Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - COMPUTER SCIENCES CORP | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - COMPUTER SCIENCES CORP | ex32_1.htm |
EX-32.2 - EXHIBIT 32.2 - COMPUTER SCIENCES CORP | ex32_2.htm |
EX-31.1 - EXHIBIT 31.1 - COMPUTER SCIENCES CORP | ex31_1.htm |
EX-31.2 - EXHIBIT 31.2 - COMPUTER SCIENCES CORP | ex31_2.htm |
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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_________________
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FORM
10-Q
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(Mark
One)
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||||
[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarter ended January 1, 2010
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _________________ to
_________________
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Commission
File No. 1-4850
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COMPUTER
SCIENCES CORPORATION
(Exact name
of registrant as specified in its charter)
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Nevada
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95-2043126
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(State or
Other Jurisdiction of
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(I.R.S.
Employer
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|||
Incorporation
or Organization)
|
Identification
No.)
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3170
Fairview Park Drive
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Falls
Church, VA
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22042
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(Address of
Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (703) 896-1000
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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. Yes [ X ] No [ ]
|
||||
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act (Check one).
|
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Large
accelerated filer
[X] Accelerated
filer
[ ] Non-accelerated
filer [ ]
Smaller
Reporting Company
[ ]
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||||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12-b of the Exchange
Act). Yes [ ] No [X]
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||||
153,615,200
shares of Common Stock, $1.00 par value, were outstanding on January 25,
2010.
|
COMPUTER
SCIENCES CORPORATION
INDEX
TO FORM 10-Q
Page
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|||||
PART
I.
|
FINANCIAL
INFORMATION
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||||
Item
1.
|
Financial
Statements (unaudited)
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||||
Consolidated
Condensed Statements of Income, Quarters and Nine Months
Ended January 1, 2010, and January 2, 2009
|
1 | ||||
Consolidated
Condensed Balance Sheets as of January
1, 2010, and April 3, 2009
|
2 | ||||
Consolidated
Condensed Statements of Cash Flows, Nine Months
Ended January 1, 2010, and January 2, 2009
|
3 | ||||
Notes to
Consolidated Condensed Financial Statements
|
4 | ||||
Item
2.
|
Management's
Discussion and Analysis of Financial
Condition and Results of Operations
|
33 | |||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
48 | |||
Item
4.
|
Controls and
Procedures
|
49 | |||
PART
II.
|
OTHER
INFORMATION
|
||||
Item
1.
|
Legal
Proceedings
|
50 | |||
Item
1A.
|
Risk
Factors
|
53 | |||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
54 | |||
Item
6.
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Exhibits
|
55 |
i
PART
I, ITEM 1. FINANCIAL STATEMENTS
COMPUTER
SCIENCES CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME (unaudited)
Quarter
Ended
|
Nine
Months Ended
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|||||||||||||||
(Amounts in
millions except per-share amounts)
|
January
1, 2010
|
January
2, 2009
|
January
1, 2010
|
January
2, 2009
|
||||||||||||
Revenues
|
$ | 3,953 | $ | 3,952 | $ | 11,892 | $ | 12,628 | ||||||||
Costs of
services (excludes depreciation and amortization)
|
3,105 | 3,085 | 9,476 | 10,097 | ||||||||||||
Selling,
general and administrative
|
239 | 261 | 732 | 824 | ||||||||||||
Depreciation
and amortization
|
280 | 282 | 825 | 912 | ||||||||||||
Interest
expense
|
50 | 68 | 158 | 191 | ||||||||||||
Interest
income
|
(6 | ) | (12 | ) | (20 | ) | (31 | ) | ||||||||
Other
(income)/expense
|
(6 | ) | 5 | (15 | ) | 9 | ||||||||||
Total costs
and expenses
|
3,662 | 3,689 | 11,156 | 12,002 | ||||||||||||
Income before
taxes
|
291 | 263 | 736 | 626 | ||||||||||||
Taxes on
income
|
75 | 100 | 166 | (114 | ) | |||||||||||
Net
income
|
216 | 163 | 570 | 740 | ||||||||||||
Less:
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||||||||||||||||
Net income
attributable to noncontrolling interest, net of tax
|
5 | 2 | 12 | 7 | ||||||||||||
Net income
attributable to CSC common shareholders
|
$ | 211 | $ | 161 | $ | 558 | $ | 733 | ||||||||
Earnings per
share:
|
||||||||||||||||
Basic
|
$ | 1.38 | $ | 1.06 | $ | 3.67 | $ | 4.84 | ||||||||
Diluted
|
$ | 1.36 | $ | 1.06 | $ | 3.62 | $ | 4.80 |
See accompanying
notes.
