10-K 1 csc329201310-k.htm 10-K CSC 3.29.2013 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 2013

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 of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3170 Fairview Park Drive
 
Falls Church, Virginia
22042
(Address of principal executive offices)
(zip code)
 
 
Registrant's telephone number, including area code: (703) 876-1000
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class:
Name of each exchange on which registered
Common Stock, $1.00 par value per share
New York Stock Exchange
Preferred Stock Purchase Rights
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     x Yes  o No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      o Yes  x   No  
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.
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

As of September 28, 2012, the aggregate market value of stock held by non-affiliates of the Registrant was approximately $4,956,615,996.
There were 150,228,623 shares of the Registrant’s common stock outstanding as of May 3, 2013.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2013 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after March 29, 2013, are incorporated by reference into Part III hereof.




TABLE OF CONTENTS

Item
 
 
Page
 
 
 
 
 
 
 
1.
 
1A.
 
1B.
 
2.
 
3.
 
4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.
 
6.
 
7.
 
7A.
 
8.
 
9.
 
9A.
 

9B.
 
 
 
 
 
 
 
 
 
 
 
 
10.
 
11.
 
12.
 
13.
 
14.
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
15.
 


i


PART I

Item 1.
Business

INTRODUCTION AND HISTORY


General

Computer Sciences Corporation (CSC or the Company), is a global leader of information technology (IT) and professional services and solutions. Since the Company was founded in 1959, CSC has helped develop and integrate IT assets in support of operational efficiency, new growth initiatives and other business objectives. The Company’s 90,000 employees serve approximately 2,500 clients in more than 70 countries. Clients include commercial enterprises and the U.S. federal government, as well as state, local and non-U.S. government agencies. The Company is incorporated in the state of Nevada.

The Company's mission is to enable superior returns on our client's technology investments through best-in-class industry solutions, domain expertise and global scale. CSC generally does not operate through exclusive agreements with hardware or software providers and believes this vendor neutrality enables the Company to better identify and manage solutions specifically tailored to each client’s needs.

CSC's management team has strived to create shareholder value by aligning its assets with its strategy, executing its $1.0 - $1.2 billion cost takeout program, and prudent capital deployment. The Company completed four divestitures in fiscal 2013 in order to better align our assets with its strategy of leading the next generation of IT services and solutions. The Company's cost takeout program is focused on four areas: 1) supply chain and procurement savings, 2) workforce optimization, 3) enterprise overhead reduction, and 4) contract management discipline. The cost takeout program was initiated in fiscal 2012 and extends through fiscal 2014. CSC's priorities for capital deployment include 1) reinvesting in the core business, 2) pursuing strategic acquisitions, 3) ensuring a strong financial position with ample access to liquidity, and 4) returning cash to shareholders.

Services and Sectors

The Company delivers IT services and solutions through three broad service lines or sectors: North American Public Sector (NPS), Managed Services Sector (MSS), and Business Solutions and Services (BSS). Geographically, CSC has major operations throughout North America, Europe, Asia and Australia. Segment and geographic information are included in Note 16 to the Consolidated Financial Statements for the year ended March 29, 2013. For a discussion of risks associated with our foreign operations, see Item 1A "Risk Factors".

NPS

NPS provides IT-related and mission/operations-related services to the U.S. federal government. NPS's customer base includes most branches of the military and many civil departments, as well as the Department of Homeland Security and NASA. The Company provides systems integration and outsourcing to complex project management and technical services. Key offerings include enterprise modernization, telecommunications and networking, managed services, base and range operations, and training and simulation.

MSS

MSS provides information systems outsourcing services to clients in a broad array of industries, including financial services, healthcare, manufacturing, and other diversified industries. IT outsourcing involves operating all or a portion of a customer's technology infrastructure, including systems analysis, applications development, network operations, end-user computing and data center management. In addition, MSS provides an array of emerging services in the areas of Infrastructure as a Service (IaaS), Software as a Service (SaaS), Business Process as a Service (BPaaS), Platform as a Service (PaaS), Cyber Security Managed Services and other emerging technologies and associated service delivery models. CSC's services are delivered through allocation of resources located both on a client's premises and through CSC's service centers around the world.


1


BSS

BSS serves a broad array of industries, providing industry-specific solutions in areas such as consulting and systems integration, business process outsourcing, and intellectual property-based software to chemical, energy and natural resources, financial services, technology and consumer, manufacturing, healthcare, and public sector organizations. Consulting and professional services include advising clients on the strategic acquisition and utilization of IT and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering. Systems integration encompasses designing, developing, implementing and integrating complete information systems. In prior periods, BSS provided professional technology staffing services in Australia, computer equipment repair and maintenance services in Asia, and credit reporting services in the United States. These businesses were divested in fiscal 2013.

During the last three fiscal years, the Company’s revenue mix by line of business was as follows:
 
2013
 
2012
 
2011
North American Public Sector
36
 %
 
37
 %
 
39
 %
Managed Services Sector
43

 
43

 
42

Business Solutions and Services
22

 
21

 
20

Subtotal
101

 
101

 
101

Corporate and Eliminations
(1
)
 
(1
)
 
(1
)
Total Revenues
100
 %
 
100
 %
 
100
 %

Fiscal 2013 Overview

During fiscal 2013, CSC announced contract awards, or bookings, with a total contract value (TCV) of approximately $13.8 billion, consisting of $3.5 billion of NPS awards, $6.9 billion of MSS awards, and $3.4 billion of BSS awards. The total commercial awards represented through MSS and BSS of $10.3 billion was lower than the $12.8 billion of awards during fiscal 2012. Additionally, fiscal 2013 NPS awards of $3.5 billion compare with fiscal 2012 awards of $6.0 billion, reflecting softness in demand among public sector clients. These amounts have been adjusted for discontinued operations.

New business contributed $8.5 billion and $12.4 billion to the TCV of fiscal 2013 and 2012 contract awards, respectively. The TCV of renewals and recompetes was $5.3 billion and $6.4 billion, during fiscal 2013 and fiscal 2012, respectively.

For NPS, announced values for indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. The bookings value of MSS announced awards is estimated at the time of contract signing and includes optional contract years. New contract bookings are recorded using then-existing projections of service volumes and then-existing currency exchange rates, and are not subsequently adjusted for volume or currency fluctuations. The announced values for BSS line of business awards are based on firm commitments.

Although commercial demand for IT services and solutions grew modestly during the year, CSC did not benefit materially from this trend because the Company embarked on a concerted program to review, rationalize, and modernize its portfolio of service offerings. As part of the broader transformation of CSC's business operations, its go-to-market organizations, programs, and offerings were thoroughly assessed relative to competitive position, profitability, and scalable delivery. The effect of these reviews and realignments impacted the Company's lead generation activities. Win rates on the business opportunities pursued by the Company's sales force were sustained at historical levels, but the absolute volume of new business proposals submitted declined year-over-year. Fiscal 2013 was a year focused on rebuilding both the portfolio of service offerings and the organizations, processes, and channels through which those offerings are taken to market.

Many of our government customers continue to experience uncertainty about their fiscal budgets due to the Budget Control Act of 2011 and sequestration. As a result, large program awards are delayed and government customers are shifting to smaller and shorter term contracts.


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In future periods, CSC’s results of operations and financial condition may be negatively affected by conditions in the various global markets in which the Company operates or client budget constraints. Economic conditions could impact the credit quality of CSC's receivables portfolio and, therefore, the level of provision for bad debts. CSC continues to review credit policies and collection efforts in both the origination of new business and the evaluation of existing projects.

Contract terminations, cancellations or delays could result from our performance or factors that are beyond our control, including the business or financial condition of the client, changes in client ownership or management, and changes in client strategies, the economy or markets generally. When contracts are terminated, we lose the anticipated revenues and might not be able to eliminate associated costs simultaneously with contract termination, and the contract assets may become impaired. Consequently, our profit margins in subsequent periods could be lower than expected.

Currency fluctuations will continue to have an effect on both revenue and profit. The Company’s foreign currency risk management program, however, attempts to mitigate some of the economic and margin risk.

Acquisitions and Divestitures

Acquisitions

During fiscal 2013,CSC acquired 42Six Solutions, LLC (42Six) for $35 million in an all cash transaction. 42Six, a software development company specializing in providing analytics and applications software products and services for the U.S. government intelligence community and the Department of Defense, was acquired primarily to enhance CSC's strategy of offering customers greater value through data expertise and intellectual property. This acquisition is related to the Company's NPS segment.

During fiscal 2012, CSC acquired iSOFT Group Limited (iSOFT), a publicly-held company listed on the Australian Securities Exchange, for cash consideration of $200 million, and the assumption of debt of $315 million, of which $298 million was repaid immediately after the acquisition, in the Company's BSS segment. The acquisition complements and strengthens CSC's software products, healthcare integration and services portfolio, and its healthcare research and development capabilities, as iSOFT provides advanced application solutions across both the public and private sectors.

In addition, CSC acquired three privately-held companies for an aggregate purchase price of $201 million during fiscal 2012, the largest being the acquisition of AppLabs for $171 million in CSC's MSS segment, and the other two acquisitions in the NPS and BSS segments. The AppLabs acquisition enhances the Company's capabilities in application testing services and complements CSC's expertise in financial services, healthcare, manufacturing, chemical, energy, and natural resources and technology and consumer markets. The acquisitions in the NPS and BSS segments enhance the Company's offerings in the healthcare IT and financial services industries.

During fiscal 2011, CSC acquired four privately-held companies for an aggregate purchase price of $156 million; two of the acquisitions are included in CSC’s NPS segment and two were included in the BSS segment.

The NPS segment acquisitions enhanced the Company’s offerings and position in the key areas of cybersecurity and intelligence, surveillance and reconnaissance solutions, sensor integration, and in-theater analysis and exploitation.

The BSS segment acquisitions expanded CSC’s presence in the life sciences sector by enhancing its service offerings to include integrated, end-to-end business solutions for electronic regulatory submissions, integrating other acquired expertise with CSC’s established Cloud/SaaS capabilities, and expanding CSC’s presence and offerings in the chemical, energy and natural resources markets.

Divestitures

As described below, during fiscal 2013 CSC divested three businesses that qualified for discontinued operations presentation. As a result, CSC's results from continuing operations, for all periods presented, have been recast to exclude the results of the divested businesses.


3


During the third quarter of fiscal 2013, CSC completed the divestiture of its U.S. based credit services business for cash proceeds of approximately $1.0 billion and its Italian consulting and system integration business for a cash payment of $35 million. During the fourth quarter of fiscal 2013, CSC completed the divestiture of one of its enterprise systems integration businesses based in Singapore and Malaysia for consideration of approximately $104 million. This business was primarily involved in the reselling of enterprise hardware and software and providing the related maintenance services. All of these businesses were primarily a part of the Company's BSS segment and the divestitures reflect the Company's ongoing initiative to focus on next-generation technology services.

Additionally, during the fourth quarter of fiscal 2013, the Company divested its Australian information technology staffing unit, Paxus, for cash consideration of approximately $79 million. Due to CSC's ongoing business involvement with Paxus, this divestiture did not qualify to be presented as discontinued operations, and therefore its results are included in continuing operations.

During fiscal 2011, CSC completed the divestiture of two immaterial businesses within its NPS segment whose ultimate customer is the U.S. federal government, one during the second quarter for consideration of approximately $56 million and another during the fourth quarter for consideration of approximately $65 million. Both of these divestitures were driven by governmental Organizational Conflict of Interest concerns. These divestitures have been reflected as discontinued operations in our financial statements.

For further discussion of these acquisitions and divestitures, see Notes 3 and 4 to the Consolidated Financial Statements.

Competition

The IT and professional services markets in which CSC competes are not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those offered by the Company. Some of these are large industrial firms, including computer manufacturers and major aerospace firms that may have greater financial resources than CSC and, in some cases, may have greater capacity to perform services similar to those provided by the Company. In addition, the increased importance of offshore labor centers has brought a number of foreign-based firms into competition with CSC. Offshore IT outsourcers selling directly to end-users have captured an increasing share of awards as they compete directly with U.S. domestic suppliers of these services. The Company continues to increase resources in offshore locations to mitigate somewhat this market development.

More recently, the accelerating demand for multi-tenant infrastructure services, commonly referred to as Cloud Computing offerings, is continuing to alter the landscape of competition. New entrants to our markets are offering service models that change the decision criteria and contracting expectations of our target market. The Company has responded to these changing market conditions with new offerings that are intended to position CSC favorably.

CSC’s ability to obtain business is dependent upon its ability to offer better strategic concepts and technical solutions, better value, a quicker response, more flexibility, better quality, a higher level of experience, or a combination of these factors. In the opinion of the Company’s management, CSC’s lines of business are positioned to compete effectively in the BSS, MSS and NPS markets based on its technology and systems expertise and large project management skills. It is also management’s opinion that CSC’s competitive position is enhanced by the full spectrum of IT and professional services it provides, including consulting and software and systems design, implementation and integration, IT and business process outsourcing and technical services, delivered to a broad commercial and government customer base.


4


EMPLOYEES

The Company has offices worldwide, and as of March 29, 2013, had approximately 90,000 employees. The services provided by CSC require proficiency in many fields, such as computer sciences, programming, telecommunications networks, mathematics, physics, engineering, astronomy, geology, operations, research, finance, economics, statistics and business administration.

