10-Q 1 form10q.htm FY12 Q2 FORM 10-Q form10q.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 September 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 
 
         155,060,761 shares of Common Stock, $1.00 par value, were outstanding on October 28, 2011.
 

 
 

 


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 Ended September 30, 2011, and October 1, 2010, and Six Months Ended September 30, 2011, and October 1, 2010
 
     
 
Consolidated Condensed Balance Sheets as of September 30, 2011, and April 1, 2011
     
 
Consolidated Condensed Statements of Cash Flows for the Six Months Ended September 30, 2011, and October 1, 2010
     
 
Consolidated Condensed Statements of Changes in Equity for the Six Months Ended September 30, 2011, and October 1, 2010
     
 
Notes to Consolidated Condensed Financial Statements
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
34 
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53 
     
Item 4.
Controls and Procedures
53 
     
PART II.
OTHER INFORMATION
54 
     
Item 1.
Legal Proceedings
54 
     
Item 1A.
Risk Factors
54 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
60 
     
Item 4.
Removed and Reserved
60 
     
Item 5.
Other Events
60 
     
Item 6.
Exhibits
61 
 
 

 
(i)

 

PART I, ITEM 1.  FINANCIAL STATEMENTS
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)
 
   
Quarter Ended
   
Six Months Ended
 
(Amounts in millions, except per-share amounts)
 
September 30, 2011
   
October 1, 2010
   
September 30, 2011
   
October 1, 2010
 
                         
Revenues
  $ 3,966     $ 3,935     $ 7,999     $ 7,845  
                                 
Costs of services (excludes depreciation and amortization and settlement charge)
    3,283       3,148       6,648       6,318  
Costs of services - settlement charge (excludes amount charged to revenue of $42)
    227       -       227       -  
Selling, general and administrative
    307       246       571       489  
Depreciation and amortization
    290       272       568       528  
Goodwill impairment
    2,685       -       2,685       -  
Interest expense
    46       42       88       83  
Interest income
    (12 )     (9 )     (24 )     (17 )
Other income, net
    (6 )     (9 )     (11 )     (12 )
Total costs and expenses
    6,820       3,690       10,752       7,389  
                                 
(Loss) income from continuing operations before taxes
    (2,854 )     245       (2,753 )     456  
Taxes on income
    12       71       (73 )     137  
(Loss) income from continuing operations
    (2,866 )     174       (2,680 )     319  
Income (loss) from discontinued operations, net of taxes
    -       19       (1 )     22  
Net (loss) income
    (2,866 )     193       (2,681 )     341  
                                 
Less: Net income attributable to noncontrolling interest, net of tax
    11       9       13       14  
Net (loss) income attributable to CSC common shareholders
  $ (2,877 )   $ 184     $ (2,694 )   $ 327  
                                 
Earnings (loss) per share:
                               
     Basic:
                               
       Continuing operations
  $ (18.56 )   $ 1.06     $ (17.38 )   $ 1.98  
       Discontinued operations
    -       0.13       (0.01 )     0.14  
    $ (18.56 )   $ 1.19     $ (17.39 )   $ 2.12  
     Diluted:
                               
       Continuing operations
  $ (18.56 )   $ 1.05     $ (17.38 )   $ 1.95  
       Discontinued operations
    -       0.13       (0.01 )     0.14  
    $ (18.56 )   $ 1.18     $ (17.39 )   $ 2.09  
                                 
Cash dividend per common share
  $ 0.20     $ 0.15     $ 0.40     $ 0.30  

 
See accompanying notes.
 

