combined the previously separate iSOFT and BSS-Health reporting units, along with the NHS contract, into one BSS-Global Health reporting unit. The change reflects the integration of all aspects of the Company's healthcare business and the resulting management and monitoring of all healthcare operating results within the healthcare business. As a result of this change in reporting units, $11 million of MSS' goodwill has been reclassified to BSS.

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. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual testing dates. Such indicators may include a significant decline in expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a significant asset group within a reporting unit.

On September 15, 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which revises guidance on testing goodwill for impairment. The amendments in this ASU allow an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not, then performing the two-step impairment test is unnecessary. However, if the entity concludes that fair value is more likely than not less than carrying value, then it is required to perform the first step of the two-step impairment test and calculate the fair value of the reporting unit to compare with the carrying value of the reporting unit as described in ASC 350-20-35-4. The entity may bypass the initial qualitative assessment for any reporting unit and proceed directly to the first step of the two-step impairment test. During the second quarter of fiscal 2013, the Company performed its annual impairment test of goodwill, choosing to bypass the initial qualitative assessment and proceeding directly to the first step of the impairment test for all reporting units, and concluded that no impairment had occurred.

Due to the divestiture of two businesses in the third quarter of fiscal 2013, and specifically due to the allocation of $241 million of goodwill from one of our reporting units to the disposed credit services business, we assessed the goodwill

32

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

remaining on that reporting unit's balance sheet for potential impairment. We performed the first step of the two-step of the goodwill impairment test and concluded that the goodwill remaining on the reporting unit, after allocation of goodwill to the divested credit services business, was not impaired. For the other reporting units with goodwill, we evaluated whether there were factors which would indicate a potential impairment of goodwill as of December 28, 2012. The Company considered, among other factors, any significant changes in the Company's fiscal 2013 forecast since the annual impairment test was performed, the outlook for the Company's business and industry, the Company's market capitalization, and the current economic environment and outlook. Based on that evaluation, the Company determined that there have been no events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below their carrying amounts, and, as a result, it was unnecessary to perform the first step of the two-step impairment testing process as of December 28, 2012.

Other Intangible Assets

A summary of amortizable intangible assets is as follows:
 
 
As of
 
 
December 28, 2012
(Amounts in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Outsourcing contract costs
 
$
1,490

 
$
958

 
$
532

Software
 
2,171

 
1,543

 
628

Customer and other intangible assets
 
514

 
266

 
248

Total intangible assets
 
$
4,175

 
$
2,767

 
$
1,408


 
 
As of
 
 
March 30, 2012
(Amounts in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Outsourcing contract costs
 
$
1,802

 
$
1,240

 
$
562

Software
 
2,130

 
1,481

 
649

Customer and other intangible assets
 
599

 
306

 
293

Total intangible assets
 
$
4,531

 
$
3,027

 
$
1,504


Amortization related to intangible assets was $106 million and $112 million for the quarters ended December 28, 2012, and December 30, 2011, respectively, including reductions of revenue for amortization of outsourcing contract cost premiums of $9 million and $12 million in each of the respective quarters. Amortization expense related to capitalized software was $52 million and $42 million for the quarters ended December 28, 2012, and December 30, 2011, respectively.

Amortization related to intangible assets was $308 million and $334 million for the nine months ended December 28, 2012, and December 30, 2011, respectively, including reductions of revenue for amortization of outsourcing contract cost premiums of $31 million and $37 million in each of the respective nine month periods. Amortization expense related to capitalized software was $148 million and $149 million for the nine months ended December 28, 2012, and December 30, 2011, respectively.

Estimated amortization expense related to intangible assets as of December 28, 2012, for the remainder of fiscal 2013 is $105 million, and for each of the fiscal years 2014, 2015, 2016, and 2017, is as follows: $316 million, $253 million, $171 million and $128 million, respectively.


33

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

Note 16 –
Restructuring Costs

The Company recorded $26 million and $111 million of restructuring costs for the third quarter and nine months ended December 28, 2012, respectively, as described below.

Fiscal 2013 Plan

In September 2012, the Company initiated additional restructuring actions (the Fiscal 2013 Plan) across its business segments. The objectives of the Fiscal 2013 Plan are to (i) further increase the use of lower cost off-shore resources, and (ii) reduce headcount in order to align resources to support business needs, including the assessment of management span of control and layers. Actions under the Fiscal 2013 Plan commenced in September 2012 and management expects that further actions will be taken during the remainder of fiscal 2013 which could result in additional charges.

Total restructuring costs for the Fiscal 2013 Plan recorded during the third quarter and first nine months of fiscal 2013 were $25 million and $78 million, respectively, including pension benefit augmentations of $1 million and $6 million, respectively, that are due to certain employees in accordance with legal or contractual obligations, which will be paid out over several years as part of normal pension distributions.

The composition of the restructuring liability for the Fiscal 2013 Plan as of December 28, 2012 is as follows:
(Amounts in millions)
 
Restructuring liability as of March 30, 2012
 
Costs expensed in fiscal 2013
 
Less: costs not affecting restructuring liability (1)
 
Cash paid
 
Other(3)
 
Restructuring liability as of December 28, 2012
Workforce reductions
 
$
—

 
$
72

 
$
(6
)
 
$
(6
)
 
$
1

 
$
61

Other(2)
 
$
—

 
$
6

 
$
—

 
$
—

 
$
—

 
$
6

 
 
$
—

 
$
78

 
$
(6
)
 
$
(6
)
 
$
1

 
$
67


(1) 
Charges primarily consist of pension benefit augmentations and are recorded as a pension liability.
(2) 
Other direct costs associated with the restructuring program.
(3) 
Foreign currency translation adjustments.


Fiscal 2012 Plan

In March 2012, the Company initiated restructuring actions (the Fiscal 2012 Plan) primarily impacting its MSS 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 are expected to be carried out through fiscal 2013 which could result in additional charges.

The net restructuring costs for the Fiscal 2012 Plan accrued during the third quarter and the first nine months of fiscal 2013 were $1 million and $33 million, respectively, and consist of costs associated with employee terminations. The net restructuring costs for nine months include pension benefit augmentations of $1 million that are due to certain employees in accordance with legal or contractual obligations, which will be paid out over several years as part of normal pension distributions.


34

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

The composition of the restructuring liability for the Fiscal 2012 Plan as of December 28, 2012 is as follows:
(Amounts in millions)
 
Restructuring liability as of March 30, 2012
 
Costs expensed in fiscal 2013
 
Less: costs not affecting restructuring liability (1)
 
Cash paid
 
Other (2)
 
Restructuring liability as of December 28, 2012
Workforce reductions
 
$
110

 
$
33

 
$
(3
)
 
$
(104
)
 
$
(2
)
 
$
34

Facilities costs
 
9

 
—

 
—

 
(4
)
 
—

 
5

Total
 
$
119

 
$
33

 
$
(3
)
 
$
(108
)
 
$
(2
)
 
$
39


(1) Charges primarily consist of $1 million of pension benefit augmentation, which is recorded as a pension liability, and $1 million of additional vacation accrual.
(2) Foreign currency translation adjustments.

The composition of restructuring expenses, for the quarter and first nine months of fiscal 2013, by segment is as follows:
 
 
Quarter Ended December 28, 2012
(Amounts in millions)
 
Fiscal 2013 Plan
 
Fiscal 2012 Plan
 
Total
NPS
 
$
2

 
$
—

 
$
2

MSS
 
10

 
(2
)
 
8

BSS
 
5

 
3

 
8

Corporate
 
$
8

 
$
—

 
$
8

Total
 
$
25

 
$
1

 
$
26


 
 
Nine Months Ended December 28 2012
(Amounts in millions)
 
Fiscal 2013 Plan
 
Fiscal 2012 Plan
 
Total
NPS
 
$
3

 
$
—

 
$
3

MSS
 
56

 
12

 
68

BSS
 
11

 
21

 
32

Corporate
 
$
8

 
$
—

 
$
8

Total
 
$
78

 
$
33

 
$
111


Of the total $106 million restructuring liability as of December 28, 2012, $103 million is included in accrued expenses and other current liabilities and $3 million is included in other long-term liabilities.

Note 17 –
Contract with the U.K. National Health Service

Reference is hereby made to CSC's Form 10-K for the fiscal year ended March 30, 2012 and its Form 10-Q for the quarter ended September 28, 2012 for previously disclosed information concerning CSC's contract with the NHS relating to an integrated electronic patient records system. Historical background is also presented below.

Interim Agreement Contract Change Note
On August 31, 2012, the Company and the NHS entered into a binding interim agreement which has been approved by all required U.K. government officials ("interim agreement contract change note" or "IACCN"). The IACCN, which is described in greater detail below, 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 (the current contract as amended by the IACCN, the "modified agreement"). The modified agreement forms the basis on which the parties will subsequently finalize a full restatement of the contract through a revised project agreement. The revised project agreement will consolidate the three regional contracts which comprise the Company's NHS contract into a single agreement.

35

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

Under the modified agreement, the parties redefined the scope of the Lorenzo products and established deployment and ongoing service pricing. CSC will deliver additional Lorenzo implementations based on demand from individual NHS trusts. A more flexible arrangement than under the contract terms existing prior to the IACCN has been established for these trusts to combine additional clinical modules with the core care management functionality of the Lorenzo solution to meet their specific requirements. CSC and the NHS also agreed to a process for trusts which wish to take the Lorenzo products within the NHS-designated North, Midlands and East regions of England (NME) to obtain central funding from the U.K. Department of Health for implementation of the Lorenzo products. Separately, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through separate competitive processes. Under the modified agreement, the NHS is no longer subject to trust volume commitments and CSC has agreed to non-exclusive deployment rights in its designated regions. New trusts taking deployments of the Lorenzo product will receive ongoing managed services from CSC for a period of five years from the date of Lorenzo deployment by such trust, provided deployment is complete or substantially complete by July 2016. Beyond its Lorenzo offerings, CSC continues to provide a wide range of other solutions and services to the NHS, including general practitioner, ambulance and community systems, digital imaging and other related services.
Pursuant to the IACCN, the parties agreed to a mutual release of all past or future disputed amounts under the contract through the date of the interim agreement, August 31, 2012. In conjunction with the IACCN, CSC received a payment of approximately £68 million ($110 million) net of value added tax.

Historical Background Concerning NHS Contract

The Company and the NHS are parties to a contract (originally having a value of £2.9 billion or approximately $5.4 billion at originally announced exchange rates) 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.

In 2010, as part of the U.K. government's austerity program and to address delays in development and deployments, the Company and the NHS discussed modification of the contract scope in order to reduce the total contract value by £500 million. During the fourth quarter of fiscal year 2011, additional scope modification and total contract value reduction were discussed, bringing the combined total contract value reductions to £764 million, which would reduce the total contract value to approximately £2.1 billion or $3.4 billion (at the December 28, 2012 exchange rate). Terms related to this scope modification and contract value reduction were included in a negotiated but unsigned non-binding memorandum of understanding (MOU), which MOU included a legally binding standstill agreement which provided that, while the parties were negotiating a contract amendment to implement the terms of the MOU, neither party would pursue any claims against the other party. Negotiation of the terms of the MOU was confirmed by the NHS to be substantially completed in May 2011, but CSC was subsequently informed by the NHS in December 2011 that neither the MOU nor the related contract amendment then under discussion would be approved by the U.K. government.

Based on subsequent discussions between CSC and the NHS regarding proposals advanced by both parties reflecting significant scope modifications, a reduced commitment by the NHS for deployment of the Lorenzo software product, revised delivery and payment terms, payments by the NHS for CSC-incurred costs and commitment and contract value reductions that differed materially from those contemplated by the MOU, on March 2, 2012, CSC and the NHS entered into a non-binding letter of intent that included the statement of principles that would serve as the basis for an interim agreement between the parties. The letter of intent contemplated that under the interim agreement, the NHS would provide a commitment of a certain number of trusts to receive the Lorenzo software product, and the Lorenzo product was redefined into deployment units categorized as "Base Product" and "Additional Product" (in each case, as described below) for pricing purposes. The letter of intent also included a standstill agreement related to the Lorenzo product. While the parties originally intended to conclude a binding interim agreement by June 29, 2012, no agreement was reached by that date. On May 31, 2012, the standstill agreement was extended to August 31, 2012. On August 31, 2012, the parties entered into the IACCN.


36

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

Principal Components of IACCN

The IACCN sets the terms relating to the delivery of the Lorenzo product and associated services as described below.

The key terms introduced by the IACCN 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 modified agreement, the NHS is no longer subject to any trust volume commitment for the Lorenzo product (there were no changes in quantities for non-Lorenzo deployments), 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 creates 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. While the funding is provided by the NHS, there is a far greater degree of interaction with the trusts under the modified agreement, as the Company works with each individual trust to build a business case and seek NHS approval and central funding to proceed.

3.
The IACCN has not materially altered the terms relating to non-Lorenzo products. The Company will continue to provide non-Lorenzo deployment, hosting and maintenance services in accordance with contract terms in existence prior to the IACCN. The deployment of the non-Lorenzo products is expected to be completed by fiscal 2015.

4.
Under the IACCN, the Lorenzo product is 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. The Additional Product's three modules are expected to have completed NHS assurance during 2013; and one of these modules was accepted as having completed such assurance as at the end of December 2012. Although the NHS assurance of the Base Product's seven modules and one of the three Additional Product's modules is complete and the Company and the NHS are committed to complete the assurance of the remaining Additional Product's two modules, neither the NHS nor any trust is obliged to purchase or deploy any of those modules.

5.
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.

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 $1,485 million contract charge in that quarter, resulting in no material remaining net assets.

The terms of the IACCN represent 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

37

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

Company's exclusivity rights in two of the three contract regions. The Company concluded that it will account for the modified agreement 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 ($126 million), including the £68 million ($110 million) net settlement payment and a £10 million ($16 million) escrow release, is primarily attributed to future Lorenzo deployments and will be deferred and recognized into revenue ratably over the term of the contract ending July 2016.

Any 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.

Note 18 –
Settlement of Claims with U.S. Government

During the second quarter of fiscal 2012, the Company reached a definitive settlement agreement with the U.S. Government in its contract claims asserted under the Contract Disputes Act of 1978 (CDA). Under the terms of the settlement, the Company received $277 million in cash and a five-year extension (four base years plus one option year) with an estimated value of $1 billion to continue to support and expand the capabilities of the systems covered by the original contract scheduled to expire in December 2011. In exchange, the Government received unlimited rights to the Company’s intellectual property developed to support the services delivered under the contract, and CSC dismissed the claims and terminated legal actions against the Government and the Government dismissed its counter claims against CSC. The contract extension contained a Requirements portion (Federal Acquisition Regulation (“FAR”) 16.503) and an Indefinite Quantity portion (FAR 16.504) and is not subject to any minimum values. In December 2011, the Company signed the contract modification based on the terms described above.