U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS

All of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and other materials required to be filed with or furnished to the U.S. Securities and Exchange Commission (SEC) on or after January 19, 1995, are available free of charge through the Company’s Internet website, www.csc.com, or through the CSC Investor Relations Office at 1-800-542-3070. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise. As soon as reasonably practical after the Company has electronically filed such material with or furnished it to the SEC, these items can be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Periodic reports, proxy statements, information statements, and other information filed with or furnished by the Company to the SEC are available on the SEC’s website, www.sec.gov, or by calling the SEC at 1-800-SEC-0330 (1-800-732-0330).

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

All statements and assumptions contained in this Annual Report and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking information contained in these statements include, among other things, statements with respect to CSC’s financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of CSC’s control, which could cause actual results to differ materially from the results described in such statements. These factors include without limitation those listed below under Item 1A. "Risk Factors."

Forward-looking statements in this Annual Report speak only as of the date of this Annual Report, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. CSC does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events, except as required by law.

Item 1A.
Risk Factors

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

1.
Our business may be adversely impacted as a result of changes in demand, both globally and in individual market segments, for IT outsourcing, business process outsourcing and consulting and systems integration services. In addition, worldwide economic weakness and uncertainty could adversely affect our revenue and expenses.

Current weakness in worldwide economic conditions and political uncertainty may adversely impact our customers' demand for our services in the markets in which we compete, including our customers' demand for consulting, systems integration and other IT services. Our government customers' demand may also be affected by budgetary and political uncertainties, changing priorities, military conflicts and other events.

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2.
We are the subject of an ongoing SEC investigation and an SEC comment letter process, which could divert management's focus, result in substantial investigation expenses and have an adverse impact on our reputation and financial condition and results of operations.

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

The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

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

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

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

See Note 2 to the Consolidated Financial Statements for a discussion of these investigations and adjustments.

3.
On August 31, 2012, we entered into a binding interim agreement contract change note (IACCN) with the NHS, which amends the terms of the then current contract with the NHS and forms the basis on which we will finalize a full restatement of the current contract. Under the IACCN, the NHS will not be subject to any trust volume commitment for Lorenzo products and the Company has agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity.

CSC and the NHS are parties to a contract under which the Company is developing and deploying an integrated electronic patient records system. On August 31, 2012, after a series of negotiations, CSC and NHS entered into the IACCN, which has been approved by all required U.K. government officials, and which amended the terms of the parties' then current contract. Under the IACCN, the parties have agreed to a mutual release of all past or

6


future disputed amounts under the contract through the date of the IACCN. On March 28, 2013, the Company and the NHS signed a letter agreement that modified certain financial terms of the IACCN. The IACCN will form the basis of an amendment and restatement of the existing NHS contract which the parties are in the process of negotiating.

Under the IACCN, the NHS will not be subject to any trust volume commitment for Lorenzo (there are no changes in quantities for non-Lorenzo deployments), and the Company has agreed to non-exclusive deployment rights for all products and services in those regions in which it previously enjoyed exclusivity. As a result, the individual trusts can choose third-party software vendors other than CSC to provide a software solution. CSC and the NHS have also agreed to a streamlined approach for trusts which wish to take the Lorenzo products within the NME regions to obtain central funding from the U.K. Department of Health for implementation of the Lorenzo products. In addition, CSC may offer the Lorenzo solution throughout the rest of England where trusts select CSC's solutions through a separate competitive process.

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

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

Our NPS segment generated approximately 36.0% of our revenue for fiscal 2013. The U.S. government fiscal issues, and continued uncertainty regarding the timing and magnitude of U.S. government budget reductions, may reduce the U.S. federal government's demand and available funds for IT projects, which would have a material adverse impact on our NPS segment and our business.

We closely monitor federal budget, legislative and contracting trends and activities and continually examine our strategies to take these into consideration. The Budget Control Act of 2011 (“BCA”) commits the U.S. government to reduce the federal deficit over ten years through caps on discretionary spending. The BCA established a Congressional Joint Select Committee on Deficit Reduction responsible for identifying an additional $1.2 trillion in deficit reductions by November 23, 2011. However, the failure to produce a deficit reduction proposal by this deadline triggered sequestration, which calls for automatic spending cuts split between defense and non-defense programs beginning in 2013 and continuing over a ten-year period. Sequestration was to have gone into effect on January 2, 2013, but The American Taxpayer Relief Act of 2012 that was signed into law on January 2, 2013 contained provisions that delayed sequestration provisions of the BCA for two months and reduced the mandatory reduction to $85 billion. The sequestration order was approved by the President on March 1, 2013. As a result of sequestration, we have already begun to see our federal government customers becoming more cautious with contract awards and spending, resulting in shorter contract durations, smaller award values and an inclination towards extension of existing customers, and we expect this behavior to continue until the uncertainties are resolved. We are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we are already experiencing reduced funding on some of our programs, and may see further reductions, we do not expect the cancellation of any of our major programs.

In addition, if the existing statutory limit on the amount of permissible federal debt is not raised by May 19, 2013, we may be required to continue to perform for some period of time on certain of our U.S. government contracts even if the U.S. government is unable to make timely payments. Furthermore, such limits could also potentially delay program/contract start dates in an effort to curb obligations until all debt negotiations are complete or the U.S. government may issue a stop work order and later order the work to resume or may terminate the contract altogether. Any of these events would likely result in a material adverse effect on our financial position, results of operations and cash flows.

5.
Our contracts with the U.S. federal government contain provisions giving government customers certain rights that are unfavorable to us. Such provisions may materially and adversely affect our business and profitability.

Federal government contracts contain provisions and are subject to laws and regulations that give the federal government rights and remedies not typically found in commercial contracts. Our exposure to the risks inherent in the government contracting process is material. These risks include government audits of billable contract costs

7


and reimbursable expenses, project funding and requests for equitable adjustment, and compliance with government reporting requirements as well as the consequences if improper or illegal activities are discovered.

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

6.
Our ability to continue to develop and expand our service offerings to address emerging business demands and technological trends will impact our future growth. If we are not successful in meeting these business challenges, our results of operations and cash flows will be materially and adversely affected.

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

7.
Our primary markets, technology outsourcing and consulting and systems integration, are highly competitive markets. If we are unable to compete in these highly competitive markets, our results of operations will be materially and adversely affected.

Our competitors include large, technically competent and well capitalized companies, some of which have emerged as a result of industry consolidation, as well as “pure play” companies that have a single product focus. The competition created by these companies may place downward pressure on operating margins in our industry, particularly for technology outsourcing contract extensions or renewals. As a result, we may not be able to maintain our current operating margins, or achieve favorable operating margins, for technology outsourcing contracts extended or renewed in the future.

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

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

In fiscal 2012, Standard and Poor's Rating Services ("S&P") downgraded the Company from A- to BBB+ with a negative credit watch. On May 17, 2012, Moody's Investors Service, Inc. downgraded the Company's senior unsecured rating to Baa2 from Baa1 with a stable outlook and confirmed its short term rating at Prime-2. On May 22, 2012, S&P and Fitch Ratings LTD ("Fitch") lowered the Company's credit rating to BBB with a negative outlook. On March 5, 2013 and March 8, 2013, S&P and Fitch, respectively, raised the Company's outlook to stable.

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

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


8


9.
We may be unable to identify future attractive acquisitions, which may adversely affect our growth. In addition, our ability to consummate or integrate acquisitions we consummate may materially and adversely affect our profitability if we fail to achieve anticipated revenue improvements and cost reductions.

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

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

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

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

11.
If our customers experience financial difficulties or request out-of-scope work, we may not be able to collect our receivables, which would materially and adversely affect our profitability.

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


12.
If we are unable to accurately estimate the cost of services and the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected.

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


9


13.
We are defendants in pending litigation that may have a material and adverse impact on our profitability.

As noted in Part I, Item 3, "Legal Proceedings" and Note 20 to the Consolidated Financial Statements, we are currently party to a number of disputes which involve or may involve litigation. We are not able to predict the ultimate outcome of these disputes or the actual impact of these matters on our profitability. If we agree to settle these matters or judgments are secured against us, we may incur liabilities which may have a material and adverse impact on our liquidity and earnings.

14.
Our contracts with U.S. governmental agencies are subject to regulations, audits and cost adjustments by the U.S. government, which could materially and adversely affect our operations.

We are engaged in providing services under contracts with U.S. government agencies. These contracts are subject to extensive legal and regulatory requirements and, from time to time, such agencies investigate whether our operations are being conducted in accordance with these requirements. These investigations may include a review of our performance on contracts, pricing practices, cost structure and compliance with applicable laws and regulations. U.S. government investigations of us, whether related to the Company's federal government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. In addition, we could suffer serious reputational harm.

15.
Our ability to provide our customers with competitive services is dependent on our ability to attract and retain qualified personnel.

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

16.
Our ability to perform services for certain of our government clients is dependent on our ability to maintain necessary security clearances.

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

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

For fiscal 2013, approximately 38% of our recognized revenues were denominated in currencies other than the U.S. dollar. The exposure to currencies other than the U.S. dollar may impact our results as they are expressed in U.S. dollars. In particular, the uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations and the related European financial restructuring efforts may cause the value of the euro to fluctuate. Currency variations also contribute to variations in sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro with another currency, sales in that country or in Europe generally may be adversely affected until stable exchange rates are established. While currency risk, including exposure to fluctuations in currency exchange rates, is partially mitigated largely by matching costs with revenues in a given currency, our exposure to

10


fluctuations in other currencies against the U.S. dollar increases as revenue in currencies other than the U.S. dollar increase and as more of the services we provide are shifted to lower cost regions of the world. We believe that the percentage of our revenue denominated in currencies other than the U.S. dollar will continue to represent a significant portion of our revenue. Also, we believe that our ability to match revenue and expenses in a given currency will decrease as more work is performed at offshore locations.

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

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

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

19.
In the course of providing services to customers, we may inadvertently infringe on the intellectual property rights of others and be exposed to claims for damages.

The solutions we provide to our customers may inadvertently infringe on the intellectual property rights of third parties resulting in claims for damages against us or our customers. Our contracts generally indemnify our clients from claims for intellectual property infringement for the services and equipment we provide under our contracts. The expense and time of defending against these claims may have a material and adverse impact on our profitability. Additionally, the publicity we may receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our ability to develop new business.

20.
Our contracts generally contain provisions under which a customer may terminate the contract prior to completion. Early contract terminations may materially and adversely affect our revenues and profitability.

Our contracts typically contain provisions by which customers may terminate the contract prior to completion of the term of the contract. These contracts generally allow the customer to terminate the contract for convenience upon providing written notice. If a contract is terminated for convenience, we seek, either by defined contract schedules or through negotiations, recovery of our property, plant, equipment, outsourcing costs, investments, and other intangibles. However, there is no assurance we will be able to fully recover our investments.

We may not be able to replace the revenue and earnings from these contracts in the short-term. In the long-term, our reputation may be harmed by the publicity generated from contract terminations.

21.
Our ability to compete in certain markets we serve is dependent on our ability to continue to expand our capacity in certain offshore locations. However, as our presence in these locations increases, we are exposed to risks inherent to these locations which may adversely impact our revenue and profitability.

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

11


addition, India has recently experienced civil unrest and acts of terrorism and has been involved in confrontations with Pakistan. If India continues to experience this civil unrest or if its conflicts with Pakistan escalate, our operations in India could be adversely affected.

22.
Our performance on contracts, including those on which we have partnered with third parties, may be adversely affected if we or the third parties fail to deliver on commitments.

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

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

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

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

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

25.
We may be adversely affected by disruptions in the credit markets, including disruptions that reduce our customers' access to credit and increase the costs to our customers of obtaining credit.

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

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

We enter into foreign currency forward contracts and options with a number of counterparties. As of March 29, 2013, we had outstanding foreign currency forward contracts with a notional value of $993 million and outstanding option contracts with a notional value of $744 million. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur significant losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.

12



27.
We derive significant revenue and profit from contracts awarded through competitive bidding processes, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to bid on such projects effectively.

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

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

28.
Catastrophic events or climate conditions may disrupt our business.

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

Item 1B.
Unresolved Staff Comments

On February 11, 2011, the Company received a letter from the Staff of the SEC's Division of Corporation Finance as part of its review of the Company's Form 10-Q for the fiscal quarter ended October 1, 2010 and Form 10-Q for the fiscal quarter ended December 31, 2010. The Company responded to that letter, which has been followed by a series of new letters with additional comments from the Staff on subsequent filings. The Company has responded to each of these letters with supplemental information and analyses to address the comments from the Staff. The Staff's comments have focused on a number of issues and have requested, among other things, additional information regarding the Company's previously disclosed accounting adjustments, the Company's conclusions regarding the materiality of such adjustments and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. As of the date of this annual report, the Company has not received confirmation from the Staff that its review process is complete. The Company intends to continue to work with the Staff and respond to any remaining comments. See Risk Factor number 2 under Item 1A. "Risk Factors" in this Annual Report.