 
- 1 -

 


COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
 
   
As of
 
(Amounts in millions, except share and per share data)
 
September 30, 2011
   
April 1, 2011
 
ASSETS
           
Cash and cash equivalents
  $ 978     $ 1,837  
Receivables, net of allowance for doubtful accounts of $46 (2012) and $46 (2011)
    3,965       3,719  
Prepaid expenses and other current assets
    1,733       2,001  
     Total current assets
    6,676       7,557  
                 
Property and equipment, net of accumulated depreciation of $3,895 (2012) and $3,853 (2011)
    2,523       2,496  
Outsourcing contract costs, net
    622       647  
Software, net
    686       562  
Goodwill
    1,786       4,038  
Other assets
    1,028       820  
     Total assets
  $ 13,321     $ 16,120  
                 
LIABILITIES
               
Short-term debt and current maturities of long-term debt
  $ 787     $ 170  
Accounts payable
    451       517  
Accrued payroll and related costs
    772       817  
Other accrued expenses
    1,145       1,291  
Deferred revenue
    590       987  
Income taxes payable and deferred income taxes
    329       396  
     Total current liabilities
    4,074       4,178  
                 
Long-term debt, net of current maturities
    2,478       2,409  
Income tax liabilities and deferred income taxes
    507       511  
Other long-term liabilities
    1,526       1,462  
                 
EQUITY
               
Common stock, par value $1 per share, authorized 750,000,000 shares, issued
  163,568,059 (2012) and 162,873,485 (2011)
    164       163  
Additional paid-in capital
    2,156       2,120  
Retained earnings
    3,539       6,296  
Accumulated other comprehensive loss
    (791 )     (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
    4,679       7,504  
Noncontrolling interest in subsidiaries
    57       56  
Total equity
    4,736       7,560  
     Total liabilities and equity
  $ 13,321     $ 16,120  



 
See accompanying notes.
 

 
- 2 -

 

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

   
Six Months Ended
 
(Amounts in millions)
 
September 30, 2011
   
October 1, 2010
 
             
Cash flows from operating activities:
           
Net (loss) income
  $ (2,681 )   $ 341  
                 
Adjustments to reconcile net (loss) income to net cash (used in) provided by  operating activities:
               
                 
      Depreciation and amortization and other non-cash charges
    611       571  
Goodwill impairment
    2,685       -  
Settlement charge
    269       -  
      Stock based compensation
    22       30  
      Provision for losses on accounts receivable
    6       6  
      Unrealized foreign currency exchange loss (gain)
    10       (12 )
      Loss (gain) on dispositions
    3       (30 )
      Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
               
          Increase in assets
    (217 )     (277 )
          Decrease in liabilities
    (748 )     (287 )
                 
Net cash (used in) provided by operating activities
    (40 )     342  
                 
Cash flows from investing activities:
               
     Purchases of property and equipment
    (301 )     (337 )
     Outsourcing contracts
    (96 )     (58 )
     Acquisitions, net of cash acquired
    (368 )     (65 )
     Business dispositions
    -       52  
     Software purchased or developed
    (146 )     (94 )
     Other investing activities, net
    8       44  
                 
Net cash used in investing activities
    (903 )     (458 )
                 
Cash flows from financing activities:
               
     Net borrowings of commercial paper
    505       -  
     Borrowings under lines of credit
    79       8  
     Repayment of borrowings under lines of credit
    (19 )     (5 )
     Principal payments on long-term debt
    (395 )     (40 )
     Proceeds from stock options
    15       18  
     Excess tax benefit from stock based compensation
    2       2  
     Dividend payments
    (62 )     (23 )
     Other financing activities, net
    (6 )     (7 )
                 
Net cash provided by (used in) financing activities
    119       (47 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (35 )     36  
                 
Net decrease in cash and cash equivalents
    (859 )     (127 )
Cash and cash equivalents at beginning of year
    1,837       2,784  
Cash and cash equivalents at end of period
  $ 978     $ 2,657  


 
 
 


 
 

 
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
                            (2,694 )                     (2,694 )     13       (2,681 )
      Currency translation adjustment
                                    (101 )             (101 )             (101 )
         Comprehensive (loss) income
                                                    (2,795 )     13       (2,782 )
Stock based compensation expense
                    22                               22               22  
Acquisition of treasury stock
                                            (4 )     (4 )             (4 )
Stock option exercises and other common stock transactions
    695       1       14                               15               15  
Cash dividends declared
                            (62 )                     (62 )             (62 )
Distributions and other
                            (1 )                     (1 )     (12 )     (13 )
Balance at September 30, 2011
    163,568     $ 164     $ 2,156     $ 3,539     $ (791 )   $ (389 )   $ 4,679     $ 57     $ 4,736  


