10-K 1 csc401201610-k.htm 10-K Document
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 April 1, 2016

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No.: 1-4850

COMPUTER SCIENCES CORPORATION
 
(Exact name of Registrant as specified in its charter)
 
Nevada
95-2043126
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1775 Tysons Boulevard
 
Tysons, Virginia
22102
(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.     o Yes  x 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.   o
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 October 2, 2015, the aggregate market value of stock held by non-affiliates of the Registrant was approximately $8,609,679,934.

There were 138,523,516 shares of the Registrant’s common stock outstanding as of May 13, 2016.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after April 1, 2016, 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.
 




PART I

Item 1.
Business

INTRODUCTION AND HISTORY

General

Computer Sciences Corporation (CSC, the Company, we, our, us), is a next-generation global provider of information technology (IT) services and solutions. CSC helps lead its clients through their digital transformations to meet new business demands and customer expectations in a market of escalating complexity, interconnectivity, mobility, and opportunity.

On November 27, 2015, the Company completed the previously announced separation of CSRA Inc. (CSRA) (the Separation) and accelerated its transformation. CSC is creating an industry-leading organization focused on streamlined offerings to address market shifts and client needs while leveraging its partnership ecosystem. CSRA's assets and business primarily consist of those that the Company previously reported as its North American Public Sector (NPS) segment. Under the terms of the Separation agreement, on November 27, 2015, stockholders who held CSC common stock at the close of business on November 18, 2015 (the Record Date), received a distribution of one CSRA common share for every one share of CSC common stock. As a result of the Separation, CSRA is now an independent public company trading under the symbol "CSRA" on the New York Stock Exchange.

On May 24, 2016 we announced that our Board of Directors unanimously approved entering into an agreement to merge CSC with the Enterprise Services segment of Hewlett Packard Enterprise (HPE) other than certain excluded portions. The merger is expected to be completed by the end of March 2017, subject to shareholder and regulatory reviews and approvals. Following the transaction, CSC and HPE shareholders will each own approximately 50 percent of the new company’s shares. The transaction is intended to be tax-free to CSC and HPE and their respective shareholders for federal income tax purposes. We believe the merger should not adversely affect the tax treatment of the Separation.

CSC’s strategy is to lead our clients on their digital journey with a new generation of offerings by leveraging partners, industry IP and domain expertise across the globe. We strive to be a trusted IT partner through providing next-generation IT services which include applications modernization, cloud infrastructure, cyber security, big data and mobility. Current and prospective clients are changing how they buy and consume IT services. Clients are looking for greater operational agility from their IT services and they are looking to benefit from the insights provided by mobility, social media, and big data analytics. At the same time, they continue to seek significant cost reductions by migrating from traditional IT infrastructure to the cloud.
This change in client preferences is creating a market opportunity for CSC. The Company is responding by assembling key assets and forming strategic partnerships with technology leaders. CSC has built a highly secure, flexible, private cloud infrastructure offering BizCloud for our clients.

CSC has developed global alliances to enhance cloud infrastructure, specialized consulting and applications expertise with AT&T’s highly secure network and cloud infrastructure platform to help global businesses move more quickly to the cloud. Through this alliance, CSC can assist in reducing capital intensity and create the global scale necessary to run modernized application workloads. CSC acquired one of the leading providers of enterprise cloud management software, ServiceMesh, to facilitate the orchestration of enterprise applications across multi-vendor hybrid clouds including Amazon Web Services, VMware and Microsoft. Additionally, ServiceMesh provides our clients with advanced capabilities such as tiered service levels, different levels of security, self-service options, governance, policy and real-time monitoring. CSC is also creating a Cloud Center of Excellence using services from Amazon, to accelerate the development of cloud solutions for enterprise and public sector customers.

CSC’s strategic partnership with HCL Technologies (HCL) aims to create a world-class application modernization delivery network. The Company expects to offer our commercial customers a global footprint of delivery capabilities for modernizing their legacy applications and moving them to the cloud. HCL and CSC will also jointly create a Banking Center of Excellence to accelerate and expand our core banking and card services solutions by leveraging our global banking expertise which includes CSC’s Hogan and Celeriti offerings.

1


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

CSC's service contracts vary in duration, scope, terms and conditions. CSC's contracts typically contain provisions by which customers may terminate the contract prior to completion, though such instances are infrequent due to the differentiated services provided, complex transition of personnel, assets, methodologies and processes involved. If a contract is terminated early for convenience, the Company seeks to recover tangible assets, investments and other intangible assets through stated contract terms or negotiation. If a contract is terminated early due to CSC's default, the Company may have additional liability and its ability to compete for future business with that customer could also be adversely impacted. See Risk Factor number 16 under Item 1A "Risk Factors" in this Annual Report for further discussion.

CSC was founded in 1959 and incorporated in the state of Nevada and is listed on the New York Stock Exchange under the symbol “CSC.”

Services and Sectors

The Company's reportable segments are Global Business Services (GBS) and Global Infrastructure Services (GIS). Geographically, CSC has significant operations throughout North America, Europe, Asia and Australia. Segment and geographic information is included in Note 19 of the Notes to the Consolidated Financial Statements, in Part II, Item 8 of this Annual Report. For a discussion of risks associated with our foreign operations, see Risk Factor number 11 under Item 1A "Risk Factors," in this Annual Report.
GBS

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

GIS

GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers CSC's next-generation cloud offerings, including Infrastructure as a Service (IaaS), private cloud solutions, CloudMail and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. To provide clients with differentiated offerings, GIS maintains a select number of key alliance partners to make investments in developing unique offerings and go-to-market strategies. This collaboration helps CSC determine the best technology, road map and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions. GIS seeks to capitalize on the emerging market trend with a rebundled IT portfolio of virtualized infrastructure.


2


During the last three fiscal years, the Company’s revenue mix by line of business was as follows:
 
2016
 
2015
 
2014
Global Business Services
51
%
 
50
%
 
49
%
Global Infrastructure Services
49

 
50

 
51

Total Revenue
100
%
 
100
%
 
100
%

Fiscal 2016 Overview

Total revenue of $7.1 billion decreased by 12.5% year over year, reflecting certain trends in its commercial infrastructure outsourcing business, the repositioning of its consulting business, and the impact of restructured contracts and price-downs.

Overall market demand for IT services was in transition in fiscal 2016 as organizations sought to use technology to improve enterprise efficiency, agility and productivity. In response to this transition, the Company expanded its sales force and invested in sales tools, next-generation offerings, internal systems and workforce optimization. During fiscal 2016, GBS contract awards were $4.3 billion as compared to $4.7 billion in the prior fiscal year. GIS contract awards were $4.3 billion in fiscal 2016 as compared to $4.1 billion in the prior fiscal year. Due to the general industry decline in the number and total value of large contract awards valued at more than $100 million, the Company is targeting smaller contract awards of $100 million or less.

Acquisitions and Divestitures

Acquisitions

During the fourth quarter of fiscal 2016, CSC acquired UXC Limited (UXC), an Australian publicly owned IT services company who is a leading provider of enterprise application capabilities, for total purchase consideration of $289 million (net of cash acquired of $13 million). The acquisition further advances CSC’s process of rebalancing its offering portfolio, strengthens CSC’s next-generation delivery model, and expands its client base among mid-sized enterprises. UXC has components in both the Company's GBS and GIS segments.

During the third quarter of fiscal 2016, CSC acquired Axon Puerto Rico, Inc. (Axon), an ITAR-compliant provider of enterprise application and infrastructure managed services to aerospace and defense, and other commercial industries. Axon is a component of the Company's GBS segment.