The Company recorded a pre-tax charge of $269 million during the second quarter of fiscal 2012 to write down its claim related assets (claim related unbilled receivables of $379 million and deferred costs of $227 million) to reflect the cash received of $277 million, the estimated fair value of the contract extension of $45 million, and previously unapplied payments of $15 million. Of the pre-tax charge of $269 million, $42 million was recorded as a reduction of revenue and $227 million as a separately itemized charge to cost of services. The fair value of the contract extension was recorded as a contract asset and will be amortized as a reduction of revenue over the four year fixed contract term in proportion to the expected revenues or on a straight line basis, whichever is greater.

These claims relate to a contract that was awarded (the “Contract”) in December 1999 as a 10-year fixed price contract. In April 2004, the contract was extended by two additional years. Revenue recorded under the core Contract was initially recognized as a single profit center using the percentage of completion method based on the guidance in ASC 605-35, “construction-type and production-type contracts.”

During the course of the contract, CSC incurred significant costs for out-of-scope work that was a result of Government directed changes and delays. Negotiations with the Government were initiated to recover the costs related to this work. During the second quarter of fiscal 2007, the Company filed its 14 interest bearing claims (collectively the “CDA Claims”), then totaling approximately $858 million, with the Government.  On September 11, 2007, the Company initiated litigation at the Armed Services Board of Contract Appeals (“ASBCA”), one of the two forums available for litigation of CDA claims.  
 
In accordance with accepted practice, the Company amended its CDA Claims twice to reflect adjustments to the total value of the CDA Claims.  On December 24, 2009, the Government made a partial payment of $35 million on one of the CDA Claims. Thereafter, CSC filed a second amended complaint with the ASBCA reducing the value of its CDA Claims by $35 million. On November 19, 2010, the Government and the Company entered into a formal agreement to stay the CDA Claims litigation and engage in a non-binding alternate dispute resolution (“ADR”) process to resolve all outstanding CDA Claims and other issues associated with the contract. As of July 1, 2011, the Company had fourteen claims totaling approximately $675 million, excluding interest, asserted against the U.S. Federal Government under a single contract pending before the ASBCA.  


38

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

Prior to the settlement, the Company believed it had valid bases for pursuing recovery of the CDA Claims supported by outside counsel’s evaluation of the facts and assistance in the preparation of the claims. To verify its position, CSC requested that outside counsel analyze whether the first two conditions of Paragraph 31 of Accounting Standards Codification (“ASC”) 605-35-25 were satisfied with respect to the Company’s assertions of Government breaches of the contract, Government-caused delays and disruption to the Company’s performance of the contract, and unanticipated additional work performed by the Company under the contract. The outside counsel issued an opinion that the Company’s position met the criteria on April 22, 2005, and reiterated that opinion on May 20, 2011.

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 December 28, 2012, the Company had $32 million of outstanding surety bonds and $153 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 affect 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 December 28, 2012, the Company had $82 million of outstanding stand-by letters of credit.

The following table summarizes the expiration of the Company’s financial guarantees and stand-by letters of credit outstanding as of December 28, 2012:
(Amounts in millions)
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015 and thereafter
 
Total
Surety bonds
 
$
3

 
$
29

 
$
—

 
$
32

Letters of credit
 
109

 
28

 
16

 
153

Stand-by letters of credit
 
52

 
15

 
15

 
82

Total
 
$
164

 
$
72

 
$
31

 
$
267


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 amends the terms of the current contract and forms the basis on which the parties will finalize a full restatement of the contract. See Note 17 for further information relating to the NHS contract and the IACCN.

As previously disclosed in fiscal 2012 and fiscal 2011, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in our MSS segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and

39

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

forensic accountants retained by such counsel later assisted in the Company's investigation. On January 28, 2011, the Company was notified by the SEC's Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC's Division of Enforcement as well as matters under investigation by the Audit Committee, as further described below. The Company is cooperating in the SEC's investigation.

On May 2, 2011, the Audit Committee commenced an independent investigation into the matters relating to the MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC's Division of Enforcement, and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants to assist with their work. Independent counsel also represents CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with the investigation by the SEC's Division of Enforcement.

The Audit Committee’s investigation was expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (iii) certain of the Company’s accounting practices that involve the percentage of completion accounting method, including the Company’s contract with the NHS. In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or resigned. 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. The SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are investigating these matters and are continuing to cooperate with the SEC's Division of Enforcement in its investigation. The SEC's investigative activities are ongoing. In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company's conclusions relating to materiality of such adjustments, and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigation being conducted by the SEC's Division of Enforcement and the review of our financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors, irregularities or other areas of review. As a result, we have incurred and will continue to incur significant legal and accounting expenditures, and a significant amount of our senior management's time that otherwise would have been focused on the growth of the Company has been focused on these matters. We are unable to predict how long the SEC's Division of Enforcement's investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against the Company. In addition, we are unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of our financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC's investigation, even if ultimately resolved favorably for us, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

Between June 3, 2011, and July 21, 2011, four putative class action complaints were filed in the United States District Court for the Eastern District of Virginia, entitled City of Roseville Employee's Retirement System v. Computer Sciences Corporation, et al. (No. 1:11-cv-00610-TSE-IDD), Murphy v. Computer Sciences Corporation, et al. (No. 1:11-cv-00636-TSE-IDD), Kramer v. Computer Sciences Corporation, et al. (No. 1:11-cv-00751-TSE-IDD) and Goldman v. Computer Sciences Corporation, et al. (No. 1:11-cv-777-TSE-IDD). On August 29, 2011, the four actions were consolidated as In re Computer Sciences Corporation Securities Litigation (No. 1:11-cv-610-TSE-IDD) and Ontario Teachers' Pension Plan Board was appointed lead plaintiff. A consolidated class action complaint was filed by plaintiff on September 26, 2011, and names as defendants CSC, Michael W. Laphen, Michael J. Mancuso and Donald G. DeBuck. A corrected complaint was

40

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

filed on October 19, 2011. The complaint alleges violations of the federal securities laws in connection with alleged misrepresentations and omissions regarding the business and operations of the Company. Specifically, the allegations arise from the Company's disclosure of the Company's investigation into certain accounting irregularities in the Nordic region and its disclosure regarding the status of the Company's agreement with the NHS. Among other things, the plaintiff seeks unspecified monetary damages. The plaintiff filed a motion for class certification with the court on September 22, 2011, and the defendants filed a motion to dismiss on October 18, 2011. A hearing was held on November 4, 2011. On August 29, 2012, the court issued a Memorandum Opinion and Order granting in part and denying in part the motion to dismiss. The court granted the motion to dismiss with respect to the plaintiff's claims in connection with alleged misrepresentations and omissions concerning the Company's operations in the Nordic Region. The court granted in part and denied in part the motion to dismiss with respect to the plaintiff's claims in connection with alleged misrepresentations and omissions concerning the Company's internal controls and the Company's contract with the NHS. The court also granted the plaintiff leave to amend its complaint by September 12, 2012, and maintained the stay of discovery until the sufficiency of the amended complaint had been decided. The court further denied plaintiff's motion for class certification without prejudice. On September 12, 2012, the plaintiff filed a notice advising the Court that it had determined not to amend its complaint and renewed its motion for class certification. On September 21, 2012, the court issued an Order setting the hearing on the motion for class certification for October 12, 2012, directing the parties to complete discovery by January 11, 2013 and scheduling the final pretrial conference for January 17, 2013. On October 9, 2012, the defendants filed their answer to the plaintiff's complaint. On October 12, 2012, the hearing on the motion for class certification was rescheduled to November 1, 2012. On October 31, 2012, the parties filed a joint motion with the court requesting that the hearing on the motion for class certification be rescheduled to a later date. On November 1, 2012, the court issued an order setting the hearing for class certification for November 15, 2012. On November 30, 2012, the court granted plaintiff's motion for class certification. On December 14, 2012, defendants filed with the Fourth Circuit a petition for permission to appeal the class certification order pursuant to Federal Rule of Civil Procedure 23(f). Plaintiff's response to the petition was filed on January 30, 2013. On December 14, 2012, the court issued an order extending the expert discovery deadline to February 25, 2013. On December 20, 2012, the court issued an order extending the fact discovery deadline to February 11, 2013 and the expert discovery deadline to March 25, 2013. Motions for summary judgment are due on March 18, 2013. Trial is scheduled for May 21, 2013. The defendants deny the allegations and intend to defend their position vigorously. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

On September 13, 2011, a shareholder derivative action entitled Che Wu Hung v. Michael W. Laphen, et al. (CL 2011 13376) was filed in Circuit Court of Fairfax County, Virginia, against Michael W. Laphen, Michael J. Mancuso, the members of the Audit Committee and the Company as a nominal defendant asserting claims for breach of fiduciary duty and contribution and indemnification relating to alleged failure by the defendants to disclose accounting and financial irregularities in the MSS segment, primarily in the Nordic region, and the Company's performance under the NHS agreement and alleged failure to maintain effective internal controls. The plaintiff seeks damages, injunctive relief and attorneys' fees and costs. On October 24, 2011, the defendants removed the action to the United States District Court for the Eastern District of Virginia. On November 23, 2011, the plaintiff filed a motion to remand the case to state court. Argument was held on December 15, 2011. During argument the plaintiff voluntarily dismissed his complaint without prejudice to refiling the action in state court. The Court granted the plaintiff's request, dismissed the complaint without prejudice and denied the motion to remand as moot. On December 22, 2011, the plaintiff refiled his complaint in Circuit Court of Fairfax County, Virginia in a shareholder derivative action entitled Che Wu Hung v. Michael W. Laphen, et al. (CL 2011 18046). Named as defendants are Michael W. Laphen, Michael J. Mancuso, the members of the Audit Committee and the Company as a nominal defendant. The complaint asserts claims for (i) breach of fiduciary duty relating to alleged failure by the defendants to disclose accounting and financial irregularities in the MSS segment, primarily in the Nordic region, the Company's performance under the NHS agreement and alleged failure to maintain effective internal controls and (ii) corporate waste. The plaintiff seeks damages, injunctive relief and attorneys' fees and costs. On April 6, 2012, the state court stayed the action until the earlier of (i) entry of an order on the pending motion to dismiss In re Computer Sciences Corporation Securities Litigation (No. 1:11-cv-610-TSE-IDD) or (ii) July 5, 2012. On July 20, 2012, the state court renewed the stay until the earlier of (i) entry of an order on the pending motion to dismiss in In re Computer Sciences Corporation Securities Litigation or (ii) October 18, 2012. The stay expired on August 30, 2012 with the entry of the court's order in In re Computer Sciences Corporation Securities Litigation. On October 19, 2012, upon the joint motion of the parties, the state court issued an order staying the action while discovery proceeds in In re Computer Sciences Corporation Securities Litigation. The order requires defendants to provide to the plaintiff certain of the discovery

41

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

produced in the federal action. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

On May 11, 2012, a separate shareholder derivative action entitled Judy Bainto v. Michael W. Laphen et al. (No. A-12-661695-C), was filed in District Court, Clark County, Nevada, against Messrs. Laphen and Mancuso, members of the Company's Board of Directors and the Company as a nominal defendant. The complaint is substantively similar to the second Hung complaint. On or about August 1, 2012, the court granted the parties' joint motion to extend the time for defendants to respond to the complaint to sixty days after the United States District Court for the Eastern District of Virginia's entry of an order on the pending motion to dismiss the complaint in In re Computer Sciences Corporation Securities Litigation. On September 5, 2012, Defendants notified the court of the Eastern District of Virginia's ruling in In re Computer Sciences Corporation Securities Litigation. On September 11, 2012, the parties filed a joint status report proposing a schedule for the filing of an amended complaint by plaintiff and for motion to dismiss briefing. Plaintiff filed an amended complaint on September 28, 2012. Upon stipulation of the parties, the court consolidated the Bainto case and Himmel case (described below) and deemed the amended complaint filed in Bainto the operative complaint. In addition, on November 8, 2012, upon joint motion of the parties, the court issued an order staying the action while discovery proceeds in In re Computer Sciences Corporation Securities Litigation. The order requires Defendants to provide to the Plaintiffs certain of the discovery produced in the federal action. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

On October 16, 2012, a separate shareholder derivative action entitled Daniel Himmel v. Michael W. Laphen et al. (No. A-12-670190-C), was filed in District Court, Clark County, Nevada, against Messrs. Laphen and Mancuso, members of the Company's Board of Directors and the Company as a nominal defendant. The Himmel complaint is substantively similar to the Bainto complaint, but includes a claim for unjust enrichment and seeks additional injunctive relief. Upon stipulation of the parties, the court consolidated the Bainto case (describe above) and the Himmel case and deemed the amended complaint filed in Bainto the operative complaint. In addition, on November 8, 2012, upon joint motion of the parties, the court issued an order staying the action while discovery proceeds in In re Computer Sciences Corporation Securities Litigation. The order requires Defendants to provide to the Plaintiffs certain of the discovery produced in the federal action. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

On December 20, 2012, a separate shareholder derivative complaint entitled Shirley Morefield v Irving W. Bailey, II, et al, (Case No. 1:120V1468GBL/TCB) was filed in the United States District Court for the Eastern District of Virginia. The complaint names certain of CSC's current and former directors and officers as defendants and the Company as a nominal defendant. The complaint is similar to the Hung complaint but asserts only a claim for breach of fiduciary duty and alleges that the plaintiff made a demand on the CSC Board prior to commencing suit and that such demand was refused. Motions to dismiss are due March 18, 2013. The Company is unable to estimate any possible loss or range of loss associated with this matter at this time.

On October 19, 2012, a putative class action complaint was filed in the United States District Court of the Southern District of Indiana, entitled Andrea M. Childress v. Experian Information Services, Inc. and CSC Credit Services , Inc. The complaint alleges Fair Credit Reporting Act claims regarding reports prepared about consumers who filed for Chapter 13 bankruptcy protection and subsequently withdrew their bankruptcy filing before court approval of a bankruptcy plan. Plaintiff, on behalf of the class, seeks statutory and punitive damages, injunctive relief and attorneys' fees. On February 4, 2013, CSC was dismissed without prejudice from this lawsuit by plaintiff's notice filed with the court.