(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
                            327                       327       14       341  
      Currency translation adjustment
                                    121               121               121  
      Unfunded pension obligation
                                    78               78               78  
         Comprehensive income
                                                    526       14       540  
Stock based compensation expense
                    30                               30               30  
Acquisition of treasury stock
                                            (4 )     (4 )             (4 )
Stock option exercises and other common stock transactions
    556       1       18                               19               19  
Cash dividends declared
                            (46 )                     (46 )             (46 )
Distributions and other
                                                            (13 )     (13 )
Balance at October 1, 2010
    162,790     $ 163     $ 2,054     $ 5,990     $ (853 )   $ (383 )   $ 6,971     $ 63     $ 7,034  



 

 


 

 

 
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 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. 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 six months ended October 1, 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 six months ended September 30, 2011, include separate line items for “costs of services - settlement charge” and “goodwill impairment.” The settlement charge is discussed further in Notes 15 and 16, and the goodwill impairment is discussed further in Note 14.
 
The Company recognized significant changes in estimated profitability on nine contracts in fiscal 2012 and two contracts in fiscal 2011 that netted to a decrease in pre-tax earnings of $8 million and $45 million for the quarter and the six months ended September 30, 2011, an increase in pre-tax earnings of $28 million and $44 million for the comparable periods in the prior year.
 
Depreciation expense was $185 million and $367 million for the quarter and six months ended September 30, 2011, respectively, and $175 million and $342 million for the quarter and six months ended October 1, 2010, respectively.

Contractual work in process balances at September 30, 2011, and April 1, 2011, of $1,243 million and $1,162 million, respectively, are included in prepaid expenses and other current assets.

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 $156 million.

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

   
As of
 
(Amounts in millions)
 
September 30, 2011
   
April 1, 2011
 
             
Foreign currency translation adjustment
  $ 183     $ 284  
Unfunded pension obligation
    (974 )     (974 )
Accumulated other comprehensive loss
  $ (791 )   $ (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 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 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. The amendments in the Update become effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

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, with early adoption permitted. The adoption of this amendment 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 for the transaction are estimated to be $9 million, and are included in the selling, general and administrative expenses in the Company’s consolidated condensed statement of operations for the quarter ended September 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 preliminarily 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 quarter ended September 30, 2011, iSOFT contributed revenues of $32 million and an operating loss of $27 million, including the effect of purchase accounting adjustments, primarily relating to amortization of intangibles.  The operating loss was offset by currency gains of $13 million attributable to inter-company balances included in other income, resulting in an effective pre-tax loss of $14 million. The currency gains resulted from unhedged positions.
 
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
 
September 30, 2011
   
October 1, 2010
   
September 30, 2011
   
October 1, 2010
 
Revenue
  $ 3,966     $ 3,935     $ 3,981     $ 3,978  
Net (loss) income attributable to CSC common shareholders
    (2,877 )     184       (2,888 )     154  
Basic EPS
    (18.56 )     1.19       (18.62 )     1.00  
Diluted EPS
    (18.56 )     1.18       (18.62 )     0.99  
                                 
   
As Reported
   
Pro Forma
 
   
Six Months Ended
   
Six Months Ended
 
Amounts in millions, except per share data
 
September 30, 2011
   
October 1, 2010
   
September 30, 2011
   
October 1, 2010
 
Revenue
  $ 7,999     $ 7,845     $ 8,077     $ 7,938  
Net (loss) income attributable to CSC common shareholders
    (2,694 )     327       (2,727 )     260  
Basic EPS
    (17.39 )     2.12       (17.60 )     1.68  
Diluted EPS
    (17.39 )     2.09       (17.60 )     1.66  
 