1
COMPUTER
SCIENCES CORPORATION
CONSOLIDATED
CONDENSED BALANCE SHEETS (unaudited)
As
of
|
As
of
|
|||||||
(Amounts in
millions except shares)
|
January
1, 2010
|
April
3, 2009
|
||||||
ASSETS
|
||||||||
Cash and cash
equivalents
|
$ | 2,427 | $ | 2,297 | ||||
Receivables,
net of allowance for doubtful accounts of $55 (fiscal 2010) and $55
(fiscal 2009)
|
3,935 | 3,786 | ||||||
Prepaid
expenses and other current assets
|
1,935 | 1,624 | ||||||
Total current
assets
|
8,297 | 7,707 | ||||||
Property and
equipment, net of accumulated depreciation of $3,843 (fiscal 2010) and
$3,417 (fiscal 2009)
|
2,330 | 2,353 | ||||||
Outsourcing
contract costs, net
|
651 | 684 | ||||||
Software,
net
|
469 | 476 | ||||||
Goodwill
|
3,921 | 3,784 | ||||||
Other
assets
|
528 | 615 | ||||||
Total
assets
|
$ | 16,196 | $ | 15,619 | ||||
LIABILITIES
|
||||||||
Short-term
debt and current maturities of long-term debt
|
$ | 131 | $ | 62 | ||||
Accounts
payable
|
415 | 636 | ||||||
Accrued
payroll and related costs
|
765 | 822 | ||||||
Other accrued
expenses
|
1,176 | 1,264 | ||||||
Deferred
revenue
|
795 | 915 | ||||||
Income taxes
payable and deferred income taxes
|
280 | 317 | ||||||
Total current
liabilities
|
3,562 | 4,016 | ||||||
Long-term
debt, net of current maturities
|
4,176 | 4,173 | ||||||
Income tax
liabilities and deferred income taxes
|
476 | 486 | ||||||
Other
long-term liabilities
|
1,302 | 1,326 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common stock,
par value $1.00 per share; authorized 750,000,000 shares; issued
161,758,003 (fiscal 2010) and 159,688,820 (fiscal 2009)
|
162 | 160 | ||||||
Additional
paid-in capital
|
1,969 | 1,836 | ||||||
Retained
earnings
|
5,450 | 4,893 | ||||||
Accumulated
other comprehensive loss
|
(582 | ) | (1,004 | ) | ||||
Less common
stock in treasury, at cost, 8,270,397 shares (fiscal 2010) and 8,190,333
shares (fiscal 2009)
|
(378 | ) | (375 | ) | ||||
Total
CSC stockholders’ equity
|
6,621 | 5,510 | ||||||
Noncontrolling
interest in subsidiaries
|
59 | 108 | ||||||
Total
stockholders' equity
|
6,680 | 5,618 | ||||||
Total
liabilities and stockholders' equity
|
$ | 16,196 | $ | 15,619 |
See accompanying
notes.
2
COMPUTER
SCIENCES CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Nine
Months Ended
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||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Cash flows
from operating activities:
|
||||||||
Net
income
|
$ | 570 | $ | 740 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization and other non-cash charges
|
878 | 987 | ||||||
Stock
based compensation
|
49 | 47 | ||||||
Provision
for losses on accounts receivable
|
17 | 20 | ||||||
Unrealized
foreign currency exchange (gain)/loss, net
|
(44 | ) | 93 | |||||
Gain
on dispositions
|
(7 | ) | (2 | ) | ||||
Changes
in operating assets and liabilities, net of acquisition
effects:
|
||||||||
Increase
in assets
|
(173 | ) | (125 | ) | ||||
Decrease
in liabilities
|
(883 | ) | (832 | ) | ||||
Net cash
provided by operating activities
|
407 | 928 | ||||||
Investing
activities:
|
||||||||
Purchases
of property and equipment
|
(437 | ) | (557 | ) | ||||
Outsourcing
contracts
|
(106 | ) | (114 | ) | ||||
Acquisitions
|
(5 | ) | (100 | ) | ||||
Software
|
(106 | ) | (129 | ) | ||||
Other
investing cash flows
|
140 | 62 | ||||||
Net cash used
in investing activities
|
(514 | ) | (838 | ) | ||||
Financing
activities:
|
||||||||
Net
repayments of commercial paper
|
(1 | ) | (263 | ) | ||||
Borrowings
under lines of credit
|
101 | 1,647 | ||||||
Repayments
on lines of credit
|
(43 | ) | (119 | ) | ||||
Principal
payments on long-term debt
|
(27 | ) | (324 | ) | ||||
Proceeds
from stock option and other common stock transactions
|
79 | 12 | ||||||
Repurchase
of common stock, net of settlement
|
(2 | ) | (4 | ) | ||||
Excess
tax benefit from stock-based compensation
|
7 | 1 | ||||||
Other
financing cash flows
|
- | 3 | ||||||
Net cash
provided by financing activities
|
114 | 953 | ||||||
Effect of
exchange rate changes on cash and cash equivalents
|
123 | (69 | ) | |||||
Net increase
in cash and cash equivalents
|
130 | 974 | ||||||
Cash and cash
equivalents at beginning of year
|
2,297 | 699 | ||||||
Cash and cash
equivalents at end of period
|
$ | 2,427 | $ | 1,673 |
See accompanying
notes.
