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EX-10.37 - COMPUTER SCIENCES CORPex10_37.htm
 
 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 30, 2011
 
OR
[   ]
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
(I.R.S. Employer
Incorporation or Organization)
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 
 
       155,074,995 shares of Common Stock, $1.00 par value, were outstanding on January 27, 2012.
 

 
 

 


COMPUTER SCIENCES CORPORATION
 
TABLE OF CONTENTS TO FORM 10-Q
 
 
    PAGE
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (unaudited)
     
 
Consolidated Condensed Statements of Operations for the Quarters and Nine Months Ended December 30, 2011 and December 31, 2010
 
     
 
Consolidated Condensed Balance Sheets as of December 30, 2011 and April 1, 2011
     
 
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended December 30, 2011 and December 31, 2010
     
 
Consolidated Condensed Statements of Changes in Equity for the Nine Months Ended December 30, 2011 and December 31, 2010
     
 
Notes to Consolidated Condensed Financial Statements
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
46
     
Item 4.
Controls and Procedures
46
     
PART II.
OTHER INFORMATION
46
     
Item 1.
Legal Proceedings
46
     
Item 1A.
Risk Factors
47
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
     
Item 4.
Mine Safety Disclosures
51
     
Item 5.
Other Events
51
     
Item 6.
Exhibits
52
 
 

 
(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 30, 2011
   
December 31,
2010
   
December 30, 2011
   
December 31, 2010
 
                         
Revenues
  $ 3,764     $ 3,995     $ 11,763     $ 11,840  
                                 
Costs of services (excludes depreciation and amortization, contract charge and settlement charge)
    3,237       3,221       9,885       9,539  
Cost of services – specified contract charge (excludes amount charged to revenue of $204)
    1,281       -       1,281       -  
Costs of services - settlement charge (excludes amount charged to revenue of $42)
    -       -       227       -  
Selling, general and administrative
    275       242       846       731  
Depreciation and amortization
    302       269       870       797  
Goodwill impairment
    60       -       2,745       -  
Interest expense
    43       43       131       126  
Interest income
    (8 )     (8 )     (32 )     (25 )
Other (income) expense, net
    12       (2 )     1       (14 )
Total costs and expenses
    5,202       3,765       15,954       11,154  
                                 
(Loss) income from continuing operations before taxes
    (1,438 )     230       (4,191 )     686  
Taxes on income
    (45 )     (14 )     (118 )     123  
(Loss) income from continuing operations
    (1,393 )     244       (4,073 )     563  
Income (loss) from discontinued operations, net of taxes
    2       (1 )     1       21  
Net (loss) income
    (1,391 )     243       (4,072 )     584  
                                 
Less: Net (loss) income attributable to noncontrolling interest, net of tax
    (1 )     1       12       15  
Net (loss) income attributable to CSC common shareholders
  $ (1,390 )   $ 242     $ (4,084 )   $ 569  
                                 
Earnings (loss) per share:
                               
     Basic:
                               
       Continuing operations
  $ (8.97 )   $ 1.58     $ (26.36 )   $ 3.55  
       Discontinued operations
    0.01       (0.01 )     0.01       0.14  
    $ (8.96 )   $ 1.57     $ (26.35 )   $ 3.69  
     Diluted:
                               
       Continuing operations
  $ (8.97 )   $ 1.55     $ (26.36 )   $ 3.51  
       Discontinued operations
    0.01       (0.01 )     0.01       0.13  
    $ (8.96 )   $ 1.54     $ (26.35 )   $ 3.64  
                                 
Cash dividend per common share
  $ 0.20     $ 0.20     $ 0.60     $ 0.50  



 
See accompanying notes.
 

 
- 1 -

 


COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
 

   
As of
 
(Amounts in millions, except share and per share data)
 
December 30, 2011
   
April 1, 2011
 
             
ASSETS
           
Cash and cash equivalents
  $ 898     $ 1,837  
Receivables, net of allowance for doubtful accounts of $42 (2012) and $46 (2011)
    3,296       3,719  
Prepaid expenses and other current assets
    477       2,001  
     Total current assets
    4,671       7,557  
                 
Property and equipment, net of accumulated depreciation of $3,867 (2012) and $3,853 (2011)
    2,470       2,496  
Outsourcing contract costs, net
    602       647  
Software, net
    666       562  
Goodwill
    1,718       4,038  
Other assets
    971       820  
     Total assets
  $ 11,098     $ 16,120  
                 
LIABILITIES
               
Short-term debt and current maturities of long-term debt
  $ 259     $ 170  
Accounts payable
    397       517  
Accrued payroll and related costs
    684       817  
Other accrued expenses
    1,198       1,291  
Deferred revenue
    642       987  
Income taxes payable and deferred income taxes
    212       396  
     Total current liabilities
    3,392       4,178  
                 
Long-term debt, net of current maturities
    2,470       2,409  
Income tax liabilities and deferred income taxes
    491       511  
Other long-term liabilities
    1,499       1,462  
                 
EQUITY
               
Common stock, par value $1 per share, authorized 750,000,000 shares, issued
  163,568,728 (2012) and 162,873,485 (2011)
    164       163  
Additional paid-in capital
    2,168       2,120  
Retained earnings
    2,118       6,296  
Accumulated other comprehensive loss
    (871 )     (690 )
Less: common stock in treasury, at cost, 8,507,298 shares (2012) and 8,392,668  shares (2011)
    (389 )     (385 )
     Total CSC stockholders’ equity
    3,190       7,504  
Noncontrolling interest in subsidiaries
    56       56  
Total equity
    3,246       7,560  
     Total liabilities and  equity
  $ 11,098     $ 16,120  



 





 
See accompanying notes.
 