 
 
- 7 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
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 six months ended September 30, 2011 information has been adjusted to exclude $37 million of goodwill impairment recorded by iSOFT in June 2011 and the six months ended October 1, 2010 information has been adjusted to exclude $290 million of goodwill impairment recorded by iSOFT in June 2010.  Additionally, the three and six months ended September 30, 2011, information has been adjusted to exclude the transaction costs of $9 million and the three and six months ended October 1, 2010, information has been adjusted to include the transaction costs of $9 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
    122  
Other current assets
    11  
Deferred tax assets
    35  
Intangible assets
    222  
Property and equipment
    20  
Trade payables and accrued expenses
    (54 )
Deferred revenue
    (54 )
Current income tax liabilities
    (6 )
Debt
    (315 )
Deferred tax, uncertain tax positions, and other long-term liabilities
    (81 )
  Total identifiable net assets acquired
    (68 )
  Goodwill
    268  
  Total purchase price
  $ 200  
 
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. Of the total debt acquired, $298 million was paid off in conjunction with the acquisition.
 
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
  $ 111       10-13  
Software
    107       5-10  
Trade names
    4       1  
Total intangible assets
  $ 222          
 
The entire amount of goodwill is associated with the Company’s 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, $15 million is estimated to be tax deductible.
 
As the acquisition occurred during the quarter ended September 30, 2011, 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 relative to the determination of the fair value of the assets and liabilities acquired.  The Company expects to finalize the purchase price allocation prior to the end of fiscal 2012.
 
 
 
- 8 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
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 financial statements from the date of acquisition.  During the quarter ended September 30, 2011, AppLabs contributed revenues of $6 million and no net income, 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 )
Income tax liabilities and deferred income taxes
    (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.
 
As the acquisition occurred near the close of the quarter ended September 30, 2011, 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 relative to the determination of the fair value of the assets and liabilities acquired.  The Company expects to finalize the purchase price allocation prior to the end of fiscal 2012.
 
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.
 
 
 
- 9 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
Primarily as a result of the short time frame elapsed since acquisition, the allocation of purchase price shown 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. The Company expects to finalize the purchase price allocation prior to the end of fiscal 2012.
 
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 and liabilities assumed 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 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 Division of Enforcement of the SEC that it had commenced a formal civil investigation relating to these matters and other matters subsequently identified by the SEC, with which the Company is cooperating. On May 2, 2011, the Audit Committee of the Board of Directors 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.
 
The Audit Committee's investigation also has 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 suspended.

The Audit Committee’s investigation also has also 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 percentage of completion accounting methodology. These activities are in the early stage.

Any out of period adjustments deemed necessary by the Company to date are hereinafter identified in this Note 4.

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 controls 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.


 
- 10 -

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

Fiscal 2012
 
During the second quarter and through the first six months of fiscal 2012, the Company recorded various pre-tax adjustments, reducing income from continuing operations before taxes by $23 million and $28 million ($17 million and $20 million, net of tax), respectively, that should have been recorded in prior fiscal years, all but $2 million of these pre-tax adjustments relate to MSS.  Of the total pre-tax adjustments recorded through the first six months of fiscal 2012, $3 million relate to fiscal 2011.
 
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 second quarter of fiscal 2012, $19 million of pre-tax adjustments with respect to the following fiscal years and has categorized such adjustments as either intentional accounting irregularities (“intentional irregularities”) or unintentional accounting errors (“unintentional errors”):
 
 
 
Increase/(Decrease) in Income Before Taxes
 
(Amounts in millions)
 
FY08 & Prior
   
FY09
   
FY10
   
FY11
   
Total
 
Intentional irregularities
  $ 10     $ (7 )   $ (2 )   $ -     $ 1  
Unintentional errors
    (6 )     (14 )     (1 )     1       (20 )
    $ 4     $ (21 )   $ (3 )   $ 1     $ (19 )


As noted above, the Audit Committee investigation is still ongoing and the categorization of the adjustments noted above is subject to change. Such categorization is based on the information currently available to the Company.