During the second quarter of fiscal 2016, CSC acquired Fixnetix, Limited (Fixnetix), a privately held provider of front-office managed trading solutions for capital markets, for total estimated purchase consideration of $112 million (net of $1 million of cash acquired). This acquisition enhances CSC's ability to offer capital market clients an expanded range of as-a-service front office capabilities and address growing demand for greater efficiency and innovation in trading, market data, hosting, infrastructure, connectivity and risk management. Fixnetix is a component of the Company's GIS segment.

During the second quarter of fiscal 2016, CSC also acquired Fruition Partners (Fruition), a privately-held company that is a leading provider of technology-enabled solutions for the service management sector and the largest exclusively ServiceNow-focused service management consulting firm, for cash consideration of $148 million (net of cash acquired of $2 million). The acquisition bolsters CSC's ability to offer enterprise and emerging clients an expanded range of cloud-based service-management solutions to improve their business through organizational efficiency and lower operating costs, and is a component of the Company's GBS segment.

Subsequent to fiscal 2016, the Company completed the previously announced acquisition of Xchanging plc (Xchanging) for total consideration of approximately $633 million. Xchanging provides technology-enabled business solutions to organizations in global insurance and financial services, healthcare, real estate and the public sector.

During fiscal 2015, CSC acquired Autonomic Resources, LLC (Autonomic), and a privately held entity. Autonomic and the privately held entity were components of the Company's former NPS segment which was separated from CSC during the third quarter of fiscal 2016.


3


During fiscal 2014, CSC acquired ServiceMesh Inc., a privately-held enterprise cloud services management company with operations in the United States, Australia and the United Kingdom, for total purchase consideration of $282 million. The acquisition enhances CSC's ability to assist its clients in migrating their applications into cloud computing environments and to automate the deployment and management of enterprise applications and platforms across private, public and hybrid cloud environments. ServiceMesh is a component of the Company's GIS segment.

Additionally, during fiscal 2014, CSC acquired Infochimps, Inc. complementing CSC’s existing Big Data business by providing a flexible, scalable, platform-as-a-service offering.

Divestitures

During the third quarter of fiscal 2016, CSC completed the Separation of CSRA. Under the terms of the Separation agreements, on November 27, 2015, stockholders who held CSC common stock at the Record Date received a distribution of one CSRA common share for every one share of CSC common stock. As a result of the Separation, CSRA is now an independent public company trading under the symbol "CSRA" on the New York Stock Exchange. The historical results of CSRA have been adjusted to present as discontinued operations consistent with fiscal year 2016 presentation in the Company's Consolidated Statements of Operations.

Additionally, during fiscal 2016, 2015 and 2014, the Company divested certain non-core businesses as a part of its service portfolio optimization initiative to focus on next-generation technology services. Certain of the divestitures met the criteria for presentation as discontinued operations, and consequently, their historical results have been presented as discontinued operations in the Company's Consolidated Statements of Operations.

During the first quarter of fiscal 2016, CSC divested its wholly-owned subsidiary, Welkin Associates Limited (Welkin) to a strategic investor. The Welkin business was part of the NPS segment. At the time of disposition, the divestiture did not qualify to be presented as discontinued operations. Subsequent to the disposition of Welkin, CSC completed the Separation, which included the operating results of the Welkin business as discontinued operations.

During the second quarter of fiscal 2015, CSC completed the sale of a German software business to a strategic investor. The historical results of this business have been presented as discontinued operations in the Company's Consolidated Statements of Operations.

During the second quarter of fiscal 2014, CSC completed the sale of its base operations, aviation and ranges services business unit, Applied Technology Division (ATD) within its NPS Segment, to a strategic investor for cash consideration of $178 million plus a net working capital adjustment receivable of $6 million. The pre-tax gain on disposal was $77 million, representing the excess of the sale price over the carrying value of the net assets of the divested business, less transaction costs, and is presented as discontinued operations in the Company's Consolidated Statements of Operations.

Additionally, during the first quarter of fiscal 2014, CSC completed the divestiture of its flood insurance-related business process outsourcing practice, within CSC's GBS segment, to a financial investor for cash consideration of $43 million plus a net working capital adjustment receivable of $4 million. The pre-tax gain on disposal was $25 million, representing the excess of the net proceeds over the carrying value of the net assets of the divested business and the related transaction costs, and is presented as discontinued operations in the Company's Consolidated Statements of Operations.

For further discussion of these acquisitions and divestitures, see Notes 3 and 4 of the Notes to the Company's 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 CSC. 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 the market as they compete directly with U.S. domestic suppliers of these services. The Company continues to increase resources in offshore locations to mitigate this market development.


4


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 customers. Amazon Web Services, for example, has emerged as a strong competitor in cloud computing, and other major competitors in this area include large and well-funded technology companies that are increasingly using social, mobile, analytics and cloud technologies to create agile new business models. Smaller and more nimble companies also continue to enter and disrupt markets with innovations in cloud computing and other areas which could emerge as significant competitors to CSC.

The Company has responded to these changing market conditions with new capabilities, partnerships and offerings that are intended to position CSC favorably in high-growth markets for next-generation IT services and solutions. For example, CSC's acquisition of UXC strengthened the Company's next-generation delivery model, and CSC's acquisition of ServiceMesh allowed the Company to deliver new offerings with partners like VMware and Microsoft and to integrate with other cloud computing providers. CSC also expanded its range of cloud-based service-management solutions through the Company's acquisition of Fruition. The addition of big data service provider Infochimps, Inc. allowed for advanced analytics delivered as a service to customers. The Company’s strategic partnerships with AT&T and HCL Technologies similarly enable expanded cloud, applications modernization and other next-generation technology services.

CSC’s ability to obtain new business and retain existing business is dependent upon its ability to offer improved strategic concepts and technical solutions, better value, a quicker response, increased flexibility, superior 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 GBS and GIS markets based on its technology and systems expertise and large project management skills. CSC management believes that its competitive position is enhanced by the full spectrum of IT and professional services it provides, including consulting, software and systems design, implementation and integration, IT and business process outsourcing, and technical services delivered to a broad commercial customer base.

Employees

The Company has offices worldwide, and as of April 1, 2016, had approximately 59,000 employees in more than 60 countries. As a result of the Xchanging acquisition in May 2016 we added an additional 7,000 employees. The services provided by CSC require proficiency in many fields, comprising but not limited to 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), are available free of charge through the Company’s Internet website, www.csc.com, or through the CSC Investor Relations Office at 1-703-245-9700. 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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.


5


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" in this Annual Report.

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 of 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.

Many factors could cause actual results to differ materially from such forward-looking statements with respect to the agreement to merge CSC with the Enterprise Services segment of HPE including risks relating to the completion of the transaction on anticipated timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, inability to achieve expected synergies, loss of revenues, and delay or business disruption caused by difficulties in integrating the businesses of CSC and Enterprise Services.

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
 
62
 
2012
 
Indefinite
 
Chairman, President and Chief Executive Officer
 
None
Paul N. Saleh
 
59
 
2012
 
Indefinite
 
Executive Vice President and Chief Financial Officer
 
None
William L. Deckelman, Jr.
 
58
 
2008
 
Indefinite
 
Executive Vice President, General Counsel and Secretary
 
None
Stephen Hilton
 
46
 
2015
 
Indefinite
 
Executive Vice President and General Manager, Global Infrastructure Services
 
None
James R. Smith
 
49
 
2013
 
Indefinite
 
Executive Vice President and General Manager, Global Business Services
 
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. On December 15, 2015, Mr. Lawrie was appointed chairman of the board of directors. Prior to joining CSC, he served as the Chief Executive Officer of U.K.-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 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. On March 16, 2016, Mr. Saleh was appointed as CSC's principal accounting officer until a new corporate controller is appointed. 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 Sprint 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. 


