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EX-31.1 - EXHIBIT 31.1 - COMPUTER SCIENCES CORPcsc712016q110-qex311.htm
EX-32.2 - EXHIBIT 32.2 - COMPUTER SCIENCES CORPcsc712016q110-qex322.htm
EX-32.1 - EXHIBIT 32.1 - COMPUTER SCIENCES CORPcsc712016q110-qex321.htm
EX-31.2 - EXHIBIT 31.2 - COMPUTER SCIENCES CORPcsc712016q110-qex312.htm
EX-10.3 - EXHIBIT 10.3 - COMPUTER SCIENCES CORPcsc712016q1ex103.htm
EX-10.2 - EXHIBIT 10.2 - COMPUTER SCIENCES CORPcsc712016q1ex102.htm
EX-10.1 - EXHIBIT 10.1 - COMPUTER SCIENCES CORPcsc712016q1ex101.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 quarterly period ended July 1, 2016

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.)
 
 
 
1775 Tysons Blvd.
 
 
Tysons, Virginia
 
22102
(Address of principal executive offices)
 
(zip code)
 
 
 
Registrant's telephone number, including area code: (703) 245-9675

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 and post 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 the definitions of “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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 12b-2 of the Exchange Act).  o  Yes  x No 
140,427,072 shares of Common Stock, $1.00 par value, were outstanding on July 22, 2016.
 
 








PART I.

ITEM 1. FINANCIAL STATEMENTS

Index
 
PAGE
 
 
 
 
 

1



COMPUTER SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
 
Three months ended
(in millions, except per-share amounts)
 
July 1, 2016
 
July 3, 2015(1)
 
 
 
 
(as adjusted)

Revenues
 
$
1,930

 
$
1,804

 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
1,421


1,272

Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
305

 
271

Depreciation and amortization
 
166

 
174

Restructuring costs
 
57

 

Interest expense
 
25

 
30

Interest income
 
(10
)
 
(11
)
Other expense (income), net
 
2

 
(4
)
Total costs and expenses
 
1,966

 
1,732

 
 
 
 
 
(Loss) income from continuing operations, before taxes
 
(36
)
 
72

Income tax (benefit) expense
 
(16
)
 
7

(Loss) income from continuing operations
 
(20
)
 
65

Income from discontinued operations, net of taxes
 

 
102

Net (loss) income
 
(20
)
 
167

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

 
4

Net (loss) income attributable to CSC common stockholders
 
$
(21
)
 
$
163

 
 
 
 
 
(Loss) earnings per common share
 
 
 
 
Basic:
 
 
 
 
Continuing operations
 
$
(0.15
)
 
$
0.47

Discontinued operations
 

 
0.71

 
 
$
(0.15
)
 
$
1.18

Diluted:
 
 
 
 
Continuing operations
 
$
(0.15
)
 
$
0.46

Discontinued operations
 

 
0.69

 
 
$
(0.15
)
 
$
1.15


 
 
 
 
Cash dividend per common share
 
$
0.14


$
0.23


(1) Certain prior year balances were adjusted for certain errors in previously issued financial statements related to income taxes, for the adoption of ASU 2016-09 related to employee stock-based compensation and to give effect to discontinued operations. See Note 19 Reconciliation of Previously Reported Amounts.



The accompanying notes are an integral part of these condensed consolidated financial statements.


2


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

 
 
Three months ended
(in millions)
 
July 1, 2016
 
July 3, 2015
 
 
 
 
 
Net (loss) income
 
$
(20
)
 
$
167

 
 
 
 
 
Other comprehensive (loss) income, net of taxes:
 
 
 
 
Foreign currency translation adjustments, net of tax expense of $1 and $0
 
(50
)
 
53

Cash flow hedges adjustments
 
(5
)
 
2

Unrealized gain on available for sale equity investment
 

 
6

Pension and other post-retirement benefit plans, net of tax
 
 
 
 
Amortization of prior service costs, net of tax benefit of $2 and $3
 
(3
)
 
(6
)
Foreign currency exchange rate changes
 

 
(1
)
Pension and other post-retirement benefit plans, net of tax
 
(3
)
 
(7
)
Other comprehensive (loss) income, net of taxes
 
(58
)
 
54

 
 
 
 
 
Comprehensive (loss) income
 
$
(78
)
 
$
221

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

 
4

Comprehensive (loss) income attributable to CSC common stockholders
 
$
(79
)
 
$
217




The accompanying notes are an integral part of these condensed consolidated financial statements.






3


COMPUTER SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
As of
(in millions, except per share and share amounts)
 
July 1, 2016
 
April 1, 2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,000

 
$
1,178

Receivables, net of allowance for doubtful accounts of $33 and $31
 
1,983

 
1,831

Prepaid expenses and other current assets
 
421

 
403

Total current assets
 
3,404

 
3,412

 
 
 
 
 
Software, net of accumulated amortization of $1,560 and $1,531
 
854

 
712

Outsourcing contract costs, net of accumulated amortization of $503 and $494
 
331

 
334

Goodwill
 
1,817

 
1,277

Other assets
 
1,101

 
631

Deferred income taxes, net
 
338

 
345

Property and equipment, net of accumulated depreciation of $2,930 and $2,894
 
1,012

 
1,025

Total Assets
 
$
8,857

 
$
7,736

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
700

 
$
710

Accounts payable
 
368

 
341

Accrued payroll and related costs
 
331

 
288

Accrued expenses and other current liabilities
 
778

 
720

Deferred revenue and advance contract payments
 
576

 
509

Income taxes payable
 
10

 
40

Total current liabilities
 
2,763

 
2,608

 
 
 
 
 
Long-term debt, net of current maturities
 
2,543

 
1,934

Non-current deferred revenue
 
345

 
348

Pension obligations
 
222

 
298

Deferred tax liabilities
 
221

 
181

Non-current income tax liabilities
 
191

 
175

Other liabilities
 
343

 
160

Total Liabilities
 
6,628

 
5,704

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
CSC stockholders' equity:
 
 
 
 
Preferred stock, par value $1 per share; authorized 1,000,000 shares; none issued
 

 

Common stock, par value $1 per share; authorized 750,000,000; issued 150,825,731 and 148,746,672
 
151

 
149

Additional paid-in capital
 
2,487

 
2,439

(Accumulated deficit) retained earnings
 
(10
)
 
33

Accumulated other comprehensive loss
 
(169
)
 
(111
)
Treasury stock, at cost, 10,508,470 and 10,365,811 shares
 
(491
)
 
(485
)
Total CSC stockholders’ equity
 
1,968

 
2,025

Noncontrolling interest in subsidiaries
 
261

 
7

Total Equity
 
2,229

 
2,032

Total Liabilities and Equity
 
$
8,857

 
$
7,736



The accompanying notes are an integral part of these condensed consolidated financial statements.