 
- 2 -

 

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
 


   
Nine Months Ended
 
(Amounts in millions)
 
December 30, 2011
   
December 31, 2010
 
             
Cash flows from operating activities:
           
Net (loss) income
  $ (4,072 )   $ 584  
                 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
                 
     Depreciation and amortization and other non-cash charges
    933       857  
Goodwill impairment
    2,745       -  
Specified contract charge
    1,485       -  
Settlement charge
    269       -  
      Stock based compensation
    36       46  
      Provision for losses on accounts receivable
    6       7  
      Unrealized foreign currency exchange loss (gain)
    5       (5 )
      Loss (gain) on dispositions
    6       (33 )
      Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
               
          Decrease (increase) in assets
    109       (50 )
          Decrease in liabilities
    (842 )     (602 )
                 
Net cash provided by operating activities
    680       804  
                 
Cash flows from investing activities:
               
     Purchases of property and equipment
    (433 )     (513 )
     Outsourcing contracts
    (142 )     (79 )
     Acquisitions, net of cash acquired
    (368 )     (158 )
     Business dispositions
    -       54  
     Software purchased or developed
    (172 )     (127 )
     Other investing activities, net
    27       88  
                 
Net cash used in investing activities
    (1,088 )     (735 )
                 
Cash flows from financing activities:
               
     Net borrowings of commercial paper
    -       335  
     Borrowings under lines of credit
    94       47  
     Repayment of borrowings under lines of credit
    (46 )     (1,545 )
     Principal payments on long-term debt
    (433 )     (63 )
     Proceeds from stock options
    15       26  
     Excess tax benefit from stock based compensation
    2       2  
     Dividend payments
    (93 )     (46 )
     Other financing activities, net
    (10 )     (19 )
                 
Net cash used in financing activities
    (471 )     (1,263 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (60 )     39  
                 
Net decrease in cash and cash equivalents
    (939 )     (1,155 )
Cash and cash equivalents at beginning of year
    1,837       2,784  
Cash and cash equivalents at end of period
  $ 898     $ 1,629  


 


 
 
 


 
 

 
See accompanying notes.
 

 
- 3 -

 


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


(Amounts in millions, except shares in thousands)
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Common
Stock in
   
Total
CSC
   
Non-
Controlling
   
Total
 
 
Shares
   
Amount
   
Capital
   
Earnings
   
(Loss)
   
Treasury
   
Equity
   
Interest
   
Equity
 
Balance at April 1, 2011
  162,873     $ 163     $ 2,120     $ 6,296     $ (690 )   $ (385 )   $ 7,504     $ 56     $ 7,560  
                                                                       
Comprehensive (loss) income:
                                                                     
      Net (loss) income
                          (4,084 )                     (4,084 )     12       (4,072 )
      Currency translation adjustment
                                  (180 )             (180 )             (180 )
      Unfunded pension obligation
                                  (1 )             (1 )             (1 )
         Comprehensive (loss) income
                                                  (4,265 )     12       (4,253 )
Stock based compensation expense
                  36                               36               36  
Stock option exercises and other common stock transactions
  696       1       12                       (4 )     9               9  
Cash dividends declared
                          (93 )                     (93 )             (93 )
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  


(Amounts in millions, except shares in thousands)
 
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Common
Stock in
   
Total
CSC
   
Non-
Controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
(Loss)
   
Treasury
   
Equity
   
Interest
   
Equity
 
Balance at April 2, 2010
    162,234     $ 162     $ 2,006     $ 5,709     $ (1,052 )   $ (379 )   $ 6,446     $ 62     $ 6,508  
                                                                         
Comprehensive income:
                                                                       
     Net income
                            569                       569       15       584  
     Currency translation adjustment
                                    83               83               83  
     Unfunded pension obligation
                                    78               78               78  
       Comprehensive income
                                                    730       15       745  
Stock based compensation expense
                    46                               46               46  
Stock option exercises and other common stock transactions
    786       1       26                       (4 )     23               23  
Cash dividends declared
                            (77 )                     (77 )             (77 )
Distributions and other
                            (1 )                     (1 )     (22 )     (23 )
Balance at December 31, 2010
    163,020     $ 163     $ 2,078     $ 6,200     $ (891 )   $ (383 )   $ 7,167     $ 55     $ 7,222  


 
 



 

 


 

 

 
See accompanying notes.
 

 
- 4 -

 
 
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 unaudited Consolidated Condensed Financial Statements included herein, as of and for the quarter and nine months ended December 30, 2011, 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 for 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 April 1, 2011 (fiscal 2011). 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 nine months ended December 31, 2010, have been recast from those presented in the previously filed Form 10-Q, to reflect discontinued operations of a business sold in the second quarter of fiscal 2011, as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2011.

The Consolidated Condensed Statements of Operations for the quarter and nine months ended December 30, 2011 include separate line items for “Costs of services – specified contract charge”, “Costs of services – settlement charge” and “Goodwill impairment”.  The specified contract charge is discussed further in Note 15, the settlement charge is discussed further in Note 17, and the goodwill impairment is discussed further in Note 14.

The Company recognized significant changes in estimated profitability on certain contracts accounted for in accordance with the percentage of completion method. The net impact of these adjustments, excluding the specified contract write off, was a decrease in pre-tax earnings of $79 million and $124 million for the third quarter and nine months ended December 30, 2011, respectively, and a decrease in pre-tax earnings of $22 million and an increase in pre-tax earnings of $19 million, respectively, for the comparable periods in the prior year.

Depreciation expense was $201 million and $568 million for the quarter and nine months ended December 30, 2011, respectively, and $173 million and $515 million for the quarter and nine months ended December 31, 2010, respectively.

Contractual work in process balances at December 30, 2011, and April 1, 2011, of $40 million and $1,162 million, respectively, are included in prepaid expenses and other current assets. The significant change is further explained in Note 15.

Unbilled recoverable amounts under contracts in progress do not have an allowance for credit losses, and any adjustments to unbilled recoverable amounts under contracts in progress related to credit quality, should they occur, would be accounted for as a reduction of revenue. Unbilled recoverable amounts under contracts in progress resulting from sales primarily to the United States and other governments that are expected to be collected after one year totaled $90 million.