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 consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to such matters in the ordinary course of business. Whether any losses, damages or remedies ultimately resulting from such matters could reasonably have a material effect on the Company's business, financial condition, results of operation, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies.  For these reasons, it is not possible to make reasonable estimates of the amount or range of loss that could result from these other matters at this time. Company management does not, however, presently expect any of such other matters to have a material impact on the consolidated financial statements of the Company.


42

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

Note 20 –
Subsequent Events

On December 31, 2012, using the proceeds from sale of its Credit Services business to Equifax, the Company contributed $400 million to its U.S. pension plan trust.

On January 25, 2013, the Company completed the divestiture of Paxus, its Australian staffing business for consideration of $78 million, for an estimated pre-tax gain on sale of $38 million (see Note 3).



43

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter and Nine Months of Fiscal 2013 versus
Third Quarter and Nine Months of Fiscal 2012

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 the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 our Annual Report on Form 10-K. The reader should 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 to 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 interim Consolidated Condensed Financial Statements and notes thereto and the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 2012. The following discusses the Company's financial condition and results of operations as of and for the third quarter and nine months ended December 28, 2012, and the comparable periods of the prior fiscal year.

Overview

The key operating results for the third quarter and for the first nine months of fiscal 2013 include:

•
Third quarter revenues increased $94 million, or 2.5%, to $3,781 million, while the nine month revenues decreased $93 million, or 0.8%, to $11,434 million as compared to the third quarter and nine months of the prior fiscal year. On a constant currency basis,(1) revenues increased $102 million, or 2.8%, and $106 million, or 0.9%, for the quarter and first nine months, respectively.

•
Income from continuing operations before taxes for the third quarter of fiscal 2013 was $155 million, compared to a loss from continuing operations before taxes of $1,459 million in the third quarter of fiscal 2012, an increase of $1,614 million. Income from continuing operations before taxes for the first nine months of fiscal 2013 was $380 million, compared to a loss from continuing operations before taxes of $4,260 million for the same period of 2012, an increase of $4,640 million.

•
Income from discontinued operations, net of taxes for the third quarter of fiscal 2013 was $390 million, compared to $30 million in the same period of fiscal 2012, an increase of $360 million. Income from continuing operations before taxes for the first nine months of fiscal 2013 was $419 million, compared to $110 million for the same period of fiscal 2012, and increase of $309 million. The increases for both the third quarter and the nine-month

44

period, due to the third quarter divestitures of the Company's Credit Services and the Italian consulting and system integration businesses.

•
Operating income(2) for the third quarter increased to $268 million as compared to an operating loss of $1,307 million for the third quarter of fiscal 2012, and operating income margin increased to 7.1% from last year's third quarter margin of (35.4)%. For the first nine months, operating income increased to $698 million as compared to an operating loss of $1,251 million for the same period of 2012, and operating income margins increased to 6.1% from (10.9)%.

•
Earnings before interest and taxes(3) (EBIT) for the third quarter of fiscal 2013 increased to $208 million as compared to a loss before interest and taxes of $1,425 million for the third quarter of fiscal 2012. EBIT margin improved to 5.5% from last year's third quarter margin of (38.6)%. For the first nine months of fiscal 2013, EBIT of $513 million increased by $4,676 million from the first nine months of fiscal 2012. EBIT margin improved to 4.5% from last year's first nine months margin of (36.1)%.

•
Net income attributable to CSC common shareholders for the third quarter of fiscal 2013 was $510 million, an increase of $1,900 million, as compared to the same period in the prior year. For the first nine months of fiscal 2013, net income attributable to CSC common shareholders was $680 million, an increase of $4,764 million, as compared to the same period in the prior year.

•
Diluted earnings per share (EPS) was $3.27 for the third quarter of fiscal 2013, an increase of $12.23 as compared to $(8.96) for the same period in the prior year. Diluted EPS was comprised of $0.77 from continuing operations and $2.50 from discontinued operations, as compared to $(9.15) and $0.19, respectively, in the prior year. Diluted EPS was $4.36 for the first nine months of fiscal 2013, an increase of $30.71 as compared to $(26.35) for the same period in the prior year. Diluted EPS was comprised of $1.67 from continuing operations and $2.69 from discontinued operations, as compared to $(27.06) and $0.71, respectively, in the prior year.

•
During the third quarter of fiscal 2013, the Company recorded restructuring costs of $26 million, of which $8 million is related to the MSS segment, $8 million is related to the BSS segment, $2 million is related to the NPS segment and $8 million is related to Corporate. For the first nine months of fiscal 2013, the Company recorded restructuring costs of $111 million, of which $68 million is related to the MSS segment, $32 million is related to the BSS segment, $3 million is related to the NPS segment and $8 million is related to Corporate.

•
The Company announced contract awards of $3.0 billion for the third quarter of fiscal 2013, including new NPS segment awards of $0.7 billion, MSS segment awards of $1.4 billion, and BSS segment awards of $0.9 billion. Total backlog(4) at the end of the third quarter of fiscal 2013 was $34.3 billion, a decrease of $0.7 billion as compared to the backlog at the end of the third quarter of fiscal 2012 of $35.0 billion. Of the total $34.3 billion backlog, $3.1 billion is expected to be realized as revenue in the remainder of fiscal 2013. Of the total $34.3 billion, $11.2 billion is not yet funded.

•
Days Sales Outstanding (DSO)(5) was 71 days at December 28, 2012, an improvement from 77 days at the end of the third quarter of the prior fiscal year.

•
Debt-to-total capitalization ratio(6) was 44.2% at December 28, 2012, a decrease of 5.0 percentage points from 49.2% at March 30, 2012, due to the early redemption of the 5.50% and 5.00% term notes, both due in 2013, and increase in equity due to higher net income attributable to CSC shareholders.

•
Cash provided by operating activities was $1,078 million for the first nine months of fiscal 2013, as compared to $680 million for the first nine months of fiscal 2012, primarily due to a cash inflow from the settlement with the U.S. government, and higher net cash flows related to the NHS contract, as well as lower vendor and payroll-related payments, partly offset by lower cash receipts and higher restructuring payments.

•
Cash provided by investing activities was $474 million for the first nine months of fiscal 2013, as compared to cash used of $1,088 million for the first nine months of fiscal 2012, primarily due to net proceeds of the divestitures of two businesses in the third quarter and lower expenditures on acquisitions and property and equipment.


45

•
Cash used in financing activities was $433 million for the first nine months of fiscal 2013, as compared to $471 million for the first nine months of fiscal 2012, primarily due to higher net borrowings in fiscal 2013, partially offset by cash used for share repurchases.

•
Free cash flow(7) of $457 million for the first nine months of fiscal 2013 was favorable to the $172 million outflow for the first nine months of fiscal 2012, driven primarily by higher year-over-year cash inflow associated with the NHS contract, the settlement with the U.S. government, and reduced payments for capital expenditures.

 
(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 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 Principle (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 other companies. We define 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. 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 (loss) from continuing operations before taxes, which includes costs excluded from the operating income definition such as goodwill impairment, corporate G&A, interest and other income (expense). A reconciliation of consolidated operating (loss) income to (loss) income from continuing operations before taxes is as follows:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Operating income (loss)
 
$
268

 
$
(1,307
)
Corporate G&A
 
(56
)
 
(46
)
Interest expense
 
(57
)
 
(42
)
Interest Income
 
4

 
8

Goodwill impairment
 
—

 
(60
)
Other expense, net
 
(4
)
 
(12
)
Income (loss) from continuing operations before taxes
 
$
155

 
$
(1,459
)

 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Operating income (loss)
 
$
698

 
$
(1,251
)
Corporate G&A
 
(186
)
 
(166
)
Interest expense
 
(147
)
 
(129
)
Interest Income
 
14

 
32

Goodwill impairment
 
—

 
(2,745
)
Other income (expense), net
 
1

 
(1
)
Income (loss) from continuing operations before taxes
 
$
380

 
$
(4,260
)

(3) 
Earnings before interest and taxes (EBIT) is a non-U.S. Generally Accepted Accounting Principle (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 other companies. We define EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, goodwill impairment, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to net income from continuing operations is as follows:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Earnings (loss) before interest and taxes
 
$
208

 
$
(1,425
)
Interest expense
 
(57
)
 
(42
)
Interest income
 
4

 
8

Taxes on income
 
(32
)
 
38

Net income (loss) from continuing operations
 
$
123

 
$
(1,421
)


46

 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Earnings (loss) before interest and taxes
 
$
513

 
$
(4,163
)
Interest expense
 
(147
)
 
(129
)
Interest income
 
14

 
32

Taxes on income
 
(106
)
 
78

Net income (loss) from continuing operations
 
$
274

 
$
(4,182
)

(4) 
Backlog represents total estimated contract value of predominantly long-term contracts, based on customer commitments that the Company believes to be firm. Backlog value is based on contract commitments, management’s judgment and assumptions about volume of services, availability of customer funding and other factors. Backlog estimates for government contracts include both the funded and unfunded portions and all of the option periods. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

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. Business awards for MSS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. BSS award values are based on firm commitments.

(5) 
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.

(6) 
Debt-to-total capitalization ratio is defined as total current and long-term debt divided by total debt and equity, including noncontrolling interest.
 
(7) 
Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. We define 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:
 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
Free cash flow
 
$
457

 
$
(172
)
Net cash (provided by) used in investing activities
 
(474
)
 
1,088

Acquisitions, net of cash acquired
 
(34
)
 
(368
)
Business dispositions
 
958

 
—

Short-term investments
 
—

 
3

Payments on capital leases and other long-term asset financings
 
171

 
129

Net cash provided by operating activities
 
$
1,078

 
$
680

Net cash provided by (used in) investing activities
 
$
474

 
$
(1,088
)
Net cash used in financing activities
 
$
(433
)
 
$
(471
)


47

Reportable Segments

CSC provides information technology (IT) and business process outsourcing, consulting and systems integration services and other professional services to its customers. The Company targets the delivery of these services within three broad service lines or sectors: North American Public Sector (NPS), Managed Services Sector (MSS), and Business Solutions and Services (BSS).

The Company's reportable segments in fiscal 2013 and 2012 are as follows:

•
The NPS segment operates principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.

•
The MSS segment provides large-scale infrastructure and application outsourcing solutions offerings as well as mid-size services delivery to customers globally.

•
The BSS segment provides industry specific consulting and systems integration services, business process outsourcing, and intellectual property-based software solutions.

Results of Operations
 
Revenues

Revenues for the NPS, MSS, and BSS segments for the quarter and nine months ended December 28, 2012 and December 30, 2011 are as follows:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
Change
 
Percent
Change
NPS
 
$
1,340

 
$
1,379

 
$
(39
)
 
(2.8
)%
MSS
 
1,620

 
1,670

 
(50
)
 
(3.0
)
BSS
 
853

 
663

 
190

 
28.7

Corporate
 
3

 
3

 
-

 
-

Subtotal
 
3,816

 
3,715

 
101

 
2.7

Eliminations
 
(35
)
 
(28
)
 
(7
)
 
-

Total Revenue
 
$
3,781

 
$
3,687

 
$
94

 
2.5
 %

 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
Change
 
Percent
Change
NPS
 
$
4,083

 
$
4,299

 
$
(216
)
 
(5.0
)%
MSS
 
4,838

 
4,908

 
(70
)
 
(1.4
)
BSS
 
2,601

 
2,410

 
191

 
7.9

Corporate
 
9

 
9

 
—

 
-

Subtotal
 
11,531

 
11,626

 
(95
)
 
(0.8
)
Eliminations
 
(97
)
 
(99
)
 
2

 
-

Total Revenue
 
$
11,434

 
$
11,527

 
$
(93
)
 
(0.8
)%


48

The major factors affecting the percent change in revenues for the quarter and nine months ended December 28, 2012 are presented as follows:
 
 
Quarter Ended
 
 
Acquisitions
 
Approximate
Impact of
Currency
Fluctuations
 
Net Internal
Growth
 
Total
NPS
 
0.3
%
 
—

 
(3.1
)%
 
(2.8
)%
MSS
 
—

 
(0.2
)%
 
(2.8
)
 
(3.0
)
BSS
 
—

 
(0.7
)
 
29.4

 
28.7

Cumulative Net Percentage
 
0.1
%
 
(0.3
)%
 
2.7
 %
 
2.5
 %

 
 
Nine Months Ended
 
 
Acquisitions
 
Approximate
Impact of
Currency
Fluctuations
 
Net Internal
Growth
 
Total
NPS
 
0.6
%
 
—

 
(5.6
)%
 
(5.0
)%
MSS
 
1.0

 
(2.4
)%
 
—

 
(1.4
)
BSS
 
2.8

 
(3.3
)
 
8.4

 
7.9

Cumulative Net Percentage
 
1.2
%
 
(1.7
)%
 
(0.3
)%
 
(0.8
)%

North American Public Sector

NPS segment revenues were derived from the following sources:
 
 
Quarter Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
Change
 
Percent
Change
Department of Defense
 
$
944

 
$
921

 
$
23

 
2.5
 %
Civil Agencies
 
337

 
392

 
(55
)
 
(14.0
)
Other (1)
 
59

 
66

 
(7
)
 
(10.6
)
Total
 
$
1,340

 
$
1,379

 
$
(39
)
 
(2.8
)%

 
 
Nine Months Ended
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
Change
 
Percent
Change
Department of Defense
 
$
2,803

 
$
2,901

 
$
(98
)
 
(3.4
)%
Civil Agencies
 
1,107

 
1,221

 
(114
)
 
(9.3
)
Other (1)
 
173

 
177

 
(4
)
 
(2.3
)
Total
 
$
4,083

 
$
4,299

 
$
(216
)
 
(5.0
)%

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

NPS revenue decreased $39 million, or 2.8%, in the third quarter of fiscal 2013, and decreased $216 million, or 5.0%, in the first nine months of fiscal 2013, as compared to similar periods of fiscal 2012.

The third quarter revenue decrease was primarily driven by a $55 million decrease in Civil Agencies (Civil) revenue, partially offset by a $23 million increase in Department of Defense (DOD) revenue. The decrease in revenue from Civil contracts was due to reduced revenue on contracts primarily with the Department of Labor, NASA, and the Department of Commerce, which either concluded, were winding down, or had reduced scope. These decreases were partially offset by increased revenue on contracts with the Department of State, which ramped up in fiscal 2013, and the Department of

49

Homeland Security, which expanded in fiscal 2013. In addition, Civil revenue was adversely impacted by a $12 million adjustment that reduced revenue resulting from a termination for convenience on a contract with Department of Labor. The increase in revenue from DOD contracts was due to a favorable wage determination settlement of $18 million on a contract with the Air Force and a fiscal 2012 forward loss that reduced revenue by $16 million on an U.S. Air Force contract that did not repeat in fiscal 2013, partially offset by net scope decreases on existing contracts.