4


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

 
 
Three months ended
(in millions)
 
July 1, 2016
 
July 3, 2015(1)
Cash flows from operating activities:

 
 
 
Net (loss) income

$
(20
)

$
167

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 
 
 
Depreciation and amortization

169


207

Stock-based compensation
 
14

 
(12
)
Gain on dispositions
 

 
(51
)
Other non-cash charges, net
 
10

 
13

Changes in assets and liabilities, net of acquisitions and dispositions:
 
 
 
 
Decrease (increase) in assets
 
(42
)
 
211

Decrease in liabilities
 
(81
)
 
(173
)
Net cash provided by operating activities
 
50

 
362

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(58
)
 
(90
)
Payments for outsourcing contract costs
 
(27
)
 
(21
)
Software purchased and developed

(36
)

(35
)
Payments for acquisitions, net of cash acquired

(423
)


Business dispositions



34

Proceeds from sale of assets

5


43

Other investing activities, net

(10
)

(15
)
Net cash used in investing activities

(549
)

(84
)
 
 
 
 
 
Cash flows from financing activities:

 
 
 
Borrowings of commercial paper

511



Repayments of commercial paper

(511
)


Borrowings under lines of credit

920


3

Repayment of borrowings under lines of credit

(453
)


Debt borrowings

13



Debt repayments

(120
)

(69
)
Proceeds from stock options

36


24

Taxes paid related to net share settlements of stock-based compensation awards

(6
)

(24
)
Repurchase of common stock



(118
)
Dividend payments

(19
)

(32
)
Other financing activities, net

(17
)


Net cash provided by (used in) financing activities

354


(216
)
Effect of exchange rate changes on cash and cash equivalents

(33
)

39

Net (decrease) increase in cash and cash equivalents

(178
)

101

Cash and cash equivalents at beginning of year

1,178


2,098

Cash and cash equivalents at end of period

$
1,000


$
2,199


(1) Certain prior year balances were adjusted for certain errors in previously issued financial statements related to income taxes and for the adoption of ASU 2016-09 related to employee stock-based compensation. See Note 19 Reconciliation of Previously Reported Amounts.

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


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


(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital

Retained Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
CSC Equity
Non-
Controlling Interest
Total Equity
Shares
Amount
Balance at April 1, 2016
148,747

$
149

$
2,439

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

Net (loss) income
 
 
 
(21
)
 
 
(21
)
1

(20
)
Other comprehensive loss
 
 
 
 
(58
)
 
(58
)

(58
)
Stock based compensation expense
 
 
14

 
 
 
14

 
14

Acquisition of treasury stock
 
 
 
 
 
(6
)
(6
)
 
(6
)
Stock option exercises and other common stock transactions
2,079

2

34

 
 
 
36

 
36

Cash dividends declared
 
 
 
(20
)
 
 
(20
)
 
(20
)
Noncontrolling interest distributions and other
 
 
 


 

(7
)
(7
)
Noncontrolling interest from acquisition
 
 
 

 
 


260

260

Divestiture of NPS
 


(2
)


(2
)

(2
)
Balance at July 1, 2016
150,826

$
151

$
2,487

$
(10
)
$
(169
)
$
(491
)
$
1,968

$
261

$
2,229

 
 
 
 
 
 
 
 
 
 
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital

Retained Earnings(1)
Accumulated
Other
Comprehensive
Income
Treasury Stock
Total
CSC Equity(1)
Non-
Controlling Interest
Total Equity(1)
Shares
Amount
Balance at April 3, 2015
148,374

$
148

$
2,286

$
928

$
21

$
(446
)
$
2,937

$
28

$
2,965

Net income
 
 
 
163

 
 
163

4

167

Other comprehensive income
 
 
 
 
54

 
54

 
54

Stock based compensation expense
 
 
(12
)
 
 
 
(12
)
 
(12
)
Acquisition of treasury stock
 
 
 
 
 
(23
)
(23
)
 
(23
)
Stock option exercises and other common stock transactions
1,406

2

24

 
 
 
26

 
26

Share repurchase program
(1,780
)
(2
)
(30
)
(86
)
 
 
(118
)
 
(118
)
Cash dividends declared
 
 
 
(32
)
 
 
(32
)
 
(32
)
Noncontrolling interest distributions and other
 
 
 


 

(8
)
(8
)
Balance at July 3, 2015
148,000

$
148

$
2,268

$
973

$
75

$
(469
)
$
2,995

$
24

$
3,019


(1) Certain prior year balances were adjusted for certain errors in previously issued financial statements related to income taxes and for the adoption of ASU 2016-09 related to employee stock-based compensation as described in Note 19 Reconciliation of Previously Reported Amounts.


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


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

Note 1 - Basis of Presentation

Computer Sciences Corporation (CSC or the Company) has prepared the interim unaudited Condensed Consolidated Financial Statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports and, therefore, omit or condense certain note disclosures and other information required by generally accepted accounting principles in the United States (GAAP) for complete financial statements. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2016 (fiscal 2016).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. As a result, actual results may be different from these estimates. In the opinion of the Company's management, the accompanying unaudited Condensed Consolidated Financial Statements of CSC contain all adjustments necessary, including those of a normal recurring nature, to present fairly the Company's financial position as of July 1, 2016 and April 1, 2016 and its results of operations and cash flows for the three months ended July 1, 2016 and July 3, 2015. The results of operations for such interim periods are not necessarily indicative of the results for the full year ending March 31, 2017. Certain prior year amounts have been reclassified to conform to the current year presentation.

During fiscal 2016, the Company adopted ASU 2016-09 which, among other elements, requires the excess tax benefits and deficiencies related to employee share-based payment awards and related dividends to be recorded in the statement of operations during the reporting period in which they occur. ASU 2016-09 also requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards, be classified as cash flows from operating activities, and that cash paid by directly withholding shares for tax withholding purposes be classified as a financing activity in the unaudited Condensed Consolidated Statements of Cash Flows. CSC elected to early adopt ASU 2016-09 in the fourth quarter of fiscal 2016 which requires us to reflect any adjustments as of April 4, 2015, the beginning of the annual period that includes the adoption. Amendments requiring recognition of excess tax benefits and tax deficiencies within the unaudited Condensed Consolidated Statements of Operations were adopted prospectively and resulted in the recognition of $14 million, or $0.10 per share, of excess tax benefits within income tax (benefit) expense for the three months ended July 3, 2015. ASU 2016-09 amendments related to presentation within the Consolidated Statements of Cash Flows were applied retrospectively, and resulted in the reclassification of $14 million of excess tax benefits related to the settlement of stock-based awards from financing to operating activities, and $24 million of taxes paid related to net share settlements of stock-based compensation awards from operating activities to financing activities for the three months ended July 3, 2015.