On August 23, 2012, the Company received a letter from the Staff of the SEC's Division of Corporation Finance as part of its review of the Company's Form 10-K for the fiscal year ended March 30, 2012. The Staff requested additional information and provided comments related to our acquisition of iSOFT Group Limited, revenue recognition policies and litigation matters. The Company responded to that letter and believes that it has addressed the Staff's comments. As of the date of this annual report, the Company has not received confirmation from the Staff that its review process is complete. The Company intends to continue to work with the Staff and respond to any remaining comments.


13


Item 2.
Properties

Following is a summary of properties owned and leased by CSC or its subsidiaries as of March 29, 2013:

Properties Owned
 
Approximate
Square Footage
 
General Usage
Blythewood, South Carolina
 
456,000

 
Computer and General Office
Falls Church, Virginia
 
401,000

 
General Office
Copenhagen, Denmark
 
368,000

 
Computer and General Office
Aldershot, United Kingdom
 
211,000

 
General Office
Newark, Delaware
 
176,000

 
Computer and General Office
Chennai, India
 
159,000

 
General Office
Daleville, Alabama
 
150,000

 
General Office
Norwich, Connecticut
 
144,000

 
Computer and General Office
Petaling Jaya, Malaysia
 
126,000

 
Computer and General Office
Meriden, Connecticut
 
118,000

 
Computer and General Office
Berkeley Heights, New Jersey
 
95,000

 
Computer and General Office
Maidstone, United Kingdom
 
79,000

 
Computer and General Office
Jacksonville, Illinois
 
60,000

 
General Office
Chesterfield, United Kingdom
 
51,000

 
General Office
Vadodara, India
 
47,000

 
General Office
Singapore, Singapore
 
46,000

 
General Office
Tunbridge Wells, United Kingdom
 
43,000

 
Computer and General Office
Sterling, Virginia
 
41,000

 
General Office
Various other U.S. and foreign locations
 
62,000

 
General Office


14


Properties Leased
 
Approximate
Square Footage
 
General Usage
Washington, D.C. area
 
2,525,000

 
Computer and General Office
India
 
1,880,000

 
General Office
Australia & other Pacific Rim locations
 
613,000

 
Computer and General Office
Germany
 
605,000

 
General Office
New Jersey
 
549,000

 
General Office
California
 
514,000

 
General Office
United Kingdom
 
464,000

 
Computer and General Office
Texas
 
421,000

 
Computer and General Office
Florida
 
356,000

 
General Office
Denmark
 
350,000

 
General Office
North Carolina
 
261,000

 
General Office
Pennsylvania
 
242,000

 
General Office
France
 
240,000

 
General Office
New York
 
229,000

 
General Office
Michigan
 
228,000

 
General Office
Illinois
 
215,000

 
General Office
Wisconsin
 
208,000

 
General Office
Canada
 
195,000

 
General Office
Connecticut
 
175,000

 
Computer and General Office
Minnesota
 
172,000

 
General Office
Iowa
 
157,000

 
General Office
Delaware
 
154,000

 
General Office
Ohio
 
153,000

 
General Office
Alabama
 
148,000

 
General Office
Spain
 
146,000

 
General Office
Sweden
 
140,000

 
General Office
China
 
125,000

 
General Office
Kansas
 
102,000

 
General Office
Bulgaria
 
101,000

 
General Office
Various other U.S. and foreign locations
 
1,089,000

 
Computer and General Office

Upon expiration of its leases, the Company expects to obtain renewals or to lease alternative space. Lease expiration dates range from fiscal 2014 through 2029. We believe that all of the properties are well-maintained, suitable and adequate to meet current and anticipated requirements.

Item 3.
Legal Proceedings

The information required by this Item is set forth in Note 20, Commitments & Contingencies of the Notes to the Consolidated Financial Statements under the caption “Contingencies”, contained in Part II - Item 8 of this filing. Such information is incorporated herein by reference and made a part hereof.

Item 4.
Mine Safety Disclosures

Not applicable.


15


Executive Officers of the Registrant

Name
 
Age
 
Year First
Elected as
an Officer
 
Term as an
Officer
 
Position Held With the Registrant as of the filing date
 
Family
Relationship
J. Michael Lawrie
 
59
 
2012
 
Indefinite
 
President and Chief Executive Officer
 
None
Paul N. Saleh
 
56
 
2012
 
Indefinite
 
Executive Vice President and Chief Financial Officer
 
None
Gary M. Budzinski
 
56
 
2012
 
Indefinite
 
Executive Vice President and General Manager, Global Infrastructure Services
 
None
Thomas R. Colan
 
57
 
2012
 
Indefinite
 
Vice President and Controller
 
None
James D. Cook
 
60
 
2009
 
Indefinite
 
Executive Vice President and General Manager, Global Industries
 
None
William L. Deckelman, Jr.
 
55
 
2008
 
Indefinite
 
Executive Vice President and General Counsel
 
None
Thomas E. Hogan
 
53
 
2012
 
Indefinite
 
Executive Vice President and General Manager, Global Business Services
 
None
Sunita Holzer
 
52
 
2012
 
Indefinite
 
Executive Vice President and Chief Human Resources Officer
 
None
John P. Maguire
 
52
 
2013
 
Indefinite
 
Executive Vice President and General Manager for Global Sales and Marketing and Regional Operations
 
None
David W. Zolet
 
53
 
2012
 
Indefinite
 
Executive Vice President and General Manager, North American Public Sector
 
None

Business Experience of Executive Officers

J. Michael Lawrie joined CSC as President and Chief Executive Officer on March 19, 2012 and as a member of its Board of Directors in February 2012. Prior to joining CSC, he served as the Chief Executive Officer of UK-based Misys plc, a leading global IT solutions provider to the financial services industry, from November 2006 to March 2012. Mr. Lawrie also served as the Executive Chairman of Allscripts-Misys Healthcare Solutions, Inc., from October 2008 to August 2010. From 2005 to 2006, Mr. Lawrie was a general partner with ValueAct Capital, a San Francisco-based private investment firm. He also served as Chief Executive Officer of Siebel Systems, Inc., an international software and solutions company, from 2004 to 2005. Mr. Lawrie also spent 27 years with IBM where he rose to Senior Vice President and Group Executive, responsible for sales and distribution of all IBM products and services worldwide. From 1998 to 2001, Mr. Lawrie was General Manager for IBM's business in Europe, the Middle East and Africa, which included operations in 124 countries and 90,000 employees. Prior to that, Mr. Lawrie served as General Manager of Industries for IBM's business operations in Asia Pacific, based in Tokyo. Mr. Lawrie is currently the lead independent, non-executive Director of Juniper Networks, Inc. and is also a Trustee of Drexel University, Philadelphia.

Paul N. Saleh joined CSC as Vice President and Chief Financial Officer on May 23, 2012. His current CSC job title is Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Saleh served as the Chief Financial Officer of Gannett Co. from 2010 to 2012. Prior to his tenure at Gannett Co., from 2008 to 2010, Mr. Saleh was a Managing Partner at Menza Partners, an operational and financial advisory group focusing on media, telecommunications, and technology industries.  Prior to that, he served as Chief Financial Officer of Nextel Communications from 2001 to 2007 and as Interim Chief Executive Officer of Sprint Nextel until 2008.  He served as Senior Vice President and Chief Financial Officer of Walt Disney International where he also held various other senior positions from 1997 to 2001. 

Gary M. Budzinski was appointed Executive Vice President and General Manager, Managed Services Sector in June 2012 and currently is the Executive Vice President and General Manager, Global Infrastructure Services. Prior to joining CSC, Mr. Budzinski was CEO and Founder of Integrity Innovation International, LLC, a private IT consulting firm from 2011 to 2012. Prior to that, he was Senior Vice President and General Manager at Hewlett Packard's Technology Services business unit from 2005 to 2011.

Thomas R. Colan was appointed Vice President, Controller and Principal Accounting Officer in August, 2012. Prior to joining the Company, Mr. Colan served as Executive Vice President and Chief Accounting Officer at Discovery Communications from 2008 to 2012. Prior to his tenure at Discovery Communications, Mr. Colan served as Senior Vice President, Controller and Treasurer at AOL Online/Time Warner. Prior to that, he held various financial leadership positions at GTE, Planning Research Corporation and Coopers & Lybrand.

16



James D. Cook is currently the Executive Vice President and General Manager, Global Industries. He served as President, Business Solutions and Services Sector from 2009 to 2012. Mr. Cook is currently the Executive Vice President and General Manager, Global Industries and has previously served as CSC's President, Financial Services Sector from 2001 to 2009. Prior to joining CSC in 1995, Mr. Cook held a wide range of executive positions at Philip Morris, Kraft Foods, General Electric, and Chase Manhattan Bank.

William L. Deckelman, Jr. is Executive Vice President and General Counsel. Mr. Deckelman joined CSC in January 2008 and served as Vice President, General Counsel and Secretary from 2008 to 2012. Prior to joining CSC, Mr. Deckelman served as Executive Vice President and General Counsel of Affiliated Computer Services Inc., since March 2000, and served as a director from 2000 to 2003, holding various executive positions there since 1989.

Thomas E. Hogan was appointed Executive Vice President and General Manager, Business Solutions and Services Sector in June 2012 and is currently the Executive Vice President and General Manager, Global Business Services. Prior to joining the Company, Mr. Hogan held senior positions at Hewlett Packard from 2006 to 2011 and served as Executive Vice President of Sales & Marketing from 2006 to 2011. Prior to that, he was CEO of Vignette, a publicly held software company that specializes in enterprise content management.

Sunita Holzer joined CSC as Vice President and Chief Human Resources Officer in June 2012. Her current job title is Executive Vice President and Chief Human Resources Officer. Prior to joining the Company, Ms. Holzer served as Executive Vice President, Human Resources at Chubb Insurance from 2003 to 2012. Prior to her tenure at Chubb Insurance, she was Vice President of Human Resources for GE Capital Corporate and also held positions at American Express and AIG.

John P. Maguire was appointed Executive Vice President and General Manager, Global Sales & Marketing and Regional Operations in May 2013. Prior to joining the Company, Mr. Maguire served as Senior Vice President at Hewlett-Packard from 2011 to 2013. Prior to that, he served as Managing Partner at Accenture from 2002 to 2011. Prior to that he served as Vice President at IBM from 1984 to 2002.

David W. Zolet is Executive Vice President and General Manager, North American Public Sector in June 2012. Mr. Zolet joined CSC as Vice President of Business Development in the North American Public Sector in July 2010 and was promoted to President, North American Public Sector in June 2012. Prior to his tenure at the Company, from 2009 to 2012, Mr. Zolet was a Vice President of Public Sector Systems Integration at IBM. Prior to that, he held various senior positions at Northrop Grumman Corporation.

PART II

Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)
Holders

Common stock of Computer Sciences Corporation is listed and traded on the New York Stock Exchange under the ticker symbol “CSC.”

As of April 29, 2013, the number of registered shareholders of Computer Sciences Corporation’s common stock was 6,315. The table shows the high and low sales prices of the Company’s common stock as reported on the composite tape of the New York Stock Exchange for each quarter during the last two fiscal years.
 
 
2013
 
2012
Fiscal Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
30.28

 
$
23.10

 
$
51.43

 
$
36.30

2nd
 
34.74

 
22.19

 
38.41

 
25.60

3rd
 
40.63

 
30.15

 
33.12

 
22.80

4th
 
50.59

 
39.02

 
33.80

 
23.27



17


Cash dividends declared on our common stock for each quarter of fiscal 2013 and fiscal 2012 are included in Selected Quarterly Financial Data (Unaudited) of this Annual Report on Form 10-K. We expect to return excess cash flow to our stockholders from time to time through our common stock repurchase program described below or the payment of dividends. However, there can be no assurance that share repurchases will occur or future dividends will be declared or paid. Our share repurchase program and the declaration and payment of future dividends, the amount of any such share repurchases or dividends, and the establishment of record and payment dates for dividends, if any, are subject to final determination by our Board of Directors after review of our current strategy and financial performance and position, among other things.

(b) Purchases of Equity Securities

The following table provides information on a monthly basis for the fourth quarter ended March 29, 2013 with respect to the Company’s purchase of equity securities:
Period
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid Per Share
 
Total Number of Shares
Purchased as
Part of Publicly
Announced Plans or Programs (2)
 
Approximate
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or Programs (2)
December 29, 2012 to January 25, 2013
 
192,942
 
$40.01
 
150,000
 
$852,089,072
January 26, 2013 to February 22, 2013
 
1,201,341
 
$47.91
 
1,200,000
 
$794,971,697
February 23, 2013 to March 29, 2013
 
3,469,734
 
$48.76
 
3,386,452
 
$629,875,583

(1) 
The Company accepted 49,458 shares of common stock in the quarter ended March 29, 2013 tendered by employees in lieu of cash due to the Company in connection with the exercise of stock options. The Company accepted 78,107 shares of its common stock in the quarter ended March 29, 2013 from employees in lieu of cash due to the Company in connection with the issuance of shares of common stock related to vested RSUs. Such shares of common stock are stated at cost and held as treasury shares.