For the nine months ended December 28, 2012, the NPS revenue decline was due to revenue decreases on both DOD and Civil contracts. The nine month decrease in revenue from DOD contracts was due to revenue decreases on contracts primarily with the U.S. Air Force of $108 million and the U.S. Army of $58 million that either had concluded or were winding down, partially offset by a favorable wage settlement of $26 million on a contract with the Air Force and a fiscal 2012 adverse adjustment of $42 million resulting from a contract settlement with the U.S. Federal government, which did not repeat in fiscal 2013. The nine month decrease in Civil revenue was due to reduced revenue on contracts primarily with NASA, the Department of Labor, the Department of Commerce, and the Department of State, which either concluded, were winding down, or had reduced scope. These decreases were partially offset by increased revenue on certain other contracts with the Department of State which ramped up in fiscal 2013 and the Department of Homeland Security, which expanded in fiscal 2013. Included in the $114 million Civil revenue reduction is a $12 million adverse adjustment resulting from a contract settlement on a contract with Department of Labor. NPS' nine month year-over-year revenue trend benefited from $26 million of fiscal 2012 net adverse adjustments on certain contracts accounted for under the percentage of completion method, which did not repeat in fiscal 2013.

During the quarter and nine months ended December 28, 2012, NPS won new contracts of $0.7 billion and $2.7 billion, as compared to $0.8 billion and $4.8 billion in the comparable periods in the prior year, respectively.

NPS' revenue decreases continue to reflect the ongoing uncertainty in government budgets and the difficulties customers are facing in awarding new initiatives. Delays in award decisions continue to be the most significant issue in the industry, with delays ranging from nine to eighteen months on submitted proposals.

The U.S. government fiscal issues, and continued uncertainty regarding the timing and magnitude of U.S. government budget reductions, may reduce the U.S. federal government's demand and available funds for IT projects, which would materially adversely impact our NPS segment and our business. We closely monitor federal budget, legislative and contracting trends and activities and continually examine our strategies to take these into consideration. The Budget Control Act of 2011 (“BCA”) commits the U.S. government to reduce the federal deficit over ten years through caps on discretionary spending. The BCA established a Congressional Joint Select Committee on Deficit Reduction responsible for identifying an additional $1.2 trillion, in deficit reductions by November 23, 2011. However, the failure to produce a deficit reduction proposal by this deadline triggered “sequestration”, which calls for automatic spending cuts split between defense and non-defense programs beginning in 2013 and continuing over a ten-year period. Sequestration was to have gone into effect on January 2, 2013, but The American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013 contained provisions that delayed sequestration provisions of the BCA for two months and reduced the mandatory reduction from to $85 billion. In September 2012, the Office of Management and Budget delivered to Congress a report detailing how sequestration would be implemented but failed to describe how reductions would occur at levels below the account level (i.e., at the project, program and activity level). As a result, there remains significant uncertainty about the implementation of sequestration and its affect on U.S. federal government IT and services contracting.

In addition, the U.S. federal government is currently operating under a continuing resolution, rather than an approved budget, which is scheduled to expire on March 31, 2013. While the continuing resolution averts a government shutdown, it also contains restrictions on starting new programs and increasing ongoing programs beyond current service levels, which could limit our ability to grow our NPS business. On December 31, 2012, the government officially reached its borrowing limits (known as the debt ceiling). On January 23, 2012, the U.S. House of Representatives passed a bill that would allow U.S. federal government borrowing through May 18, 2013 to be exempt from the debt ceiling. The United States Senate passed the bill on January 31, 2013 and the President is expected to sign the extension into law.

Managed Services Sector

MSS segment revenue decreased $50 million, or 3.0%, and decreased $70 million, or 1.4%, for the quarter and nine months ended December 28, 2012, respectively, as compared to the same periods of fiscal 2012. In constant currency, revenue for the third quarter decreased $47 million, or 2.8%, and revenue for the nine month period increased $49 million, or 1.0%, as compared to the same period of fiscal 2012.

50


The net adverse foreign currency impact for the third quarter was due to the unfavorable movement in the U.S. dollar primarily against the Euro and the Danish kroner, partially offset by favorable movement against the British pound. The nine-month revenue growth was unfavorably impacted by foreign currency movement in the U.S. dollar against the Euro, the Danish Kroner and the Swiss Franc. The MSS' fiscal 2012 acquisition of AppLabs provided $48 million, or 1.0% of the revenue growth for the nine months ended December 28, 2012. Excluding the impact of foreign currency and the acquisition, net internal revenue increased $1 million in the first nine months of fiscal 2013 as compared to the same period of fiscal 2012.

The decrease in MSS' net internal revenue for the third quarter of $47 million was a result of reduced revenue of $73 million from contracts that terminated or concluded, and reduced revenue of $80 million from existing contracts primarily due to price-downs, contract modifications and lower pass-through revenue; partially offset by increased revenue of $106 million from new client engagements acquired in late fiscal 2012 and fiscal 2013.

The increase in MSS' net internal revenue for the nine month period ended December 28, 2012 of $1 million was primarily due to increased revenue of $282 million from new client engagements acquired in fiscal 2013 and in late in fiscal 2012, and favorable impact of adverse fiscal 2012 revenue adjustments of $38 million, on contracts accounted for under percentage of completion method, that did not recur in fiscal 2013, partially offset by reduced revenue from contracts that terminated or concluded of $166 million and reduced revenue from existing contracts due to price-downs, contract modifications and lower pass-through revenue of $153 million.

MSS had new contract awards of $1.4 billion in the third quarter and $5.8 billion in the first nine months of fiscal 2013 as compared to $2.4 billion and $5.5 billion in the same periods of fiscal 2012. Fiscal 2013 third quarter and first nine months awards included $0.7 billion and $3.3 billion of successful recompetes.

Business Solutions & Services

BSS segment revenue for the third quarter of fiscal 2013 increased $190 million, or 28.7%, as compared to the same period of fiscal 2012, and increased $195 million, or 29.4% in constant currency. For the nine-month period, BSS revenue increased $191 million, or 7.9%, as compared to the same period of fiscal 2012, and increased $271 million, or 11.2% in constant currency.

Both the third quarter and nine-month revenue increases were primarily due to the fiscal 2012 adverse revenue adjustment of $204 million associated with the NHS contract charge, which did not recur. Excluding the adverse NHS contract revenue charge, BSS third quarter revenue decreased $14 million, or 1.6%, and decreased $9 million, or 1.0%, in constant currency; and the nine-month revenue decreased $13 million, or 0.5%, and increased $67 million, or 2.6%, in constant currency.

The net adverse foreign currency impact for the third quarter of fiscal 2013 was due to the adverse movement in the U.S. Dollar against the Euro, partially offset by a favorable movement against the Australian Dollar and the British Pound. The nine-month revenue growth was unfavorably impacted by foreign currency movement in the U.S. Dollar of $80 million, or 3.3%, primarily against the Euro, the Australian dollar, and the Brazilian Real. The nine-month revenue benefited from iSOFT acquisition revenue of $67 million. Excluding the impact of the adverse NHS adjustment, impact of foreign currency movement and the iSOFT acquisition, BSS revenue for the third quarter and nine months ended December 28, 2012, decreased $9 million, or 1.0%, and was flat for the quarter and nine months ended December 28, 2012, respectively, as compared to the same periods in the prior year.

The decrease in BSS net internal revenue for the quarter ended December 28, 2012 was primarily due to revenue decreases in its professional technology staffing business in Australia, resulting from budgetary constraints faced by key customers. The decrease in BSS net internal revenue, for the nine-month period ended December 28, 2012, was due to revenue decreases in its professional technology staffing business in Australia for the reasons mentioned above, revenue decreases in its financial services and health groups, partially offset by revenue increases on a contract with the NHS and year-over-year post-acquisition revenue increases on iSOFT.

The nine-month revenue increase relating to a NHS contract was primarily due to recording revenue from achieving a key milestone associated with the Lorenzo Care Management software, deployment of the software at three NHS trust sites, and revenue indexation for fiscal 2013. The iSOFT revenue was higher because the prior year revenue was adversely

51

impacted by purchase accounting adjustments that involved deferral of revenue. The revenue decrease in BSS' financial services group was primarily due to the continuing economic challenges in Europe. The revenue decrease in BSS' health services group was due to the continuing challenges in the U.S. healthcare market.

BSS year-over-year revenue trend was also impacted by out of period adjustments. The third quarter fiscal 2013 revenue trend was adversely impacted by $53 million, which was due to favorable fiscal 2012 revenue adjustments not repeating in fiscal 2013. The nine month fiscal 2013 revenue trend was adversely impacted by $35 million of out of period adjustments, which comprised $9 million of favorable adjustments in fiscal 2013 and $44 million of fiscal 2012 adjustments that did not repeat in fiscal 2013. (See Note 4 to the Consolidated Condensed Financial Statements).

BSS had new contract awards of $0.9 billion in the third quarter and $2.7 billion in the first nine months of both fiscal 2013 and 2012.

Costs and Expenses

The Company’s total costs and expenses were as follows:
 
 
Quarter Ended
 
 
Amount
 
Percentage of Revenue
 
Percentage
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
 
of Revenue Change
Costs of services (excludes depreciation and amortization, specified contract charge, and restructuring costs)
 
$
2,995

 
$
3,186

 
79.2
%
 
86.5
%
 
(7.3
)%
Cost of services – specified contract charge (excludes amount charged to revenue of $204 (fiscal 2012))
 
—

 
1,281

 
—

 
34.7

 
(34.7
)
Selling, general and administrative (excludes restructuring costs)
 
278

 
272

 
7.4

 
7.4

 
—

Depreciation and amortization
 
270

 
301

 
7.1

 
8.2

 
(1.1
)
Goodwill impairment
 
—

 
60

 
—

 
1.6

 
(1.6
)
Restructuring costs
 
26

 
—

 
0.7

 
—

 
0.7

Interest expense, net
 
53

 
34

 
1.4

 
0.9

 
0.5

Other expense (income), net
 
4

 
12

 
0.1

 
0.3

 
(0.2
)
Total
 
$
3,626

 
$
5,146

 
95.9
%
 
139.6
%
 
(43.7
)%


52

 
 
Nine Months Ended
 
 
Amount
 
Percentage of Revenue
 
Percentage
(Amounts in millions)
 
December 28, 2012
 
December 30, 2011
 
December 28, 2012
 
December 30, 2011
 
of Revenue Change
Costs of services (excludes depreciation and amortization, specified contract charge, settlement charge and restructuring costs)
 
$
9,141

 
$
9,730

 
79.9
%
 
84.5
%
 
(4.6
)%
Cost of services – specified contract charge (excludes amount charged to revenue of $204 (fiscal 2012))
 
—

 
1,281

 
—

 
11.1

 
(11.1
)
Cost of services – settlement charge (excludes amount charged to revenue of $42 (fiscal 2012))
 
—

 
227

 
—

 
2.0

 
(2.0
)
Selling, general and administrative (excludes restructuring costs)
 
864

 
838

 
7.6

 
7.3

 
0.3

Depreciation and amortization
 
806

 
868

 
7.0

 
7.5

 
(0.5
)
Goodwill impairment
 
—

 
2,745

 
—

 
23.8

 
(23.8
)
Restructuring costs
 
111

 
—

 
1.0

 
—

 
1.0

Interest expense, net
 
133

 
97

 
1.2

 
0.8

 
0.4

Other expense (income), net
 
(1
)
 
1

 
—

 
—

 
—

Total
 
$
11,054

 
$
15,787

 
96.7
%
 
137.0
%
 
(40.3
)%

Costs of Services

Costs of services (COS), excluding the settlement charge, specified contract charge and restructuring charges, as a percentage of revenue decreased 7.3 percentage points for the third quarter and 4.6 percentage points for the first nine months of fiscal 2013.

The year-over-year COS trend was adversely impacted by out of period adjustments. The third quarter COS was adversely impacted by $22 million, primarily by favorable fiscal 2012 out of period adjustments not repeating in fiscal 2013. The nine month COS was adversely impacted by $44 million, which comprised $12 million of adverse fiscal 2013 out of period adjustments and $32 million of favorable fiscal 2012 out of period adjustments which did not repeat in fiscal 2013 (see Note 4 to the Consolidated Condensed Financial Statements).

The lower MSS COS ratio for both the third quarter and the nine month period of fiscal 2013 was primarily due to year-over-year operational improvements on contracts which had performance issues in fiscal 2012, reduced headcount charges in Europe where restructuring actions were taken, reduced low-margin product resales to a customer in fiscal 2013 as compared to fiscal 2012, and certain fiscal 2012 contract impairments that did not recur in fiscal 2013. These cost reductions were partly offset by an adverse third quarter year-over-year trend in adjustments on contracts accounted for under the percentage of completion method, of $26 million.

The lower BSS COS ratio for both the third quarter and the nine-month period of fiscal 2013 was primarily due to the fiscal 2012 adverse revenue adjustment of $204 million, associated with a contract with the NHS. In addition, both the third quarter and the nine-month BSS COS ratio was favorably impacted by lower costs within BSS' consulting services in the Americas due to lower revenues and staff reductions, and adversely impacted by a higher COS ratio on the NHS contract due to change in the accounting model from the percentage of completion method to a services based model. The nine-month COS ratio was favorably impacted by a year-over-year change of $12 million related to adjustments on contracts accounted for under percentage of completion.
 
The lower third quarter NPS COS ratio was primarily due to termination for convenience of a Department of Labor contract, which resulted in a net favorable adjustment of $22 million, including a favorable cost adjustment of $34 million and an adverse revenue adjustment of $12 million, and due to adverse fiscal 2012 adjustments of $39 million, on contracts accounted for under the percentage of completion method, which did not repeat in fiscal 2013. In addition to the factors that caused a lower third quarter ratio, the fiscal 2012 revenue reduction of $42 million resulting from a contract settlement with the U.S. government resulted in a lower nine-month fiscal 2013 NPS COS ratio. Overall, the NPS COS

53

ratio for the third quarter and nine months benefited from lower, year-over-year, net adverse adjustments on contracts accounted for under the percentage of completion method. The net adverse adjustments to costs were lower by $70 million and $42 million, for the third quarter and nine-months, respectively, as compared to the prior year.