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

Separation of NPS

During fiscal 2016, the Company completed the separation of its U.S. public sector business (NPS) (the Separation) and merger of NPS with SRA International to form a new independent publicly traded Company: CSRA Inc. (CSRA). As a result of the Separation, the unaudited Condensed Consolidated Statements of Operations and related financial information reflect NPS's operations as discontinued operations for the first three months of fiscal 2016. However, the cash flows and comprehensive income of NPS have not been segregated and are included in the unaudited Condensed Consolidated Statements of Cash Flows and Statements of Comprehensive Income for the first three months of fiscal 2016. Furthermore, CSC reduced the number of its reportable segments from three to two: Global Infrastructure Services (GIS) and Global Business Services (GBS). Refer to Note 4 Divestitures and Note 15 Segment Information for further information.


7


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

Note 2 - Recent Accounting Pronouncements

New Accounting Standards

During the first three months of fiscal 2017, the Company adopted the following Accounting Standard Updates (ASUs):

ASU 2015-16, Business Combinations (Topic 805), "Simplifying the Accounting for Measurement Period Adjustments" requires an acquirer in a business combination to account for a measurement-period adjustment during the period in which the amount is determined, instead of retrospectively. CSC adopted this ASU effective April 2, 2016 and has not had any measurement-period adjustments since adoption. As a result, there has been no impact to CSC's financial statements.

ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" as clarified by ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting" (ASU 2015-15) states that debt issuance costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Presentation of fees under line of credit (LOC) arrangements had not been specified in this ASU; as a result, ASU 2015-15 was issued. ASU 2015-15 states that the SEC staff would not object to an entity deferring LOC commitment fees as an asset and subsequently amortizing ratably over the term of the underlying LOC arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement. CSC adopted both ASUs effective April 2, 2016 and the impact upon the unaudited Condensed Consolidated Financial Statements was immaterial.

ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement does not contain a software license, the customer should account for the arrangement as a service contract. If the arrangement includes software licenses, it should be accounted for consistent with other licenses of intangible assets. CSC elected to adopt this ASU prospectively effective April 2, 2016. Adoption of this ASU did not have a material impact on the unaudited Condensed Consolidated Financial Statements.

Standards Issued But Not Yet Effective

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

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): "Measurement of Credit Losses on Financial Instruments", which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will be effective for CSC in fiscal 2020. This ASU must be adopted using a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. CSC is currently evaluating the impact of the adoption of ASU 2016-13 may have on its unaudited Condensed Consolidated Financial Statements in future reporting periods.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment is intended to increase transparency and comparability among organizations by recognizing virtually all lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 will be effective for CSC in fiscal 2020 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition and provides for certain practical expedients. CSC is currently evaluating the impact that the adoption of ASU 2016-02 may have on its unaudited Condensed Consolidated Financial Statements in future reporting periods.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for CSC in fiscal 2019. This ASU should be applied prospectively to equity investments that exist as of the date of adoption for equity securities without readily

8


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

determinable fair values. CSC is currently evaluating the impact of the adoption of ASU 2016-01 may have on CSC's unaudited Condensed Consolidated Financial Statements in future reporting periods.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which CSC expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of CSC’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require CSC to apply ASU 2014-09 to each prior reporting period presented. The second method would require CSC to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for CSC beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" (ASU 2015-14) which was issued by the FASB in August 2015 and extended the original effective date by one year. CSC is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its unaudited Condensed Consolidated Financial Statements in future reporting periods.

There have been three new ASUs issued amending certain aspects of ASU 2014-09. ASU 2016-08 "Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)," was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10 "Identifying Performance Obligations and Licensing" issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. Finally, ASU 2016-12, "Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients" provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. With its evaluation of the impact of ASU 2014-09, CSC will also consider the impact related to the updated guidance provided by these three new ASUs.

Other recently issued ASUs effective after July 1, 2016 are not expected to have a material effect on CSC's unaudited Condensed Consolidated Financial Statements in future reporting periods.

Note 3 - Acquisitions

Fiscal 2017 Acquisition

Xchanging Acquisition

On December 29, 2015, CSC invested in Xchanging plc (Xchanging), a provider of technology-enabled business solutions to organizations in global insurance and financial services, healthcare, manufacturing, real estate and the public sector. Xchanging was listed on the London Stock Exchange under the symbol “XCH”. CSC purchased 24,636,553 shares of common stock of Xchanging for a purchase price of $2.83 per share for a total initial investment of approximately $70 million. The investment represented a 9.99% non-controlling equity interest in the outstanding shares of Xchanging.

On May 5, 2016, CSC acquired the remaining shares of Xchanging, for a purchase price of $2.76 per share, or approximately $623 million, resulting in total cash consideration paid to and on behalf of the Xchanging shareholders of $693 million (or $492 million net of cash acquired) in the aggregate, which was funded from existing cash balances and borrowings under our $2.9 billion credit facility. Subsequent to the acquisition, the Company repaid the $254 million of acquired debt. Transaction costs associated with the acquisition of $17 million are included within selling, general and administrative expenses in the Company's unaudited Condensed Consolidated Statements of Operations. The acquisition will expand CSC's market coverage in the global insurance industry and will enable the Company to offer access to a broader, partner-enriched portfolio of services including property and casualty insurance and wealth management business processing services.


9


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

The Company’s purchase price allocation for the Xchanging acquisition is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed is presented below:
 (in millions)
 
Estimated Fair Value
Cash and cash equivalents
 
$
201

Accounts receivable and other current assets
 
215

Intangible assets - developed technology
 
100

Intangible assets - customer relationships
 
471

Intangible assets - trade names
 
10

Deferred tax asset, long-term
 
54

Property and equipment and other noncurrent assets
 
34

Accounts payable, accrued payroll, accrued expenses and other current liabilities
 
(204
)
Deferred revenue and advance contract payments
 
(68
)
Debt
 
(254
)
Deferred tax liability, long-term
 
(99
)
Other long-term liabilities
 
(128
)
Total identifiable net assets acquired
 
332

Goodwill
 
621

Noncontrolling interest
 
(260
)
Total estimated consideration
 
$
693


The amortizable lives associated with the intangible assets acquired are as follows:
Description
 
Estimated Useful Lives (Years)
Developed technology
 
7-8
Customer relationships
 
15
Trade names
 
3-5

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed when Xchanging was acquired. The goodwill arising from the acquisition was allocated to the Company's reportable segments based on the relative fair value of the expected incremental cash flows that the acquisition was expected to provide to each reporting unit within the Company's reportable segments. The goodwill associated with this acquisition is not deductible for tax purposes.

For the three months ended July 1, 2016, Xchanging contributed revenues of $81 million and income before taxes of $4 million to CSC's consolidated results. Disclosure of proforma information under ASC Topic 805 "Business Combinations" is impracticable, due to different fiscal year-ends and financial records that are not available in GAAP.

Fiscal 2016 Acquisitions

Below is a summary of the Company's other prior year acquisitions which were all funded from existing cash balances. Additional details of the transactions were disclosed in CSC's Annual Report on Form 10-K for the year ended April 1, 2016.