(2) 
On December 13, 2010, the Company publicly announced that its Board of Directors approved a share repurchase program authorizing up to $1 billion in repurchases of shares of the Company’s outstanding common stock. CSC is implementing the program through purchases made in open market transactions in compliance with SEC Rule 10b-18, subject to market conditions, and applicable state and federal legal requirements. Share repurchases will be funded with available cash. The timing, volume, and nature of share repurchases will be at the discretion of management, and may be suspended or discontinued at any time. CSC’s Board of Directors has not established an end date for the new repurchase program. The Company repurchased 4,736,452 shares of its common stock in the fiscal quarter ended March 29, 2013 under the share repurchase program.

18


(c) Performance Graph

The following graph compares the cumulative total return on CSC common stock during the last five fiscal years with the cumulative total return on the Standard & Poor’s 500 Stock Index and the S&P North American Technology Services Index, formerly the Goldman Sachs Technology Services Index.

CSC Total Shareholder Return
(Period Ended March 29, 2013)



Indexed Return Chart (2008 = 100)
 
Return 2009
 
Return 2010
 
Return 2011
 
Return 2012
 
Return 2013
 
CAGR
CSC common stock
-1.59
 %
 
35.12
%
 
-7.61
 %
 
-37.74
 %
 
68.31
%
 
5.18
%
S&P 500 Index
-34.23
 %
 
42.85
%
 
15.36
 %
 
8.00
 %
 
13.96
%
 
5.93
%
S&P North American Technology Services Index
-16.96
 %
 
37.63
%
 
18.49
 %
 
15.36
 %
 
18.02
%
 
13.02
%

Assumes $100 invested on March 28, 2008, in CSC common ctock, the S&P 500 Index, and the S&P North American Technology Services Index, formerly the Goldman Sachs Technology Services Index. Indexed amounts and return percentages follow CSC fiscal years.

(d) Equity Compensation Plans

See Item 12 of this Annual Report on Form 10-K for information regarding our equity compensation plans.


19


Item 6.
Selected Financial Data

COMPUTER SCIENCES CORPORATION

 
 
Five Year Review
Amounts in millions, except per share amounts
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
 
April 3, 2009
Total assets
 
$
11,251

 
$
11,189

 
$
16,120

 
$
16,455

 
$
15,619

Debt
 
 
 
 
 
 
 
 
 
 
Long-term, net of current maturities
 
2,498

 
1,486

 
2,409

 
3,669

 
4,173

Short-term
 

 
43

 
29

 
21

 
32

Current maturities
 
234

 
1,211

 
141

 
54

 
30

Total
 
2,732

 
2,740

 
2,579

 
3,744

 
4,235

Stockholders’ equity
 
3,160

 
2,834

 
7,560

 
6,508

 
5,618

Debt to total capitalization
 
46.4
%
 
49.2
%
 
25.4
%
 
36.5
%
 
43.0
%


 
 
Five Year Review
 
 
Fiscal Year
Amounts in millions, except per-share amount
 
2013(5)
 
2012(1)(5)
 
2011(1)(5)
 
2010(1)(5)
 
2009(5)
Revenues
 
$
14,993

 
$
15,364

 
$
15,582

 
$
15,505

 
$
16,006

Costs of services (excludes depreciation and amortization, contract charge, settlement charge and restructuring costs of $137 (2012))
 
11,851

 
13,019

 
12,578

 
12,303

 
12,684

Costs of services – specified contract charge (excludes amount charged to revenue of $204)(2)
 

 
1,281

 

 

 

Costs of services – settlement charge (excludes amount charged to revenue of $42)(3)
 

 
227

 

 

 

Restructuring costs
 
264

 
140

 

 

 

Goodwill impairment(4)(7)
 

 
2,745

 

 


 
4

Income (loss) from continuing operations before taxes
 
480

 
(4,454
)
 
878

 
939

 
859

Taxes on income (benefit)
 
(35
)
 
(84
)
 
202

 
156

 
(213
)
Income (loss) from continuing operations, net of taxes
 
515

 
(4,370
)
 
676

 
783

 
1,072

Income (loss) from discontinued operations, net of taxes
 
464

 
145

 
83

 
51

 
51

Net income (loss) attributable to CSC common shareholders
 
$
961

 
(4,242
)
 
740

 
$
817

 
$
1,115

Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
3.22

 
$
(28.31
)
 
$
4.25

 
$
5.05

 
$
7.03

Discontinued operations
 
3.00

 
0.94

 
0.54

 
.31

 
0.34

 
 
$
6.22

 
$
(27.37
)
 
$
4.79

 
$
5.36

 
$
7.37

Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
3.20

 
(28.31
)
 
4.20

 
$
4.97

 
$
6.98

Discontinued operations
 
2.98

 
0.94

 
0.53

 
.31

 
0.33

 
 
$
6.18

 
(27.37
)
 
4.73

 
$
5.28

 
$
7.31

 
 
 
 
 
 
 
 
 
 
 
Cash dividend per common share(6)
 
$
0.80

 
$
0.80

 
$
0.70

 
$

 
$


(1) 
Fiscal 2012 and prior year amounts have been recast to present discontinued operations for divestments of three BSS businesses in fiscal 2013.
(2) 
Fiscal 2012 specified contract charge related to the Company’s contract with the U.K. National Health Service. See Note 18 of the Consolidated Financial Statements.
(3) 
Fiscal 2012 settlement charge related to the contract settlement with the federal government. See Note 19 of the Consolidated Financial Statements.
(4) 
Fiscal 2012 goodwill impairment charge related to MSS segment and two of the reporting units in the BSS segment. See Note 9 of the Consolidated Financial Statements.
(5) 
The Company recorded various out of period adjustments in fiscal 2013, 2012, 2011 and 2010 that should have been recorded in prior fiscal years. See Note 2 of the Consolidated Financial Statements.
(6) 
In Fiscal 2011, the Company implemented a regular quarterly dividend.
(7) 
Fiscal 2009 goodwill impairment charge related to an Asian reporting unit in the BSS segment.

20


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis provides information management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. This discussion should be read in conjunction with the Company's consolidated financial statements and associated notes as of and for the year ended March 29, 2013.

There are three primary objectives of this discussion:

1.
Provide a narrative on the consolidated financial statements, as presented through the eyes of management;
2.
Enhance the disclosures in the consolidated financial statements and footnotes by providing context within which the consolidated financial statements should be analyzed; and
3.
Provide information to assist the reader in ascertaining the predictive value of the reported financial results.

To achieve these objectives, the management discussion and analysis is presented in the following sections:

Overview - includes a description of the Company's business, how it earns revenue and generates cash, as well as a discussion of economic and industry factors, key business drivers, key performance indicators and fiscal 2013
highlights.

Results of Operations - discusses year-over-year changes to operating results for fiscal 2011 through fiscal 2013, describing the factors affecting revenue on a consolidated and reportable segment basis, including new contracts, acquisitions and divestitures and currency impacts, and also describing the factors affecting changes in the the Company's major cost and expense categories.

Financial Condition - discusses causes of changes in cash flows and describes the Company's liquidity and available capital resources.

Critical Accounting Estimates - discusses the significant accounting policies that require critical judgments and estimates.

Overview

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

The Company's reportable segments are as follows:

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

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

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

For additional information regarding our business segments, see Note 16 of the Consolidated Financial Statements.

During fiscal 2013, the Company was in the process of changing its operating model and realigning executive management accordingly. In the first quarter of fiscal 2014, the Company expects that it will commence operating under the new model and its operating and reportable segments will change to align with this new model.

21


Economic and Industry Factors

The Company's results of operations are impacted by economic conditions generally, including macroeconomic conditions. We are monitoring current macroeconomic and credit market conditions and levels of business confidence and their potential effect on our clients and on us. A severe and/or prolonged economic downturn could adversely affect our clients' financial condition and the levels of business activities in the industries and geographies in which we operate. This may reduce demand for our services or depress pricing of those services and have a material adverse effect on our new contract bookings and results of operations. Particularly in light of recent economic uncertainty, we continue to monitor our costs closely in order to respond to changing conditions and to manage any impact to our results of operations.

Our results of operations are also affected by levels of business activity and rates of change in the industries we serve, as well as by the pace of technological change and the type and level of technology spending by our clients. The ability to identify and capitalize on these markets and technological changes early in their cycles is a key driver of our performance.

Revenues are driven by our ability to secure new contracts and to deliver solutions and services that add value to our clients. Our ability to add value to clients, and therefore generate revenues, depends in part on our ability to deliver market-leading service offerings and to deploy skilled teams of professionals quickly and on a global basis.

The BSS and MSS segment markets are affected by various economic and industry factors. The economic environment in the regions CSC serves will impact customers' decisions for discretionary spending on IT projects. CSC is in a highly competitive industry which exerts downward pressure on pricing and requires companies to continually seek ways to differentiate themselves through several factors, including service offerings and flexibility. Management monitors industry factors including relative market shares, growth rates, billing rates, staff utilization rates and margins as well as macroeconomic indicators such as interest rates, inflation rates and foreign currency rates.

Outsourcing contracts are typically long-term relationships. Long-term, complex outsourcing contracts, including their consulting components, require ongoing review of the terms and scope of work in order to meet clients' evolving business needs and performance expectations.

More recently, the Company has rationalized its service offerings and implemented a strategy of selling defined solutions that require less customization and benefit from leveraged delivery at scale. Such solutions include our portfolio of Cloud-based Infrastructure-as-a-Service offerings, managed applications services and a range of discrete offerings for computing, storage, mobility and networking services.

The NPS segment market is also highly competitive and has unique characteristics. All U.S. government contracts and subcontracts may be modified, curtailed or terminated at the convenience of the government if program requirements or budgetary constraints change. In the event that a contract is terminated for convenience, the Company generally is reimbursed for its allowable costs through the date of termination and is paid a proportionate amount of the stipulated profit or fee attributable to the work performed. Shifting priorities of the U.S. government can also impact the future of projects. Management monitors government priorities and industry factors through numerous industry and government publications and forecasts, legislative activity, budgeting and appropriation processes and by participating in industry professional associations.

Business Drivers

Revenue in all three lines of business is generated by providing services on a variety of contract types lasting from less than six months to ten years or more. Factors affecting revenue include the Company's ability to successfully:

bid on and win new contract awards,
satisfy existing customers and obtain add-on business and win contract recompetes,
compete on services offered, delivery models offered, technical ability and innovation, quality, flexibility, global reach, experience, and results created, and
identify and integrate acquisitions and leverage them to generate new revenues.

Earnings are impacted by the above revenue factors and, in addition, the Company's ability to:


22


control costs, particularly labor costs, subcontractor expenses and overhead costs including healthcare, pension and general and administrative costs,
anticipate talent needs to avoid staff shortages or excesses,
accurately estimate various factors incorporated in contract bids and proposals,
develop offshore capabilities and migrate compatible service offerings offshore, and
manage foreign currency fluctuations related to international operations.

Cash flows are affected by the above earnings factors and, in addition, by the following factors:

timely management of receivables and payables,
investment opportunities available, particularly related to business acquisitions, dispositions and large outsourcing contracts,
tax obligations, and
the ability to efficiently manage capital deployed for outsourcing contracts, software, and property, plant and equipment.

Key Performance Indicators

The Company manages and assesses the performance of its business through various means, with the primary financial measures including new contract wins, revenue, operating margins, and free cash flow.

New contract wins: In addition to being a primary driver of future revenue, new contract wins also provide management an assessment of the Company's ability to compete. The total level of wins tends to fluctuate from year to year depending on the timing of new or recompeted contracts, as well as numerous external factors.

Revenue: Revenue is a product of contracts won in prior periods, known as backlog, and work secured in the current year. Year-over-year revenues tend to vary less than new contract wins, and reflect performance on both new and existing contracts. Foreign currency fluctuations also impact revenue.

Operating margins: Operating margins reflect the Company's performance on contracts and ability to control costs. While the ratios of various cost elements as a percentage of revenue can shift as a result of changes in the mix of businesses with different cost profiles, a focus on maintaining and improving overall margins leads to improved efficiencies and profitability. Although the majority of the Company's costs are denominated in the same currency as revenues, increased use of offshore support also exposes CSC to additional margin fluctuations.

Free cash flow: Primary drivers of the Company's free cash flow are earnings provided by the Company's operations and the use of capital to generate those earnings. Also contributing to short-term cash flow results are movements in current asset and liability balances.


23


Fiscal 2013 Highlights

The key operating results for fiscal 2013 include:

Revenues decreased $371 million, or 2.4%, to $14,993 million compared to fiscal 2012. On a constant currency basis(1), revenues decreased $164 million or 1.1%.

Operating income(2) increased to $900 million as compared to an operating loss of $1,359 million in fiscal 2012. The operating income margins increased to 6.0% from (8.8)% in fiscal 2012.

Earnings before interest and taxes(3) (EBIT) increased to $641 million as compared to a loss before interest and taxes of $(4,317) million in fiscal 2012. The EBIT margin increased to 4.3% from (28.1)% in fiscal 2012.

Income from continuing operations before taxes was $480 million, compared to a loss from continuing operations before taxes of $(4,454) million in fiscal 2012.

Income from discontinued operations, net of taxes was $464 million, compared to $145 million in fiscal 2012.

Net income attributable to CSC common shareholders was $961 million, an increase from $(4,242) million in the prior year.

Diluted earnings (loss) per share (EPS) from continuing operations was $3.20 as compared to $(28.31) in the prior year.