6


William L. Deckelman, Jr. was appointed Executive Vice President, General Counsel and Secretary in August 2014. Mr. Deckelman joined CSC in January 2008 and served as Vice President, General Counsel and Secretary from 2008 to 2012, and as Executive Vice President and General Counsel from 2012 to August 2014. 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.

Stephen Hilton is the Executive Vice President and General Manager, Global Infrastructure Services. He joined CSC in March 2015. Prior to joining CSC, from 2006 to 2014, Mr. Hilton served as Managing Director and Chief Information Officer, Technology Infrastructure Services, and as Head of Corporate Real Estate & Services at Credit Suisse. Prior to his tenure at Credit Suisse, Mr. Hilton served from 2003 to 2006 in an Information Technology leadership role at JP Morgan Chase. Prior to that, from 1996 to 2003, Mr. Hilton worked at CSC as a service delivery executive, technical architect and business development/sales director and was based in London, Singapore and New York.

James R. Smith is the Executive Vice President and General Manager, Global Business Services. He joined CSC in August 2013. Prior to joining CSC, Mr. Smith served as Chief Executive Officer of Motricity, a provider of cloud-based mobile enterprise and analytics solutions from 2009 to 2012. Prior to that, he held various executive leadership positions at Avaya from 2001 to 2008. Prior to that, he was an Associate Partner at Accenture.

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.

Risks Relating to Our Business

1.
Our business may be adversely impacted as a result of changes in demand, both globally and in individual market segments, for consulting, industry software & solutions, application services and next-generation cloud offerings. 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, industry software & solutions, application services and next-generation cloud offerings and other IT services.

2.
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 cloud, consulting, industry software and solutions and application services markets will impact our future revenue growth and earnings.


7


3.
Our primary markets, consulting, industry software and solutions, application services, and next-generation cloud, 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.

4.
Our ability to raise additional capital for future needs will impact our ability to compete in the markets we serve.    

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.

Subsequent to our announcement to separate into two publicly traded companies, all three credit rating agencies took ratings action. Fitch Ratings formally reaffirmed its existing credit ratings of BBB with "Stable" outlook. On July 30, 2015, Moody’s confirmed its existing credit ratings of Baa2 with “Stable” outlook. On February 26, 2016, S&P downgraded our BBB+ rating to BBB with "Stable" outlook, which is an investment grade rating.

Shortly after we announced the execution of a merger agreement with Hewlett Packard Enterprise Company (HPE) relating to the Enterprise Services business of HPE, Fitch Ratings reaffirmed its existing credit ratings for CSC of BBB with "Stable" outlook, Moody's reaffirmed its existing credit ratings for CSC of Baa2 with "Stable" outlook and S&P placed all of its CSC ratings, including its' BBB rating, on CreditWatch status. S&P indicated that it intends to resolve the CreditWatch status once the merger has closed, at which time they have indicated they will likely lower CSC's commercial paper rating to A-3.

If changes 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. Any 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.

5.
Achieving our growth objectives may prove unsuccessful. We may be unable to identify future attractive acquisitions and strategic partnerships, which may adversely affect our growth. In addition, our ability to consummate agreements we enter into, including the transactions contemplated by the merger agreement we recently signed with Hewlett Packard Enterprise Company (HPE) involving HPE’s Enterprise Services business, or to integrate acquisitions we consummate and implement our strategic partnerships may materially and adversely affect our profitability if we fail to achieve anticipated revenue improvements and cost reductions.

We may fail to complete transactions we sign.  For example, we recently signed a merger agreement with HPE relating to HPE’s Enterprise Services business.  Closing this or other strategic transactions is subject to uncertainties and risks, including the risk that we will be unable to satisfy conditions to closing such as regulatory and financing conditions and the absence of material adverse changes to our business.  In addition, our inability to successfully integrate the operations we acquire and leverage these operations to generate substantial cost savings as well as our inability to avoid revenue erosion and earnings decline could have a material adverse effect on our results of operations, cash flows and financial position. Integrating acquired operations is a significant challenge and there is no assurance that we will be able to manage these integrations successfully particularly given the larger scale of HPE’s Enterprise Services business in comparison to our own.
 

8


We have also entered into, and intend to identify and enter into additional strategic partnerships with other industry participants that will allow us to expand our business. However, we may be unable to identify attractive strategic partnership candidates or complete these partnerships on terms favorable to us. In addition, if we are unable to successfully implement our partnership strategies or our strategic partners do not fulfill their obligations or otherwise prove advantageous to our business, our investments in these partnerships and our anticipated business expansion could be adversely affected.

6.
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 Accounting Standards Codification (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.

7.
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 decline and lower their ability to pay their obligations. As a result, our cash collections could decrease and our bad debt expense could increase for uncollectible receivables. 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 effect on our profitability.

8.
If we are unable to accurately estimate the cost of services and the time line for completion of contracts, the profitability of our contracts may be materially and adversely affected.

Our commercial 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.
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 23 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.


9


10.
Our ability to provide our customers with competitive services is dependent on our ability to attract and retain qualified personnel.

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

11.
Our international operations are exposed to risks, including fluctuations in exchange rates, which may be beyond our control.

For fiscal 2016, approximately 57% of our recognized revenues were denominated in currencies other than the U.S. dollar. The exposure to currencies other than the U.S. dollar may impact our results as they are expressed in U.S. dollars. In particular, the uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations and the related European financial restructuring efforts may cause the value of the euro to fluctuate. Currency variations also contribute to variations in sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro with another currency, sales in that country or in Europe generally may be adversely affected until stable exchange rates are established. While currency risk, including exposure to fluctuations in currency exchange rates, is partially mitigated largely by matching costs with revenues in a given currency, our exposure to fluctuations in other currencies against the U.S. dollar increases as revenue in currencies other than the U.S. dollar increase and as more of the services we provide are shifted to lower cost regions of the world. We believe that the percentage of our revenue denominated in currencies other than the U.S. dollar will continue to represent a significant portion of our revenue. Also, we believe that our ability to match revenue and expenses in a given currency will decrease as more work is performed at offshore locations.

We operate in more than 60 countries and our operations in these countries are subject to the local, legal and political environments. Our operations are subject to regulations including 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.

12.
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 our 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. Any failure to maintain effective controls or difficulties encountered in the effective improvement of our internal controls could prevent us from timely and reliably reporting our financial results and may harm our operating results. In addition, 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, which could cause investors to lose confidence in our reported financial information. Any failure to maintain effective internal controls and the resulting negative publicity may materially and adversely affect our business and stock price.

13.
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.


10


14.
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 under 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.

A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. Our contracts and the services we provide under our contracts are often highly complex and may include numerous mutual performance obligations and conditions as well as terms permitting each party to issue default notices unilaterally which, assuming the notices are validated as proper under the contract and the default is not remedied within the applicable cure period, may entitle the non-defaulting party to terminate the contract. During the course of a contractual relationship one or both parties may issue default notices; however, given the nature of our services and our relationships with our customers, the parties routinely resolve these issues on commercially reasonable terms. If we are not able to negotiate a commercially reasonable resolution in a particular situation and termination rights are asserted, protracted litigation could ensue.
 
15.
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 a result, 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 addition, India has 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.

The Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our employees, partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged violations of the FCPA or other anti-bribery violations is expensive and could consume significant time and attention of our senior management.


11


16.
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.

17.
Security breaches or service interruptions could expose us to liability or impair our reputation, which could cause significant financial loss.

As a provider of information technology services to private and public sector customers operating in a number of regulated industries and countries, we store and process increasingly large amounts of sensitive data for our clients. At the same time, the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. We collect and store certain personal and financial information from customers and employees. Security breaches could expose us to a risk of loss of this information, regulatory scrutiny, actions and penalties, extensive contractual liability litigation, reputational harm, and a loss of customer confidence that could potentially have an adverse impact on future business with current and potential customers.

Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruption in our operations. We are required to expend capital and other resources to protect against attempted security breaches or cyber-attacks or to alleviate problems caused by successful breaches or attacks. Our security measures are designed to identify and protect against security breaches and cyber attacks, and no threat incident identified to date has resulted in a material adverse effect on us or our customers. However, our failure to detect, prevent or adequately respond to a future threat incident could subject us to liability, damage our reputation and have a material adverse effect on our business.

Increasing data privacy and information security obligations could also impose additional regulatory pressures on our customers’ businesses, and indirectly, on our operations. In response, some of our customers have sought, and may continue to seek, to contractually impose certain strict data privacy and information security obligations on us and some of our customer contracts may not contractually limit our liability for the loss of confidential information. If we are unable to adequately address these concerns, our business and results of operations could suffer. Compliance with new privacy and security laws, requirements and regulations, where required or undertaken by us, may result in cost increases due to potential systems changes, the development of additional administrative processes and increased enforcement actions, fines and penalties. While we strive to comply with all applicable data protection laws and regulations as well as our own posted privacy policies, any failure or perceived failure to comply or any misappropriation, loss or other unauthorized disclosure of sensitive or confidential information may result in proceedings or actions against us by government or other entities, private lawsuits against us including class actions or the loss of customers, which could potentially have an adverse effect on our business, reputation and results of operations.

18.
Changes in our 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 our income tax returns by the U.S. Internal Revenue Service (IRS) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our 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.


12


19.
We may be adversely impacted 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 us 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 us. In addition, customers may decide to downsize, defer or cancel contracts which could negatively affect our revenue.

20.
Our hedging program is subject to counterparty default risk.

We enter into foreign currency forward contracts and options and interest rate swaps with a number of counterparties. 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.

21.
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 these projects effectively.

We derive significant revenue and profit from government contracts that are awarded through competitive bidding processes. We expect that most of the non-U.S. government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding is expensive 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;
the requirement to resubmit bids protested by our competitors, 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.

22.
Catastrophic events or climate conditions may disrupt our business.

We and our 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 new 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.


13


23.
The Separation could result in substantial tax liability to CSC and our shareholders.

Among the conditions to completing the Separation was our receipt of a legal opinion of tax counsel substantially to the effect that, for U.S. federal income tax purposes, the Separation will qualify for tax-free treatment as a spin-off under Section 355 of the Internal Revenue Code. The legal opinions we received were based on, among other things, various assumptions and representations we provided to counsel. If any of those assumptions or representations turn out to be inaccurate or incomplete, we may not be able to rely on the opinion. Furthermore, a legal opinion of counsel is not binding on the IRS or the courts. Accordingly, the IRS or the courts may challenge the conclusions stated in the opinion and could prevail. If, notwithstanding receipt of the opinion, the Separation is determined to be taxable, we could be subject to a substantial tax liability. In addition, there could be a tax liability for our investors based on the fair market value of the CSRA shares received.
Even if the Separation otherwise qualifies as a tax-free spin-off transaction, the distribution could be taxable to us (but not to our shareholders) in certain circumstances if future significant acquisitions of our stock or the stock of the new company are deemed to be part of a plan or series of related transactions that include the spin-off. In this event, the resulting tax liability could be substantial. In connection with the Separation, we entered into a tax matters agreement with CSRA, under which it agreed not to enter into any transaction without our consent that could cause any portion of the Separation to be taxable to us and to indemnify us for any tax liabilities resulting from such transactions. These obligations and potential tax liabilities may discourage, delay or prevent a change of control of us or of CSRA.

24. The announcement and pendency of our proposed Merger with HPE’s Enterprise Services business could adversely affect our business, financial results and operations.
    
The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the proposed Merger is completed. In particular, we could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

Item 1B.
Unresolved Staff Comments

The Company has previously received comment letters from the Staff of the SEC’s Division of Corporation Finance (the Staff) with respect to certain of the Company’s filings for its fiscal years 2011, 2012 and 2013. The Company has responded to each of these letters and believes that it has addressed the Staff’s comments. Further, the Company believes that its Form 10-K/A with respect to fiscal year 2014, filed with the SEC on June 5, 2015, also addressed certain of the Staff’s prior comments.

On September 25, 2014, 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 28, 2014 and the Company's Form 10-Q for the quarter ended July 4, 2014. The Staff provided comments and requested additional information related to certain accounting disclosures, including disclosure relating to software development costs, contingencies and goodwill. The Company responded to that letter on October 16, 2014 and believes that it has addressed the Staff's comments.

On May 27, 2016, we received a letter from the SEC's Division of Corporation Finance stating that it has completed its review of our Form 10-Ks noted above. As of the date of this annual report, the Company has not received confirmation from the Staff that its review process is complete for the Company's Form 10-Q for the quarter ended July 4, 2014. The Company intends to continue to work with the Staff and respond to any remaining comments.


14


Item 2.
Properties

The following tables provides a summary of properties owned and leased by CSC or its subsidiaries as of April 1, 2016:
Properties Owned
 
Approximate
Square Footage
 
General Usage
Blythewood, South Carolina
 
456,000

 
 Computer and 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
Norwich, Connecticut
 
144,000

 
 Computer and General Office
Falls Church, Virginia
 
127,000

 
 General Office
Petaling Jaya, Malaysia
 
126,000

 
 Computer and General Office
Meriden, Connecticut
 
118,000

 
 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

 
 Computer and General Office
Tunbridge Wells, United Kingdom
 
43,000

 
 Computer and General Office
Sterling, Virginia
 
41,000

 
 General Office
Various other US and foreign locations
 
39,000

 
 General Office

Properties Leased
 
Approximate
Square Footage
 
General Usage
India
 
2,402,000

 
 General Office
Australia & other Pacific Rim locations
 
596,000

 
 Computer and General Office
Germany
 
422,000

 
 General Office
Washington, D.C. area
 
230,000

 
 General Office
Texas
 
200,000

 
 General Office
France
 
172,000

 
 General Office
United Kingdom
 
159,000

 
 General Office
Illinois
 
154,000

 
 General Office
Spain
 
145,000

 
 General Office
Connecticut
 
135,000

 
 Computer and General Office
Denmark
 
133,000

 
 General Office
China
 
119,000

 
 General Office
Puerto Rico
 
118,000

 
 General Office
Sweden
 
117,000

 
 General Office
Bulgaria
 
101,000

 
 General Office
Various other U.S. and foreign locations
 
1,097,000

 
 Computer and General Office

We currently have facilities in excess of our needs and have entered into various sublease agreements for our unused computer and general office space. As a result, included in our accrued expenses, other current liabilities and other long-term liabilities are costs to be incurred through 2022 related to such facilities. We believe all of the properties we own or lease are well-maintained, suitable and adequate to meet our current and anticipated requirements. For additional information regarding our excess space obligations, see Note 20 of the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report.