UXC Acquisition

On February 26, 2016, CSC acquired all outstanding capital stock of UXC Limited (UXC), a publicly owned IT services company which is a leading provider of enterprise application capabilities, consulting, applications management, professional

10


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

services, connect infrastructure and health services in Australia. UXC was listed on the Australian Securities Exchange under the symbol "UXC". UXC was acquired for total purchase consideration of $289 million (net of cash acquired of $13 million). The purchase consideration included cash paid at closing to and on behalf of the UXC shareholders of $302 million and was funded from existing cash balances.

The acquisition continues CSC’s process of rebalancing its offering portfolio, strengthening CSC’s next-generation delivery model, and expanding its client base around the world. Transaction costs associated with the acquisition of $7 million are included within selling, general and administrative expenses in the Company's unaudited Condensed Consolidated Statements of Operations. The Company’s purchase price allocation for the UXC acquisition is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. There was no change to the UXC purchase price allocation as disclosed within CSC's Annual Report on Form 10-K for the year ended April 1, 2016. The preliminary allocation of the UXC purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair value at date of acquisition as follows: $125 million to current assets, $35 million to noncurrent assets, $91 million to intangible assets other than goodwill, $154 million to current liabilities, $49 million to long-term liabilities and $254 million to goodwill. The amortizable lives associated with the intangible assets acquired includes customer relationships which have an estimated useful life of ten years, software and trade names both of which have indefinite lives. The goodwill arising from the acquisition was allocated to both the Company's reportable segments and is not deductible for tax purposes.

Axon Acquisition

On December 11, 2015, CSC acquired all of the outstanding capital stock of Axon Puerto Rico, Inc. (Axon), a provider of enterprise application and infrastructure managed services to aerospace and defense, and other commercial industries, for cash consideration of $29 million (net of cash acquired of $5 million). The acquisition further advances CSC’s position as a leader in providing cost effective, highly-secure IT managed services to firms worldwide, strengthens CSC’s next-generation delivery model and expands its network of regional delivery centers. The Company’s purchase price allocation is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The preliminary purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair values at the date of acquisition, as follows: $5 million to current assets, $3 million to noncurrent assets, $11 million to an intangible asset other than goodwill, $2 million to current liabilities, and $12 million to goodwill. The goodwill is associated with the Company's GBS segment and is tax deductible. The amortizable lives associated with the intangible assets acquired includes customer relationships which have an estimated useful life of ten years. Transaction costs associated with the acquisition were less than $1 million and are included within selling, general and administrative expenses in the Company's unaudited Condensed Consolidated Statements of Operations.

Fixnetix Acquisition

On September 24, 2015, CSC acquired Fixnetix, Limited (Fixnetix), a privately held provider of front-office managed trading solutions for capital markets clients, for a total purchase consideration of $112 million ($88 million of cash at closing, net of $1 million of cash acquired and $19 million of contingent consideration). The fair value measurement of remaining contingent consideration as of July 1, 2016 was $0 million. The acquisition enhanced CSC's ability to offer capital market clients an expanded range of as-a-service front office capabilities and address growing demand for greater efficiency and innovation in trading, market data, hosting, infrastructure, connectivity and risk management.

Fruition Acquisition

On September 17, 2015, CSC acquired all of the outstanding capital stock of Fruition Partners, a privately held provider of technology-enabled solutions for the service management sector for cash consideration of $148 million (net of cash acquired of $2 million). The acquisition bolsters CSC's ability to offer enterprise and emerging clients an expanded range of cloud-based service-management solutions to improve their business through organizational efficiency and lower operating costs.


11


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

Note 4 - Divestitures

During fiscal 2016, the Company completed the separation of NPS. As a result, the operating results for NPS were reclassified to discontinued operations. The following table details the components of discontinued operations:
 
Three months ended
(in millions)
 
July 3, 2015
Revenues
 
$
957

Costs of services
 
(754
)
Selling, general and administrative
 
(16
)
Depreciation and amortization
 
(33
)
Separation and merger costs
 
(15
)
Interest expense
 
(5
)
Other income, net
 
22

Total income from discontinued operations, before income taxes
 
156

Income tax expense
 
(54
)
Total income from discontinued operations
 
$
102


There was no gain or loss on disposition recognized as a result of the Separation.

The following selected financial information of NPS is included in the unaudited Condensed Consolidated Statements of Cash Flows:
 
Three months ended
(in millions)
 
July 3, 2015
Depreciation
 
$
28

Amortization
 
$
5

Capital expenditures
 
$
(16
)
Significant operating non-cash items:
 
 
Net gain on disposition of business

 
$
22

Significant investing non-cash items:
 
 
Capital expenditures in accounts payable
 
$
(9
)

J. Michael Lawrie currently serves as CSC's Chief Executive Officer and as a member of its Board of Directors. Since the Separation became effective on November 27, 2015, Mr. Lawrie also has served as Chairman of the Board of Directors of CSRA. Due to Mr. Lawrie's leadership positions at the Company and CSRA, CSRA is considered a related party under ASC 850 "Related Party Disclosures." On June 23, 2016, Mr. Lawrie announced that he will resign as chairman and as a member of the board of directors of CSRA on August 9, 2016 at CSRA's scheduled annual meeting.

Implementation of the Separation and CSC's post-Separation relationship with CSRA is governed by several agreements, including a master separation and distribution agreement and intellectual property (IP) matters, real estate matters, tax matters, non-U.S. agency and employee matters agreements.


12


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

Pursuant to the IP matters agreement, which grants CSRA perpetual, royalty-free, non-assignable licenses to certain software products, trademarks and workflow and design methodologies owned by CSC, CSRA agreed to pay CSC an annual net maintenance fee of $30 million per year for each of the five years following the Separation in exchange for maintenance services. Under the IP matters agreement, CSC recognized $8 million of related party revenue in its unaudited Condensed Consolidated Statements of Operations for the three months ended July 1, 2016. An additional $12 million is included in deferred revenue and advance contract payments on CSC's unaudited Condensed Consolidated Balance Sheets as of July 1, 2016, which will be amortized to revenue over the two successive quarters. In addition, CSC is also party to various other commercial agreements with CSRA totaling $13 million of revenue during the three months ended July 1, 2016. As of July 1, 2016, related party accounts receivable of approximately $23 million was due from CSRA.