The components of accumulated other comprehensive losses, net of taxes, are as follows:


   
As of
 
(Amounts in millions)
 
December 30, 2011
   
April 1, 2011
 
             
Foreign currency translation adjustment
  $ 104     $ 284  
Unfunded pension obligation
    (975 )     (974 )
Accumulated other comprehensive loss
  $ (871 )   $ (690 )

 

 
- 5 -

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

Note 2—Recent Accounting Pronouncements

New Accounting Standards
 
In November 2010, the FASB issued Accounting Standards Update (ASU) 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts—A Consensus of the FASB Emerging Issues Task Force.” The guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments in the update became effective at the beginning of CSC’s fiscal year ending March 30, 2012 (fiscal 2012) and did not have a material effect on CSC’s Consolidated Condensed Financial Statements.
 
In April 2010, the FASB issued ASU 2010-17, “Milestone Method of Revenue Recognition—A Consensus of the FASB Emerging Issues Task Force.” The update establishes a revenue recognition model for contingent consideration that is payable upon achievement of an uncertain event, referred to as a milestone. The statement (1) limits the scope of this Issue to research or development arrangements and (2) requires that certain guidance be met for an entity to apply the milestone method (i.e., record the milestone payment in its entirety in the period received). The guidance in this Issue applies to milestones in multiple deliverable arrangements involving research or development transactions. The amendments in the update became effective at the beginning of CSC’s fiscal 2012 and did not have a material effect on CSC’s financial statements.
 
In October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangements-A Consensus of the FASB Emerging Issues Task Force," which amends Topic 605: Revenue Recognition. This update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The amendments in the update establish a selling price hierarchy for determining the selling price of a deliverable and eliminate the residual method of allocation. The selling price used for each deliverable is based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. Vendors are required to determine their best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The adoption of ASU 2009-13 is applicable only to non-software transactions as software transactions will continue to be accounted for using guidance applicable to software transactions. The Company adopted amendments in the update effective at the beginning of fiscal 2012 on a prospective basis, and they did not have a material effect on CSC's financial statements.
 
In October 2009, the FASB issued ASU 2009-14, "Certain Revenue Arrangements that include Software Elements-A Consensus of the FASB Emerging Issues Task Force," which amends Topic 985: Software to exclude from the scope all tangible products containing both software and non-software components that function together to deliver the product's essential functionality.  In addition, if the software contained in the tangible product is essential to the tangible product's functionality, the software is excluded from the scope of the software revenue guidance. The Company adopted amendments in the update effective at the beginning of fiscal 2012 on a prospective basis and they did not have a material effect on CSC's financial statements.
 
Standards Issued But Not Yet Effective
 
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.   On December 23, 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which defers the requirement under ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income for all periods presented.  The amendments in both updates become effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which will be CSC's fiscal 2013.
 
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 the 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 amendments in the update become effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which will be CSC's fiscal 2013, with early adoption permitted.  The adoption of this amendment is not expected to have a material effect on CSC’s Consolidated Condensed Financial Statements.
 
On December 16, 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which provides guidance on disclosure of information pertaining to the offsetting (netting) of assets and liabilities in the financial statements.  The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either offset in accordance with either ASC 210-20-45 or ASC 815-10-45, or 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 this update is not expected to have a material effect on CSC’s Consolidated Condensed Financial Statements.
 
 


 
- 6 -

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

Note 3 – Acquisitions and Divestitures

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 acquisition was funded through CSC’s existing cash balances.  Acquisition costs recorded during the third quarter and nine month period were $2 million and $11 million, respectively, and are included in the selling, general and administrative expenses in the Company’s consolidated condensed statement of operations for the nine months ended December 30, 2011.
 
Prior to the acquisition, the Company and iSOFT had a subcontracting agreement related to the development and delivery of software and IT services under the Company’s U.K. National Health Service (NHS) contract.  The agreement was effectively settled upon the completion of the acquisition.  The Company evaluated whether any settlement gain or loss arose due to the settlement of the pre-existing relationship, and determined that the subcontract was at market and no settlement gain or loss was recognized.
 
The 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.  During the nine months ended December 30, 2011, iSOFT contributed revenues of $81 million and an operating loss of $58 million, including the effect of purchase accounting adjustments, primarily relating to amortization of intangibles.  The operating loss was offset by currency gains of $15 million, resulting in an effective pre-tax loss of $43 million.  The currency gains, which resulted from unhedged inter-company loans are included in other income. The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of iSOFT had occurred on April 3, 2010 for all periods presented:

   
As Reported
   
Pro Forma
 
   
Quarter Ended
   
Quarter Ended
 
Amounts in millions, except per share data
 
December 30, 2011
   
December 31, 2010
   
December 30, 2011
   
December 31, 2010
 
Revenue
  $ 3,764     $ 3,995     $ 3,764     $ 4,048  
Net (loss) income attributable to CSC common shareholders
    (1,390 )     242       (1,390 )     221  
Basic EPS
    (8.96 )     1.57       (8.96 )     1.43  
Diluted EPS
    (8.96 )     1.54       (8.96 )     1.41  

   
As Reported
   
Pro Forma
 
   
Nine Months Ended
   
Nine Months Ended
 
Amounts in millions, except per share data
 
December 30, 2011
   
December 31, 2010
   
December 30, 2011
   
December 31, 2010
 
Revenue
  $ 11,763     $ 11,840     $ 11,841     $ 11,984  
Net (loss) income attributable to CSC common shareholders
    (4,084 )     569       (4,153 )     475  
Basic EPS
    (26.35 )     3.69       (26.79 )     3.08  
Diluted EPS
    (26.35 )     3.64       (26.79 )     3.04  
 
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, and the nine months ended December 31, 2010 information has been adjusted to exclude $290 million of goodwill impairment recorded by iSOFT in June 2010.  Additionally, the nine months ended December 30, 2011 information has been adjusted to exclude the transaction costs of $11 million, and the nine months ended December 31, 2010 information has been adjusted to include the transaction costs of $11 million.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 (Amounts in millions)
 
Estimated Fair Value
 
Cash and cash equivalents
  $ 32  
Trade and other receivables
    117  
Other current assets
    11  
Deferred tax assets
    22  
Intangible assets
    212  
Property and equipment
    20  
Trade payables and accrued expenses
    (60 )
Deferred revenue
    (54 )
Current income tax liabilities
    (6 )
Debt
    (315 )
Deferred taxes, uncertain tax positions, and other long-term liabilities
    (67 )
  Total identifiable net assets acquired
    (88 )
  Goodwill
    288  
  Total purchase price
  $ 200  

 
- 7 -

 

COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
As of the acquisition date, the fair value of receivables approximated book value, which included billed and unbilled receivables and the historical allowance for uncollectible amounts of $10 million.
 