Costs of Services – Settlement Charge

During the second quarter of fiscal 2012, the Company reached a settlement agreement with the U.S. government in its contract claims asserted under the Contract Disputes Act of 1978 (CDA). Under the terms of the settlement, the Company received $277 million in cash and a five-year extension (four base years plus one option year) with an estimated total contract value of $1 billion to continue to support and expand the capabilities of the systems covered by the original contract scheduled to expire in December 2011. In December 2011, the Company signed the contract modification based on the terms described above. As a result of the settlement, the Company recorded a pre-tax charge of $269 million during the second quarter of fiscal 2012 to write down its claim related assets (claim related unbilled receivables of $379 million and deferred costs of $227 million) to reflect the cash received of $277 million, the estimated fair value of the contract extension of $45 million, and previously unapplied payments of $15 million. Of the pre-tax charge of $269 million, $42 million was recorded as a reduction of revenue and $227 million as a separately itemized charge to cost of services. The fair value of the contract extension was recorded as a contract asset and will be amortized as a reduction of revenue over the four year fixed contract term in proportion to the expected revenues or a straight line basis, whichever is greater. The contract extension contained a Requirements portion and an Indefinite Quantity portion (and is not subject to any minimum values). See Note 18 to the Consolidated Condensed Financial Statements for further discussion.

Selling, General and Administrative

Selling, general and administrative (SG&A) expense as a percentage of revenue remained flat for the third quarter of fiscal 2013, and increased 0.3 percentage points for the first nine months of fiscal 2013, as compared to the same periods of fiscal 2012.

The SG&A ratio was flat for the quarter and modestly increased for the nine-month period primarily due to higher corporate general and administrative expenses and a higher MSS ratio, mostly offset by lower BSS and NPS ratios.

Corporate General & Administrative expenses were higher both for the third quarter and the first nine months of fiscal 2013, as compared to the same periods in the prior year. For the third quarter, the higher expenses were primarily due to higher consulting and advisory expenses primarily related to the Company's financial and infrastructure transformation. For the nine-month period, in addition to the reasons mentioned above, the year-over-year increase was also due ramp up of internal audit fees, with an partial offset from lower legal fees related to the SEC investigation and the class action cases. As the Company continues its financial and infrastructure transformation, additional expenses are expected to be incurred during the remainder of fiscal 2013 and during fiscal 2014.

The higher MSS ratio, for both the third quarter and the nine-month period, was due to increased costs associated with setting up of the the U.K. Sales Center, which did not fully start until the third quarter of fiscal 2012, higher marketing costs within Europe, and additional costs in Australia associated primarily with the independent investigation and the related remediation.

Both the lower third quarter and the lower nine-month BSS ratios were primarily due to the fiscal 2012 adverse revenue adjustment of $204 million associated with a contract with NHS, and due to lower expenses of iSOFT. iSOFT had a lower SG&A ratio due to a lower run rate due to cost take out activity, including back office integration, and fiscal 2012 acquisition and transition costs of $10 million, which did not repeat in fiscal 2013.

The lower NPS ratio, for both the third quarter and the nine-month period of fiscal 2013, as compared to the same periods in fiscal 2012, was primarily due to cost reduction initiatives and lower bid and proposal costs due to delays in government procurements.


54

Goodwill Impairment

The Company initiated its fiscal 2012 annual goodwill impairment analysis at the beginning of the second quarter of fiscal 2012 and concluded that fair value was below carrying value for three reporting units: Managed Services Sector (MSS), Global Business Solutions (BSS-GBS) and the Healthcare Group (BSS-Health). At the end of the second quarter, sufficient indicators existed to require performance of an additional, interim goodwill impairment analysis, and the BSS-GBS reporting unit again had a fair value that was below carrying value. Management believed that the decline in the estimated fair values of these reporting units was a result of several factors, including uncertainty about the Company's overall value as reflected in CSC's stock price decline over the first half of fiscal 2012, overall decline in the broader stock market as indicated by reduced performance metric multiples at comparable public companies, and decline in forecasted operating performance of these reporting units.

By the end of the second quarter of fiscal 2012, the Company had not been able to complete its analysis as of the issuance of the consolidated financial statements and therefore recorded its best estimated goodwill impairment charge of $2,685 million, of which $2,074 million related to the MSS reporting unit, $453 million related to the BSS-GBS reporting unit, and $158 million related to the BSS-Health reporting unit. During the third quarter of fiscal 2012, the Company completed its goodwill impairment analysis and identified adjustments that reduced the impairment loss recorded during the second quarter by $3 million, to $2,682 million.

At the end of the third quarter of fiscal year 2012, the Company assessed whether there were any events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value and concluded that such indicators were present for only two of its reporting units, BSS-Health and BSS-iSOFT. In conducting the first step of the goodwill impairment test for BSS-Health, factors including the loss of a significant customer, failure to win some major bids for new business, and reduction in forecasted earnings resulted in a reassessment of forecasted cash flow assumptions under an income approach as well as a revised valuation using a market multiples fair value approach. This led to the weighted average fair value of the reporting unit to be less than its carrying value, thus triggering the need to proceed to step two. For BSS iSOFT, however, the weighted average fair value was estimated to be greater than its carrying value due to better than forecasted performance on the core iSOFT business (not related to the NHS contract).

During the process of conducting the second step of the goodwill impairment test for BSS-Health, the Company estimated the hypothetical fair value of its tangible assets and unrecognized intangible assets, primarily customer relationships and technology assets, and recorded an impairment charge of $63 million. After recording this impairment charge, the BSS-Health reporting unit had no remaining goodwill as of December 30, 2011.

During the second quarter of fiscal 2013, the Company performed its annual impairment test of goodwill, choosing to bypass the initial qualitative assessment and proceeding directly to the first step of the impairment test for all reporting units, and concluded that no impairment had occurred.

Depreciation and Amortization

Depreciation and amortization (D&A) as a percentage of revenue decreased 1.1 percentage points for both the third quarter and the first nine months of fiscal 2013, as compared to the same periods of fiscal 2012.

The lower BSS D&A ratio, for each of the third quarter and nine-months of fiscal 2013, was primarily due to the fiscal 2012 adverse revenue adjustment of $204 million associated with the NHS contract, and due to lower depreciation expense due to certain data center assets, associated with the NHS contract, coming to the end of their useful lives.

The lower MSS D&A ratio was caused by reduced depreciation and amortization expense as a result of significant impairments of fixed and intangible assets recorded in fiscal 2012, and reduced capital expenditures.

The lower third quarter NPS D&A ratio is due to reduced depreciation related to assets used in connection with contracts, which have concluded or are winding down. The nine-month NPS ratio is higher than for the previous year primarily due to the impact of lower year-over-year revenue.


55

Restructuring Costs

Total restructuring costs recorded during the quarter and nine months ended December 28, 2012 were $26 million and $111 million, respectively, which included $1 million and $7 million, respectively, of pension benefit augmentations that are due to certain employees in accordance with legal or contractual obligations, and which will be paid out over several years as part of normal pension distributions.

Fiscal 2013 Plan

In September 2012, the Company initiated additional restructuring actions (the Fiscal 2013 Plan) across its business segments. The objectives of the Fiscal 2013 Plan are to (i) further increase the use of lower cost off-shore resources, and (ii) reduce headcount in order to align resources to support business needs, including assessment of management span of control and layers. Actions under the Fiscal 2013 Plan commenced in September 2012 and are expected to be carried out through fiscal 2013. Additional restructuring actions may be initiated under this plan during the remainder of fiscal 2013, including rationalization of facilities, which may result in additional costs to the Company. Total restructuring costs recorded during the third quarter and first nine months of fiscal 2013 for the Fiscal 2013 Plan were $25 million and $78 million, respectively.

Fiscal 2012 Plan

In March 2012, the Company initiated a series of restructuring actions (Fiscal 2012 Plan) primarily to address excess capacity issues and to align its workforce with current business needs, primarily in Europe. In addition to reducing headcount, these actions contemplate increased use of lower cost off-shore resources and optimal utilization of facilities, which includes vacating and consolidating office space. Actions under the Fiscal 2012 Plan commenced in March 2012 and are expected to be carried out through fiscal 2013. Total restructuring costs recorded during the third quarter and the first nine months of fiscal 2013 for the Fiscal 2012 plan were $1 million and $33 million, respectively.

Of the total restructuring expense recorded for the first nine months of fiscal 2013 of $111 million, $3 million relates to NPS, $68 million to MSS, $32 million to BSS, and $8 million to Corporate.

Excluding the pension liability, the restructuring liability as of December 28, 2012, was $106 million, of which $103 million is expected to be paid in the next twelve months and $3 million thereafter.

Income from Discontinued Operations

During the third quarter of fiscal 2013, CSC completed the divestiture of its credit services business and its Italian consulting and system integration business. Both of these businesses were a part of the Company's BSS segment and the divestitures reflect the Company's ongoing service portfolio optimization initiative to focus on next-generation technology services. The Company received cash proceeds of $1 billion upon sale of its credit services business and paid $35 million ($43 million including cash on divested entity's balance sheet) in relation to the divestment of the Italian consulting and system integration business.

For the quarter ended December 28, 2012, income from discontinued operations, net of taxes, was $390 million, which comprised net income from discontinued operations of $14 million and a net gain on disposition, net of taxes, of $376 million. For the nine months ended December 28, 2012, income from discontinued operations, net of taxes, was $419 million, which comprised net income from discontinued operations of $43 million and a net gain on disposition, net of taxes, of $376 million.

Interest Expense and Interest Income

Interest expense of $57 million in the third quarter of fiscal 2013 increased $15 million and increased $18 million to $147 million for the nine months of fiscal 2013, when compared to similar periods of fiscal 2012. The increase in interest expense for both the third quarter and the nine-month period was primarily due to recognition of a $19 million loss associated with the early redemption of the 5.50% and 5.00% Senior Notes due 2013, partially offset by lower interest expense associated with the new 4.45% $350 million Senior Notes due 2022 and 2.50% $350 million Senior Notes due 2015 issued in fiscal 2013, and the new $250 million term loan credit facility, issued during the third quarter (see Note 8 to the Consolidated Condensed Financial Statements).

56


Interest income of $4 million in the third quarter of fiscal 2013 decreased $4 million and interest income of $14 million in the first nine months of fiscal 2013 decreased $18 million as compared to the same periods in fiscal 2012 primarily due to reduced cash balances outside the U.S.

Other (Income) Expense, Net

Other (income) expense, net primarily 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 hedges, equity in earnings of unconsolidated affiliates, and other miscellaneous gains and losses from the sale of non-operating assets.

For both the third quarter and nine months of fiscal 2013, movement of foreign currency exchange rates used to fair value Company's foreign currency derivatives, favorably impacted other (income) expense, net. For the third quarter of fiscal 2013, other expense decreased $8 million to $4 million, as compared to the same period in the prior year; and for the nine-month period, other expense decreased $2 million to result in other income, net of $1 million, as compared to the same period in fiscal 2012.

Taxes

The Company's effective tax rate (ETR) was 20.6% and 27.9% for the quarter and nine months ended December 28, 2012, respectively, and 2.6% and 1.8% for the quarter and nine months ended December 30, 2011, respectively. The following are the primary drivers of the ETR for the nine months ended December 28, 2012 and December 30, 2011. For the tax impact of discontinued operations see Note 3 to the Consolidated Condensed Financial Statements.

•
During the third quarter and nine months ended December 28, 2012, there was a decrease in valuation allowances in non-U.S. jurisdictions due to (i) a shift in the global mix of income which impacted the ETR by 7.1% and 2.9%, respectively and (ii) expected capital gains from the sale of certain other assets which impacted the ETR by 5.6% and 2.3%, respectively.
•
During the second quarter of fiscal 2013, the Company released $6.4 million of its liability for uncertain tax positions related to prior year research and development credits which reduced the ETR for the nine months ended December 28, 2012 by 1.7%.
•
During the third quarter of fiscal 2012, the Company recorded a $1,485 million charge related to the U.K. NHS contract. The Company established a full valuation allowance against the net operating losses in the U.K. and did not record a tax benefit for the NHS charge. The NHS charge had a significant impact on the ETR for the third quarter and nine months ended December 30, 2011 and was one of the primary drivers of the difference between the ETR and statutory tax rate of 35%.
•
During the third quarter of fiscal 2012, as a result of the charge related to the NHS contract, the Company established a valuation allowance of approximately $65 million against the prior year ending net deferred tax assets of the U.K. operating entities. The valuation allowance had an unfavorable impact on the ETR for the third quarter and nine months ended December 30, 2011 of 4.5% and 1.5%, respectively.
•
During the second quarter of fiscal 2012, the Company settled various tax examinations and recognized income tax benefits related to audit settlements and the expiration of the statute of limitations of approximately $112 million which reduced the ETR for the nine months ended December 30, 2011 by 2.6%.
•
During the second quarter of fiscal 2012, the Company recorded a $2.7 billion goodwill impairment charge, which was mostly not deductible for tax purposes. During the third quarter of fiscal 2012, the Company recorded an additional goodwill impairment charge of $60 million, which was also not deductible for tax purposes. The goodwill impairment charge had a significant impact on the ETR for the third quarter and nine months ended December 30, 2011 and was one of the primary drivers of the difference between the ETR and statutory tax rate of 35%.
•
During the first quarter of fiscal 2012, the Company elected to change the tax status of one of its foreign subsidiaries. This change in tax status resulted in a deemed liquidation for U.S. tax purposes and triggered various deductions which resulted in an income tax benefit of approximately $32 million in continuing operations (the balance of the benefit is now shown in discontinued operations) and reduced the ETR for the nine months ended December 30, 2011 by 0.7%.

There were no material changes to uncertain tax positions as of the third quarter of fiscal 2013 compared to year-end of fiscal 2012.

57


On January 2, 2013, the American Taxpayer Relief Act of 2012 (Act) was enacted and extended several expired or expiring temporary business tax provisions, including the active financing income exception, the controlled foreign corporation look through rule, and the research and development credit. Pursuant to ASC 740, the effects of new legislation are recognized in the period of enactment. Therefore, the impact of the Act will be recorded in the fourth quarter and is expected to have a significant impact on the ETR.

The Finance Act of 2012 ("the Finance Act") was signed into law in India on May 28th, 2012. The Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The Finance Act overrides the recent Vodafone 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 Finance Act has been challenged in the Indian courts. However, there is no assurance that such a 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 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 Finance Act does not apply to these prior acquisitions and that is has strong defenses against any claims that might be raised by the Indian tax authorities.

Earnings Per Share and Share Base

Earnings per share (EPS), on a diluted basis, increased $12.23 and $30.71 for the quarter and nine months ended December 28, 2012, respectively. The increase in EPS was the result of an increase in income before taxes from continuing operations of $1,614 million and $4,640 million for the quarter and nine months ended December 28, 2012, partially offset by an increase in tax expense of $184 million for the nine months ended December 28, 2012.