The principal intentional irregularities relate to excess reserves of $8 million established in fiscal 2008 of $8 million to manage earnings, which reserves were reversed in fiscal 2009, while the unintentional errors include an incorrect accounting conclusion on a sale leaseback transaction in fiscal 2009 that triggered an impairment of $9 million and the inappropriate capitalization of transition costs of $3 million in fiscal 2011.  Included in the adjustments discussed above, the Company identified and recorded a $1 million pre-tax adjustment reducing income from continuing operations related to its review of the accounting treatment with respect to revenue recognition for one of its Australia customer contracts.
 
Nordic Region Adjustments:
 
The Nordic pre-tax adjustments recorded in the second quarter of fiscal 2012 totaled $6 million, which were primarily attributable to an understatement of amortization expense resulting from the use of incorrect useful lives for purchased software licenses. The Nordic adjustments recorded in the first quarter of fiscal 2012 totaled $4 million and included $2 million in adjustments which were attributable to an understatement of accrued expenses associated with vendor invoices relating to fiscal 2011. These adjustments were identified late in the fiscal 2011 closing process, and due to the immaterial amounts involved, were not included in the Company’s consolidated fiscal 2011 statements. The Nordic adjustments in the first quarter of fiscal 2012 also included (i) $1 million of outsourcing contract costs amortized over a contract term (including an extension rather than just the original contract term) attributable to fiscal 2006-2012, and (ii) a $1 million error in the accounting for an operating lease attributable to fiscal 2010. The $1 million operating lease adjustment is a refinement of an error previously corrected and reported in fiscal 2011. The Company attributes these Nordic adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than the adjustment relating to the Nordic operating lease, 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 MSS operations outside of the Nordics and Australia regions which increased income from continuing operations by $2 million for the second quarter and $1 million for the first six months of fiscal 2012. The Company attributes these adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct.


 
- 11 -

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

The foregoing pre-tax out of period adjustments are related to the following consolidated balance sheet line items as of September 30, 2011:
 
·  
Property and equipment ($22 million decrease)
·  
Prepaid expenses and other current assets ($3 million decrease)
·  
Lease liabilities ($2 million increase)
·  
Accounts payable ($1 million decrease)
·  
Accrued expenses and other current liabilities ($2 million increase)
 
The impact of the consolidated Nordic, Australia and other out of period adjustments is immaterial to the consolidated results, financial position and cash flows for the second quarter of fiscal 2012, first six 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 second quarter and six months ended September 30, 2011, impacted by the Nordic, Australia, and other out of period adjustments (under the rollover method) are shown below:

   
Quarter ended September 30, 2011
 
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 3,966     $ 11     $ 3,977  
Costs of services (excludes depreciation and amortization, and settlement charge)
    3,283       (11 )     3,272  
Selling, general and administrative
    307       -       307  
Depreciation and amortization
    290       -       290  
Interest expense
    46       (3 )     43  
Other income
    (6 )     2       (4 )
Income from continuing operations before taxes
    (2,854 )     23       (2,831 )
Taxes on income
    12       6       18  
Income from continuing operations
    (2,866 )     17       (2,849 )
Income from discontinued operations, net of taxes
    -       -       -  
Net income attributable to CSC common shareholders
    (2,877 )     17       (2,860 )
EPS – Diluted
                       
     Continuing operations
  $ (18.56 )   $ 0.11     $ (18.45 )
     Discontinued operations
    -       -       -  
     Total
  $ (18.56 )   $ 0.11     $ (18.45 )


   
Six months ended September 30, 2011
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 7,999     $ 12     $ 8,011  
Costs of services (excludes depreciation and amortization, and settlement charge)
    6,648       (13 )     6,635  
Selling, general and administrative
    571       -       571  
Depreciation and amortization
    568       (1 )     567  
Interest expense
    88       (3 )     85  
Other income
    (11 )     1       (10 )
Income from continuing operations before taxes
    (2,753 )     28       (2,725 )
Taxes on income
    (73 )     8       (65 )
Income from continuing operations
    (2,680 )     20       (2,660 )
Income from discontinued operations, net of taxes
    (1 )     -       (1 )
Net income attributable to CSC common shareholders
    (2,694 )     20       (2,674 )
EPS – Diluted
                       