Note 5 - Earnings Per Share

Basic earnings per common share (EPS) and diluted EPS are calculated as follows:
 
 
Three months ended
(in millions, except per-share amounts)
 
July 1, 2016
 
July 3, 2015(1)
 
 
 
 
 
Net income attributable to CSC common stockholders
 
 
 
 
From continuing operations
 
$
(21
)
 
$
65

From discontinued operations
 

 
98

 
 
$
(21
)
 
$
163

Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
138.98

 
137.92

Dilutive effect of stock options and equity awards
 

 
3.47

Weighted average common shares outstanding for diluted EPS
 
138.98

 
141.39

 
 
 
 
 
Earnings per share – basic and diluted:
 
 
 
 
Basic EPS:
 
 
 
 
Continuing operations
 
$
(0.15
)
 
$
0.47

Discontinued operations
 

 
0.71

Total
 
$
(0.15
)
 
$
1.18

 
 
 
 
 
Diluted EPS:
 
 
 
 
Continuing operations
 
$
(0.15
)
 
$
0.46

Discontinued operations
 

 
0.69

Total
 
$
(0.15
)
 
$
1.15


(1) The Company adopted ASU 2016-09 during the fourth quarter of fiscal 2016, effective as of the beginning of the fiscal year. As a result, weighted average diluted shares outstanding has been adjusted from the amount previously reported for the three months ended July 3, 2015 to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. The adoption of this standard resulted in diluted weighted average shares outstanding of 141.39 million for the three months ended July 3, 2015 versus 140.80 million as calculated under the previous guidance. Stock options and RSUs with an exercise price greater than the average market price of the shares for the full year would have been anti-dilutive, and therefore were excluded from the diluted earnings per share computation.

For the three months ended July 1, 2016, stock options of 1,507,757, performance stock units of 1,070,917 and restricted stock units (RSUs) of 876,785 were excluded from the computation of diluted EPS due to the Company's net loss. For the three months ended July 3, 2015, stock options of 1,534,173 and RSUs of 80,994 were excluded in the computation of diluted EPS, which if included, would have been anti-dilutive.  


13


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

Note 6 - Fair Value

Fair value measurements on a recurring basis

The following tables present the Company’s assets and liabilities, excluding pension assets (See Note 10 Pension and Other Benefit Plans) that are measured at fair value on a recurring basis:
 
 
 
 
Fair Value Hierarchy
(in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
July 1, 2016
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
220

 
$
220

 
$

 
$

Derivative instruments
 
51

 

 
51

 

Total assets
 
$
271

 
$
220

 
$
51

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative instruments
 
$
25

 
$

 
$
25

 
$

Total liabilities
 
$
25

 
$

 
$
25

 
$

 
 
April 1, 2016
Assets:
 
 
 
 
 
 
 
 
Money market funds and money market deposit accounts
 
$
348

 
$
348

 
$

 
$

Time deposits
 
1

 
1

 

 

Available for sale equity investments
 
66

 
66

 

 

Derivative instruments
 
15

 

 
15

 

Total assets
 
$
430

 
$
415

 
$
15

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative instruments
 
$
11

 
$

 
$
11

 
$

Total liabilities
 
$
11

 
$

 
$
11

 
$


The Company's money market funds, money market deposit accounts and time deposits are reported in cash and cash equivalents, and short-term investments, including available for sale securities (which was the Company's investment in Xchanging prior to the completion its acquisition as described in Note 4 Divestitures), are included in prepaid expenses and other current assets. The balance sheet classifications of the Company's derivative instruments are presented in Note 7 Derivative Instruments. There were no transfers between any of the levels during the periods presented.

Financial instruments not measured at fair value

The carrying amounts of the Company’s financial instruments with short-term maturities are deemed to approximate their market values. As of July 1, 2016, the carrying amount of the Company’s long-term debt, excluding capital leases, and the estimated fair value was $2.5 billion. The fair value of long-term debt is estimated based on current interest rates offered to the Company for instruments with similar terms and remaining maturities and classified as Level 2.

The Company is subject to counterparty risk in connection with its derivative instruments (see Note 7 Derivative Instruments). With respect to its foreign currency derivatives, as of July 1, 2016 there were five counterparties with concentration of credit risk. Based on gross fair value of these foreign currency derivative instruments, the maximum amount of loss that the Company could incur is approximately $43 million.


14


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

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 July 1, 2016, the Company had $17 million of accounts receivable, $11 million of related allowance for doubtful accounts, $1 million of other assets and $4 million of accounts payable with customers involved in bankruptcy proceedings.

Note 7 - Derivative Instruments

The following table presents the fair values of derivative instruments included in the unaudited Condensed Consolidated Balance Sheets:
 
 
Derivative Assets
 
 
 
 
As of
(in millions)
 
Balance sheet line item
 
July 1, 2016
 
April 1, 2016
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
Interest rate swaps
 
Other assets
 
$

 
$

Foreign Currency forward contracts
 
Prepaid expenses and other current assets
 
2

 
3

Total fair value of derivatives designated for hedge accounting
 
$
2

 
$
3

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign Currency forward contracts
 
Prepaid expenses and other current assets
 
$
49

 
$
12

Total fair value of derivatives not designated for hedge accounting
 
$
49

 
$
12


 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance sheet line item
 
July 1, 2016
 
April 1, 2016
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
 
Interest rate swaps
 
Other long-term liabilities
 
$
4

 
$

Foreign Currency forward contracts
 
Accrued expenses and other current liabilities
 
5

 
4

Total fair value of derivatives designated for hedge accounting
 
$
9

 
$
4

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
 
Foreign Currency forward contracts
 
Accrued expenses and other current liabilities
 
$
16

 
$
7

Total fair value of derivatives not designated for hedge accounting
 
$
16

 
$
7


Derivatives designated for hedge accounting

Cash flow hedges

As of July 1, 2016, the Company had a series of interest rate swap agreements with a total notional amount of $641 million. These instruments were designated as cash flow hedges of the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted the debt into fixed interest rate debt.


15


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

The Company has designated certain foreign currency forward contracts as cash flow hedges, to reduce risks related to certain Indian Rupee denominated intercompany obligations and forecasted transactions. The notional amount of foreign currency forward contracts designated as cash flow hedges as of July 1, 2016 was $418 million and the related forecasted transactions extend through March 2018.

For the three months ended July 1, 2016, the Company performed an assessment at the inception of the cash flow hedge transactions that determined all critical terms of the hedging instruments and hedged items match; therefore, there is no ineffectiveness to be recorded and all changes in the hedging instruments’ fair value are recorded in accumulated other comprehensive loss (OCI) and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three months ended July 1, 2016, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of July 1, 2016, approximately $5 million of the existing losses related to the cash flow hedges reported in accumulated OCI are expected to be reclassified into earnings within the next 12 months.

Derivatives not designated for hedge accounting

Foreign currency derivatives

The Company manages exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. For accounting purposes, these foreign currency option and forward contracts are not designated as hedges, as defined under ASC 815, “Derivatives and Hedging,” and all changes in their fair value are reported in current period earnings within the other income (expense) line of the unaudited Consolidated Condensed Statements of Operations.