The components of the intangible assets acquired and their respective estimated useful lives are as follows:
 

Amounts in millions
 
Estimated
Fair Value
   
Estimated Useful Lives
(Years)
 
Customer relationships
  $ 92       10-13  
Software
    116       5-7  
Trade names
    4       1  
Total intangible assets
  $ 212          
 
The entire amount of goodwill is associated with the Company’s Business Solutions and Services (BSS) segment, and is attributable to expected increases in the Company’s market capabilities, synergies from combining operations, and the value of the acquired workforce. Of the estimated total goodwill, $71 million is estimated to be tax deductible.
 
The opening balance sheet stated above includes adjustments to the valuation of net assets acquired, based on additional information that became available during the third quarter of fiscal 2012. The adjustments resulted in a net increase of $20 million to goodwill, primarily from a $10 million decrease in the preliminary estimated fair value of intangible assets.
 
The purchase price allocation is still in process, and the allocation shown above is preliminary and based upon estimates which may change as additional information becomes available primarily related to valuation of purchased intangible assets and the acquired tax balances.  The Company expects to finalize the purchase price allocation prior to the filing of the fiscal 2012 Annual Report on Form 10-K.
 
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 time-to-market. The AppLabs acquisition will complement CSC’s expertise in financial services, healthcare, manufacturing, chemical, energy and natural resources and technology and consumer verticals.
 
CSC acquired all outstanding shares of AppLabs for cash consideration of $171 million, which was funded through CSC’s existing cash balances.
 
The results of AppLabs have been included in the Company’s Consolidated Condensed Financial Statements from the date of acquisition.  During the nine months ended December 30, 2011, AppLabs contributed revenues of $34 million and a net loss of $1 million, including the effect of purchase accounting adjustments, primarily relating to amortization of intangibles.  The pro forma financial information for this acquisition is not presented as this acquisition is not material to CSC’s consolidated results.
 
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 (Amounts in millions)
 
Estimated Fair Value
 
Cash and cash equivalents
  $ 4  
Trade receivables
    20  
Other current assets
    8  
Intangible assets
    33  
Property and equipment
    4  
Trade payables and accrued expenses
    (27 )
Deferred taxes and uncertain tax positions
    (18 )
Other liabilities
    (2 )
  Total identifiable net assets acquired
    22  
  Goodwill
    149  
  Total purchase price
  $ 171  
 

As of the acquisition date, the fair value of trade receivables approximated book value and was considered fully recoverable.
 
The components of the intangible assets acquired and their respective estimated useful lives are as follows:

Amounts in millions
 
Estimated
Fair Value
   
Estimated Useful Lives
(Years)
 
Customer relationships
  $ 31       2-8  
Software
    2       1-5  
Total intangible assets
  $ 33          

The entire amount of goodwill is associated with the Company’s Managed Services Sector (MSS) segment, and is attributable to expected increases in the Company’s market capabilities and the value of the acquired workforce.  None of the goodwill is expected to be tax deductible.
 
The purchase price allocation is still in process, and the allocation shown above is preliminary and based upon estimates which may change as additional information becomes available, primarily related to the valuation of purchased intangible assets and acquired tax balances.  The Company expects to finalize the purchase price allocation prior to the filing of the fiscal 2012 Annual Report on Form 10-K.
 
 
 
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COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

Other Acquisitions
 
During fiscal 2012, CSC also acquired two small privately-held entities for $28 million in all-cash transactions plus additional consideration of up to $2 million contingent on achievement of agreed revenue targets for future periods through the end of May 2014. The acquisitions will enhance CSC’s offerings in the healthcare information technology and financial services industries.
 
The results of the acquired businesses have been included in the Company’s consolidated financial statements from the dates of acquisition. The pro forma financial information for these acquisitions is not presented as these acquisitions, both individually and in the aggregate, are not material to CSC’s consolidated results.
 
The purchase prices were allocated to net assets acquired based on preliminary estimates of fair values at the dates of acquisition as:  $8 million to current assets, $2 million to property and equipment, $7 million to intangible assets, $6 million to current liabilities and $17 million to goodwill.  Identified intangible assets consist primarily of customer related intangibles with useful lives of 4-10 years.  Of the $17 million goodwill, $14 million is associated with the Company’s North American Public Sector (NPS) segment and $3 million with the BSS segment. The $14 million goodwill associated with the NPS segment is expected to be tax deductible.

The allocation of purchase price discussed in the paragraph above is preliminary and based upon estimates which may change as additional information becomes available relative to the determination of the fair value of the assets and liabilities acquired, primarily as it relates to the acquired tax balances.  The Company expects to finalize the purchase price allocation prior to the filing of the fiscal 2012 Form 10-K.
 
During the second quarter of fiscal 2011, CSC acquired two separate privately-held companies for $61 million in cash. The purchase consideration for the acquisitions was allocated to the net assets acquired based on their respective fair values at the dates of acquisition. The total purchase consideration was allocated as $8 million to software, $16 million to acquired intangible assets, $1 million to property and equipment, and $36 million to goodwill. Of the total goodwill, $10 million is associated with CSC’s BSS segment and $26 million with the NPS segment.
 
Pro forma financial statements are not presented as the impact of these acquisitions was immaterial to CSC’s consolidated results.
 