Diluted EPS from discontinued operations was $2.98 as compared to $0.94 in the prior year.

In fiscal 2013, the Company recorded restructuring costs of $264 million, of which $190 million related to MSS, $39 million to BSS, $13 million to NPS and $22 million to Corporate. In fiscal 2012, the Company recorded restructuring costs of $140 million, of which $108 million was related to MSS, $31 million to BSS, $1 million to NPS and none to Corporate.

The Company announced contract awards of $13.8 billion, including MSS segment awards of $6.9 billion, NPS segment awards of $3.5 billion, and BSS segment awards of $3.4 billion.

Total backlog(4) at the end of fiscal 2013 was $34.4 billion, a decrease of $2.0 billion as compared to the backlog at the end of fiscal 2012 of $36.4 billion. Of the total $34.4 billion backlog, $10.5 billion is expected to be realized as revenue in fiscal 2014, and $11.4 billion is not yet funded.

Days Sales Outstanding (DSO)(5) was 73 days at March 29, 2013, a change from 72 days at March 30, 2012.

Debt-to-total capitalization ratio(6) was 46.4% at the end of fiscal 2013, a decrease of 2.8 percentage points from 49.2% at the end of fiscal 2012.

Cash provided by operating activities was $1,119 million, as compared to $1,176 million during fiscal 2012.

Cash provided by investing activities was $456 million, as compared to cash used of $1,308 million during fiscal 2012.

Cash used in financing activities was $589 million, as compared to $581 million during fiscal 2012.

Free cash flow(7) was $264 million, as compared to $59 million in fiscal 2012.


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


24


(2) 
Operating income is a non-U.S. Generally Accepted Accounting Principle (GAAP) measure used by management to assess performance of the Company's segments and on a consolidated basis. The Company’s definition of such measure may differ from other companies. We define operating income as revenue less costs of services, depreciation and amortization expense, and segment general and administrative (G&A) expense, excluding corporate G&A. Management compensates for the limitations of this non-GAAP measure by also reviewing income (loss) from continuing operations before taxes, which includes costs excluded from the operating income definition such as goodwill impairment, corporate G&A, interest and other income. A reconciliation of consolidated operating (loss) income to (loss) income from continuing operations before taxes is as follows:
 
 
Twelve Months Ended
(Amounts in millions)
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
Operating (loss) income
 
$
900

 
$
(1,359
)
 
$
1,125

Corporate G&A
 
(293
)
 
(219
)
 
(138
)
Interest expense
 
(183
)
 
(175
)
 
(167
)
Interest Income
 
22

 
38

 
37

Goodwill impairment
 

 
(2,745
)
 

Other income, net
 
34

 
6

 
21

Income (loss) from continuing operations before taxes
 
$
480

 
$
(4,454
)
 
$
878


(3) 
EBIT is a non-U.S. GAAP measure that provides useful information to investors regarding the Company's results of operations as it provides another measure of the Company's profitability, and is considered an important measure by financial analysts covering CSC and its peers. The Company’s definition of such measure may differ from other companies. We define EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, goodwill impairment, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to net income from continuing operations is as follows:
 
 
Twelve Months Ended
(Amounts in millions)
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
Earnings (loss) before interest and taxes
 
$
641

 
$
(4,317
)
 
$
1,008

Interest expense
 
(183
)
 
(175
)
 
(167
)
Interest income
 
22

 
38

 
37

Taxes on income
 
35

 
84

 
(202
)
Income (loss) from continuing operations
 
$
515

 
$
(4,370
)
 
$
676


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

For NPS, announced award values for competitive indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. Announced values for non-competitive IDIQ awards represent management’s estimate at the award date. Business awards for MSS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. BSS award values are based on firm commitments, with the exception of deals greater than $20 million and contract terms greater than two years. In those instances, BSS estimates are based on projections of service volumes and currency exchange rates at the time of contract signing and include option years. CSC's business awards, for all periods presented, have been recast to exclude the awards relating to discontinued operations.

(5) 
DSO is calculated as total receivables at the fiscal period end divided by revenue-per-day. Revenue-per-day equals total revenues divided by the number of days in the fiscal period. Total receivables includes unbilled receivables but excludes tax receivables and long-term receivables.

(6) 
Debt-to-total capitalization ratio is defined as total current and long-term debt divided by total debt and equity, including noncontrolling interest.
 
(7) 
Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that used by other companies. We define free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities) and (3) payments on capital leases and other long-term asset financings.

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


25


A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:
 
 
Twelve Months Ended
(Amounts in millions)
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
Free cash flow
 
$
264

 
$
59

 
$
678

Net cash used in investing activities
 
(456
)
 
1,308

 
892

Acquisitions, net of cash acquired
 
(34
)
 
(374
)
 
(158
)
Business dispositions
 
1,108

 
2

 
119

Short-term investments
 

 
4

 

Payments on capital leases and other long-term asset financings
 
237

 
177

 
33

Net cash provided by operating activities
 
$
1,119

 
$
1,176

 
$
1,564

Net cash provided by (used in) investing activities
 
$
456

 
$
(1,308
)
 
$
(892
)
Net cash used in financing activities
 
$
(589
)
 
$
(581
)
 
$
(1,676
)

Results of Operations
 
Revenues

Revenues for the NPS, MSS, and BSS segments for fiscal 2013, 2012, and 2011 are as follows:
 
 
Twelve Months Ended
 
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
(Amounts in millions)
 
Amount
 
Percent
Change
 
Amount
 
Percent
Change
 
Amount
NPS
 
$
5,391

 
(5.5
)%
 
$
5,703

 
(5.0
)%
 
$
6,002

MSS
 
6,457

 
(2.2
)
 
6,602

 
0.3

 
6,583

BSS
 
3,272

 
2.9

 
3,180

 
2.3

 
3,110

Corporate
 
13

 
 
 
13

 


 
14

Subtotal
 
15,133

 
(2.4
)
 
15,498

 
(1.3
)
 
15,709

Eliminations
 
(140
)
 
 
 
(134
)
 


 
(127
)
Total Revenue
 
$
14,993

 
(2.4
)%
 
$
15,364

 
(1.4
)%
 
$
15,582


The major factors affecting the percent change in revenues are presented as follows:

Twelve Months Ended
March 29, 2013 vs. March 30, 2012
 
Acquisitions
 
Approximate
Impact of
Currency
Fluctuations
 
Net Internal
Growth (Decline)
 
Total
NPS
 
0.5
%
 

 
(6.0
)%
 
(5.5
)%
MSS
 
0.7

 
(1.9
)%
 
(1.0
)
 
(2.2
)
BSS
 
2.1

 
(2.6
)
 
3.4

 
2.9

Cumulative Net Percentage
 
0.9
%
 
(1.3
)%
 
(2.0
)%
 
(2.4
)%
 
 
 
 
 
 
 
 
 
Twelve Months Ended
March 30, 2012 vs. April 1, 2011
 
Acquisitions
 
Approximate
Impact of
Currency Fluctuations
 
Net Internal
Growth (Decline)
 
Total
NPS
 
0.6
%
 

 
(5.6
)%
 
(5.0
)%
MSS
 
0.9

 
2.7
 %
 
(3.3
)
 
0.3

BSS
 
5.5

 
3.6

 
(6.8
)
 
2.3

Cumulative Net Percentage
 
1.7
%
 
1.8
 %
 
(4.9
)%
 
(1.4
)%


26


The Company's fiscal 2013 revenue decreased $371 million as compared to fiscal 2012. This decrease was primarily due to reduction in net internal revenue of $299 million and the adverse impact of foreign currency movement of $207 million, partially offset by $141 million of revenue from acquisitions.

The Company's fiscal 2012 revenue decreased $218 million as compared to fiscal 2011. This decrease was primarily due to reduction in net internal revenue of $762 million, partially offset by favorable impact of foreign currency movement of $284 million and $268 million of revenue from acquisitions.

North American Public Sector

The Company’s NPS Sector segment revenues were derived from the following sources:
 
 
Twelve Months Ended
 
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
Dollars in millions
 
Amount
 
Percent
Change
 
Amount
 
Percent
Change
 
Amount
Department of Defense
 
$
3,687

 
(4.6
)%
 
$
3,863

 
(10.0
)%
 
$
4,290

Civil agencies
 
1,473

 
(9.0
)
 
1,618

 
7.3

 
1,508

Other (1)
 
231

 
4.1

 
222

 
8.8

 
204

Total
 
$
5,391

 
(5.5
)%
 
$
5,703

 
(5.0
)%
 
$
6,002


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

Fiscal 2013

NPS segment revenue decreased $312 million, or 5.5%, as compared to fiscal 2012. This decline was due to decreases on both Department of Defense (DOD) and Civil Agencies (Civil) contracts, of $176 million, or 4.6%, and $145 million, or 9.0%, respectively.

The revenue decrease on DOD contracts was comprised of reduced revenue of $96 million on certain contracts with the U.S. Air Force and other DOD agencies that either had concluded or were winding down, and reduced revenue of $140 million due to a net reduction in tasking on existing contracts, primarily with the U.S. Army and the U.S. Navy. The year-over-year revenue trend, however, benefited from the fiscal 2012 adverse adjustment to revenue of $42 million resulting from the settlement on a contract with the U.S. Army, which did not recur, and an increase in revenue of $19 million from a wage determination settlement on a contract with the U.S. Air Force, which occurred in the third quarter of fiscal 2013.

The revenue decrease on contracts with Civil was primarily due to a net reduction in scope and tasking on existing contracts of $138 million, primarily on contracts with NASA and the U.S. Postal Service, and reduced revenue of $92 million due to the programs winding down or ending with the Department of State, Department of Commerce, Department of Labor and the Environmental Protection Agency (EPA), along with reduced revenue due to timing of certain contractual milestones of $12 million. These revenue decreases were partially offset by increased revenue of $97 million on contracts with the Department of State and Department of Homeland Security (DHS), which fully ramped up in fiscal 2013.

NPS revenue trend benefited $34 million from adjustments recorded on contracts accounted for under the percentage-of-completion method. Fiscal 2013 had net favorable adjustments of $5 million as compared to $29 million of net adverse adjustments in fiscal 2012.

NPS won contracts of $3.5 billion during fiscal 2013 compared to $6.0 billion during fiscal 2012. These amounts included $1.1 billion and $1.3 billion of recompetes, respectively. The decrease was due to two large awards that occurred in fiscal 2012.

As previously reported, and reinforced by sequestration, NPS' federal government customers are becoming more cautious with contract awards and spending, resulting in shorter contract durations, smaller award values and an inclination towards extension of existing contracts. We expect this trend to continue for the foreseeable future.


27


Fiscal 2012

NPS segment revenue for fiscal 2012 decreased $299 million, or 5.0%, as compared to fiscal 2011. This decrease was due to its DOD contracts, which had a $427 million, or 10.0%, decrease. Partially offsetting the decline in revenue on DOD contracts were increases in revenue from contracts with Civil , which had a $110 million, or 7.3%, increase, and increases in revenue from Other contracts, which had a $18 million, or 8.8%, increase. Fiscal 2012 NPS revenue was adversely impacted by net $29 million of adjustments on certain long-term contracts accounted for under the percentage-of-completion method. Of such adjustments, $39 million reduced revenue and $10 million increased revenue.

The decreases in revenue on DOD contracts, primarily with the U.S. Army and the U.S. Air Force, were due to a combination of completion of existing task orders, a contract termination and net reduction in scope and tasking on other existing contracts. In addition, revenue was adversely impacted by the contract claims settlement with the U.S. federal government in the second quarter of $42 million (see Note 19 to the Consolidated Financial Statements) and by a $14 million adjustment on a contract with the U.S. Air Force accounted for under the percentage-of-completion method due to a stop work order.

The increase in revenue from Civil was primarily due to contracts with the DHS, the Department of Human and Health Services (DHHS) and the Social Security Administration that commenced during the second half of fiscal 2011. These increases were partially offset by revenue that did not recur due to contract completions, primarily the U.S. Census support contract, as well as reduced scope on certain other contracts, primarily with the EPA, Department of Transportation, Department of Energy and the Internal Revenue Service.

The increase in revenue from Other contracts was primarily due to higher revenue on a contract with a state agency for the development of a healthcare administration system. The higher revenue on this contract was partially offset by a $25 million adverse adjustment resulting from revised estimates under the percentage-of-completion accounting method. Of the $25 million revenue reduction, $16 million was recorded in the fourth quarter of fiscal 2012.

During fiscal 2012, many of our government customers continued to experience uncertainty about their fiscal budgets due to the Budget Control Act of 2011. As a result, large program awards were delayed and customers shifted to smaller and shorter term contracts.

NPS won new contracts of $6.0 billion during fiscal 2012 as compared to $5.5 billion during fiscal 2011.

Managed Services Sector

Fiscal 2013

MSS segment revenue decreased $145 million, or 2.2%, as compared to fiscal 2012. In constant currency, revenue decreased $22 million, or 0.3%. The unfavorable foreign currency impact was primarily due to the movement in the U.S. dollar against the euro, the Danish kroner, and the British pound. MSS' fiscal 2012 acquisition of AppLabs resulted in an increase of revenue for the year of $48 million, or 0.7% of the revenue growth for fiscal 2013. Excluding the impact of foreign currency and the acquisition, net internal revenue decreased $70 million, or 1.0%, as compared to the same period of fiscal 2012.