The notional amount of the foreign currency forward contracts outstanding as of July 1, 2016 was $2.0 billion. The following table presents the amounts included within income from continuing operations, before taxes not designated for hedge accounting, net of remeasurement gains and losses:
 
 
 
 
Three Months Ended
(in millions)
 
Statement of Operations line item
 
July 1, 2016
 
July 3, 2015
 
 
 
 
 
 
 
Foreign currency forwards
 
Other Income (Expense), net
 
$
(2
)
 
$
3


Other risks

As discussed further in Note 7 Derivative Instruments, the Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes it is the Company’s policy to not offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counterparties.


16


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

Note 8 - Goodwill and Other Intangible Assets

Goodwill

The following table summarizes the changes in the carrying amount of goodwill by segment for the three months ended July 1, 2016:
(in millions)
 
GBS
 
GIS
 
Total
Goodwill, gross
 
$
1,615

 
$
2,424

 
$
4,039

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of April 1, 2016, net
 
914

 
363

 
1,277

 
 
 
 
 
 
 
Additions
 
590

 
31

 
621

Foreign currency translation
 
(77
)
 
(4
)
 
(81
)
 
 
 
 
 
 
 
Goodwill, gross
 
2,128

 
2,451

 
4,579

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of July 1, 2016, net
 
$
1,427

 
$
390

 
$
1,817


The fiscal 2017 additions to goodwill are due to the acquisition of Xchanging. The foreign currency translation amount reflects the impact of currency movements on non-U.S. dollar-denominated goodwill balances.

The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter. An impairment test is also performed 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. At the end of the first three months of fiscal 2017, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below their carrying amount. The Company concluded that there have been no such indicators and, therefore, it was unnecessary to perform an interim goodwill impairment test as of July 1, 2016.

Other Intangible Assets

A summary of amortizable intangible assets is as follows:
 
 
As of July 1, 2016
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
2,414

 
$
1,560

 
$
854

Outsourcing contract costs
 
834

 
503

 
331

Customer and other intangible assets
 
928

 
217

 
711

Total intangible assets
 
$
4,176

 
$
2,280

 
$
1,896


 
 
As of April 1, 2016
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
2,243

 
$
1,531

 
$
712

Outsourcing contract costs
 
828

 
494

 
334

Customer and other intangible assets
 
485

 
203

 
282

Total intangible assets
 
$
3,556

 
$
2,228

 
$
1,328


17


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


Total intangible assets amortization was $80 million and $71 million for the three months ended July 1, 2016 and July 3, 2015, respectively. These estimates included reductions of revenue for amortization of outsourcing contract cost premiums of $3 million and $3 million, respectively. Amortization expense related to capitalized software, included within total intangible amortization, was $43 million and $41 million for the three months ended July 1, 2016 and July 3, 2015, respectively. Estimated future amortization expense related to intangible assets as of July 1, 2016 is as follows:
Fiscal year
 
(in millions)

Remainder of 2017
 
$
285

2018
 
$
315

2019
 
$
287

2020
 
$
245

2021
 
$
196


During the three months ended July 3, 2015, CSC sold certain fully amortized intangible assets to a third party and recorded a $31 million gain on sale as a reduction of cost of sales in its GIS segment. There were no sales of intangible assets to a third party in the first three months of fiscal 2017.


18


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

Note 9 - Debt

The following is a summary of the Company's debt:
 
 
As of
(in millions)
 
July 1, 2016
 
April 1, 2016
Short-term debt and current maturities of long-term debt
 
 
 
 
Euro-denominated commercial paper
 
$
551

 
$
559

Current maturities of long-term debt
 
84

 
79

Current maturities of capitalized lease liabilities
 
65

 
72

Short-term debt and current maturities of long term debt
 
$
700

 
$
710

 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
4.45% term notes, due September 2022
 
$
454

 
$
454

Loan payable, due March 2021
 
575

 
575

Loan payable, due January 2019
 
266

 
284

Loan payable, due May 2016
 

 
71

Payable - credit facility, long-term(1)
 
1,049

 
395

Lease credit facility, various(2)
 
58

 
49

Mandatorily redeemable preferred stock outstanding, due March 2023
 
61

 
61

Capitalized lease liabilities
 
137

 
141

Borrowings for assets acquired under long-term financing
 
89

 
51

Other borrowings
 
3

 
4

Long-term debt
 
2,692

 
2,085

Less: current maturities of long-term debt
 
149

 
151

Long-term debt, net of current maturities
 
$
2,543

 
$
1,934


(1) Borrowings under the $2.9 billion credit facility are classified as short-term debt if the Company intends to repay within 12 months and as long-term debt otherwise.

(2) Drawings under the lease credit facility convert into individual term notes of variable terms up to sixty months, depending on the nature of the underlying equipment being financed. Borrowings under the lease credit facility are classified as short-term debt if the Company intends to repay within 12 months and as long-term debt otherwise.

During the first three months of fiscal 2017, the Company amended its existing $2.5 billion credit facility by expanding its borrowing capacity to $2.9 billion, which was further expanded to $3.0 billion subsequent to July 1, 2016 (see Note 20 Subsequent Events). Additionally, the Company drew down $920 million on the credit facility and repaid $199 million. During the first three months of fiscal 2017, the loan payable due May 2016 was replaced with borrowings under the credit facility.

During the first three months of fiscal 2017, the Company increased the maximum size of its existing European commercial paper program (the ECP Program) from €500 million to €1 billion or its equivalent in alternative currencies. The Company had borrowings of $511 million and repayments of $511 million under the ECP Program during the first three months of fiscal 2017.

Additionally, during the three months ended July 1, 2016, the Company amended its existing master loan and security agreement which reduced the aggregate commitment under our lease credit facility from $250 million to $150 million. The drawdown availability period of the lease credit facility expires November 29, 2016 and, once drawn, converts into individual term notes of varying terms not to exceed 60 months, depending upon the nature of the underlying equipment being financed.

The Company was in compliance with all financial covenants associated with its borrowings as of July 1, 2016.


19


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

Note 10 - Pension and Other Benefit Plans

The Company sponsors a number of defined benefit plans and defined contribution plans for the benefit of eligible employees. The defined benefit plans comprise primarily pension plans and post-retirement medical benefit plans. The defined contribution plans include the Company's deferred compensation plan for executives and non-employee directors.

Subsequent to the Separation, U.S. pension and other U.S. benefit plans represent an insignificant portion of the Company's pension and other post-retirement benefits. As a result, the disclosures below include the Company's U.S. and non-U.S. pension plans on a global consolidated basis. The net periodic pension benefit included the following components:
 
 
Three months ended
(in millions)
 
 
July 1, 2016
 
July 3, 2015
Service cost
 
 
$
6

 
$
6

Interest cost
 
 
21

 
23

Expected return on assets
 
 
(43
)
 
(45
)
Amortization of prior service costs
 
 
(5
)
 
(4
)
Net periodic pension benefit
 
 
$
(21
)
 
$
(20
)

The weighted-average rates used to determine net periodic pension cost were as follows:
 
Three months ended
 
July 1, 2016

 
July 3, 2015
Discount or settlement rates
3.1
%
 
3.0
%
Expected long-term rates of return on assets
6.3
%
 
6.3
%
Rates of increase in compensation levels
2.6
%
 
2.8
%

The Company contributed $3 million to the defined benefit pension plans and other post-retirement benefit plans during the first three months of fiscal 2017. The Company expects to contribute an additional $66 million during the remainder of fiscal 2017.