Divestiture
 
During the second quarter of fiscal 2011, CSC completed the divestiture of an immaterial set of sub-contracts within its NPS segment, whose ultimate customer is the U.S. federal government, for consideration of approximately $56 million. The divestiture was driven by the government Organizational Conflict of Interest concerns. Reflecting the divestiture, CSC derecognized net current assets of $18 million, net property and equipment of $1 million, and goodwill of $10 million, and incurred transaction costs of $1 million. The divestiture resulted in a pre-tax gain on discontinued operations of $26 million.

Note 4—Out of Period Adjustments
 
As previously disclosed in fiscal 2011, the Company initiated an investigation into 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 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 subsequently 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 has retained forensic accountants to assist 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.

Each of the Audit Committee’s and the SEC’s separate investigations have been expanded to encompass the Company’s operations in Australia, and in the course of that investigation, accounting errors and irregularities have been identified. As a result, certain personnel in Australia have been reprimanded, suspended and/or terminated. These investigative activities are ongoing.

Each of the Audit Committee’s and the SEC’s separate investigations also have been expanded to encompass a review of (i) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (ii) certain of the Company’s contracts and related disclosures that involve the percentage of completion accounting method, including the Company’s contract with NHS. These investigative activities are ongoing.

In the course of the review of the Americas Outsourcing accounting practices, accounting conventions used by the Company relating to intraperiod cost allocations were identified which have been determined to be unintentional accounting errors. The errors did not have an impact on a fiscal year basis. As a result of this review, the Company assessed other operating units for similar practices which existed in certain units but there was no material impact outside of a fiscal year.
 
Any out of period adjustments identified, including items that self corrected within a fiscal year, by the Company to date are hereinafter identified in this Note 4.
 


 
- 9 -

 

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

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 investigations being conducted by the Division of Enforcement and the Audit Committee as well as the review of our financial disclosures by the 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 time of our senior management has been focused on these matters. We are unable to predict how long the Division of Enforcement’s and Audit Committee’s investigations 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 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.

Fiscal 2012
 
During the third quarter and through the first nine months of fiscal 2012, the Company recorded various 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.  In addition, during the third quarter of fiscal 2012, the Company recorded $3 million of net pre-tax adjustments reducing income from continuing operations that should have been recorded in the first and second quarter of fiscal 2012 and had no impact on prior fiscal years. Of these adjustments, $21 million and $5 million related to the third quarter and for the first nine months of fiscal 2011, respectively. The Company also recorded a $3 million income tax benefit in the third quarter of fiscal 2012 attributable to the reversal of a deferred tax liability related to the goodwill impairment recorded in the second quarter of fiscal 2012.

Australia Adjustments:

Based upon the information developed to date, and the Company’s assessment of the same, the Company has preliminarily identified and recorded during the third quarter and through the first nine months of fiscal 2012, $1 million and $20 million, respectively, of pre-tax adjustments reducing income from continuing operations relating to its operations in Australia. Such adjustments have been categorized as either intentional accounting irregularities (“intentional irregularities”) or other accounting errors (“other errors”). Other accounting errors include both unintentional errors and errors for which the categorization is unclear. The impact of the adjustments is attributable to the following prior fiscal years:

(Amounts in millions)
 
Increase/(Decrease) in Income Before Taxes
 
   
FY08 &
Prior
   
FY09
   
FY10
   
FY11
   
Total
 
Intentional irregularities
  $ 10     $ (7 )   $ (4 )   $ -     $ (1 )
Other errors
    (5 )     (16 )     5       (3 )     (19 )
    $ 5     $ (23 )   $ 1     $ (3 )   $ (20 )

As noted above, the Audit Committee investigation is still ongoing and the categorization of the adjustments noted above is subject to change. Such categorization was provided to the Company through the independent investigation.

Nordic Region Adjustments:

The Nordic pre-tax adjustments impacting prior fiscal years both identified and recorded in the first nine months of fiscal 2012 totaled $10 million. In the third quarter of fiscal 2012, two adjustments were identified in the Nordic region. One adjustment was a $2 million pre-tax adjustment that should have been recognized in the second quarter of fiscal 2012 and was identified and recorded in the third quarter of fiscal 2012. This adjustment, which had no impact on prior fiscal years, reduced income from continuing operations in the third quarter of fiscal 2012 and was related to recognition of a forward loss on a software contract. The second Nordic adjustment identified in the third quarter of fiscal 2012 was a $2 million adjustment that was recorded by the Company in the second quarter of fiscal 2011. During the ongoing Nordic investigation, it was determined that this adjustment had not been disclosed in the Company’s fiscal 2011 out of period adjustments. The adjustment was related to the inappropriate capitalization of operating costs and reduced income from continuing operations in the second quarter of fiscal 2011 but does not have an impact on fiscal 2012. The Nordic adjustments disclosed in the first quarter of fiscal 2012 included a $1 million error in the accounting for an operating lease attributable to fiscal 2010. The operating lease adjustment is a refinement of an error previously corrected and reported in fiscal 2011. The Company attributes the Nordic adjustments identified and/or recorded through the third quarter of fiscal 2012 to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than the adjustment relating to the Nordic operating lease and the adjustment related to the inappropriate capitalization of operating costs, which the Company attributes to suspected intentional misconduct by certain former employees of our Nordic subsidiaries.

Other Adjustments:

The Company also identified certain out of period adjustments related to 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. In addition, $1 million of net pre-tax adjustments, reducing income from continuing operations related to operations outside of the Nordic region and Australia, were recorded in the third quarter of fiscal 2012 that should have been recorded in the first and second quarters of fiscal 2012 with no impact on prior fiscal years.  These adjustments primarily included $7 million of costs associated with a termination settlement of a MSS outsourcing contract that should have been recognized in the second quarter of fiscal 2012.   The termination settlement was reached in early November, 2011 just prior to the November 9, 2011 filing of the Company’s Quarterly Report on Form 10-Q for the second quarter of fiscal 2012. Offsetting the termination settlement were two adjustments in operating units outside of MSS.  These adjustments included a $2 million adjustment related to a correction of a foreign currency adjustment for the iSOFT acquisition related to the second quarter of fiscal 2012 and $4 million in adjustments noted by the Company in its assessment of accounting conventions relating to the intraperiod cost allocations mentioned above.  The Company attributes these adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct.
  