The decrease in MSS' net internal revenue for fiscal 2013 of $70 million was primarily due to reduced revenue of $267 million from contracts that terminated or concluded and reduced revenue of $276 million from existing contracts primarily due to price-downs, contract modifications and lower pass-through revenue. Partially offsetting these decreases was increased revenue from new client engagements acquired in late in fiscal 2012 and fiscal 2013 of $391 million, favorable impact of a year-over-year change in revenue adjustments of $54 million related to adjustments on contracts accounted for under the percentage-of-completion method, and $28 million of other fiscal 2013 favorable revenue adjustments relating primarily to contract settlements with certain customers.

Included in the MSS revenue change described above is a $5 million year-over-year favorable impact of out of period adjustments. MSS' fiscal 2013 revenue was adversely impacted by $1 million of out of period adjustments where as the fiscal 2012 revenue was adversely impacted by $6 million of out of period adjustments (see Notes 2 and 16 to the Consolidated Financial Statements).


28


During fiscal 2013, the MSS had contract awards with a total value of $6.9 billion compared to $9.5 billion during fiscal 2012. These amounts included $4 billion and $5.1 billion of recompetes, respectively. Additionally, the decrease in awards was mainly due to the Company being more selective in its bid and proposal activity, and the awards that were bid on being of shorter duration and, thus, lower total contract value. Prospectively, the Company plans to focus on securing new business through greater cross selling between segments and targeting a greater number of market renewals.

Fiscal 2012

MSS segment revenue increased $19 million, or 0.3%, as compared to fiscal 2012. In constant currency, revenue decreased $156 million, or 2.4%. The foreign currency impact was primarily due to the movement in the U.S. dollar against the Australian dollar, the British pound, the euro and the Swiss franc. MSS' second quarter acquisition of AppLabs (see Note 4 to the Consolidated Financial Statements) provided revenue of $60 million, or 0.9% of the revenue growth.

Excluding the impact of foreign currency effects and the acquisition, fiscal 2012 net internal revenue decreased $216 million, or 3.3%, as compared to the prior year. This decrease was primarily due to net volume and scope reductions of approximately $140 million and contract conclusions and terminations of approximately $200 million, partially offset by revenue from new contracts of approximately $270 million. In addition, revenue was impacted by certain one-time adjustments, including adverse adjustments on long-term contracts accounted for under the percentage-of-completion method of $48 million and missed service level metrics of $10 million due to delays on certain outsourcing contracts, partially offset by a favorable adjustment on termination of a contract of $15 million. The MSS year-over-year revenue trend was also adversely impacted by out of period adjustments. The out of period revenue decreases recorded in fiscal 2012 and fiscal 2011 were $7 million and $33 million, respectively (see Notes 2 and 15 to the Consolidated Financial Statements).

During fiscal 2012, MSS had contract awards with a total value of $9.5 billion as compared to $5 billion during fiscal 2011.

Business Solutions & Services

Fiscal 2013

BSS segment revenue increased $92 million, or 2.9%, as compared to fiscal 2012. In constant currency, revenue increased $176 million or 5.5%. The twelve-month revenue growth was unfavorably impacted by foreign currency movement in the U.S. dollar of $84 million, or 2.6%, primarily against the euro, the Brazilian real, the British pound and the Australian dollar.

The acquisition of iSOFT and the other fiscal 2012 acquisitions provided $67 million, or 2.1% of the year-over-year revenue increase. Excluding the effect of foreign currency movements and acquisitions, BSS fiscal 2013 revenue increased $109 million, or 3.4%, over the prior year. The increase in BSS net internal revenue includes the impact of the fiscal 2012 adverse revenue adjustment of $204 million associated with the NHS contract charge, which did not recur in fiscal 2013. Excluding the adverse NHS contract revenue charge, BSS fiscal 2013 net internal revenue decreased $95 million, or 2.8%.

The decrease in BSS net internal revenue for fiscal 2013, excluding the impact of the adverse fiscal 2012 NHS revenue adjustment, was due to revenue decreases primarily in its professional technology staffing business in Australia, in its financial services group, and in its healthcare group. These revenue decreases were partially offset by revenue increases on contracts with the NHS.

The year-over-year revenue decrease from the Australian staffing business was $90 million. This was due to a combination of a slowdown in its business, prior to its sale, from reduced demand from certain of its key customers, and its sale on January 25, 2013. The revenue decrease of $37 million in the financial services group was due to lower license sales and services revenue in European markets. The revenue decrease in the health services of $35 million was due to a combination of lower revenue in the Nordic and U.S. markets. The revenue increase relating to the NHS contract, excluding the fiscal 2012 write-off, was primarily due to recording revenue from achieving a key milestone associated with the Lorenzo Care Management software, deployment of the software at three NHS trust sites, and revenue indexation for fiscal 2013.


29


BSS revenue increase included $17 million of favorable adjustments on contracts accounted for under the percentage-of-completion method. Fiscal 2013 revenue included favorable adjustments of $11 million as compared to fiscal 2012 revenue that included adverse adjustments of $6 million.

BSS year-over-year revenue trend was also favorably impacted by $32 million of out of period adjustments. Fiscal 2013 revenue included $13 million of adverse out of period adjustments, whereas fiscal 2012 included $45 million of adverse adjustments. (see Notes 2 and 16 to the Consolidated Financial Statements).

During fiscal 2013, BSS had contract awards of $3.4 billion compared to $3.3 billion in fiscal 2012. The fiscal 2013 amount included $0.2 billion of recompetes. There were no recompete awards in fiscal 2012.

Fiscal 2012

BSS segment revenue increased $70 million, or 2.3%, as compared to fiscal 2011. In constant currency, revenue decreased $40 million, or 1.3%. The foreign currency impact was primarily due to the movement in the U.S. dollar against the Australian dollar, the British pound and the euro. The acquisition of iSOFT and the other fiscal 2012 and fiscal 2011 acquisitions provided $171 million, or 5.5%, of the year-over-year revenue increase. Excluding the effect of foreign currency movements and acquisitions, BSS fiscal 2012 revenue decreased $211 million, or 6.8%, compared to the prior year.

The lower net internal fiscal 2012 revenue was primarily due to a decrease in revenue on the NHS contract of $233 million, which was adversely impacted by the third quarter $204 million revenue write-down (see Note 18 to the Consolidated Financial Statements) and by fiscal 2011 milestone revenue of $23 million that did not recur in fiscal 2012. BSS' health vertical also had reduced revenue due to continuing softness in the life sciences market and certain project completions in North America. Both of these revenue decreases were partially offset by revenue increases in the other verticals of BSS' consulting group. The consulting group's growth was primarily in North America, which offset revenue shortfalls in other regions. The BSS year-over-year revenue trend was also adversely impacted by out of period adjustments. The out of period revenue adjustments recorded in fiscal 2012 and fiscal 2011 were revenue decreases of $15 million and revenue increases of $15 million, respectively (see Notes 2 and 16 to the Consolidated Financial Statements).

During fiscal 2012, BSS had contract awards of $3.3 billion compared to $3.8 billion in fiscal 2011.

Costs and Expenses

The Company’s total costs and expenses were as follows:
 
 
Twelve Months Ended
 
Percentage of Revenue
Dollars in millions
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
 
2013
 
2012
 
2011
Costs of services (excludes depreciation and amortization, specified contract charge, settlement charge and restructuring costs of $238 (2013) and $137 (2012))
 
$
11,851

 
$
13,019

 
$
12,578

 
78.9
 %
 
84.7
 %
 
80.7
 %
Cost of services – specified contract charge (excludes amount charged to revenue of $204)
 

 
1,281

 

 

 
8.3

 

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

 
227

 

 

 
1.5

 

Selling, general and administrative (excludes restructuring costs of $26 (2013) and $3 (2012))
 
1,195

 
1,128

 
949

 
8.0

 
7.3

 
6.1

Depreciation and amortization
 
1,076

 
1,147

 
1,068

 
7.2

 
7.5

 
6.9

Restructuring costs
 
264

 
140

 

 
1.8

 
0.9

 

Goodwill impairment
 

 
2,745

 

 

 
17.9

 

Interest expense, net
 
161

 
137

 
130

 
1.1

 
0.9

 
0.8

Other income, net
 
(34
)
 
(6
)
 
(21
)
 
(0.2
)
 

 
(0.1
)
Total
 
$
14,513

 
$
19,818

 
$
14,704

 
96.8
 %
 
129.0
 %
 
94.4
 %

30


Costs of Services

Fiscal 2013

Costs of services (COS), excluding the specified contract charge, the settlement charge, and the restructuring charges noted above, as a percentage of revenue decreased to 78.9% for fiscal 2013 from 84.7% for fiscal 2012. The year-over-year COS trend was favorably impacted by out of period adjustments of $33 million, which was comprised of $6 million of favorable fiscal 2013 out of period adjustments and $27 million of adverse fiscal 2012 out of period adjustments which did not repeat in fiscal 2013 (see Note 2 to the Consolidated Financial Statements).

The fiscal 2013 NPS COS ratio decreased primarily due to a net favorable year-over-year adjustment to COS of $98 million on contracts accounted for under the percentage-of-completion method. Fiscal 2013 revenue included $55 million of favorable adjustments as compared to fiscal 2012, which had $43 million of adverse adjustments. Of the $98 million, $94 million related to three contracts, one each with the Department of Labor, U.S. Air Force and the State of North Carolina. The NPS COS ratio also benefited from a $42 million adverse fiscal 2012 revenue adjustment resulting from a contract settlement with the U.S. government that did not recur, and $34 million year-over-year net favorable revenue adjustment on contracts accounted for under the percentage-of-completion method.

The lower MSS COS ratio for fiscal 2013 was primarily due to year-over-year operational improvements on contracts which had performance issues in fiscal 2012. The operational improvements were a result of continued focus on troubled accounts, greater focus on cost take out by standardization of products and processes including diagnostics and re-engineering and greater focus on delivery. This year-over-year improvement was illustrated by reduced year-over-year adverse impact of asset impairments of $138 million, net favorable year-over-year adjustments to COS and revenue on contracts accounted for under the percentage-of-completion method of $32 million and $54 million, respectively, and reduced year-over-year impact of transition cost overruns of $16 million. The COS also benefited from operational efficiencies resulting from the implementation of the turnaround strategy, such as improved cost controls, headcount reductions through restructuring, centralized procurement, better discipline around contract management, rationalized organizational spans and layers, and reduced enterprise overhead. These efficiencies are partially offset by costs related to start-up issues on certain new contracts.

The lower BSS COS ratio for fiscal 2013 was primarily due to the fiscal 2012 adverse revenue adjustment of $204 million associated with a contract with the NHS. In addition, the BSS COS ratio was favorably impacted by lower costs within BSS' consulting services due to staff reductions, and adversely impacted by a higher COS ratio in the financial services group due to lower revenue. The twelve-month COS ratio was favorably impacted by a year-over-year change of $34 million related to adjustments on contracts accounted for under the percentage-of-completion method, including a year-over-year favorable adjustment to revenue of $17 million.

Fiscal 2012

COS, excluding the specified contract charge, the settlement charge, and the restructuring charges noted above, as a percentage of revenue increased to 84.7% for fiscal 2012 from 80.7% for fiscal 2011. Both fiscal 2012 and fiscal 2011 COS were adversely impacted by out of period adjustments recorded during these years but which were related to prior years. The amounts recorded in fiscal 2012 and fiscal 2011 were $25 million and $15 million, respectively, in MSS and $15 million and $4 million, respectively, in BSS. The fiscal 2012 increase in the COS ratio was primarily driven by adverse results in the MSS and BSS segments.

The MSS COS ratio was impacted by adverse adjustments on long-term contracts accounted for under the percentage-of-completion method of $142 million of which $48 million was recorded as a reduction of revenue, impairment of tangible and intangible assets of $144 million associated primarily with service delivery issues on certain outsourcing contracts, and start-up issues on certain outsourcing contracts, including transition cost overruns of $34 million. Of these specific charges of $320 million, $171 million were recorded in the fourth quarter of fiscal 2012.

BSS' COS ratio was adversely impacted primarily by the NHS contract and the financial services business. Subsequent to the $1.5 billion NHS adjustment recorded in the third quarter of fiscal 212, and pending the finalization of a contract amendment, the Company recorded $29 million of operating losses in the fourth quarter (see Note 18 to the Consolidated Financial Statements). In addition, a year-over-year shift in BSS' financial services revenue mix, caused by a decline in the proportion of the higher margin license revenue, adversely impacted the BSS COS ratio. BSS COS ratio was

31


impacted by adverse adjustments of $17 million on certain long-term contracts accounted for under the percentage-of-completion method, of which $6 million was recorded as reduction in revenue.

The NPS COS ratio increased primarily as a result of recording $72 million of net adverse adjustments on certain long-term contracts accounted for under the percentage-of-completion method. The net adjustments included adverse adjustments of $130 million, of which $40 million reduced revenue, and favorable adjustments of $58 million, of which $10 million increased revenue. Favorable adjustments included a $48 million COS benefit on a contract that had a similar adjustment in fiscal 2011. Of the total $72 million net adverse adjustments, $44 million was recorded in the fourth quarter of fiscal 2012.