Subsequent to the Separation, CSC had no assets in its other post-retirement benefit plans. The weighted-averages of the assumptions used to determine net periodic post-retirement income were as follows:
 
 
Three months ended
 
 
July 1, 2016
 
July 3, 2015
Discount or settlement rates
 
4.1
%
 
3.8
%
Rates of increase in compensation levels
 
3.0
%
 
3.0
%

Note 11 - Income Taxes

The Company's effective tax rate (ETR) from continuing operations was 44.4% and 9.7% for the first three months of fiscal 2017 and 2016, respectively. For the first three months of fiscal 2017, the primary drivers of the ETR increase was the global mix of income, and excess tax benefits related to employee share-based payment awards, reduced by non-deductible transaction related costs. The primary driver of the ETR for the first three months of fiscal year 2016 was the global mix of income and the impact of ASU 2016-09.

There were no material changes to uncertain tax positions in the first quarter of fiscal 2017 compared to the fiscal 2016 year-end.

It is reasonably possible that during the next 12 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 2008 through 2013. The Company entered into negotiations for a resolution of the fiscal 2008 through 2010 audit through settlement with the IRS

20


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

Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company has agreed to extend the statute of limitations associated with the audit through March 31, 2017. During the fourth quarter of fiscal 2016, the Company and the IRS reached an agreement in principle as to the settlement terms and the Company remeasured its uncertain tax positions. In addition, the Company may settle certain other tax examinations, have lapses in statute 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 though payment. The Company believes the outcomes which are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of between $18 million and $49 million, excluding interest, penalties, and tax carryforwards.

Note 12 - Stock Incentive Plans

The Company recognized stock-based compensation expense (benefit) as follows:
 
 
Three months ended
(in millions)
 
July 1, 2016
 
July 3, 2015
Cost of services
 
$
6

 
$
(11
)
Selling, general and administrative
 
8

 
(1
)
Total
 
$
14

 
$
(12
)
Total, net of tax
 
$
9

 
$
(8
)

Stock-based compensation for the first three months of fiscal 2016 was a benefit due to changes in the assumed forfeiture rates in fiscal 2015.

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 three months ended July 1, 2016 and July 3, 2015 were $12.40 and $20.10 per share, respectively. In calculating the compensation expense for its stock incentive plans, the Company used the following weighted-average assumptions:
 
Three months ended
 
July 1, 2016
 
July 3, 2015
Risk-free interest rate
1.56
%
 
1.80
%
Expected volatility
29
%
 
32
%
Expected term (in years)
6.19

 
6.22

Dividend yield
1.67
%
 
1.39
%

As a result of the Separation, most stock awards issued by the Company were modified, including acceleration of vesting of certain awards and the issuance of new CSRA awards under the basket method, whereby awards granted prior to fiscal year 2016 in CSC equity were converted into two awards: an adjusted CSC equity award and a CSRA equity award. In the case of stock options, the number of options and the exercise price were adjusted for the impact of the Separation. The conversions were structured to generally preserve the intrinsic value of the awards immediately prior to the Separation. There was no incremental stock compensation expense recognized as a result of the modification of the awards.

Employee Incentives

The Company currently has two active stock incentive plans that authorize the issuance of stock options, restricted stock and other stock-based incentives to employees upon terms approved by the Compensation Committee of the Board of Directors. The Company issues authorized but previously unissued shares upon the exercise of stock options, the granting of restricted stock and the settlement of RSUs. As of July 1, 2016, 6,817,452 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.

21


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


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:
 
Number
of Option Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(millions)
Outstanding as of April 1, 2016(1)
5,366,621

 
$
24.83

 
7.06
 
$
51

Granted
2,055,958

 
49.25

 
 
 
 
Exercised
(1,716,447
)
 
21.34

 
 
 
44

Canceled/Forfeited
(187,097
)
 
29.84

 
 
 
 
Expired
(44,322
)
 
23.19

 
 
 
 
Outstanding as of July 1, 2016
5,474,713

 
34.94

 
8.25
 
79

Vested and expected to vest in the future as of
July 1, 2016
5,346,408

 
35.04

 
8.23
 
77

Exercisable as of July 1, 2016
2,041,272

 
$
23.65

 
6.21
 
$
53


(1) The amount of the weighted average exercise price and aggregate intrinsic value has been revised to reflect the impact of the Separation.

The total intrinsic value of options exercised during the three months ended July 1, 2016 and July 3, 2015 was $44 million and $18 million, respectively. The cash received from stock options exercised during the three months ended July 1, 2016 and July 3, 2015 was $36 million and $24 million, respectively. As of July 1, 2016, there was $34 million of total unrecognized compensation expense related to unvested stock options, net of expected forfeitures. The cost is expected to be recognized over a weighted-average period of 2.56 years.

Restricted Stock Units

Information concerning RSUs granted under the Company's stock incentive plans is as follows:
 
Number of
Shares
 
Weighted Average
Fair Value per share
Outstanding as of April 1, 2016(1)
3,597,999

 
$
29.25

Granted
968,768

 
47.80

Released/Issued
(356,746
)
 
25.77

Canceled/Forfeited
(232,022
)
 
29.87

Outstanding as of July 1, 2016
3,977,999

 
$
34.04


(1) The amount of the weighted average fair value per share has been revised to reflect the impact of the Separation.

As of July 1, 2016, there was $98 million of total unrecognized compensation expense related to unvested RSUs, net of expected forfeitures. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.33 years.


22


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

Non-employee Director Incentives

The Company has two stock incentive plans that authorize the issuance of stock options, restricted stock and other stock-based incentives to non-employee directors upon terms approved by the Company’s Board of Directors. There was no non-employee director incentive activity during the three months ended July 1, 2016. As of July 1, 2016, 124,936 shares of CSC common stock remained available for grant to non-employee directors as RSUs or other stock-based incentives.

Note 13 - Accumulated Other Comprehensive (Loss) Income

The following tables show the changes in accumulated other comprehensive (loss) income, net of taxes:
(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedge
 
Pension and Other Post-retirement Benefit Plans(1)
 
Accumulated Other Comprehensive Loss
Balance at April 1, 2016
 
$
(399
)
 
$
(1
)
 
$
289

 
$
(111
)
Current-period other comprehensive loss, net of taxes
 
(50
)
 
(5
)
 

 
(55
)
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 

 

 
(3
)
 
(3
)
Balance at July 1, 2016
 
$
(449
)
 
$
(6
)
 
$
286

 
$
(169
)

(1) Net of transfer to CSRA of $31 million at April 1, 2016.