15



Approximately 2,131,000, 4,146,000 and 211,000 square feet of our properties are used by our GBS and GIS segments, and Corporate, respectively, and approximately 1,898,000 square feet support the operations of both the GBS and GIS segments. Upon expiration of its leases, the Company expects to obtain renewals or to lease alternative space. Lease expiration dates range from fiscal 2017 through fiscal 2028.

Item 3.
Legal Proceedings

The information required by this Item is set forth in Note 23, Commitments & Contingencies of the Notes to the Consolidated Financial Statements under the caption “Contingencies,” contained in Item 8 of this Annual Report on Form 10-K. Such information is incorporated herein by reference and made a part hereof.

Item 4.
Mine Safety Disclosures

Not applicable.



16



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 May 13, 2016, the number of registered shareholders of Computer Sciences Corporation’s common stock was 5,548. The following table shows the high and low sales prices of the Company’s common stock as reported on the New York Stock Exchange for each quarter during the last two fiscal years.
 
 
2016(1)
 
2015(1)
Fiscal Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
71.00

 
$
63.85

 
$
64.72

 
$
57.46

2nd
 
68.57

 
58.77

 
65.52

 
56.19

3rd
 
71.15

 
29.51

 
66.99

 
54.23

4th
 
34.49

 
24.27

 
73.29

 
59.80


(1) Historical market prices do not reflect any adjustment for the impact of the Separation of CSRA, which occurred during the third quarter of fiscal 2016.

Cash dividends declared on our common stock for each quarter of fiscal 2016 and 2015 are included in Selected Quarterly Financial Data (Unaudited) in Part II, Item 8 of this Annual Report. 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 April 1, 2016 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)
January 2, 2016 to January 29, 2016
 
1,250,000

 
$
29.76

 
1,250,000

 
$
723,551,645

January 30, 2016 to February 26, 2016
 
518,972

 
$
32.06

 
250,000

 
$
715,662,670

February 27, 2016 to April 1, 2016
 
63,273

 
$
31.52

 

 
$
715,662,670


(1) 
The Company accepted 329,800 shares of its common stock in the quarter ended April 1, 2016 from employees in lieu of cash due to the Company in connection with the issuance of shares of common stock related to the settlement of restricted stock units. The Company accepted 2,445 shares of common stock in the quarter ended April 1, 2016 tendered by employees in lieu of cash due to the Company in connection with the exercise of stock options. Such shares of common stock are stated at cost and held as treasury shares to be used for general corporate purposes.

(2) 
During the first quarter of fiscal 2015, the Company's Board of Directors approved a share repurchase program authorizing up to $1.5 billion in share repurchases of the Company's outstanding common stock. CSC has been implementing this program through purchases made in open market transactions and accelerated share repurchase arrangements in compliance with SEC Rule 10b-18 and Rule 10b5-1, subject to market conditions, and applicable state and federal legal requirements. Share repurchases are funded with available cash. The timing, volume, and nature of share repurchases are 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 repurchase program. The Company repurchased 1,500,000 shares of its common stock in the fiscal quarter ended April 1, 2016 pursuant to the share repurchase program. The approximate amount for which shares may yet be purchased under this program at April 1, 2016 is $716 million.


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(c) Performance Graph

The graph below compares the total cumulative five-year return on CSC’s common stock through our fiscal year ended April 1, 2016 to: (i) the Standard & Poor’s 500 index and (ii) the Standard & Poor’s North American Technology Index(1). The graph assumes an initial investment of $100 on April 1, 2011 and that dividends have been reinvested.

On November 27, 2015, we completed the Separation of CSRA, Inc. Our stockholders received one share of CSRA common stock for every one share of our common stock held on the Record Date and a Special Dividend of $10.50 per share. The effect of the Separation is reflected in the cumulative total return as a reinvested dividend. The comparisons in the graph are required by the SEC, based upon historical data and are not intended to forecast or be indicative of possible future performance of CSC common stock.

CSC Total Shareholder Return
(Period Ended April 1, 2016)


The following table provides indexed returns assuming $100 was invested on April 1, 2011, with annual returns using CSC's fiscal year ending dates.
Indexed Return Table (2011 = 100)
 
Return 2012
 
Return 2013
 
Return 2014
 
Return 2015
 
Return 2016
 
Compound Annual Growth Rate
CSC common stock
-37.74
 %
 
68.31
%
 
24.35
%
 
10.04
%
 
23.78
%
 
12.42
%
S&P 500 Index
8.00
 %
 
13.96
%
 
20.88
%
 
13.59
%
 
1.81
%
 
11.58
%
S&P North American Technology Index(1)
13.91
 %
 
3.80
%
 
25.45
%
 
15.66
%
 
9.38
%
 
13.41
%

(1) In prior years, we used the North American Technology Services Index, which was discontinued on March 7, 2016.  Accordingly, we now use the S&P North American Technology Index as a replacement for the discontinued index.

(d) Equity Compensation Plans

See Item 12, contained in Part III of this Annual Report for information regarding our equity compensation plans.


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Item 6.
Selected Financial Data (Unaudited)

 
 
As of
(Amounts in millions)
 
April 1, 2016(6)
 
April 3, 2015(1), (6)
 
March 28, 2014(1), (6)
 
March 29, 2013(1), (6)
 
March 30, 2012(1), (6)
Total assets
 
$
7,736

 
$
10,221

 
$
11,361

 
$
11,210

 
$
11,149

Debt
 
 
 
 
 
 
 
 
 
 
Long-term, net of current maturities
 
1,934

 
1,635

 
2,207

 
2,498

 
1,486

Short-term
 
559

 

 
444

 

 
43

Current maturities
 
151

 
883

 
237

 
234

 
1,211

Total
 
2,644

 
2,518

 
2,888

 
2,732

 
2,740

Stockholders’ equity
 
2,032

 
2,965

 
3,950

 
3,166

 
2,839

Net debt-to-total capitalization
 
31.4
%
 
8.1
%
 
6.5
%
 
11.5
%
 
29.5
%
 
 
Fiscal Year Ended
(Amounts in millions,
except per-share amounts)
 
2016(6)
 
2015(3), (6)
 
2014(3), (6)
 
2013(3), (6)
 
2012(3), (6)
Revenues
 
$
7,106

 
$
8,117

 
$
8,899

 
$
9,533

 
$
9,788

Costs of services (excludes depreciation and amortization and restructuring costs)
 
5,185

 
6,159

 
6,032

 
7,455

 
8,124

Selling, general and administrative - SEC settlement related charges(4)
 

 
197

 

 

 

Restructuring costs
 
23

 
256

 
74

 
251

 
139

Debt extinguishment costs(5)
 
95

 

 

 

 

Goodwill impairment(2)
 

 

 

 

 
232

Income (loss) from continuing operations, before taxes
 
10

 
(671
)
 
694

 
(249
)
 
(1,000
)
Income tax (benefit) expense
 
(62
)
 
(464
)
 
174

 
(248
)
 
(231
)
Income (loss) from continuing operations, net of taxes
 
72

 
(207
)
 
520

 
(1
)
 
(769
)
Income from discontinued operations, net of taxes
 
191

 
224

 
448

 
780

 
171

Net income attributable to CSC common stockholders
 
251
 
2

 
947
 
760
 
(613
)
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.51

 
$
(1.45
)
 
$
3.52

 
$
(0.01
)
 
$
(4.98
)
Discontinued operations
 
1.31

 
1.46

 
2.89

 
4.92
 
1.01

 
 
$
1.82

 
$
0.01

 
$
6.41

 
$
4.91

 
$
(3.97
)
Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.50

 
$
(1.45
)
 