Costs of Services – Settlement Charge

During the second quarter of fiscal 2012, the Company reached a settlement agreement with the U.S. government relating to its contract claims asserted under the Contract Disputes Act of 1978 (CDA). Under the terms of the settlement, the Company received $277 million in cash and a five-year extension (four base years plus one option year) with an estimated total contract value of $1 billion to continue to support and expand the capabilities of the systems covered by the original contract scheduled to expire in December 2011. In December 2011, the Company signed the contract modification based on the terms described above. As a result of the settlement, the Company recorded a pre-tax charge of $269 million during the second quarter of fiscal 2012 to write down its claim related assets (claim related unbilled receivables of $379 million and deferred costs of $227 million) to reflect the cash received of $277 million, the estimated fair value of the contract extension of $45 million, and previously unapplied payments of $15 million. Of the pre-tax charge of $269 million, $42 million was recorded as a reduction of revenue and $227 million as a separately itemized charge to cost of services. The fair value of the contract extension was recorded as a contract asset and will be amortized as a reduction of revenue over the four year fixed contract term in proportion to the expected revenues or a straight line basis, whichever is greater. The contract extension contained a Requirements portion and an Indefinite Quantity portion (and is not subject to any minimum values). See Note 19 to the Consolidated Financial Statements for further discussion.

Selling, General and Administrative

Fiscal 2013

Selling, general and administrative (SG&A) expense, excluding the restructuring charges, as a percentage of revenue increased to 8.0% for fiscal 2013 from 7.3% for fiscal 2012. The fiscal 2013 increase was primarily driven by an increase in corporate general & administrative (G&A) costs and a higher MSS ratio, partially offset by decreases in NPS and BSS ratios.

The higher MSS ratio was primarily due to the reclassification of $17 million of costs from COS to SG&A in fiscal 2013. In addition, there were higher costs in fiscal 2013 associated with the remediation efforts of investigation findings (see Note 2 of the Consolidated Financial Statements).

The lower NPS ratio was primarily due to the cost reduction initiatives and lower bid and proposal costs due to delays in government procurements, fewer opportunities and more selectivity in the bid process towards higher margin targets.

The lower BSS ratio was primarily due to the fiscal 2012 adverse revenue adjustment of $204 million associated with a contract with the NHS. The lower ratio was also attributable to a lower run rate within iSOFT due to cost take out activity, including back office integration, and fiscal 2012 acquisition and transition costs of $10 million, which did not repeat in fiscal 2013.

Corporate G&A for fiscal 2013 was $293 million and increased $74 million as compared to the prior year. The higher fiscal 2013 expense was primarily due to accrual of $97.5 million on account of the settlement of the consolidated shareholder securities class action lawsuit (see Note 20 to the Consolidated Financial Statements). This amount was partially offset by $45 million that was recoverable under the Company's corporate insurance policies. In addition, the fiscal 2013 increase was also due to higher professional fees of $20 million primarily associated with the Company's financial transformation, higher internal audit fees of $10 million, and higher stock-based compensation and bonus expense. Partially offsetting the increases in the Corporate G&A was net reduced legal fees associated with the SEC investigation and class action lawsuits due to $45 million of insurance claims that offset the fiscal 2013 legal expenses of $78 million.


32


Fiscal 2012

SG&A expense, excluding the restructuring charges, as a percentage of revenue increased to 7.3% for fiscal 2012 from 6.1% for fiscal 2011. The fiscal 2012 increase was primarily driven by an increase in corporate G&A costs and a higher BSS ratio.

The corporate G&A costs increased year-over-year primarily due to higher legal and other fees of $67 million incurred, mainly related to the ongoing SEC and Audit Committee investigations into the matters surrounding the out of period adjustments and additional legal and other professional fees in connection with consolidated securities class action lawsuits filed in federal court (see Note 20 to the Consolidated Financial Statements). Corporate G&A costs were also higher due to costs associated with the former CEO's severance of $7 million. These cost increases were partially offset by lower bonuses of $10 million and reduced stock compensation expense of $11 million, principally due to reduction in the probable outcome of performance-based restricted stock units for certain executives.

The BSS ratio increased primarily due to the acquisition of iSOFT. iSOFT's SG&A ratio was adversely impacted by $23 million of transaction and transition costs incurred related to its acquisition.

Goodwill Impairment

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

Due to the divestiture of our credit services business in the third quarter of fiscal 2013, which caused the allocation of $241 million of goodwill from our BSS-Financial Services (BSS-FS) reporting unit to that disposed business, we assessed the goodwill remaining on BSS-FS' balance sheet for potential impairment. We performed the first step of the two-step goodwill impairment test and concluded that the goodwill remaining on BSS-FS' balance sheet, after the allocation of goodwill to the divested business, was not impaired.

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

Based on the Company's fiscal 2012 annual goodwill impairment analysis performed during the second quarter, it was concluded that fair value was below carrying value for three reporting units: MSS, BSS Global Business Solutions (BSS-GBS) and the BSS Healthcare Group (BSS-Health). Management believed that the decline in the estimated fair values of these reporting units was a result of several factors, including uncertainty about the Company's overall value as reflected in CSC's stock price decline over the first half of fiscal 2012, overall decline in the broader stock market as indicated by reduced performance metric multiples at comparable public companies, and decline in forecasted operating performance of these reporting units. At that time, the Company recorded its best estimated goodwill impairment charge of $2,685 million, of which $2,074 million related to the MSS reporting unit, $453 million related to the BSS-GBS reporting unit, and $158 million related to the BSS-Health reporting unit. During the third quarter of fiscal 2012, based on the finalization of the annual test begun in the prior quarter, the Company recorded adjustments that reduced the impairment loss recorded in the second quarter by $3 million, to $2,682 million.

In the third quarter of fiscal 2012, the Company recorded an impairment charge of $63 million on the goodwill related to its reporting unit BSS-Health. After recording this impairment charge, the BSS-Health reporting unit had no remaining goodwill.


33


Depreciation and Amortization

Fiscal 2013

Depreciation and amortization (D&A) as a percentage of revenue decreased to 7.2% for fiscal 2013 from 7.5% for fiscal 2012. The decrease in the fiscal 2013 ratio was driven by decreases in the MSS and BSS segments.

The lower MSS ratio was due to reduced D&A expense as a result of significant impairments of fixed and intangible assets recorded in fiscal 2012, as well as a reduction in capital expenditures in fiscal 2013. The lower BSS ratio was due to the fiscal 2012 adverse revenue adjustment of $204 million associated with the NHS contract, as well due to lower depreciation expense due to certain data center assets associated with the NHS contract coming to the end of their useful lives.

Fiscal 2012

D&A as a percentage of revenue increased to 7.5% for fiscal 2012 from 6.9% for fiscal 2011. The increase in the fiscal 2012 ratio was driven by all three segments. The BSS ratio increased due to higher amortization expense associated with the acquired iSOFT intangible and tangible assets. The higher MSS ratio is due to higher capital expenditure on outsourcing contracts. The higher NPS ratio is due to higher fixed asset purchases on certain of its contracts, as well as amortization of acquired intangible assets from fiscal 2012 and 2011 acquisitions.

Restructuring Costs

During fiscal 2013, the Company continued its efforts to reduce its staffing and facility costs and engaged in additional restructuring actions that were first commenced in the fourth quarter of fiscal 2012. The fiscal 2013 actions (the "Fiscal 2013 Plan") related primarily to reducing headcount in order to align resources to support business needs, including assessment of management span of control and layers, and further increase the use of lower cost off-shore resources. In contrast, the fiscal 2012 restructuring efforts (the "Fiscal 2012 Plan") were designed primarily to address excess capacity issues and alignment of workforce with current business needs, primarily in Europe.

Total restructuring costs recorded during fiscal 2013 and 2012 were $264 million and $140 million, respectively. There were no restructuring costs for fiscal 2011. The amounts recorded in fiscal 2013 and 2012 included $22 million and $20 million, respectively, of pension benefit augmentations that were due to certain employees in accordance with legal or contractual obligations and which will be paid out over several years as part of normal pension distributions.

The total fiscal 2013 restructuring costs of $264 million comprised $233 million under the Fiscal 2013 Plan and $31 million under the Fiscal 2012 Plan, as compared to total fiscal 2012 restructuring costs of $140 million.

Of the total restructuring expense recorded for fiscal 2013 of $264 million, $13 million related to NPS, $190 million to MSS, $39 million to BSS, and $22 million to Corporate.

Income from Discontinued Operations

During fiscal 2013, CSC completed the divestiture of three businesses within its BSS segment, reflecting the Company's ongoing service portfolio optimization initiative to focus on next-generation technology services. These divestitures have been presented separately as discontinued operations in the Consolidated Statement of Operations and the prior years have been recast to reflect the divestitures.

The fiscal 2013 income from discontinued operations, net of taxes was $464 million, and included $47 million of net income from the operations of the divestitures and $417 million of gain on disposition, net of taxes from sale of the businesses.The fiscal 2012 income from discontinued operations, net of taxes was $145 million, and included $1 million gain on disposition, net of taxes (see Note 3 to the Consolidated Financial Statements).

During fiscal 2011, CSC completed the divestiture of two businesses within its NPS segment whose ultimate customer was the U.S. federal government. These divestitures resulted in total pre-tax gains of $59 million (after-tax gains of approximately $28 million).


34


Interest Expense and Interest Income

Fiscal 2013

Interest expense of $183 million in fiscal 2013 increased $8 million compared to fiscal 2012. The higher interest expense was primarily due to the loss of $19 million associated with the early redemption of the 5.50% and 5.00% Senior Notes due 2013, partially offset by lower interest expense associated with the issuances of new Senior Notes (see Note 11 of the Consolidated Financial Statements). Interest income decreased $16 million to $22 million in fiscal 2013 primarily due to reduced average cash balances outside the U.S., primarily in India, where both the rate of interest and average cash balances are typically higher than other non-U.S. jurisdictions.

Fiscal 2012

Interest expense of $175 million in fiscal 2012 increased $8 million compared to fiscal 2011 due to an increase in capital leases in MSS. Interest income increased $1 million to $38 million in fiscal 2012. Higher interest income was primarily due to higher interest earned on cash balances in India during the first two quarters of fiscal 2012.

Other (Income) Expense, Net

The components of other (income) expense, net for fiscal 2013, fiscal 2012, and fiscal 2011 are:
 
 
Twelve Months Ended
(Amounts in millions)
 
March 29, 2013
 
March 30, 2012
 
April 1, 2011
Foreign currency loss (gain)
 
$
17

 
$
4

 
$
(2
)
Equity in earnings of unconsolidated affiliates
 
(9
)
 
(10
)
 
(11
)
Other gains
 
(42
)
 

 
(8
)
Total
 
$
(34
)
 
$
(6
)
 
$
(21
)

Fiscal 2013

The foreign currency loss increased $13 million primarily due to movement in the U.S. dollar primarily versus the Indian Rupee, which caused a year-over-year increase in mark-to-market charge of $12 million. The other gains were primarily comprised of the $38 million gain on our sale of Paxus, the Australian staffing business.

Fiscal 2012

Foreign currency loss of $4 million for fiscal 2012 was due to the movements in foreign currency exchange rates, primarily between the U.S. dollar and the Indian rupee, which adversely impacted the Company's foreign currency options. Reduction in other gains is due to fiscal 2011 gains on sale of an investment and non-controlling interest in a business, both of which did not recur in fiscal 2012.

Taxes

The Company's effective tax rate (ETR) on (loss) income from continuing operations for fiscal years 2013, 2012, and 2011 was (7.3)%, (1.9)%, and 23%, respectively. As a global enterprise, our ETR is affected by many factors, including our global mix of earnings, the extent to which those global earnings are indefinitely reinvested outside the U.S., legislation, acquisitions, dispositions, and tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. A reconciliation of the differences between the U.S. federal statutory rate and the ETR, as well as other information about our income tax provision, is provided in Note 10 to the Consolidated Financial Statements. For the tax impact of discontinued operations, see Note 3 to the Consolidated Financial Statements.

In fiscal 2013, the ETR was primarily driven by:

The Company executed an internal restructuring whereby a significant operating subsidiary was recapitalized. Certain securities issued pursuant to the recapitalization were subsequently sold to a third party. The sale

35


resulted in the recognition of a capital loss of approximately $640 million, which reduced tax expense and the ETR by $248 million and 51.8%, respectively.
A valuation allowance recorded for certain of the Company's German subsidiaries related to net operating losses and other net deferred tax assets. The impact to tax expense and the ETR was an increase of $77 million and 16%, respectively.
An increase in the valuation allowance determined on a tax jurisdictional basis due to several factors including: (i) a shift in the global mix of income which increased tax expense and the ETR by $27.6 million and 5.8%, respectively (ii) capital gains from the sale of certain other assets which decreased tax expense and the ETR by $11.5 million and 2.4%, respectively and (iii) state capital losses and credits not expected to be fully utilized within the carryforward period which increased tax expense and the ETR by $29.6 million and 6.2%, respectively.
Local losses on investment write-downs in Luxembourg (i) increased the valuation allowance and the ETR by $240.5 million and 50.2%, respectively, and (ii) decreased the foreign rate differential and ETR by $240.5 million and 50.2%, respectively.