Income before taxes increased primarily due to the fiscal 2012 second quarter settlement charge of $269 million that resulted from the settlement of claims with the government (see Note 18 to the Consolidated Condensed Financial Statements), a contract write-off of $1,485 during the fiscal year 2012 third quarter (see Note 17) and goodwill impairment of $2,745 million during the first nine months of fiscal year 2012, which did not recur in fiscal 2013 (see Note 15 to the Consolidated Condensed Financial Statements). The increase in the tax expense was primarily due to decrease in valuation allowances in certain non-U.S. subsidiaries due to changes in the global mix of income before taxes, expected capital gains in Australia due to the expected sale of Paxus, and non-recurrence of certain discrete tax benefits that were recognized during fiscal 2012 (see Note 10 to the Consolidated Condensed Financial Statements).

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

Background

As previously disclosed, in fiscal 2011, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in our MSS segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in this investigation. On January 28, 2011, the Company was notified by the SEC’s Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC’s Division of Enforcement as well as matters under investigation by the Audit Committee of the Board of Directors, as further described below. The Company is cooperating in the SEC’s investigation.

On May 2, 2011, the Audit Committee commenced an independent investigation into the matters relating to the MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC’s Division of Enforcement and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants to assist with their work. Independent counsel also

58

represents CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with the investigation by the SEC’s Division of Enforcement.

The Audit Committee’s investigation was expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation and (iii) certain of the Company’s accounting practices that involve the percentage of completion accounting method, including the Company’s contract with the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. 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. The SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with the NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are investigating these matters and are continuing to cooperate with the SEC's Division of Enforcement in its investigation.

As previously disclosed, in fiscal 2012, and in the first quarter of fiscal 2013, the Company had identified but not yet recorded certain additional items related to the NHS contract that could have an effect on the amount and the allocation of the prior period adjustments. During the second quarter of fiscal 2013, based on its analysis of these items, the Company recorded net credits of $9 million in pre-tax out of period adjustments impacting prior fiscal years. These adjustments resulted primarily from accounting errors identified by the Company related to costs incurred under the contract. During the third quarter of fiscal 2013, additional accounting errors were identified related to the Company's use of the percentage of completion accounting method on its NHS contract. Such adjustments, which were self-correcting, had no rollover impact on income (loss) from continuing operations before taxes during the first nine months of fiscal 2013. Based on information provided by the independent counsel, the Company believes that a small portion of such adjustments should be characterized as intentional accounting irregularities.
 
The following is the cumulative rollover impact on income (loss) from continuing operations before taxes of the out of period adjustments related to the Company's NHS contract:
 
 
Increase/(Decrease)
(Amounts in millions)
 
Fiscal 2012 Adjustments
 
First Nine Months Fiscal 2013 Adjustments
 
Total Adjustments
Fiscal 2013
 
$
—

 
$
(9
)
 
$
(9
)
Fiscal 2012
 
25

 
10

 
35

Fiscal 2011
 
(7
)
 
(15
)
 
(22
)
Fiscal 2010
 
(4
)
 
18

 
14

Prior fiscal years (unaudited)
 
(14
)
 
(4
)
 
(18
)

The Company believes the SEC has expanded its investigation into the foregoing areas as well as into certain related disclosure matters. The SEC's investigative activities are ongoing. In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company's conclusions relating to materiality of such adjustments, and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigation being conducted by the SEC's Division of Enforcement and the review of the Company's financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors or irregularities or other areas of review. As a result, CSC has incurred and will continue to incur significant legal and accounting expenditures, and a significant amount of the Company's senior management's time that otherwise would have been focused on the growth of the Company has been focused on these matters. The Company is unable to predict how long the SEC's Division of Enforcement's investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against the Company. In addition, CSC is unable to

59

predict the timing of the completion of the SEC's Division of Corporation Finance's review of its financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC's investigation, even if ultimately resolved favorably for the Company, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows.

Any out of period adjustments identified, including items that self corrected within a fiscal year, by the Company to date are described in Note 4.

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments (including the out of period adjustments related to the NHS contract) in the first nine months of fiscal 2013, fiscal 2012 and fiscal 2011 is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
 
 
(Amounts in millions)
 
Fiscal 2011 Adjustments
 
Fiscal 2012 Adjustments
 
First Nine Months Fiscal 2013 Adjustments
 
Total Adjustments
Fiscal 2013
 
$
—

 
$
—

 
$
(4
)
 
$
(4
)
Fiscal 2012
 
—

 
79

 
10

 
89

Fiscal 2011
 
52

 
(29
)
 
(17
)
 
6

Fiscal 2010
 
(48
)
 
(9
)
 
15

 
(42
)
Prior fiscal years (unaudited)
 
(4
)
 
(41
)
 
(4
)
 
(49
)

Fiscal 2013 Financial Impact Summary

During the third quarter and through the first nine months of fiscal 2013, the Company identified and recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $3 million and increasing income from continuing operations before taxes by $4 million, respectively, that should have been recorded in prior fiscal years ($3 million and $13 million, net of tax and including discrete tax benefits). In addition, during the third quarter of fiscal 2013, the Company recorded $3 million of net pre-tax adjustments increasing income from continuing operations before taxes and $2 million of net pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the second and first quarters of fiscal 2013.

The $3 million pre-tax out of period adjustments recorded in the third quarter of fiscal 2013 resulted primarily from correcting the useful lives of property and equipment that were inconsistent with established CSC accounting conventions. This error occurred in connection with a BSS contract in France.

As noted above, during the third quarter of fiscal 2013, the Company identified additional prior period errors related to the use of the percentage of completion accounting method on its NHS contract. Such errors, which were self-correcting, have no impact on income from continuing operations before taxes for fiscal 2013. Had such adjustments been recorded in fiscal 2012, income from continuing operations before taxes would have increased by $22 million. For fiscal 2011, income from continuing operations before taxes would have decreased by $3 million. For fiscal 2010, there would have been no impact on income from continuing operations before taxes. For fiscal 2009 and prior periods, income from continuing operations before taxes would have decreased by $19 million.

As previously reported, during the second quarter and through the first six months of fiscal 2013, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $8 million and $7 million, respectively, that should have been recorded in prior fiscal years ($10 million and $13 million, net of tax). In addition, during the second quarter of fiscal 2013, the Company recorded $2 million of net pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2013 and had no impact on prior fiscal years.

The $8 million pre-tax out of period adjustments recorded in the second quarter of fiscal 2013 consisted primarily of $9 million of net adjustments increasing income from continuing operations before taxes related to the Company's investigation of the use of percentage of completion accounting on the NHS contract. Such adjustments result primarily from accounting errors identified by the Company related to costs incurred under the NHS contract.


60

As previously reported, based on information then known by the Company, the out of period adjustments recorded in the first quarter of fiscal 2013 were comprised of $6 million of net adjustments reducing income from continuing operations before taxes identified by the Company late in the fiscal 2012 closing process, and due to the immaterial amounts involved, were not included in the Company's consolidated fiscal 2012 financial statements. Also in the first quarter of fiscal 2013, the Company identified and recorded $5 million of net pre-tax adjustments increasing income from continuing operations that should have been recorded in prior fiscal years. The $5 million of net pre-tax adjustments consisted primarily of charges related to a $2 million software revenue recognition correction and a $2 million adjustment to prepaid expenses offset by credits primarily related to corrections of $10 million to reduce accrued expenses related to the restructuring costs recorded by the Company in fiscal 2012.

The Company also recorded a $2 million tax benefit in the first quarter of fiscal 2013 related to prior periods. The $2 million tax benefit was attributable to the adjustment of the deferred tax liability related to intellectual property assets.

The select line items of the Consolidated Statement of Operations for the quarter and nine months ended December 28, 2012 impacted by the consolidated out of period adjustments under the rollover method are shown below.
 
 
Quarter Ended December 28, 2012
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,781

 
$
1

 
$
3,782

Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,995

 
2

 
2,997

Selling, general and administrative
 
278

 
1

 
279

Depreciation and amortization
 
270

 
(4
)
 
266

Restructuring costs
 
26

 
2

 
28

Interest expense
 
57

 
(1
)
 
56

Other (income) expense
 
4

 
(1
)
 
3

Income from continuing operations before taxes
 
155

 
2

 
157

Taxes on income
 
32

 
3

 
35

Income from continuing operations
 
123

 
(1
)
 
122

Income from discontinued operations, net of taxes
 
390

 
—

 
390

Income attributable to CSC common shareholders
 
510

 
(1
)
 
509

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
0.77

 
$
(0.01
)
 
$
0.76

Discontinued operations
 
2.50

 
—

 
2.50

Total
 
$
3.27

 
$
(0.01
)
 
$
3.26



61

 
 
Nine Months Ended December 28, 2012
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
11,434

 
$
10

 
$
11,444

Costs of services (excludes depreciation and amortization and restructuring costs)
 
9,141

 
12

 
9,153

Selling, general and administrative
 
864

 
(1
)
 
863

Depreciation and amortization
 
806

 
(2
)
 
804

Restructuring costs
 
111

 
5

 
116

Interest expense
 
147

 
—

 
147

Other (income) expense
 
(1
)
 
—

 
(1
)
Income from continuing operations before taxes
 
380

 
(4
)
 
376

Taxes on income
 
106

 
9

 
115

Income from continuing operations
 
274

 
(13
)
 
261

Income from discontinued operations, net of taxes
 
419

 
—

 
419

Income attributable to CSC common shareholders
 
680

 
(13
)
 
667

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
1.67

 
$
(0.08
)
 
$
1.59

Discontinued operations
 
2.69

 
—

 
2.69

Total
 
$
4.36

 
$
(0.08
)
 
$
4.28


The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the nine months ended December 28, 2012 are related to the following consolidated balance sheet line items:

•
Accounts receivable ($1 million decrease);
•
Prepaid expenses ($8 million increase);
•
Property and equipment ($4 million decrease);
•
Deferred revenue ($9 million increase); and
•
Accrued expenses and other current liabilities ($10 million decrease).

The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2013 is immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2013, first nine months of fiscal 2013 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2013.

Effect of Adjustments on Prior Year Financial Statements

As previously disclosed, during fiscal 2012, the Company recorded various pre-tax adjustments that should have been recorded in prior fiscal years. The aggregate fiscal 2012 adjustments reduced income from continuing operations before taxes by $79 million ($63 million net of tax) and were comprised of $13 million of charges relating to operations in the Nordic region, $23 million of charges relating to the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's BSS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s MSS and BSS segments, with $37 million and $26 million of adjustments within MSS and BSS, respectively.

During the third quarter and through the first nine months of fiscal 2012, based on information then known by the Company, the Company recorded, primarily in the Nordic Region and Australia, net pre-tax adjustments reducing income from continuing operations before taxes by $3 million and $31 million ($1 million and $23 million, net of tax), respectively, that should have been recorded in prior fiscal years.





62

Nordic Region Adjustments

The Nordic pre-tax adjustments recorded in the third quarter and first nine months of fiscal 2012, based on information then known by the Company, totaled $2 million and $10 million, respectively, and were primarily attributable to an understatement of amortization expense resulting from the use of incorrect useful lives for purchased software licenses. The Company attributes these Nordic adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct (other than a $1 million operating lease adjustment, which was a refinement of an error previously corrected and reported in fiscal 2011).

Australia

In the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities were identified. Based on the information then known by the Company, the Company recorded $1 million and $20 million of pre-tax adjustments reducing income from continuing operations during the third quarter and the nine months ended December 30, 2011, respectively. Such adjustments have been categorized as either intentional accounting irregularities (“intentional irregularities”) or other accounting errors (“Other Errors”). Other Errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation.

The impact of the Australia adjustments recorded during the first nine months of fiscal 2012 on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
(Amounts in millions)
 
FY08 &
Prior (unaudited)
 
FY09 (unaudited)
 
FY10
 
FY11
 
Total
Intentional irregularities
 
$
10

 
$
(7
)
 
$
(4
)
 
$
—

 
$
(1
)
Other Errors
 
(5
)
 
(16
)
 
5

 
(3
)
 
(19
)
 
 
$
5

 
$
(23
)
 
$
1

 
$
(3
)
 
$
(20
)

The principal intentional irregularities relate to excess reserves of $8 million established in fiscal 2008 to manage earnings, which reserves were reversed in fiscal 2009, while the unintentional errors include an incorrect accounting conclusion on a sale leaseback transaction in fiscal 2009 that triggered an impairment of $9 million and the inappropriate capitalization of transition costs of $3 million in fiscal 2011. In addition, included in the adjustments discussed above, the Company identified and recorded a $1 million pre-tax adjustment reducing income from continuing operations related to its review of the accounting treatment with respect to revenue recognition for one of its Australia customer contracts.

NHS Adjustments

As noted above, during fiscal 2012 and through the first nine months of fiscal 2013, the Company has identified certain accounting errors related to the Company's use of the percentage of completion accounting method on its NHS contract. The impact of such errors would be to increase income from continuing operations before taxes by $47 million and $43 million for the third quarter and first nine months of fiscal 2012, respectively.

Other Adjustments

Based on information then known by the Company, the Company identified certain out of period adjustments related to MSS operations outside of the Nordics and Australia regions, which decreased income from continuing operations by $2 million and $1 million for the third quarter and for the first nine months, respectively, of fiscal 2012. The Company attributes these adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct.

63

The following table summarizes the cumulative effect on net loss attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2011, fiscal 2012 and the nine months ended December 28, 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.
 
 
Increase/(Decrease)
(Amounts in millions)
 
Quarter Ended December 30, 2011
 
Nine Months Ended December 30, 2011
Nordic adjustments
 
$
2

 
$
12

Australia adjustments
 
2

 
22

NHS adjustments
 
47

 
43

Other adjustments
 
—

 
(3
)
Effect on loss from continuing operations before taxes
 
51

'
74

Taxes on income
 
(12
)
 
(2
)
Effect on net loss attributable to CSC common shareholders
 
$
39

 
$
72


The select line items of the Consolidated Condensed Statements of Operations for the quarter and nine months ended December 30, 2011 impacted by the out of period adjustments, including those recorded in the first nine months of fiscal 2013, under the rollover method are shown below.
 