 
- 10 -

 

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

The pre-tax out of period adjustments recorded by the Company in the nine months ended December 30, 2011 are related to the following consolidated balance sheet line items as of December 30, 2011:

·  
Property and equipment ($24 million decrease)
·  
Prepaid expenses and other current assets ($4 million decrease)
·  
Accounts receivable ($10 million decrease)
·  
Accounts payable ($1 million decrease)
·  
Accrued expenses and other current liabilities ($6 million decrease)

The impact of the consolidated Nordic, Australia and other out of period adjustments recorded in fiscal 2012 is immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2012, first nine months of fiscal 2012 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2012.

The select line items of the Consolidated Condensed Statement of Operations for the third quarter and nine months ended December 30, 2011, impacted by the Nordic, Australia, and other out of period adjustments (under the rollover method) are shown below. Certain adjustments reflected below only impacted quarters within the annual period.

   
Quarter ended December 30, 2011
 
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 3,764     $ 8     $ 3,772  
Costs of services (excludes depreciation and amortization, contract charge and settlement charge)
    3,237       (13 )     3,224  
Selling, general and administrative
    275       3       278  
Depreciation and amortization
    302       6       308  
Interest expense
    43       -       43  
Other (income) expense
    12       6       18  
Income from continuing operations before taxes
    (1,438 )     6       (1,432 )
Taxes on income
    (45 )     5       (40 )
Income from continuing operations
    (1,393 )     1       (1,392 )
Income from discontinued operations, net of taxes
    2       -       2  
Net income attributable to CSC common shareholders
    (1,390 )     1       (1,389 )
EPS – Diluted
                       
     Continuing operations
  $ (8.97 )   $ 0.01     $ (8.96 )
     Discontinued operations
    0.01       -       0.01  
     Total
  $ (8.96 )   $ 0.01     $ (8.95 )


   
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
  $ 11,763     $ 17     $ 11,780  
Costs of services (excludes depreciation and amortization, contract charge and settlement charge)
    9,885       (14 )     9,871  
Selling, general and administrative
    846       1       847  
Depreciation and amortization
    870       (2 )     868  
Interest expense
    131       (3 )     128  
Other (income) expense
    1       4       5  
Income from continuing operations before taxes
    (4,191 )     31       (4,160 )
Taxes on income
    (118 )     8       (110 )
Income from continuing operations
    (4,073 )     23       (4,050 )
Income from discontinued operations, net of taxes
    1       -       1  
Net income attributable to CSC common shareholders
    (4,084 )     23       (4,061 )
EPS – Diluted
                       
     Continuing operations
  $ (26.36 )   $ 0.15     $ (26.21 )
     Discontinued operations
    0.01       -       0.01  
     Total
  $ (26.35 )   $ 0.15     $ (26.20 )



 




 
- 11 -

 

COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
Effect of Adjustments on Prior Year Financial Statements

During fiscal 2011, the Company recorded various pre-tax adjustments reducing income from continuing operations before taxes that should have been recorded in prior fiscal years. The aggregate adjustments recorded in fiscal 2011 reduced income from continuing operations before taxes by $51 million ($34 million, net of taxes). The total out of period adjustments reported in fiscal 2011 were comprised of $91 million of charges reducing income from continuing operations before taxes originating out of the Company’s MSS operations in the Nordic region, and $40 million of adjustments increasing income from continuing operations before taxes, principally out of other MSS businesses with $36 million of the $40 million within MSS. The Company also recorded out of period income tax benefits during fiscal 2011 of $17 million, consisting of $12 million of income tax benefits related to the net out of period adjustments and $5 million of unrelated tax benefit adjustments.

During the third quarter and nine months ended December 31, 2010, based on information then known by the Company, the Company recorded certain pre-tax adjustments reducing income from continuing operations before taxes by $21 million ($11 million, net of taxes) and $55 million ($23 million, net of taxes), respectively, that should have been recorded in prior fiscal years.  As discussed below, these recorded adjustments comprised $25 million and $85 million for the third quarter and nine months ended December 31, 2010, respectively, of charges reducing income from continuing operations before taxes originating out of the Company's MSS operations in the Nordic region, and $4 million and $30 million, respectively, of adjustments increasing income from continuing operations before taxes, principally out of other MSS businesses with all of the $4 million and $26 million of the $30 million for the third quarter and nine months ended December 31, 2010, respectively, within MSS. These adjustments reduced MSS operating income (a non-GAAP measure) by $20 million and $58 million for the third quarter and nine months ended December 31, 2010, respectively, as discussed in Note 13, Segment Information. The Company also recorded out of period income tax benefits in the third quarter and nine months ended December 31, 2010 of $10 million and $32 million, respectively, consisting of $4 million and $12 million of income tax benefits related to the net out of period adjustments and $6 million and $20 million of unrelated income tax benefit adjustments, respectively. These out of period recorded adjustments are primarily attributable to fiscal 2010.

The cumulative roll over impact of the out of period recorded adjustments, including those identified in fiscal 2012, is attributable to the following prior fiscal years:

   
Increase/(Decrease)
 
(Amounts in millions)
 
Income from continuing
operations before taxes
   
Taxes on income
   
Net income attributable to
CSC common shareholders
 
Fiscal 2011
  $ 44     $ 14     $ 30  
Fiscal 2010
    (50 )     (18 )     (32 )
Fiscal 2009
    (28 )     (7 )     (21 )
Prior fiscal years
    3       3       -  

Nordic Region Adjustments:

As part of closing the Company's financial statements for the third quarter and nine months ended December 31, 2010, management identified and recorded pre-tax out of period charges totaling $25 million and $85 million, respectively, in its Nordic operations. Based upon the Company's investigation, which extended into the fourth quarter of fiscal 2011, review of the underlying documentation for certain transactions and balances, review of contract documentation and discussions with Nordic personnel, the Company attributes the majority of the adjustments in the third quarter of fiscal 2011 and additional adjustments during the remainder of fiscal 2011 to accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries.