3
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
1 – Basis of Presentation
Computer Sciences
Corporation (CSC or the Company) has prepared the unaudited consolidated
condensed financial statements included herein pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles for the
United States (GAAP) have been condensed or omitted pursuant to such rules and
regulations. It is recommended that these condensed financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended April 3, 2009. In the opinion of the Company, the unaudited
consolidated condensed financial statements included herein reflect all
adjustments necessary, including those of a normal recurring nature, to present
fairly the financial position, the results of operations and the cash flows for
such interim periods. The results of operations for such interim
periods are not necessarily indicative of the results for the full
year.
Certain columns and
rows within the financial tables in this Form 10-Q include rounded numbers for
disclosure purposes. Certain percentages and ratios are calculated from
whole-dollar amounts.
Deferred cost
balances at January 1, 2010, and April 3, 2009, of $1,343 million and $1,073
million, respectively, are included in prepaid expenses and other current
assets.
Prior amounts have
been updated from those presented in previously filed Forms 10-Q to reflect
implementation of ASC 810-10 (SFAS No. 160), “Noncontrolling Interests in
Consolidated Financial Statements.”
Equity in earnings
of unconsolidated affiliates of $3 million and $13 million for the quarter and
nine months ended January 2, 2009, have been reclassified from cost of services
to other (income)/expense in the consolidated condensed statements of
income.
Subsequent events
have been evaluated through February 10, 2010, the date the financial statements
were issued.
4
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
2 – Accounting Changes
In
June 2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles,”
which establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant
to the provisions of ASC 105, the Company has updated references to GAAP in its
financial statements issued for the period ended January 1, 2010. The
adoption of ASC 105 did not impact the Company’s financial position or results
of operations.
In
August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair
Value,” which amends Topic 820: Fair Value Measurements and Disclosures. This
statement provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
techniques:
1)
|
A valuation
technique that uses the quoted price of the identical liability when
traded as an asset or quoted prices for similar liabilities;
and
|
2)
|
Another
valuation technique that is consistent with the principles of Topic
820.
|
The statement
became effective for CSC’s third quarter ended January 1, 2010, and did not have
a material effect on CSC’s financial statements.
In
December 2007, the FASB issued ASC 810-10 (SFAS No. 160), “Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51.”
This statement requires that the noncontrolling interests in the equity of a
subsidiary be accounted for and reported as equity, provides revised guidance on
the treatment of net income and losses attributable to the noncontrolling
interests and changes in ownership interests in a subsidiary and requires
additional disclosures that identify and distinguish between the interests of
the controlling and noncontrolling owners. Pursuant to the transition provisions
of ASC 810-10 (SFAS No. 160), the Company adopted the statement as of the
beginning of fiscal year 2010 via retrospective application of the presentation
and disclosure requirements. Noncontrolling interests of $108 million at April
3, 2009, was reclassified from the liabilities section to the stockholders’
equity section in the consolidated condensed balance sheet as of the beginning
of fiscal year 2010. Net income attributable to noncontrolling interests, net of
tax of $5 million and $2 million for the quarter and $12 million and $7 million
for the nine months ended January 1, 2010, and January 2, 2009, respectively, is
presented separately in the consolidated condensed statements of
income.