In fiscal 2012, the ETR was primarily driven by:

The Company recorded a $1,485 million charge related to the NHS contract. Following the write-down, a full valuation allowance was established against the net operating losses in the U.K., which resulted in the Company not recording a tax benefit for the NHS charges. This charge and subsequent valuation allowance had a significant impact on the tax expense and ETR of $508 million and 11.3%, respectively.
The Company recorded a $2,745 million goodwill impairment charge, which was mostly not deductible for tax purposes. This charge resulted in an impact to the tax expense and ETR of $838 million and 18.8%, respectively.
The Company settled various tax examinations and recognized income tax benefits related to audit settlements (and the expiration of statutes of limitations on audits) of approximately $111 million, which had a favorable impact on the ETR for the fiscal year of 2.5%.
The Company elected to change the tax status of one of its foreign subsidiaries. This change in tax status resulted in a deemed liquidation for U.S. tax purposes and triggered various deductions, which resulted in an income tax benefit of approximately $32 million and had a favorable impact on the ETR for the fiscal year of 0.7%.

In fiscal 2011, the Company settled a portion of its U.S. federal income tax audit for the fiscal years 2005 through 2007 related specifically to research and development (R&D) credits. This favorable settlement of $68 million had a 7.7% impact on the ETR for the fiscal year ended 2011.

As of March 29, 2013, in accordance with ASC 740, "Income Taxes," the Company’s liability for uncertain tax positions was $262 million, including interest of $38 million, penalties of $17 million, and net of tax attributes of $32 million. During the year ended March 29, 2013, the Company accrued interest expense of $7 million ($5 million net of tax) and accrued penalties of $2 million.

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


36


Earnings (Loss) Per Share and Share Base

Fiscal 2013

Earnings (loss) per share (EPS), on a diluted basis, increased $33.55 to $6.18 in fiscal 2013. This increase in total diluted EPS was comprised of increase in EPS from continuing operations of $31.51 and increase in EPS from discontinued operations of $2.04.

The increase in EPS from continuing operations was primarily due to the adverse fiscal 2012 charges not recurring in fiscal 2013. These fiscal 2012 charges included goodwill impairment of $2,745 million (see Note 9 to the Consolidated Financial Statements), the NHS contract related charge of $1,485 million (see Note 18 to the Consolidated Financial Statements), the settlement charge of $269 million resulting from settlement of claims with the federal government (see Note 19 to the Consolidated Financial Statements) and reduced impact of net adjustments on contracts accounted for under the percentage-of-completion method (see Note 1 to the Consolidated Financial Statements) and asset impairments (see Note 8 to the Consolidated Financial Statements).

The increase in EPS from discontinued operations was primarily due to the gain, net of taxes of $417 million on the disposition of the U.S. based credit services business and enterprise systems integration business in Malaysia and Singapore.

Fiscal 2012

Diluted EPS for fiscal 2012 decreased $32.10 to $(27.37) from $4.73 in fiscal 2011. The decrease in diluted EPS was due to the net loss attributable to CSC common shareholders in fiscal 2012 which was primarily due to the goodwill impairment charge of $2,745 million recorded during the second and third quarters of fiscal 2012 (see Note 9 to the Consolidated Financial Statements), the contract charge associated with the NHS contract of $1,485 million recorded during the third quarter of fiscal 2012 (see Note 18 to the Consolidated Financial Statements), the settlement charge of $269 million that resulted from the settlement of claims with the U.S. federal government during the second quarter of fiscal 2012 (see Note 19 to the Consolidated Financial Statements), and restructuring costs of $140 million recorded during the fourth quarter of fiscal 2012 (see Note 17 to the Consolidated Financial Statements). Delivery issues on certain MSS and NPS contracts resulted in recording forward losses on contracts accounted for under the percentage-of-completion method and asset impairments which also adversely impacted the EPS for fiscal 2012.

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

As previously disclosed in fiscal 2012 and fiscal 2011, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in our Managed Services Sector (MSS) segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in the Company's investigation. On January 28, 2011, the Company was notified by the SEC's Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC's Division of Enforcement as well as matters under investigation by the Audit Committee, as further described below. The Company is cooperating in the SEC's investigation.

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

The Audit Committee’s investigation was expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (iii) certain of the

37


Company’s accounting practices that involve the percentage-of-completion accounting method, including the Company’s contract with the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

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

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

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

Out of Period Adjustments Financial Impact Summary

Cumulative Impact of Out of Period Adjustments

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments in fiscal 2013, 2012 and 2011 is attributable to the following prior fiscal years:

 
 
Increase/(Decrease)
 
 
(Amounts in millions)
 
Fiscal 2011 Adjustments
 
Fiscal 2012 Adjustments
 
 Fiscal 2013 Adjustments
 
Total Adjustments
Fiscal 2013
 
$

 
$

 
$
6

 
$
6

Fiscal 2012
 

 
79

 
7

 
86

Fiscal 2011
 
52

 
(29
)
 
(22
)
 
1

Fiscal 2010
 
(48
)
 
(9
)
 
14

 
(43
)
Prior fiscal years (unaudited)
 
(4
)
 
(41
)
 
(4
)
 
(49
)

See Note 16 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for fiscal 2013, 2012 and 2011.


38


Fiscal 2013 Adjustments Financial Impact Summary

During fiscal 2013, the Company identified and recorded net adjustments decreasing income from continuing operations before taxes by $6 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes for fiscal 2013 is comprised of the following:

net adjustments decreasing fourth quarter pre-tax income by $9 million resulting primarily from the correction of inappropriately capitalized operating costs originating from MSS, a software revenue recognition correction originating from the Company's Business Solutions and Services (BSS) segment and the correction of understated payroll and related expenses at Corporate;
net adjustments decreasing third quarter pre-tax income by $1 million primarily resulting from the correction of useful lives of property and equipment in service at a BSS contract that were inconsistent with established CSC accounting conventions;
net adjustments increasing second quarter pre-tax income by $5 million primarily resulting from the correction of accounting errors identified by the Company related to costs incurred under the NHS contract (see below for more discussion of out of period adjustments related to the Company's NHS contract); and
net adjustments decreasing first quarter pre-tax income by $1 million primarily resulting from the corrections of fiscal 2012 revenue recognized on a software contract in the Company's BSS segment, corrections of fiscal 2012 restructuring cost accruals originating primarily from the Company's BSS and MSS segments and corrections to record adjustments originating primarily from the Company's North American Public Sector (NPS) and MSS segments that were identified late in the close process but not included in the Company's consolidated fiscal 2012 financial statements.

Adjustments recorded during fiscal 2013 that should have been recorded in prior fiscal years increased income from continuing operations by $7 million. This increase is attributable to the tax effect of the adjustments described above and $5 million of discrete tax benefits that should have been recorded in prior fiscal years. The discrete tax benefits are primarily attributable to the adjustment of the deferred tax liability related to intellectual property assets.

NHS

As previously disclosed in fiscal 2012 and in the first quarter of fiscal 2013, the Company had identified certain additional items related to the investigation of the Company's use of the percentage-of-completion accounting method used on the NHS contract. During the second quarter of fiscal 2013, based on its analysis of these items, the Company recorded net credits of $9 million in pre-tax out of period adjustments impacting prior fiscal years. During the third quarter of fiscal 2013, the Company identified additional prior period errors. Such errors identified in the third quarter, which were self-correcting in the third quarter of fiscal 2012, have no impact on income from continuing operations before taxes for fiscal 2013. The accounting errors identified during fiscal 2013 are primarily related to either costs incurred under the contract or the estimation of contract revenues and costs at completion, which resulted in the overstatement of income from continuing operations before taxes. The Company has concluded that there is no cumulative impact of this overstatement as a result of the $1.5 billion specified contract charge recorded as of December 30, 2011 being overstated by the same amount.

The Company has concluded that the errors identified during fiscal 2013 do not appear to have any impact on amounts charged to the NHS. Based on information provided by independent counsel, the Company believes that a small portion of such adjustments should be characterized as intentional accounting irregularities. The impact on income (loss) from continuing operations before taxes of the out of period adjustments identified in fiscal 2013 related to the Company's NHS contract is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
(Amounts in millions)
 
Fiscal 2013 Adjustments
Fiscal 2013
 
$
(9
)
Fiscal 2012
 
10

Fiscal 2011
 
(15
)
Fiscal 2010
 
18

Prior fiscal years (unaudited)
 
(4
)


39


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 2013 under the rollover method. The amounts noted below also include certain adjustments that only impacted quarters (unaudited) within fiscal 2013 but had no net impact on the full year fiscal 2013 results:
 
 
Fiscal 2013
 
 
 
 
Quarter Ended
 
 
(Amounts in millions)
 
June 29, 2012
 
September 28, 2012
 
December 28, 2012
 
March 29, 2013
 
Total
NHS adjustments
 
$

 
$
(9
)
 
$

 
$

 
$
(9
)
Other adjustments
 
3

 
12

 
4

 
(4
)
 
15

Effect on income from continuing operations before taxes
 
3

 
3

 
4

 
(4
)
 
6

Taxes on income
 
(2
)
 
(1
)
 
(4
)
 
(1
)
 
(8
)
Other income tax adjustments
 
(2
)
 

 
(2
)
 
(1
)
 
(5
)
Effect on income from discontinued operations, net of taxes
 

 

 
(28
)
 
28

 

Effect on net income attributable to CSC common shareholders
 
$
(1
)
 
$
2

 
$
(30
)
 
$
22

 
$
(7
)

Out of period adjustments recorded in fiscal 2013 had the following impact on select line items of the Consolidated Statements of Operations for the twelve months ended March 29, 2013 under the rollover method:
 
 
Twelve Months Ended March 29, 2013
(Amounts in millions, except per-share amounts)
 
As Reported
 
Adjustments
Increase/
(Decrease)
 
Amount Adjusted
for Removal
of Errors
Revenues
 
$
14,993

 
14

 
$
15,007

Costs of services (excludes depreciation and amortization and restructuring costs)
 
11,851

 
6

 
11,857

Selling, general and administrative (excluding restructuring costs)
 
1,195

 
(1
)
 
1,194

Depreciation and amortization
 
1,076

 
(2
)
 
1,074

Restructuring costs
 
264

 
5

 
269

Interest expense
 
183

 

 
183

Other (income) expense
 
(34
)
 

 
(34
)
Income from continuing operations before taxes
 
480

 
6

 
486

Taxes on income
 
(35
)
 
13

 
(22
)
Income from continuing operations
 
515

 
(7
)
 
508

Income from discontinued operations, net of taxes
 
464

 

 
464

Net income attributable to CSC common shareholders
 
961

 
(7
)
 
954

EPS – Diluted
 
 
 
 
 
 
Continuing operations
 
$
3.20

 
$
(0.04
)
 
$
3.16

Discontinued operations
 
2.98

 

 
2.98

Total
 
$
6.18

 
$
(0.04
)
 
$
6.14


The out of period adjustments affecting income from continuing operations before taxes during the twelve months ended March 29, 2013 under the rollover method are related to the following consolidated balance sheet line items:

Accounts receivable ($1 million decrease);
Prepaid expenses and other current assets ($15 million increase);
Outsourcing contract costs ($1 million decrease);
Other assets ($6 million decrease);
Property and equipment ($5 million decrease);
Accrued payroll and related costs ($9 million increase);
Accrued expenses and other current liabilities ($12 million decrease); and
Deferred revenue ($13 million increase).

40



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

Fiscal 2012 Adjustments Financial Impact Summary

As previously disclosed, during fiscal 2012, the Company recorded various pre-tax adjustments that should have been recorded in prior fiscal years. The aggregate fiscal 2012 adjustments increased the loss from continuing operations before taxes by $79 million ($63 million net of tax) and were comprised of $13 million of charges relating to operations in the Nordic region, $23 million of charges relating to the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's BSS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s MSS and BSS segments, with $37 million and $26 million of adjustments within MSS and BSS, respectively. Further adjustments were identified and recorded in fiscal 2013 related to fiscal 2012 that increased the net error by $7 million.

Nordic Region

The Company attributes the $13 million in pre-tax adjustments recorded in the Nordic region in fiscal 2012 to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than a $1 million operating lease adjustment noted in the first quarter of fiscal 2012 which was a refinement of an error previously corrected and reported in fiscal 2011.

Australia

As previously disclosed, in the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities were identified. As a result, certain personnel in Australia have been reprimanded, terminated and/or resigned. The Company attributes the $23 million of pre-tax adjustments recorded in fiscal 2012 to either intentional accounting irregularities (intentional irregularities) or other accounting errors (Other Errors). Other Errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation. The impact of the adjustments on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
(Amounts in millions)
 
Fiscal 2008 &
Prior (unaudited)
 
Fiscal 2009 (unaudited)
 
Fiscal 2010
 
Fiscal 2011
 
Total
Intentional irregularities
 
$
10

 
$
(7
)
 
$
(4
)
 
$
1

 
$

Other Errors
 
(7
)
 
(16
)
 
3

 
(3
)
 
(23
)
 
 
$
3

 
$
(23
)
 
$
(1