Other Adjustments:

During the third quarter and nine months ended December 31, 2010, the Company also identified pre-tax out of period adjustments of $4 million and $30 million, respectively, that increased income from continuing operations before taxes, of which $4 million and $26 million, respectively, relates to other MSS operations.

The remaining $4 million of pre-tax out of period adjustments during the nine months ended December 31, 2010 consist of a reduction of other accrued expenses related to non-MSS segments from an adjustment to corporate general and administrative expense. The Company also identified $6 million and $20 million of net out of period adjustments related to income tax benefits associated with complex tax positions in the third quarter and nine months ended December 31, 2010.

The following table summarizes the cumulative effect on net income attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2011 and 2012 (in millions). Certain adjustments reflected below only impacted quarters within the annual period:

(Amounts in millions)
 
Quarter Ended
December 31, 2010
   
Nine Months Ended
December 31, 2010
 
Operating costs inappropriately capitalized
  $ 8     $ 61  
Misapplication of US GAAP
    7       13  
Miscellaneous errors
    9       10  
Total Nordic adjustments
    24       84  
Operating costs inappropriately capitalized
    (1 )     (2 )
Misapplication of US GAAP
    4       3  
Miscellaneous errors
    (2 )     (1 )
Total Australia adjustments
    1       0  
Other adjustments
    (25 )     (33 )
Effect on income from continuing operations before taxes
    -       51  
Income tax benefit
    3       (10 )
Other income tax adjustments
    (6 )     (20 )
Effect on net income attributable to CSC common shareholders
  $ (3 )   $ 21  



 
- 12 -

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

The out of period adjustments through the nine months ended December 31, 2010 for inappropriately capitalized costs are related to the following consolidated balance sheet line items:

·  
Outsourcing contract costs ($12 million decrease)
·  
Prepaid expenses and other current assets ($35 million decrease)
·  
Accounts receivable and other current assets ($5 million decrease)
·  
Property and equipment ($7 million decrease)

The net impact of the out of period adjustments was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2011. Consequently, the cumulative effect of these adjustments was recorded during the third quarter of fiscal 2011.

The select line items of the Consolidated Condensed Statement of Operations for the third quarter and nine months ended December 31, 2010, impacted by the out of period adjustments, including those identified in fiscal 2012 (under the rollover method) are shown below. Adjustments include unrecorded items which have not been recorded due to self-correction in a subsequent period. Certain adjustments reflected below only impacted quarters within the annual period.

   
Quarter ended December 31, 2010
 
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 3,995     $ 7     $ 4,002  
Costs of services (excludes depreciation and amortization, contract charge and settlement charge)
    3,221       8       3,229  
Selling, general and administrative
    242       1       243  
Depreciation and amortization
    269       (1 )     268  
Interest expense
    43       (1 )     42  
Other (income) expense
    (2 )     -       (2 )
Income from continuing operations before taxes
    230       -       230  
Taxes on income
    (14 )     3       (11 )
Income from continuing operations
    244       (3 )     241  
Income from discontinued operations, net of taxes
    (1 )     -       (1 )
Net income attributable to CSC common shareholders
    242       (3 )     239  
EPS – Diluted
                       
     Continuing operations
  $ 1.55     $ (0.02 )   $ 1.53  
     Discontinued operations
    (0.01 )     -       (0.01 )
     Total
  $ 1.54     $ (0.02 )   $ 1.52  


   
Nine months ended December 31, 2010
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 11,840     $ 33     $ 11,873  
Costs of services (excludes depreciation and amortization, contract charge and settlement charge)
    9,539       (14 )     9,525  
Selling, general and administrative
    731       -       731  
Depreciation and amortization
    797       (3 )     794  
Interest expense
    126       (1 )     125  
Other (income) expense
    (14 )     -       (14 )
Income from continuing operations before taxes
    686       51       737  
Taxes on income
    123       30       153  
Income from continuing operations
    563       21       584  
Income from discontinued operations, net of taxes
    21       -       21  
Net income attributable to CSC common shareholders
    569       21       590  
EPS – Diluted
                       
     Continuing operations
  $ 3.51     $ 0.13     $ 3.64  
     Discontinued operations
    0.13       -       0.13  
     Total
  $ 3.64     $ 0.13     $ 3.77  


 
 
- 13 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
Note 5 – Earnings (Loss) Per Share

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

   
Quarter Ended
 
(Amounts in millions, except per share data)
 
December 30, 2011
   
December 31, 2010
 
             
Net (loss) income attributable to CSC common shareholders:
           
     From continuing operations
  $ (1,392 )   $ 243  
     From discontinued operations
    2       (1 )
    $ (1,390 )   $ 242  
                 
Common share information:
               
     Weighted average common shares outstanding for basic EPS
    155.061       154.526  
     Dilutive effect of stock options and other equity awards
    -       2.190  
Shares for diluted earnings (loss) per share
    155.061       156.716  
                 
Basic EPS:
               
     Continuing operations
  $ (8.97 )   $ 1.58  
     Discontinued operations
    0.01       (0.01 )
      (8.96 )   $ 1.57  
                 
Diluted EPS:
               
     Continuing operations
  $ (8.97 )   $ 1.55  
     Discontinued operations
    0.01       (0.01 )
    $ (8.96 )   $ 1.54  


   
Nine Months Ended
 
(Amounts in millions, except per share data)
 
December 30, 2011
   
December 31, 2010
 
             
Net (loss) income attributable to CSC common shareholders:
           
     From continuing operations
  $ (4,085 )   $ 548  
     From discontinued operations
    1       21  
    $ (4,084 )   $ 569  
                 
Common share information:
               
     Weighted average common shares outstanding for basic EPS
    154.983       154.378  
     Dilutive effect of stock options and other equity awards
    -       2.056  
Shares for diluted earnings (loss) per share
    154.983       156.434  
                 
Basic EPS:
               
     Continuing operations
  $ (26.36 )   $ 3.55  
     Discontinued operations
    0.01       0.14  
    $ (26.35 )   $ 3.69  
                 
Diluted EPS:
               
     Continuing operations
  $ (26.36 )   $ 3.51  
     Discontinued operations
    0.01       0.13  
    $ (26.35 )   $ 3.64  


The computation of the diluted earnings (loss) per share for the quarter and nine months ended December 30, 2011, excluded 790,381 and 2,149,775 of stock options and restricted stock units, respectively, 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 such shares related to stock options was 18,336,991 and 17,211,569 for the quarter and nine months ended December 30, 2011, respectively, and 9,730,532 and 9,597,005 for the quarter and nine months ended December 31, 2010, respectively.
  