In
December 2007, the FASB issued ASC 805-10 (SFAS No. 141(R)), “Business
Combinations,” which became effective as of the beginning of fiscal year 2010
via prospective application to business combinations. This statement requires
that the acquisition method of accounting be applied to a broader set of
business combinations, amends the definition of a business combination, provides
a definition of a business, requires an acquirer to recognize an acquired
business at its fair value at the acquisition date and requires the assets and
liabilities assumed in a business combination to be measured and recognized at
their fair values as of the acquisition date (with limited exceptions). The
Company adopted this statement as of the beginning of fiscal year 2010. There
was no impact upon adoption, and its effects on future periods will depend on
the nature and significance of business combinations subject to this
statement.
5
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
3 – Earnings Per Share
Basic and diluted
earnings per share are calculated as follows:
Quarter
Ended
|
||||||||
(Amounts in
millions, except per share data)
|
January
1, 2010
|
January
2, 2009
|
||||||
Net income
attributable to CSC common shareholders
|
$ | 211 | $ | 161 | ||||
Common share
information:
|
||||||||
Average
common shares outstanding for basic
EPS
|
152.784 | 151.485 | ||||||
Dilutive
effect of stock options and equity awards
common
stock equivalents
|
2.646 | 0.372 | ||||||
Shares for
diluted EPS
|
155.430 | 151.857 | ||||||
Basic
EPS
|
$ | 1.38 | $ | 1.06 | ||||
Diluted
EPS
|
$ | 1.36 | $ | 1.06 |
Nine
Months Ended
|
||||||||
(Amounts in
millions, except per share data)
|
January
1, 2010
|
January
2, 2009
|
||||||
Net income
attributable to CSC common shareholders
|
$ | 558 | $ | 733 | ||||
Common share
information:
|
||||||||
Average
common shares outstanding for
basic
EPS
|
152.052 | 151.352 | ||||||
Dilutive
effect of common stock equivalents
|
2.227 | 1.267 | ||||||
Shares
for diluted EPS
|
154.279 | 152.619 | ||||||
Basic
EPS
|
$ | 3.67 | $ | 4.84 | ||||
Diluted
EPS
|
$ | 3.62 | $ | 4.80 |
The computation of
diluted EPS did not include stock options which were antidilutive, as their
exercise price was greater than the average market price of the common stock of
CSC during the periods presented. The numbers of such options were
5,969,792 and 10,257,633 for the quarter and nine months ended January 1, 2010,
respectively, and 18,013,187 and 14,312,953 for the quarter and nine months
ended January 2, 2009, respectively.
6
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
4 – Fair Value
The following table
presents the Company’s assets and liabilities that are measured at fair value on
a recurring basis as of January 1, 2010, and April 3, 2009, consistent with the
fair value
hierarchy
provisions of ASC 820-10 (SFAS No. 157):
As
of
|
||||||||||||||||
(Amounts in
millions)
|
January
1, 2010
|
Fair
Value Hierarchy
|
||||||||||||||
Fair
Value
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Money market
funds
|
$ | 1,630 | $ | 1,630 | $ | - | $ | - | ||||||||
Time
deposits
|
117 | 117 | - | - | ||||||||||||
Derivative
assets, net
|
2 | - | 2 | - | ||||||||||||
Total
|
$ | 1,749 | $ | 1,747 | $ | 2 | $ | - |
As
of
|
||||||||||||||||
(Amounts in
millions)
|
April
3, 2009
|
Fair
Value Hierarchy
|
||||||||||||||
Fair
Value
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Money market
funds
|
$ | 1,190 | $ | 1,190 | $ | - | $ | - | ||||||||
Time
deposits
|
549 | 549 | - | - | ||||||||||||
Derivative
assets, net
|
1 | - | 1 | - | ||||||||||||
Total
|
$ | 1,740 | $ | 1,739 | $ | 1 | $ | - |
The Company’s
derivative assets include foreign currency forward and purchased option
contracts. The fair value of the Company’s forward contracts is based
on quoted prices for similar but not identical derivative financial instruments;
as such, the inputs are considered Level 2 for forward contracts. The
option contract valuation inputs are based on quoted pricing from external
valuations and do not involve management judgment. The inputs used to value the
option contracts are considered Level 2 inputs. The Company did not have any
assets or liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3).
The money market
funds and time deposits are included and reported in cash and cash equivalents
whereas the derivative assets are included and reported in prepaid expenses and
other current assets and derivative liabilities in accrued expenses. Gains and
losses from changes in the fair value of financial instruments are included in
earnings and reported in other (income)/expense (see Note 6).