 
Quarter Ended December 30, 2011
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
3,687

 
$
45

 
$
3,732

Costs of services (excludes depreciation and amortization)
 
3,186

 
(20
)
 
3,166

Selling, general and administrative
 
272

 
4

 
276

Depreciation and amortization
 
301

 
7

 
308

Interest expense
 
42

 
—

 
42

Other (income) expense
 
12

 
3

 
15

Income from continuing operations before taxes
 
(1,459
)
 
51

 
(1,408
)
Taxes on income
 
(38
)
 
12

 
(26
)
Income from continuing operations
 
(1,421
)
 
39

 
(1,382
)
Loss from discontinued operations, net of taxes
 
30

 
—

 
30

Net income attributable to CSC common shareholders
 
(1,390
)
 
39

 
(1,351
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(9.15
)
 
$
0.25

 
$
(8.90
)
Discontinued operations
 
0.19

 
—

 
0.19

Total
 
$
(8.96
)
 
$
0.25

 
$
(8.71
)


64

 
 
Nine Months Ended December 30, 2011
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenue
 
$
11,527

 
$
40

 
$
11,567

Costs of services (excludes depreciation and amortization)
 
9,730

 
(32
)
 
9,698

Selling, general and administrative
 
838

 
2

 
840

Depreciation and amortization
 
868

 
(2
)
 
866

Interest expense
 
129

 
(3
)
 
126

Other (income) expense
 
1

 
1

 
2

Income from continuing operations before taxes
 
(4,260
)
 
74

 
(4,186
)
Taxes on income
 
(78
)
 
2

 
(76
)
Income from continuing operations
 
(4,182
)
 
72

 
(4,110
)
Loss from discontinued operations, net of taxes
 
110

 
—

 
110

Net income attributable to CSC common shareholders
 
(4,084
)
 
72

 
(4,012
)
EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
(27.06
)
 
$
0.46

 
$
(26.60
)
Discontinued operations
 
0.71

 
—

 
0.71

Total
 
$
(26.35
)
 
$
0.46

 
$
(25.89
)

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company through the nine months ended December 30, 2011 are related to the following consolidated balance sheet line items:

•
Accounts receivable ($48 million decrease);
•
Prepaid expenses ($40 million increase);
•
Property and equipment ($26 million decrease);

•
Accrued expense ($42 million increase); and
•
Deferred revenue ($2 million decrease).

The Company determined that the impact of the consolidated out of period adjustments recorded in the third quarter of fiscal 2012 was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2012 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during the third quarter of fiscal 2012.

Cash Flows

 
 
Nine Months Ended
Amounts in millions
 
December 28, 2012
 
December 30, 2011
Net cash provided by operating activities
 
$
1,078

 
$
680

Net cash provided by (used in) investing activities
 
474

 
(1,088
)
Net cash used in financing activities
 
(433
)
 
(471
)
Effect of exchange rate changes on cash and cash equivalents
 
(14
)
 
(60
)
Net increase (decrease) in cash and cash equivalents
 
1,105

 
(939
)
Cash and cash equivalents at beginning of year
 
1,093

 
1,837

Cash and cash equivalents at the end of period
 
$
2,198

 
$
898


Net cash provided by operating activities for the first nine months of fiscal 2013 was $1,078 million, an increase of $398 million compared to the first nine months of fiscal 2012. The increase is primarily due to higher cash flow of $450 million, associated with the NHS contract, lower payroll related payments of $269 million reflecting lower headcount, lower vendor payments partially offset by higher restructuring payments of $114 million, higher pension plan funding of $70 million, non-

65

recurrence of cash inflow of $277 million received in the third quarter of fiscal 2012 in connection with settlement of claims with the U.S. government, and lower cash collections.

The higher cash inflow associated with the NHS contract was due to the second quarter receipt of $185 million, $110 million in relation to the settlement agreement (see Note 17 to the Consolidated Condensed Financial Statements) and $75 million primarily related to achievement of a milestone during the first quarter, and non-recurrence of the fiscal 2012 repayment to the NHS of $265 million.

Net cash provided by investing activities for the first nine months of fiscal 2013 was $474 million, an increase of $1,562 million compared to the first nine months of fiscal 2012. The year-over-year increase is primarily due to net proceeds of $958 million from the fiscal 2013 divestitures (see Note 3 to the Consolidated Condensed Financial Statements), lower cash used for purchase of property and equipment, software and contract premium of $226 million, and lower cash used for acquisitions of $334 million.

Net cash used in financing activities in the first nine months of fiscal 2013 was $433 million, a decrease of $38 million compared to the first nine months of fiscal 2012. The decrease is primarily due to higher net borrowings in fiscal 2013 as compared to fiscal 2012, partially offset by cash used for share repurchases of $59 million and higher payments to non-controlling interests of $25 million. The higher net borrowings comprised proceeds from issuance of new long-term debt of $983 million, and higher repayments on long-term debt of $849 million (see Note 8 to the Consolidated Condensed Financial Statements).

Contractual Obligations

The Company has contractual obligations for long-term debt, capital lease obligations, operating lease obligations, minimum purchase obligations, bank debt, 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 30, 2012.

Liquidity and Capital Resources

Cash and cash equivalents were $2.2 billion at December 28, 2012 and $1.1 billion at March 30, 2012. At December 28, 2012, the Company had approximately $762 million of cash and cash equivalents held outside of the U.S. A substantial amount of cash held outside of the U.S. can be made available through the settlement of intercompany loans in a tax efficient manner to fund U.S. obligations. However, should the Company determine to repatriate cash held by the Company outside the U.S. as dividends, it could be required to pay additional taxes. It is generally management's intent to permanently reinvest the earnings of its foreign operations. The cash held outside of the U.S. can be used to fund acquisitions such as the fiscal 2012 acquisitions of iSOFT and AppLabs.

At the end of the second quarter of fiscal 2013, CSC’s ratio of debt to total capitalization was 44.2%, a decrease from 49.2% at the end of fiscal 2012. The decrease in the ratio was the result of a decrease of $111 million in total debt and the increase in total equity of $483 million, arising largely from increases in retained earnings. The increase in retained earnings during the nine month period of fiscal 2013 was primarily driven by net income attributable to CSC common shareholders of $680 million, partially offset by dividends declared of $93 million. The following table summarizes the Company’s debt to total capitalization ratios as of the end of the third quarter of fiscal 2013 and as of fiscal year end 2012:
 
 
As of
(Amounts in millions)
 
December 28, 2012
 
March 30, 2012
Debt
 
$
2,629

 
$
2,740

Equity
 
3,317

 
2,834

Total capitalization
 
$
5,946

 
$
5,574

Debt to total capitalization
 
44.2
%
 
49.2
%

At December 28, 2012, the Company had $13 million of short-term working capital borrowings outstanding at its international subsidiaries under uncommitted lines of credit with foreign banks, $218 million of current maturities of long-term debt, $2,398 million of long-term debt, no borrowings outstanding against the Company's commercial paper program,

66

and no amounts drawn under the Company's committed revolving credit facility (see Note 8 of the Consolidated Condensed Financial Statements).

The Company's committed line of credit of $1.5 billion serves as collateral to the Company's commercial paper program. This revolving credit facility, which expires on March 18, 2015, requires the Company to: (1) maintain a minimum interest coverage ratio of consolidated Earnings Before Interest, Taxes, Depreciation and Amortization adjusted for other non-cash charges as defined by the credit agreement (EBITDA), to consolidated interest expense for the period of four consecutive fiscal quarters ending on or immediately prior to such period not to be less than 3.00 to 1.00; and (2) not permit at the end of any quarterly financial reporting period the ratio of consolidated total debt to consolidated EBITDA for the period of four consecutive fiscal quarters ending on or immediately prior to such date, to exceed 3.00 to 1.00. The Company was in compliance with these requirements as of December 28, 2012.

During the second quarter, the Company successfully secured financing for the redemption of $1 billion of debt originally scheduled to mature in the fourth quarter of fiscal 2013. On October 19, 2012, the Company used the proceeds received from the issuance of new term notes and $250 million drawn from the new term loan credit facility to fund the early redemption of its 5.50% senior notes due March 2013 and its 5.00% senior notes due February 2013 (see Note 8 to the Consolidated Condensed Financial Statements) resulting in the recognition of a $19 million loss on debt extinguishment during the third quarter of fiscal 2013.

On December 13, 2010, CSC’s Board of Directors approved a share repurchase program authorizing up to $1.0 billion in share repurchases of the Company’s outstanding common stock (“2011 Repurchase Program”). The timing, volume, and nature of future share repurchases will be at the discretion of management, and may be suspended or discontinued at any time. CSC’s Board has not established an end date for the 2011 Repurchase Program. During the third quarter of fiscal 2013, using the proceeds from sale of its credit services business to Equifax, the Company repurchased 1,971,200 shares of its common shares at an aggregate cost of $77 million in both open market purchases and pursuant to a Rule 10b5-1 share repurchase plan authorized by CSC.

During the first nine months of fiscal 2013, the Company paid quarterly cash dividends to its common stockholders aggregating to $0.60 per share or approximately $93 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.

The Company’s total liquidity is comprised of cash and cash equivalents plus any borrowing available under its credit facility. As of December 28, 2012, the Company’s total liquidity, including the pre-tax proceeds received from the sale of its credit services business to Equifax that closed on December 28, 2012, was approximately $3.7 billion, consisting of $2.2 billion of cash and cash equivalents, and the full $1.5 billion available under the 2015 credit facility (see Note 8 to the Consolidated Condensed Financial Statements).

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 from available borrowings under the Company's undrawn credit facilities. 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 issue additional debt with acceptable terms in the future.

Subsequent to the third quarter of fiscal 2013, the Company contributed $400 million to its US pension plan trust and repurchased an additional 150,000 shares at an aggregate cost of $6 million pursuant to the 2011 Repurchase Program.

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. Continued 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.

The three major rating agencies that rate the Company's debt took ratings actions during the first quarter of fiscal 2013. On May 17, 2012, Moody's lowered the Company's long term credit rating from Baa1 with a negative watch to Baa2 with a stable outlook. Moody's confirmed its short term rating at P-2. On May 22, 2012, S&P and Fitch lowered the credit rating to BBB with a negative outlook and a short term rating of A-2 and F-3 respectively. These changes in our credit ratings

67

had no material impact on our current borrowing costs, and we believe they will not have a material impact on our ability to raise further debt financing in the future although the costs of such borrowing would increase. The 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
Negative
F-3
Moody's
Baa2
Stable
P-2
S&P
BBB
Negative
A-2

Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in our operating performance, our financial position, resolution of the issues relating to the NHS contract and changes in our business strategy. If further changes in our credit ratings were to occur, they could impact, among other things, our future borrowing costs and access to capital markets.

Contract with the U.K. National Health Service

Reference is hereby made to CSC's Form 10-K for the fiscal year ended March 30, 2012 and its Form 10-Q for the quarter ended September 28, 2012 for previously disclosed information concerning CSC's contract with the NHS relating to an integrated electronic patient records system. Historical background is also presented below.

Interim Agreement Contract Change Note
On August 31, 2012, the Company and the NHS entered into a binding interim agreement which has been approved by all required U.K. government officials ("interim agreement contract change note" or "IACCN"). The IACCN, which is described in greater detail below, 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 (the current contract as amended by the IACCN, the "modified agreement"). The modified agreement forms the basis on which the parties will subsequently finalize a full restatement of the contract through a revised project agreement. The revised project agreement will consolidate the three regional contracts which comprise the Company's NHS contract into a single agreement.
Under the modified agreement, the parties redefined the scope of the Lorenzo products and established deployment and ongoing service pricing. CSC will deliver additional Lorenzo implementations based on demand from individual NHS trusts. A more flexible arrangement than under contract terms existing prior to the IACCN has been established for these trusts to combine additional clinical modules with the core care management functionality of the Lorenzo solution to meet their specific requirements. CSC and the NHS also agreed to a process for trusts which wish to take the Lorenzo products within the NHS-designated North, Midlands and East regions of England (NME) to obtain central funding from the U.K. Department of Health for implementation of the Lorenzo products. Separately, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through separate competitive processes. Under the modified agreement, the NHS is no longer subject to trust volume commitments and CSC has agreed to non-exclusive deployment rights in its designated regions. New trusts taking deployments of the Lorenzo product will receive ongoing managed services from CSC for a period of five years from the date of Lorenzo deployment by such trust, provided deployment is complete or substantially complete by July 2016. Beyond its Lorenzo offerings, CSC continues to provide a wide range of other solutions and services to the NHS, including general practitioner, ambulance and community systems, digital imaging and other related services.
Pursuant to the IACCN, the parties agreed to a mutual release of all past or future disputed amounts under the contract through the date of the interim agreement, August 31, 2012. In conjunction with the IACCN, CSC received a payment of approximately £68 million ($110 million) net of value added tax.

Historical Background Concerning NHS Contract

The Company and the NHS are parties to a contract (originally having a value of £2.9 billion or approximately $5.4 billion at originally announced exchange rates) under which the Company has developed and deployed an integrated electronic

68

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.

In 2010, as part of the U.K. government's austerity program and to address delays in development and deployments, the Company and the NHS discussed modification of the contract scope in order to reduce the total contract value by £500 million. During the fourth quarter of fiscal year 2011, additional scope modification and total contract value reduction were discussed, bringing the combined total contract value reductions to £764 million, which would reduce the total contract value to approximately £2.1 billion or $3.4 billion (at the December 28, 2012 exchange rate). Terms related to this scope modification and contract value reduction were included in a negotiated but unsigned non-binding memorandum of understanding (MOU), which MOU included a legally binding standstill agreement which provided that, while the parties were negotiating a contract amendment to implement the terms of the MOU, neither party would pursue any claims against the other party. Negotiation of the terms of the MOU was confirmed by the NHS to be substantially completed in May 2011, but CSC was subsequently informed by the NHS in December 2011 that neither the MOU nor the related contract amendment then under discussion would be approved by the U.K. government.

Based on subsequent discussions between CSC and the NHS regarding proposals advanced by both parties reflecting significant scope modifications, a reduced commitment by the NHS for deployment of the Lorenzo software product, revised delivery and payment terms, payments by the NHS for CSC-incurred costs and commitment and contract value reductions that differed materially from those contemplated by the MOU, on March 2, 2012, CSC and the NHS entered into a non-binding letter of intent that included the statement of principles that would serve as the basis for an interim agreement between the parties. The letter of intent contemplated that under the interim agreement, the NHS would provide a commitment of a certain number of trusts to receive the Lorenzo software product, and the Lorenzo product was redefined into deployment units categorized as "Base Product" and "Additional Product" (in each case, as described below) for pricing purposes. The letter of intent also included a standstill agreement related to the Lorenzo product. While the parties originally intended to conclude a binding interim agreement by June 29, 2012, no agreement was reached by that date. On May 31, 2012, the standstill agreement was extended to August 31, 2012. On August 31, 2012, the parties entered into the IACCN.