$
3.45

 
$

 
$
(4.98
)
Discontinued operations
 
1.28

 
1.46

 
2.83

 
4.89
 
1.01

 
 
$
1.78

 
$
0.01

 
$
6.28

 
$
4.89

 
$
(3.97
)
 
 
 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
2.99

 
$
0.92

 
$
0.80

 
$
0.80

 
$
0.80


(1) Fiscal 2012 through fiscal 2015 have been adjusted for the adoption of ASU 2015-17 (Topic 740), "Balance Sheet Classification of Deferred Taxes" (see Note 1 of the Notes to the Consolidated Financial Statements).
(2) Fiscal 2012 goodwill impairment charge related to one reporting unit in the GBS segment.
(3) Fiscal 2012 through fiscal 2015 have been adjusted to present discontinued operations for the divestiture of the Company's NPS segment in the third quarter of fiscal 2016 (see Note 4 of the Notes to the Consolidated Financial Statements).
(4) Fiscal 2015 charge related to the settlement of the SEC investigation (see Note 2 of the Notes to the Consolidated Financial Statements).
(5) Fiscal 2016 debt extinguishment costs related to the Company's redemption of all outstanding 6.50% term notes due March 2018 (see Note 13 of the Notes to the Consolidated Financial Statements).
(6) Certain amounts in fiscal 2012 through fiscal 2016 have been restated as the Company identified certain immaterial errors in previously issued financial statements related to income tax (benefit) expense (see Notes 1 and 24 of the Notes to the consolidated Financial Statements).

19


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 April 1, 2016, included in Part II, Item 8 of this Annual Report.

The three primary objectives of this discussion are to:

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 related Notes 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, management's discussion and analysis is presented with 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 2016
highlights.

Results of Operations - discusses year-over-year changes to operating results for fiscal 2014 through fiscal 2016, 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 Company's major cost and expense categories.

Financial Condition - discusses causes of changes in cash flows, describes the Company's liquidity and available capital resources, any off balance sheet arrangements, outstanding contractual obligations and dividends.

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

Overview

CSC is a global provider of IT and professional services and solutions. The Company's mission is to enable superior returns on its clients' technology investments through best-in-class industry solutions, domain expertise and global scale.

The Company’s reportable segments are as follows:

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

20



Global Infrastructure Services (GIS) – GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers CSC's next-generation cloud offerings, including Infrastructure as a Service (IaaS), private cloud solutions, CloudMail and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. To provide clients with differentiated offerings, GIS maintains a select number of key alliance partners to make investments in developing unique offerings and go-to-market strategies. This collaboration helps CSC determine the best technology, road map and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions. GIS seeks to capitalize on the emerging market trend with a rebundled IT portfolio of virtualized infrastructure.

On November 27, 2015, CSC completed the separation of CSRA through a one-for-one pro rata distribution of all shares of CSRA common stock to CSC stockholders as of the Record Date. CSRA's assets and business primarily consist of those that the Company previously reported as its North American Public Sector (NPS) segment. Beginning in the third quarter of fiscal 2016, CSRA's financial results for periods prior to the distribution have been reflected in our Consolidated Statements of Operations, retrospectively, as income from discontinued operations, net of taxes. Additionally, the related assets and liabilities associated with the discontinued operations in the prior year are classified as assets and liabilities of discontinued operations in our Consolidated Balance Sheets. Refer to Note 4 of the Notes to the Consolidated Financial Statements for additional information regarding the separation of CSRA and Note 19 of the Notes to our Consolidated Financial Statements for further information regarding CSC's reportable segments. Unless otherwise stated, financial results herein reflect continuing operations.

Economic and Industry Factors

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

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

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

The GBS and GIS 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 IaaS offerings, managed applications services and a range of discrete offerings for computing, storage, mobility and networking services.

21



Business Drivers

Revenue in both segments 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:
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 to include 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 comprised of revenue generated from contracts won in prior periods, known as backlog, and additional 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 its contracts and ability to control its 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.


22


Fiscal 2016 Highlights

The key operating results for fiscal 2016 include:

Revenues decreased $1.0 billion, or 12.5%, to $7.1 billion compared to fiscal 2015. On a constant currency
basis(1), revenues decreased $544 million, or 6.7%.

Operating income(2) was $515 million as compared to $459 million in fiscal 2015. Operating income margins increased to 7.2% from 5.7% in fiscal 2015. Operating income was beneficially impacted by a year-over-year reduction in restructuring costs of $233 million during fiscal 2016, which more than offset the adverse impact of a reduction in revenues which exceeded the decrease in costs of services. Restructuring costs were $23 million in fiscal 2016, as compared to $256 million in fiscal 2015.

Earnings (loss) before interest and taxes(3) (EBIT) increased to $95 million as compared to $(565) million in fiscal 2015. The EBIT margin increased to 1.3% from (7.0)% in fiscal 2015, largely as a result of the year-over-year decrease in pension and OPEB actuarial and settlement losses of $485 million, and non-recurrence of the fiscal 2015 SEC settlement related charges of $200 million.
 

(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 non-U.S. Generally Accepted Accounting Principle (GAAP) measures calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar.
(2) 
Operating income is a non-GAAP measure used by management to assess performance of the Company's segments and on a consolidated basis. CSC presents this non-GAAP measure because management believes it assists investors by providing another measure of the Company's profitability. The Company’s definition of such measure may differ from that used by other companies. CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment selling, general and administrative (SG&A) expense. Operating income, as defined by CSC, excludes corporate G&A, actuarial and settlement charges related to CSC's pension and other postemployment benefit (OPEB) plans, SEC settlement related charges, separation costs, and debt extinguishment costs. Operating margin is defined as operating income as a percentage of revenue. Management compensates for the limitations of this non-GAAP measure by also reviewing income (loss) from continuing operations before taxes.

A reconciliation of consolidated operating income to income (loss) from continuing operations before taxes is as follows:
 
 
Twelve Months Ended
(Amounts in millions)
 
April 1, 2016
 
April 3, 2015
 
March 28, 2014
Operating income
 
$
515

 
$
459

 
$
852

Corporate G&A
 
(216
)
 
(230
)
 
(245
)
Pension & OPEB actuarial (losses) gains
 
(99
)
 
(584
)
 
217

SEC settlement related charges and other
 

 
(200
)
 

Separation costs
 
(19
)
 

 

Interest expense
 
(123
)
 
(126
)
 
(128
)
Interest income
 
38

 
20

 
16

Debt extinguishment costs
 
(95
)
 

 

Other income (expense), net
 
9

 
(10
)
 
(18
)
Income (loss) from continuing operations before taxes
 
$
10

 
$
(671
)
 
$
694


(3) 
EBIT is a non-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 that used by other companies. CSC defines EBIT as net income less income from discontinued operations, interest expense, interest income and income tax (benefit) expense. EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to net income is as follows:

23


 
 
Twelve Months Ended
(Amounts in millions)
 
April 1, 2016
 
April 3, 2015
 
March 28, 2014
EBIT
 
$
95

 
$
(565
)
 
$
806

Interest expense
 
(123
)
 
(126
)
 
(128
)
Interest income
 
38

 
20

 
16

Income tax benefit (expense)
 
62

 
464

 
(174
)
Income (loss) from continuing operations
 
72

 
(207
)
 
520

Income from discontinued operations
 
191

 
224

 
448

Net income
 
263

 
17

 
968


Income (loss) from continuing operations before taxes was $10 million, compared to $(671) million in fiscal 2015, an increase of $681 million. The increase in income from continuing operations was primarily due to a decrease in pension and OPEB actuarial and settlement losses of $485 million, and the SEC settlement related charges of $200 million which was unique to fiscal 2015.
Non-GAAP income from continuing operations before taxes(4) was $425 million, compared to $407 million in fiscal 2015.
Income from discontinued operations, net of taxes was $191 million, compared to $224 million in fiscal 2015.
Net income (loss) attributable to CSC common stockholders was $251 million, compared to $2 million in fiscal 2015.
Non-GAAP net income attributable to CSC common shareholders(4) was $542 million, compared to $535 million in fiscal 2015.
Diluted earnings (loss) per share (EPS) from continuing operations was $0.50 as compared to $(1.45) in the prior year. Diluted EPS from discontinued operations was $1.28 as compared to $1.46 in the prior year.
Non-GAAP diluted EPS from continuing operations(4) was $2.57 as compared to $2.24 in the prior year.
The Company recorded debt extinguishment costs of $95 million resulting from the early redemption of certain term notes.