(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedge
 
Available for Sale
Security
 
Pension and Other Post-Retirement Benefit Plans
 
Accumulated Other Comprehensive Income
Balance at April 3, 2015
 
$
(316
)
 
$
(2
)
 
$

 
$
339

 
$
21

Current-period other comprehensive income (loss), net of taxes
 
53

 
2

 
6

 
(1
)
 
60

Amounts reclassified from accumulated other comprehensive loss, net of taxes
 

 

 

 
(6
)
 
(6
)
Balance at July 3, 2015
 
$
(263
)
 
$

 
$
6

 
$
332

 
$
75



23


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

Note 14 - Supplemental Cash Flow

Supplemental cash flow information is provided below.
(in millions)

 
Three months ended
 
 
July 1, 2016
 
July 3, 2015
Cash paid for:
 
 
 
 
Interest
 
$
22

 
$
13

Income taxes, net of refunds
 
$
16

 
$
13

 
 
 
 
 
Non-cash activities:
 
 
 
 
Operating:
 
 
 
 
     Depreciation
 
$
89

 
$
106

Investing:
 
 
 
 
    Capital expenditures in accounts payable and accrued expenses
 
$
45

 
$
45

    Capital expenditures through capital lease obligations
 
$
26

 
$
1

    Assets acquired under long-term financing
 
$
55

 
$

Financing:
 
 
 
 
     Dividends declared but not yet paid
 
$
20

 
$
32


Note 15 - Segment Information

Due to the Separation, on November 27, 2015, North American Public Sector is no longer included as a reportable segment and its results have been reclassified to discontinued operations, net of taxes, for the three months ended July 3, 2015. CSC now operates in two reportable segments, as follows:

Global Business Services - GBS provides innovative technology solutions including consulting, applications services and software, which address key business challenges within the customer’s industry. GBS strives to help clients understand and exploit industry trends of IT modernization and virtualization of the IT portfolio (hardware, software, networking, storage and computing assets). GBS has four primary focus areas: industry aligned next-generation software and solutions, end-to-end applications services, consulting services, and big data services. Industry aligned next-generation software and solutions is centered on the insurance, banking, healthcare and life sciences industries, as well as manufacturing and other diversified industries. Activities are primarily related to vertical alignment of software solutions and process-based intellectual property that power mission-critical transaction engines, in addition to the provision of tailored business process services (BPS). Applications services optimize and modernize clients' business and technical environments, enabling clients to capitalize on emerging services such as cloud and mobility as well as big data within new commercial models including "as a Service." The consulting services business helps organizations innovate, transform and create sustainable competitive advantage through a combination of industry, business process, technology, systems integration and change management expertise. Key competitive differentiators for GBS include its global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Changing business issues such as globalization, fast-developing economies, government regulation and growing concerns around risk, security and compliance drive demand for these GBS offerings.

Global Infrastructure Services – GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers CSC's next-generation cloud offerings, including Infrastructure as a Service (IaaS), private cloud solutions and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. To provide clients with differentiated offerings, GIS maintains a select number of key alliance partners to make investments in developing unique offerings and go-to-market strategies. This collaboration helps CSC determine the

24


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

best technology, develop road maps and enhance opportunities to differentiate solutions, expand market reach, augment capabilities and jointly deliver impactful solutions.
 
The following table summarizes operating results by reportable segment:
(in millions)
 
GBS
 
GIS
 
Corporate
 
Total
Three months ended July 1, 2016
 
 
 
 
 
 
 
 
Revenues
 
$
1,049

 
$
881

 
$

 
$
1,930

Operating income (loss)(1)
 
$
73

 
$
(4
)
 
$
(17
)
 
$
52

Depreciation and amortization
 
$
36

 
$
114

 
$
16

 
$
166

 
 
 
 


 
 
 
 
Three months ended July 3, 2015
 
 
 
 
 
 
 
 
Revenues
 
$
919

 
$
885

 
$

 
$
1,804

Operating income (loss)(1)
 
$
97

 
$
53

 
$
(6
)
 
$
144

Depreciation and amortization
 
$
30

 
$
135

 
$
9

 
$
174


(1) Operating income (loss) is a non-GAAP financial measure which management believes assists investors in comparing the Company's performance across reporting periods on a consistent basis by excluding items that management does not believe are indicative of the Company's core operating performance, and are considered important measures by financial analysts covering CSC and its peers. 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.

A reconciliation of operating income to (loss) income from continuing operations, before taxes is as follows:
 
 
Three months ended
(in millions)
 
July 1, 2016
 
July 3, 2015
Operating income
 
$
52

 
$
144

Corporate G&A
 
(70
)
 
(57
)
Pension & OPEB actuarial & settlement losses
 
(1
)
 

Interest expense
 
(25
)
 
(30
)
Interest income
 
10

 
11

Other (expense) income, net
 
(2
)
 
4

(Loss) income from continuing operations, before taxes
 
$
(36
)
 
$
72


Note 16 - Restructuring Costs

The Company recorded $57 million and $0 million of net restructuring costs for the three months ended July 1, 2016 and July 3, 2015, respectively. The costs recorded during the three months ended July 1, 2016 were largely the result of implementing the Fiscal 2017 Plan, as described below.

Of the total $102 million restructuring liability as of July 1, 2016, $98 million is a short-term liability and is included in accrued expenses and other current liabilities and $4 million is included in other liabilities.

Fiscal 2017 Plan

In May 2016, the Company initiated restructuring actions across its business segments in certain areas (Fiscal 2017 Plan). The objective of the Fiscal 2017 Plan is to realign the Company's cost structure and resources to take advantage of operational efficiencies following recent acquisitions.


25


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

The composition of the restructuring liability for the Fiscal 2017 Plan was as follows:
(in millions)
 
Restructuring liability as of April 1, 2016
 
Costs expensed in fiscal 2017
 
Less: costs not affecting restructuring liability(1)
 
Cash paid
 
Other(2)
 
Restructuring liability as of July 1, 2016
Workforce reductions
 
$

 
$
59

 
(6
)
 
$
(6
)
 
$
(3
)
 
$
44


(1) Pension benefit augmentations recorded as a pension liability

(2) Foreign currency translation adjustments

Fiscal 2016 Plan

In September 2015, the Company initiated restructuring actions across its business segments. The objectives of the Fiscal 2016 Plan are to optimize utilization of facilities and rightsize overhead organizations as a result of the Separation.

The composition of the restructuring liability for the Fiscal 2016 Plan was as follows:
(in millions)
 
Restructuring liability as of April 1, 2016
 
Costs reversed in fiscal 2017
 
Cash paid
 
Restructuring liability as of July 1, 2016
Workforce reductions
 
$
29

 
$
(1
)
 
$
(7
)
 
$
21

Facilities costs
 
30

 

 
(5
)
 
25

 
 
$
59

 
$
(1
)