     Continuing operations
  $ (17.38 )   $ 0.13     $ (17.25 )
     Discontinued operations
    (0.01 )     -       (0.01 )
     Total
  $ (17.39 )   $ 0.13     $ (17.26 )

 
 
- 12 -

 
 
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 second quarter and six months ended October 1, 2010, based on information then known by the Company, the Company recorded certain pre-tax adjustments reducing income from continuing operations before taxes by $28 million ($11 million, net of taxes) and $34 million ($12 million, net of taxes), respectively, that should have been recorded in prior fiscal years.  As discussed below, these recorded adjustments comprised $39 million and $60 million for the second quarter and six months ended October 1, 2010, respectively, of charges reducing income from continuing operations before taxes originating out of the Company's MSS operations in the Nordic region, and $11 million and $26 million, respectively, of adjustments increasing income from continuing operations before taxes, principally out of other MSS businesses with $9 million of the $11 million and $22 million of the $26 million for the second quarter and six months ended October 1, 2010, respectively, within MSS. These adjustments reduced MSS operating income (a non-GAAP measure) by $30 million and $38 million, for the second quarter and six months ended October 1, 2010, respectively, as discussed in Note 13, Segment Information. The Company also recorded out of period income tax benefits in the second quarter and six months ended October 1, 2010 of $17 million and $22 million, respectively, consisting of $4 million and $8 million of income tax benefits related to the net out of period adjustments and $13 million and $14 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, are 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
  $ 49     $ 16     $ 33  
Fiscal 2010
    (56 )     (21 )     (35 )
Fiscal 2009
    (24 )     (6 )     (18 )
Prior fiscal years
    3       3       -  

Nordic Region Adjustments:
 
As part of closing the Company's financial statements for the second quarter and six months ended October 1, 2010, management identified and recorded out of period charges totaling $39 million and $60 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 second 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 second quarter and six months ended October 1, 2010, the Company also identified out of period adjustments of $11 million and $26 million, respectively, that increased income from continuing operations before taxes, of which $9 million and $22 million, respectively, relates to other MSS operations.
 
The remaining $2 million and $4 million of out of period adjustments during the second quarter and six months ended October 1, 2010 consists 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 $13 million and $14 million of net out of period adjustments related to income tax benefits associated with complex tax positions in the second quarter and six months ended October 1, 2010.
 
 
 
- 13 -

 
 
COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
 
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):
 
(Amounts in millions)
 
Quarter Ended
October 1, 2010
   
Six Months Ended
October 1, 2010
 
Operating costs inappropriately capitalized
  $ 36     $ 52  
Misapplication of US GAAP
    4       7  
Miscellaneous errors
    (1 )     1  
Total Nordic adjustments
    39       60  
Operating costs inappropriately capitalized
    (2     (2
Misapplication of US GAAP
    -       1  
Miscellaneous errors
    4       -  
Total Australian adjustments
    2       (1 )
Other adjustments
    (12 )     (23 )
Effect on income from continuing operations before taxes
    29       36  
Income tax benefit
    (4 )     (8 )
Other income tax adjustments
    (13 )     (14 )
Effect on net income attributable to CSC common shareholders
  $ 12     $ 14  

The out of period adjustments during the second quarter and six months ended October 1, 2010 for inappropriately capitalized costs are related to the following consolidated balance sheet line items:
 
·  
Outsourcing contract costs ($2 million and $10 million)
·  
Prepaid expenses and other current assets ($31 million and $35 million)
·  
Accounts receivable and other current assets ($1 million and $2 million)
·  
Property and equipment ($0 million and $3 million)
 
The net impact of the out of period adjustments was immaterial to the consolidated results, financial position and cash flows for the second quarter of fiscal 2011. Consequently, the cumulative effect of these adjustments was recorded during the second quarter of fiscal 2011.
 