 

(4) 
Non-GAAP results are financial measures calculated by excluding certain significant items, which management believes are not indicative of the Company's operating performance. CSC presents these non-GAAP results because management believes they assist investors in comparing the Company's performance across reporting periods on a consistent basis by excluding items that management does not believe are indicative of the Company's core operating performance. Adjustments to results of operations include:

Certain CSRA overhead costs - Reflects costs historically allocated to CSRA but not included in discontinued operations based on ASC Subtopic 205-20 "Presentation of Financial Statements - Discontinued Operations." These costs are expected to be largely eliminated on a prospective basis.
U.S. Pension and OPEB - Reflects the impact of certain U.S. pension and OPEB plans historically included in CSC's financial results that have been transferred to CSRA as part of the Separation.
Separation, restructuring, and other transaction costs - Reflects non-recurring costs related to CSC's separation of CSRA and infrequently occurring costs related to CSC's (1) certain restructuring related to workforce optimization and real estate charges, including the fiscal 2015 special restructuring, (2) previously announced acquisitions and (3) process remediation related to fiscal 2016 software implementation.
Pension and OPEB actuarial & settlement gains (losses) - Reflects pension and OPEB actuarial and settlement gains (losses) from mark-to-market accounting.
Debt extinguishment costs - Reflects costs related to the fiscal 2016 redemption of all outstanding 6.50% term notes due March 2018.
SEC settlement-related items - Reflects costs associated with certain SEC charges and settlements.
Reversal of contingent consideration - Reflects fiscal 2014 reversal of contingent consideration related to the acquisition of ServiceMesh.
Tax valuation allowance & adjustments - Reflects the adoption of ASU 2016-09 as described in Note 1 of the Notes to the Consolidated Financial Statements, adjustments to tax valuation allowances in certain jurisdictions and the application of a 20% tax rate, for the first and second quarters of fiscal 2016, fiscal 2015, and fiscal 2014, which is at the low end of the prospective targeted effective tax rate range of 20% to 25% and effectively excludes the impact of discrete tax adjustments for those periods.

24




A reconciliation of non-GAAP results to reported results is as follows:
 
 
Twelve Months Ended April 1, 2016
(Amounts in millions, except per-share amounts)
 
As reported
 
Certain CSRA overhead costs
 
U.S. Pension & OPEB
 
Separation, restructuring & other transaction costs
 
Pension & OPEB actuarial & settlement losses
 
SEC settlement related items
 
Debt extinguishment costs
 
Tax valuation allowance & adjustments
 
Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
5,185

 
$
(41
)
 
$
32

 
$
(5
)
 
$
(100
)
 
$

 
$

 
$

 
$
5,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
$
1,040

 
$
(47
)
 
$
6

 
$
(55
)
 
$
1

 
$
(5
)
 
$

 
$

 
$
940

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, before taxes
 
$
10

 
$
(88
)
 
$
38

 
$
(161
)
 
$
(99
)
 
$
(5
)
 
$
(100
)
 
$

 
$
425

Income tax (benefit) expense
 
$
(62
)
 
$
(34
)
 
$
15

 
$
(41
)
 
$
(18
)
 
$
(2
)
 
$
(40
)
 
$
(4
)
 
$
62

Income (loss) from continuing operations
 
$
72

 
$
(54
)
 
$
23

 
$
(120
)
 
$
(81
)
 
$
(3
)
 
$
(60
)
 
$
4

 
$
363

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
263

 
$
(54
)
 
$
23

 
$
(120
)
 
$
(81
)
 
$
(3
)
 
$
(60
)
 
$
4

 
$
554

Less: net income attributable to noncontrolling interest, net of tax
 
$
12

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
12

Net income attributable to CSC common stockholders
 
$
251

 
$
(54
)
 
$
23

 
$
(120
)
 
$
(81
)
 
$
(3
)
 
$
(60
)
 
$
4

 
$
542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
(620.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.51

 
$
(0.39
)
 
$
0.17

 
$
(0.87
)
 
$
(0.59
)
 
$
(0.02
)
 
$
(0.43
)
 
$
0.03

 
$
2.63

Diluted EPS from continuing operations
 
$
0.50

 
$
(0.38
)
 
$
0.16

 
$
(0.85
)
 
$
(0.57
)
 
$
(0.02
)
 
$
(0.42
)
 
$
0.03

 
$
2.57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
138.281

 
138.281

 
138.281

 
138.281

 
138.281

 
138.281

 
138.281

 
138.281

 
138.281

Diluted EPS
 
141.329

 
141.329

 
141.329

 
141.329

 
141.329

 
141.329

 
141.329

 
141.329

 
141.329


* The net periodic pension cost within income from continuing operations includes $49 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP income from continuing operations includes $179 million of expected long-term return on pension assets of defined benefit plans subject to interim remeasurement.



25


 
 
Twelve Months Ended April 3, 2015
(Amounts in millions, except per-share amounts)
 
As reported
 
Certain CSRA overhead costs
 
U.S. Pension & OPEB
 
Pension & OPEB actuarial & settlement losses
 
SEC settlement related charges
 
Special restructuring costs
 
Tax valuation allowance & adjustments
 
Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
6,159

 
$
(32
)
 
$
43

 
$
(525
)
 
$

 
$

 
$

 
$
5,645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes depreciation and amortization, SEC settlement related charges and restructuring costs)
 
$
1,220

 
$
(72
)
 
$
8

 
$
(59
)
 
$
(3
)
 
$

 
$

 
$
1,094

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, before taxes
 
$
(671
)
 
$
(104
)
 
$
51

 
$
(584
)
 
$
(200
)
 
$
(241
)
 
$

 
$
407

Income tax (benefit) expense
 
$
(464
)
 
$
(40
)
 
$
20

 
$
(135
)
 
$
(2
)
 
$
(50
)
 
$
(338
)
 
$
81

(Loss) income from continuing operations
 
$
(207
)
 
$
(64
)
 
$
31

 
$
(449
)
 
$
(198
)
 
$
(191
)
 
$
338

 
$
326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
17

 
$
(64
)
 
$
31

 
$
(449
)
 
$
(198
)
 
$
(191
)
 
$
338

 
$
550

Less: net income attributable to noncontrolling interest, net of tax
 
$
15

 
$

 
$

 
$

 
$

 
$

 
$

 
$
15

Net income (loss) attributable to CSC common stockholders
 
$
2

 
$
(64
)
 
$
31

 
$
(449
)
 
$
(198
)
 
$
(191
)
 
$
338

 
$
535

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
69.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
19.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
(1.45
)
 
$
(0.45
)
 
$
0.22

 
$
(3.15
)
 
$
(1.39
)
 
$
(1.34
)
 
$
2.37

 
$
2.29

Diluted EPS from continuing operations
 
$
(1.45
)
 
$
(0.44
)
 
$
0.21

 
$
(3.08
)
 
$
(1.36
)
 
$
(1.31
)
 
$
2.32

 
$
2.24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
142.557

 
142.557

 
142.557

 
142.557

 
142.557

 
142.557

 
142.557

 
142.557

Diluted EPS
 
142.557

 
145.780

 
145.780

 
145.780

 
145.780

 
145.780

 
145.780

 
145.780


* The net periodic pension cost within income from continuing operations includes $298 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP income from continuing operations includes $223 million of expected long-term return on pension assets of defined benefit plans subject to interim remeasurement.