 
- 14 -

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

Note 6—Fair Value

Fair value measurements on a recurring basis
 
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 30, 2011, and April 1, 2011:

   
As of December 30, 2011
 
(Amounts in millions)
       
Fair Value Hierarchy
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Money market funds
  $ 282     $ 282     $ -     $ -  
Time deposits
    54       54       -       -  
Short-term investments
    6       6       -       -  
Derivative assets
    12       -       12       -  
     Total assets
  $ 354     $ 342     $ 12     $ -  
                                 
Liabilities:
                               
Derivative liabilities
  $ 25     $ -     $ 25     $ -  
     Total liabilities
  $ 25     $ -     $ 25     $ -  
                                 
                                 
   
As of April 1, 2011
 
(Amounts in millions)
         
Fair Value Hierarchy
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                               
Money market funds
  $ 556     $ 556     $ -     $ -  
Time deposits
    241       241       -       -  
Short-term investments
    10       10       -       -  
Derivative assets
    9       -       9       -  
     Total assets
  $ 816     $ 807     $ 9     $ -  
                                 
Liabilities:
                               
Derivative liabilities
  $ 4     $ -     $ 4     $ -  
     Total liabilities
  $ 4     $ -     $ 4     $ -  

Derivative assets and liabilities include foreign currency forward and options contracts. 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 period-end foreign currency exchange rates. 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.
 
The money market funds and time deposits are included and reported in cash and cash equivalents; short-term investments and derivative assets are included in prepaid expenses and other current assets; and the derivative liabilities are included in 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.

Fair value measurements on a non-recurring basis
 
During the first nine months of fiscal 2012, as a result of annual and interim goodwill impairment assessments, goodwill was impaired with a charge of $2,745 million (see Note 14). The remeasurement of goodwill is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed using Company specific information.
 
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 was $2,470 million and $2,409 million and the estimated fair value was $2,488 million and $2,587 million as of December 30, 2011, and April 1, 2011, 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.
 
The primary financial instruments which 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 receivables 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 30, 2011, the Company had $12 million of accounts receivable and $7 million of related allowance for doubtful accounts with customers involved in bankruptcy proceedings.
 
- 15 -

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

 
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 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 forwards and option contracts to manage risk of certain foreign currency assets and liabilities, including intercompany loans, and certain revenue streams 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, but 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 30, 2011, and April 1, 2011, was $1,590 million and $787 million, respectively. The notional amount of option contracts outstanding as of December 30, 2011, and April 1, 2011, was $957 million and $676 million, respectively.
 
The estimated fair values of the foreign currency derivative assets and liabilities were $12 million and $25 million, respectively, as of December 30, 2011. The estimated fair values of the foreign currency derivative assets and liabilities were $9 million and $4 million, respectively, as of April 1, 2011 (see Note 6).
 
 
As a result of the use of derivative instruments, the Company is subject to counterparty credit risks. 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 30, 2011, there were four counterparties with concentration of credit risk and the maximum amount of loss, based on gross fair value of the foreign currency derivative instruments, that the Company would incur is $11 million.
  
Note 8–Commercial Paper

During the nine months ended December 30, 2011, the Company issued commercial paper with average maturities of one to three months, at a weighted average interest rate of 0.38%. The commercial paper is backed by the Company’s existing $1.5 billion multi-year committed revolving credit facility. There was no commercial paper outstanding at December 30, 2011 and April 1, 2011.
 
 
- 16 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
Note 9—Pension and Other Benefit Plans

The Company and its subsidiaries offer a number of pension and postretirement healthcare and life insurance benefit plans.  The components of net periodic benefit cost for defined benefit pension plans are as follows:

   
Quarter Ended
 
(Amounts in millions)
 
December 30, 2011
   
December 31, 2010
 
Pensions
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ 3     $ 6     $ 2     $ 7  
Interest cost
    41       31       41       31  
Expected return on assets
    (37 )     (32 )     (39 )     (32 )
Amortization of unrecognized net loss and other
    9       4       6       4  
Net periodic pension cost
  $ 16     $ 9     $ 10     $ 10  


   
Nine Months Ended
 
(Amounts in millions)
 
December 30, 2011
   
December 31, 2010
 
Pensions
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ 7     $ 20     $ 6     $ 22  
Interest cost
    123       95       123       90  
Expected return on assets
    (109 )     (96 )     (117 )     (93 )
Amortization of unrecognized net loss and other
    26       12       18       16  
Net periodic pension cost
  $ 47     $ 31     $ 30     $ 35  

The Company contributed $55 million and $140 million to the defined benefit pension plans during the quarter and nine months ended December 30, 2011, respectively. In aggregate, the Company expects to contribute $232 million during fiscal 2012. Additional contributions may be required to meet funding levels as required by Section 430 of the 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 2012.
 
The components of net periodic benefit cost for postretirement benefit plans are as follows (amounts reported on a global basis):

   
Quarter Ended
 
(Amounts in millions)
 
December 30, 2011
   
December 31, 2010
 
             
Other Postretirement Benefits
           
Service cost
  $ -     $ 1  
Interest cost
    2       4  
Expected return on assets
    -       (2 )
Amortization of unrecognized net loss and other
    2       3  
Net provision for postretirement benefits
  $ 4     $ 6