The select line items of the Consolidated Condensed Statement of Operations for the second quarter and six months ended October 1, 2010, impacted by the out of period adjustments, including those identified in fiscal 2012 (under the rollover method) are shown below:
 
   
Quarter ended October 1, 2010
 
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 3,935     $ 34     $ 3,969  
Costs of services (excludes depreciation and amortization, and settlement charge)
    3,148       6       3,154  
Selling, general and administrative
    246       (1 )     245  
Depreciation and amortization
    273       (1 )     272  
Interest expense
    42       1       43  
Other income
    (9 )     -       (9 )
Income from continuing operations before taxes
    245       29       274  
Taxes on income
    71       17       88  
Income from continuing operations
    174       12       186  
Income from discontinued operations, net of taxes
    19       -       19  
Net income attributable to CSC common shareholders
    184       12       196  
EPS – Diluted
                       
     Continuing operations
  $ 1.05     $ 0.08     $ 1.13  
     Discontinued operations
    0.13       -       0.13  
     Total
  $ 1.18     $ 0.08     $ 1.26  


 
- 14 -

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


     
Six months ended October 1, 2010
 
(Amounts in millions, except per share amounts)
 
As Reported
   
Adjustments
Increase/
(Decrease)
   
Amount Adjusted
for Removal
of Errors
 
Revenue
  $ 7,845     $ 27     $ 7,872  
Costs of services (excludes depreciation and amortization, and settlement charge)
    6,318       (9 )     6,309  
Selling, general and administrative
    489       1       490  
Depreciation and amortization
    529       (2 )     527  
Interest expense
    83       1       84  
Other income
    (12 )     -       (12 )
Income from continuing operations before taxes
    456       36       492  
Taxes on income
    137       22       159  
Income from continuing operations
    319       14       333  
Income from discontinued operations, net of taxes
    22       -       22  
Net income attributable to CSC common shareholders
    327       14       341  
EPS – Diluted
                       
     Continuing operations
  $ 1.95     $ 0.09     $ 2.04  
     Discontinued operations
    0.14       -       0.14  
     Total
  $ 2.09     $ 0.09     $ 2.18  


 
 
- 15 -

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

Note 5 – Earnings (Loss) Per Share
 
Basic and diluted earnings per share are calculated as follows:

   
Quarter Ended
 
(Amounts in millions, except per share data)
 
September 30, 2011
   
October 1, 2010
 
             
Net (loss) income attributable to CSC common shareholders:
           
     From continuing operations
  $ (2,877 )   $ 165  
     From discontinued operations
    -       19  
    $ (2,877 )   $ 184  
                 
Common share information:
               
     Weighted average common shares outstanding for basic EPS
    155.045       154.393  
     Dilutive effect of stock options and other equity awards
    -       1.373  
Shares for diluted earnings (loss) per share
    155.045       155.766  
                 
Basic earnings (loss) per share:
               
     Continuing operations
  $ (18.56 )   $ 1.06  
     Discontinued operations
    -       0.13  
    $ (18.56 )   $ 1.19  
Diluted earnings (loss) per share:
               
     Continuing operations
  $ (18.56 )   $ 1.05  
     Discontinued operations
    -       0.13  
    $ (18.56 )   $ 1.18  

   
Six Months Ended
 
(Amounts in millions, except per share data)
 
September 30, 2011
   
October 1, 2010
 
             
Net (loss) income attributable to CSC common shareholders:
           
     From continuing operations
  $ (2,693 )   $ 305  
     From discontinued operations
    (1 )     22  
    $ (2,694 )   $ 327  
Common share information:
               
     Weighted average common shares outstanding for basic EPS
    154.944       154.304  
     Dilutive effect of stock options and other equity awards
    -       1.998  
Shares for diluted earnings (loss) per share
    154.944       156.302  
                 
Basic earnings (loss) per share:
               