26


 
 
Twelve Months Ended March 28, 2014
(Amounts in millions, except per-share amounts)
 
As reported
 
Certain CSRA overhead costs
 
U.S. Pension & OPEB
 
Pension & OPEB actuarial & settlement gains
 
Reversal of contingent consideration
 
Tax adjustment
 
Non-GAAP results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
6,032

 
$
(36
)
 
$
26

 
$
170

 
$

 
$

 
$
6,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
$
1,099

 
$
(65
)
 
$
4

 
$
47

 
$
21

 
$

 
$
1,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, before taxes
 
$
694

 
$
(101
)
 
$
30

 
$
217

 
$
21

 
$

 
$
527

Income tax expense (benefit)
 
$
174

 
$
(40
)
 
$
12

 
$
68

 
$
6

 
$
23

 
$
105

Income (loss) from continuing operations
 
$
520

 
$
(61
)
 
$
18

 
$
149

 
$
15

 
$
(23
)
 
$
422

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
968

 
$
(61
)
 
$
18

 
$
149

 
$
15

 
$
(23
)
 
$
870

Less: net income attributable to noncontrolling interest, net of tax
 
$
21

 
$

 
$

 
$

 
$

 
$

 
$
21

Net income (loss) attributable to CSC common stockholders
 
$
947

 
$
(61
)
 
$
18

 
$
149

 
$
15

 
$
(23
)
 
$
849

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
25.1
%
 
 
 
 
 
 
 
 
 
 
 
19.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
3.52

 
$
(0.41
)
 
$
0.12

 
$
1.01

 
$
0.10

 
$
(0.16
)
 
$
2.86

Diluted EPS from continuing operations
 
$
3.45

 
$
(0.40
)
 
$
0.12

 
$
0.99

 
$
0.10

 
$
(0.15
)
 
$
2.79

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
147.647

 
147.647

 
147.647

 
147.647

 
147.647

 
147.647

 
147.647

Diluted EPS
 
150.761

 
150.761

 
150.761

 
150.761

 
150.761

 
150.761

 
150.761


* The net periodic pension cost within income from continuing operations includes $242 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP income from continuing operations includes $186 million of expected long-term return on pension assets of defined benefit plans subject to interim remeasurement.

27




The Company announced contract awards(5) of $8.6 billion, including GBS segment awards of $4.3 billion and GIS segment awards of $4.3 billion.

Days Sales Outstanding (DSO)(6) was 83 days at April 1, 2016, an increase from 75 days at April 3, 2015.

Net debt-to-total capitalization ratio(7) was 31.4% at the end of fiscal 2016, an increase from 8.1% at the end of fiscal 2015.

Cash provided by operating activities was $802 million, as compared to $1.5 billion during fiscal 2015. Cash used in investing activities was $1.2 billion, as compared to $536 million during fiscal 2015. Cash used in financing activities was $485 million, as compared to $1.1 billion during fiscal 2015.

Free cash flow(8) was $319 million, as compared to $757 million in fiscal 2015.


(5) 
Business awards for GBS & GIS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include approved option years. Segment awards may not add to total awards due to rounding.

(6) 
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 include unbilled receivables but excludes income tax receivables and long-term receivables.

(7) 
Net debt and Net debt-to-total capitalization are non-GAAP measures used by management to assess the Company's ability to service its debts using only its cash and cash equivalents. CSC presents these non-GAAP measures to assist investors in analyzing the Company's capital structure in a more comprehensive way compared to gross debt based ratios alone. Net debt-to-total capitalization ratio is defined as total current and long-term debt less total cash and cash equivalents divided by the sum of total debt and equity, including noncontrolling interest.
 
(8) 
Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that used by other companies. CSC defines 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. Free cash flow is further adjusted for certain non-recurring cash flow items, such as (i) payments related to separation and transaction costs related to fiscal 2016 acquisitions, (ii) payments related to certain restructuring, (iii) SEC settlement related payments, (iv) benefit from the sale of accounts receivables and (v) certain CSRA overhead costs.

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. CSC's free cash flow measure includes CSRA through the date of Separation. A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:
 
 
Twelve Months Ended
(Amounts in millions)
 
April 1, 2016
 
April 3, 2015
 
March 28, 2014
Net cash provided by operating activities(a)
 
$
802

 
$
1,473

 
$
1,577

Net cash used in investing activities(b)
 
(1,126
)
 
(536
)
 
(566
)
Acquisitions, net of cash acquired
 
554

 
49

 
190

Business dispositions
 
(37
)
 
13

 
(248
)
Short-term investments
 
70

 

 
(5
)
Payments on capital leases and other long-term asset financings
 
(166
)
 
(242
)
 
(242
)
Payments on separation and other transaction costs
 
79

 

 

Payments on restructuring costs
 
173

 

 

SEC settlement-related payments
 
187

 

 

Sale of NPS accounts receivables
 
(239
)
 

 

Certain CSRA overhead costs
 
22

 

 

Free cash flow
 
$
319

 
$
757

 
$
706


(a) Amounts have been adjusted as a result of the adoption of ASU 2016-09 (see Note 1 of the Notes to the Consolidated Financial Statements).
(b) Excludes capital expenditures financed through CSC Finco.

Results of Operations

28



Revenues

Revenues for the GBS and GIS segments for fiscal 2016, 2015, and 2014 were as follows:
 
 
Twelve Months Ended
 
 
April 1, 2016
 
April 3, 2015
 
March 28, 2014
(Amounts in millions)
 
Amount
 
Percent
Change
 
Amount
 
Percent
Change
 
Amount
GBS
 
$
3,637

 
(9.9
)%
 
$
4,036

 
(6.6
)%
 
$
4,321

GIS
 
3,469

 
(15.0
)%
 
4,081

 
(10.9
)%
 
4,578

Total Revenue
 
$
7,106

 
(12.5
)%
 
$
8,117

 
(8.8
)%
 
$
8,899


The major factors impacting the percent change in revenues are as follows:
Twelve Months Ended
April 1, 2016 vs. April 3, 2015
 
Acquisitions
 
Approximate
Impact of
Currency
Fluctuations
 
Organic Growth (Decline)
 
Total
GBS
 
1.6
%
 
(6.1
)%
 
(5.4
)%
 
(9.9
)%
GIS
 
0.9
%
 
(5.4
)%
 
(10.5
)%
 
(15.0
)%
Cumulative Net Percentage
 
1.2
%
 
(5.8
)%
 
(7.9
)%
 
(12.5
)%

Twelve Months Ended
April 3, 2015 vs. March 28, 2014
 
Acquisitions
 
Approximate
Impact of
Currency Fluctuations
 
Organic Growth (Decline)
 
Total
GBS
 
%
 
(1.9
)%
 
(4.7
)%