Principal Components of IACCN

The IACCN sets the terms relating to the delivery of the Lorenzo product and associated services as described below.

The key terms introduced by the IACCN 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 modified agreement, the NHS is no longer subject to any trust volume commitment for the Lorenzo product (there were no changes in quantities for non-Lorenzo deployments), 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 creates 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. While the funding is provided by the NHS, there will is a far greater degree of interaction with the trusts under the modified agreement, as the Company works with each individual trust to build a business case and seek NHS approval and central funding to proceed.

3.
The IACCN has not materially altered the terms relating to non-Lorenzo products. The Company will continue to provide non-Lorenzo deployment, hosting and maintenance services in accordance with contract terms in existence prior to the IACCN. The deployment of the non-Lorenzo products is expected to be completed by fiscal 2015.


69

4.
Under the IACCN, the Lorenzo product is 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. The Additional Product's three modules are expected to have completed NHS assurance during 2013; and one of these modules was accepted as having completed such assurance as at the end of December 2012. Although the NHS assurance of the Base Product's seven modules and one of the three Additional Product's modules is complete and the Company and the NHS are committed to complete the assurance of the remaining Additional Product's two modules, neither the NHS nor any trust is obliged to purchase or deploy any of those modules.

5.
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.

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 $1,485 million contract charge in that quarter, resulting in no material remaining net assets.

The terms of the IACCN represent 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 modified agreement 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 ($126 million), including the £68 million ($110 million) net settlement payment and a £10 million ($16 million) escrow release, is primarily attributed to future Lorenzo deployments and will be deferred and recognized into revenue ratably over the term of the contract ending July 2016.

Any 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.

RECENT ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING ESTIMATES

Recent accounting pronouncements and the anticipated impact to the Company are described in the notes to the interim 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 30, 2012.

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 2012. 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 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

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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, we caution that future events may not develop as forecast, and the best estimates routinely require adjustment.

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 the 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 30, 2012. For the quarter ended December 28, 2012, there has been no significant change in related market risk factors.

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 Securities and Exchange Commission’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 December 28, 2012 to ensure (i) that information required to be disclosed by us in the reports that we file or submit 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 us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our 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 December 28, 2012.

Changes in Internal Controls

“Internal controls 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 generally accepted accounting principles 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 generally accepted accounting principles, 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.

During the fiscal quarter ended December 28, 2012, 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.


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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The information required by this Item is set forth in Note 19, Commitments & Contingencies, to the 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 information technology outsourcing, business process outsourcing and consulting and systems integration services. 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, systems integration 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 and an SEC comment letter process, which could divert management's focus, result in substantial investigation expenses and have an adverse impact on our reputation and financial condition and results of operations.

On May 2, 2011, the Audit Committee commenced its investigation into certain accounting errors and irregularities, primarily in our Nordic region and in our operations in Australia. This investigation also reviewed certain aspects of our accounting practices within our Americas Outsourcing operation and certain of our contracts that involve the percentage of completion accounting method, including our contract with the U.K. National Health Service (NHS). As a result of this investigation, we have recorded certain out of period adjustments to our historical financial statements and taken certain remedial measures.

The SEC is conducting its own investigation into the foregoing areas as well as certain related disclosure matters. See Note 4 to the Consolidated Condensed Financial Statements for a discussion of these investigations and adjustments.

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. The SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are investigating these matters and are continuing to cooperate with the SEC's Division of Enforcement in its investigation.

In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding the Company's previously disclosed accounting adjustments, the Company's conclusions regarding the materiality of such adjustments and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

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The investigation being conducted by the SEC's Division of Enforcement and the review of our financial disclosures by the SEC's Division of Corporation Finance, are continuing and could identify other accounting errors, irregularities and other areas of review. As a result, we have incurred and will continue to incur significant legal and accounting expenditures, and a significant amount of our senior management's time has been focused on these matters that otherwise would have been focused on the growth of our business. We are unable to predict how long the SEC's Division of Enforcement's investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against us. In addition, we are unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of our financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC's investigation, even if ultimately resolved favorably for us, could have an adverse impact on our reputation, business, financial condition, results of operations or cash flows.

3.
We have entered into a binding interim agreement contract change note ("IACCN") which amends the terms of the current contract with the NHS and forms the basis on which we will finalize a full restatement of the current contract. Under the IACCN, the NHS will not be 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.

CSC and the NHS are parties to a £2.9 billion (approximately $5.4 billion at originally announced exchange rates) contract under which the Company is developing and deploying an integrated electronic patient records system. As a result of unresolved and continuing discussions between the Company and the NHS concerning possible modifications to such contract, the Company materially impaired its net investment in the contract and recorded a $1.5 billion contract charge as of December 31, 2011. In connection with continuing contract discussions, on March 2, 2012, CSC and the NHS entered into a non-binding letter of intent (the “letter of intent”) pursuant to which the parties agreed to a set of high-level principles regarding contract scope modifications and value reductions and expressed their mutual intention to enter into a binding interim agreement reflecting such principles. The letter of intent also included a Lorenzo-related standstill agreement. On August 31, 2012, CSC and NHS entered into the IACCN, which has been approved by all required U.K. government officials, and which amends the terms of the parties' current contract (the "modified agreement"). Under the IACCN, the parties have agreed to a mutual release of all past or future disputed amounts under the contract through the date of the IACCN. The modified agreement will form the basis of an amendment and restatement of the existing NHS contract to be negotiated by the parties.

Under the modified agreement, the NHS will not be subject to any trust volume commitment for Lorenzo (there are no changes in quantities for non-Lorenzo deployments), 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 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.

See Note 17 to the Consolidated Condensed Financial Statements for further discussion concerning the foregoing matters.

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 36% of our revenue for fiscal 2012. The U.S. government fiscal issues, and continued uncertainty regarding the timing and magnitude of U.S. government budget reductions, may reduce the U.S. federal government's demand and available funds for IT projects, which would materially adversely impact our NPS segment and our business.

We closely monitor federal budget, legislative and contracting trends and activities and continually examine our strategies to take these into consideration. The Budget Control Act of 2011 (“BCA”) commits the U.S. government to reduce the federal deficit over ten years through caps on discretionary spending. The BCA established a

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Congressional Joint Select Committee on Deficit Reduction responsible for identifying an additional $1.2 trillion in deficit reductions by November 23, 2011. However, the failure to produce a deficit reduction proposal by this deadline triggered “sequestration”, which calls for automatic spending cuts split between defense and non-defense programs beginning in 2013 and continuing over a ten-year period. Sequestration was to have gone into effect on January 2, 2013, but The American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013 contained provisions that delayed sequestration provisions of the BCA for two months and reduced the mandatory reduction from to $85 billion. In September 2012, the Office of Management and Budget delivered to Congress a report detailing how sequestration would be implemented but failed to describe how reductions would occur at levels below the account level (i.e., at the project, program and activity level). As a result, there remains significant uncertainty about the implementation of sequestration and its affect on U.S. federal government IT and services contracting. In addition, the U.S. federal government is currently operating under a continuing resolution, rather than an approved budget, which is scheduled to expire on March 31, 2013. While the continuing resolution averts a government shutdown, it also contains restrictions on starting new programs and increasing ongoing programs beyond current service levels, which could limit our ability to grow our NPS business. On December 31, 2012, the government officially reached its borrowing limits (known as the debt ceiling). On January 23, 2012, the U.S. House of Representatives passed a bill that would allow U.S. federal government borrowing through May 18, 2013 to be exempt from the debt ceiling. The United States Senate passed the bill on January 31, 2013and the President is expected to sign the extension into law.
  
5.
Our contracts with the U.S. federal government contain provisions giving government customers certain rights that are unfavorable to us. Such provisions may materially and adversely affect our business and profitability.

Federal government contracts contain provisions and are subject to laws and regulations that give the federal government rights and remedies not typically found in commercial contracts. Our exposure to the risks inherent in the government contracting process is material. These risks include government audits of billable contract costs and reimbursable expenses, project funding and requests for equitable adjustment, and compliance with government reporting requirements as well as the consequences if improper or illegal activities are discovered.

If any of these should occur, our reputation may be adversely impacted and our relationship with the government agencies we work with may be damaged, resulting in a material and adverse effect on our profitability.

6.
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 the 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 consulting and systems integration and technology outsourcing markets will impact our future revenue growth and earnings.

7.
Our primary markets, technology outsourcing and consulting and systems integration, 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 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 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.

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8.
Our ability to raise additional capital for future needs will impact our ability to compete in the markets we serve.    

In fiscal 2012, Standard and Poor's Rating Services ("S&P") downgraded the Company from A- to BBB+ with a negative credit watch. On May 17, 2012, Moody's Investors Service, Inc. downgraded the Company's senior unsecured rating to Baa2 from Baa1 with a stable outlook and confirmed its short term rating at Prime-2. On May 22, 2012, S&P and Fitch Ratings LTD ("Fitch") lowered the Company's credit rating to BBB with a negative outlook.

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 further downgrades in our credit ratings were to occur, it could result in higher interest costs for certain of our credit facilities. It would also cause our future borrowing costs to increase and limit our access to capital markets. Further 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.

9.
We may be unable to identify future attractive acquisitions, which may adversely affect our growth. In addition, our ability to consummate and integrate acquisitions we consummate 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 the integrations successfully. Failure to successfully integrate acquired operations may adversely affect our cost structure, thereby reducing our margins and return on investment.

10.
We could suffer additional losses due to asset impairment charges.

We test our goodwill for impairment during the second quarter 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. This could materially affect our reported net earnings.

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. These impairments could materially affect our reported net earnings.

11.
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 federal government, 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 affect on our profitability.

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12.
If we are unable to accurately estimate the cost of services and the timeline 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 be able 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.

13.
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 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.

14.
Our contracts with U.S. governmental 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 investigate whether our operations are being conducted in accordance with these requirements. These investigations may include a review of our performance on contracts, pricing practices, cost structure and compliance with applicable laws and regulations. U.S. government investigations of us, whether related to the Company's federal government contracts or conducted for other reasons, 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.

15.
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.

16.
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 Company 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 their respective governments. 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 its contractual commitments, a

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contract could be terminated for non-performance. Under either circumstance, such termination, depending on the contract value, could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows.

17.
Our international operations are exposed to risks, including fluctuations in exchange rates, which may be beyond our control.

For fiscal 2012, approximately 38% 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 some of 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, taxation, statutory reporting, trade restrictions 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.

18.
We may be exposed to negative publicity and other potential risks if we are unable to maintain effective internal controls.

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.

19.
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 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.

20.
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

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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.

21.
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, (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 reduce the demand for the services we provide in India and may adversely impact our cost structure and profitability. In addition, India has recently 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.

22.
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.

23.
Security breaches or service interruptions could expose us to liability or impair our reputation, which could cause significant financial loss.

As a U.S. government contractor and a provider of information technology services operating in a number of regulated industries and countries, we handle sensitive data of our clients, including personal information and information relating to sensitive government functions. In the ordinary course of our business, we develop, install and maintain systems and networks that manage and store this data. The security and privacy of information stored or managed by our systems is subject to numerous international, U.S. federal and state laws. While we maintain information security policies and procedures designed to comply with relevant privacy and security laws and restrictions, if a system or network that we develop, install or maintain were to fail or experience a security breach or service interruption, we may be subject to significant legal and financial exposure, damage to our reputation, and loss of confidence in the security of our products and services.

24.
Changes in the Company's tax rates could affect its future results.

The Company's 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. The Company is subject to the continuous examination of its income tax returns by the U.S. Internal Revenue Service and other tax authorities. The Company regularly assesses 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 the Company's financial condition and operating results.


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25.
We may be adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs 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 the Company's 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.

26.
Our foreign currency hedging program is subject to counterparty default risk.

We enter into foreign currency forward contracts and options with a number of counterparties. As of December 28, 2012, we had outstanding foreign currency forward contracts with a notional value of $1,219 million and outstanding option contracts with a notional value of $128 million. The terms of these contracts are often customized and complex. 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.

27.
We derive significant revenue and profit from contracts awarded through a competitive bidding process, 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 contracts that are awarded through a competitive bidding process. 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.

28.
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 for 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.


79

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 December 28, 2012, 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)
September 29, 2012 to October 26, 2012
 
1,704

 
$31.77
 
—
 
$935,013,016
October 27, 2012 to November 23, 2012
 
20,096

 
$35.73
 
—
 
$935,013,016
November 24, 2012 to December 28, 2012
 
1,997,966

 
$39.05
 
1,971,200
 
$858,026,342

(1)
The Company accepted 24,442 shares of its common stock in the quarter ended December 28, 2012, from employees in lieu of cash due to the Company in connection with the release 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 24,124 shares of its common stock in the quarter ended December 28, 2012, 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)
On December 13, 2010, the Company publicly announced that its board of directors approved a new share repurchase program authorizing up to $1 billion in share repurchases of the Company’s outstanding common stock. CSC expects to implement the program through purchases made in open market transactions in compliance with Securities and Exchange Commission 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 has not established an end date for the repurchase program. The approximate amount for which shares may yet be purchased under this program at December 28, 2012 is $858 million.

The Company repurchased 1,971,200 shares of its common stock in the fiscal quarter ended December 28, 2012 pursuant to the share repurchase program.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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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 the Amended and Restated Bylaws, dated August 7, 2012 (incorporated by reference to Exhibit 3.2.1 to the Company's Current Report on Form 8-K (filed August 10, 2012) (file number 121024334))
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 February 10, 2003, by and between the Company and Citibank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (filed February 14, 2003) (file number 03568367))
4.3
First Supplemental Indenture dated as of February 14, 2003, by and between the Company and Citibank, N.A., as trustee, and attaching a specimen form of the Notes (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K (filed February 14, 2003) (file number 03568367))
4.4
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))
4.5
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))
10.1
Asset Purchase Agreement, dated as of December 1, 2012, by and among Computer Sciences Corporation, CSC Credit Services, Inc., Equifax Inc. and Equifax Information Services LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (filed December 3, 2012) (file number 121236237))
10.2
Deferred Compensation Plan, amended and restated effective as of December 31, 2012.*
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
99.1
Revised Financial Information Disclosure as a result of the Company's restructuring (incorporated by reference to Exhibits 99.01, 99.02 and 99.03 to the Company's Current Report on Form 8-K (filed on December 16, 2008) (file number 081252513))
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
 
 
 
(1)Management contract or compensatory plan or agreement
 
* Filed herewith



81


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 5, 2013
By:
/s/ Thomas R. Colan
 
 
Name:
Thomas R. Colan
 
 
Title:
Vice President and Controller
 
 
 
(Principal Accounting Officer)
 


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