     Continuing operations
  $ (17.38 )   $ 1.98  
     Discontinued operations
    (0.01 )     0.14  
    $ (17.39 )   $ 2.12  
                 
Diluted earnings (loss) per share:
               
     Continuing operations
  $ (17.38 )   $ 1.95  
     Discontinued operations
    (0.01 )     0.14  
    $ (17.39 )   $ 2.09  


The computation of the diluted earnings (loss) per share for the quarter and six months ended September 30, 2011, excluded 1,277,573 and 2,273,975 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 18,398,637 and 16,879,578 for the quarter and six months ended September 30, 2011, respectively, and 15,410,251 and 11,731,829 for the quarter and six months ended October 1, 2010, respectively.
 

 
 
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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 September 30, 2011, and April 1, 2011:

   
As of September 30, 2011
 
(Amounts in millions)
       
Fair Value Hierarchy
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Money market funds
  $ 346     $ 346     $ -     $ -  
Time deposits
    78       78       -       -  
Short-term investments
    6       6       -       -  
Derivative assets
    2       -       2       -  
     Total assets
  $ 432     $ 430     $ 2     $ -  
                                 
Liabilities:
                               
Derivative liabilities
  $ 9     $ -     $ 9     $ -  
     Total liabilities
  $ 9     $ -     $ 9     $ -  
                                 
                                 
   
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 contracts and currency options. The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates, and is based on the 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 in prepaid expenses and other current assets; and the derivative liabilities are 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 second quarter of fiscal 2012, as a result of annual and interim goodwill impairment assessments, goodwill was impaired with a charge of $2,685 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 $2,478 million and $2,409 million and the estimated fair value was $2,619 million and $2,587 million as of September 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.
 
 
 
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COMPUTER SCIENCES CORPORATION - NOTES TO CONSOLIDATED CONDENSED 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 September 30, 2011, the Company had $15 million of accounts receivable and $8 million of related allowance for doubtful accounts with customers involved in bankruptcy proceedings.
 
Note 7—Foreign Currency Derivative Instruments
 
As a large global organization, the Company faces exposure to adverse movements in foreign currency exchange rates. During the ordinary course of business, the Company enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. The Company generally manages these transactions by incurring costs to service 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 hedge certain foreign currency assets and liabilities, including intercompany loans, and certain revenue streams denominated in non-functional currencies. In addition, the Company uses these instruments as economic hedges and not for speculative or trading purposes. For accounting purposes, these foreign currency contracts are not designated as hedges, as defined under ASC 815, “Derivatives and Hedging” and all changes in fair value are reported as part of other (income) expense.

The notional amount of the foreign currency forward contracts outstanding as of September 30, 2011, and April 1, 2011, was $1,412 million and $787 million, respectively. The notional amount of option contracts outstanding as of September 30, 2011, and April 1, 2011, was $347 million and $676 million, respectively.

The estimated fair values of the foreign currency derivative assets and liabilities were $2 million and $9 million, respectively, as of September 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 counterparty. As of September 30, 2011, there was one counterparty with concentration of credit risk and the maximum amount of loss, based on gross fair value of the foreign currency derivative instrument, that the Company would incur is $1 million.

Note 8–Commercial Paper
 
During the six months ended September 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 $505 million of commercial paper outstanding at September 30, 2011, and none outstanding at April 1, 2011. The amount outstanding is included in short-term debt and current maturities of long-term debt.
 
 
 
- 18 -

 
 
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)
 
September 30, 2011
   
October 1, 2010
 
Pensions
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ 2     $ 7     $ 2     $ 5  
Interest cost
    41       32       41       30  
Expected return on assets
    (36 )     (32 )     (39 )     (31 )
Amortization of unrecognized net loss and other
    8       4       6       3  
Net periodic pension cost
  $ 15     $ 11     $ 10     $ 7  


   
Six Months Ended
 
(Amounts in millions)
 
September 30, 2011
   
October 1, 2010
 
Pensions
 
U.S. Plans