Financial
Instruments
The carrying
amounts of the Company’s financial instruments with short maturities are deemed
to approximate their market values.
The carrying amount
of the Company’s long-term debt was $4,176 million and $4,173 million and the
estimated fair value was $4,149 million and $4,155 million as of January 1,
2010, and April 3, 2009, respectively. The fair value of long-term debt is
estimated based on the current interest rates offered to the Company for
instruments with similar terms and remaining maturities.
7
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
5 – Foreign Currency Derivative Instruments
As
a large global organization, the Company faces exposure to adverse movements in
foreign currency exchange rates. During the ordinary course of
business, the Company enters into certain contracts denominated in foreign
currency. Potential foreign currency exposures arising from these contracts are
analyzed during the contract bidding process. The Company generally
manages these transactions by incurring costs to service contracts in the same
currency in which revenue is received. Short-term contract financing
requirements are met by borrowing in the same currency. By generally matching
revenues, costs and borrowings to the same currency, the Company has been able
to substantially mitigate foreign currency risk to earnings. However, as
business practices evolve, the Company is increasing its use of offshore support
and is therefore becoming more exposed to currency fluctuations.
The Company
established policies and procedures to manage the exposure to fluctuations in
foreign currency by using foreign currency forwards and purchased option
contracts to hedge certain intercompany loans denominated in non-functional
currencies and certain foreign currency assets and liabilities. These financial
instruments are generally short term in nature with typical maturities of less
than one year. In addition, the Company uses these instruments as
economic hedges and not for speculative or trading purposes. For
accounting purposes, these foreign currency contracts are not designated as
hedges, as defined under ASC 815 (previously FAS 133) and all changes in fair
value are reported in net earnings as part of other (income)/expense (see Note
6).
The notional amount
of forward contracts outstanding was approximately $432 million and $951 million
as of January 1, 2010, and April 3, 2009, respectively. The notional amount of
purchased option contracts outstanding was $54 million as of January 1, 2010,
but none were outstanding on April 3, 2009. The estimated aggregate fair value
of the forward and option contracts, as of January 1, 2010, and April 3, 2009,
was $2 million and $1 million, respectively (see Note 4).
As
a result of the use of derivative instruments, the Company is subject to
counterparty credit risks. To mitigate this risk, the Company enters into
forward and option contracts with several financial institutions and regularly
reviews its credit exposure and the creditworthiness of the
counterparty.
8
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
6 – Other (Income)/Expense
Other
(income)/expense includes foreign currency gains and losses on intercompany and
foreign currency balances, gains and losses on foreign exchange forward
contracts and purchased options, equity in earnings of unconsolidated
affiliates, and gains and losses from the sale of non-operating assets or
immaterial businesses.
For the quarters
and nine months ended January 1, 2010, and January 2, 2009, the components of
other (income)/expense were as follows:
Quarter
Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2,
2009
|
||||||
Foreign
exchange (gains)/losses, net
|
$ | (2 | ) | $ | 10 | |||
Equity in
earnings of unconsolidated affiliates
|
(3 | ) | (3 | ) | ||||
Gain on sale
of non-operating assets
|
(1 | ) | (2 | ) | ||||
Total
Other (Income)/Expense
|
$ | (6 | ) | $ | 5 |
Nine
Months Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2,
2009
|
||||||
Foreign
exchange losses, net
|
$ | 3 | $ | 24 | ||||
Equity in
earnings of unconsolidated affiliates
|
(12 | ) | (13 | ) | ||||
Gain on sale
of non-operating assets
|
(6 | ) | (2 | ) | ||||
Total
Other (Income)/Expense
|
$ | (15 | ) | $ | 9 |
Net foreign
exchange losses of $3
million and $24 million for the nine months ended January 1, 2010, and January
2, 2009, respectively, were attributed to the costs to hedge foreign currency
intercompany balances and foreign currency economic risk associated with
off-shore operations and miscellaneous foreign currency losses due to un-hedged
intercompany balances.
There was no
material net cost for the Company’s option program during the quarters ended
January 1, 2010, and January 2, 2009. For the nine months ended
January 1, 2010, and January 2, 2009, the net premium paid was $4 million and $5
million, respectively.
Gain on sale of
non-operating assets for the first nine months of fiscal year 2010 was primarily
from a $4 million gain on sale of the former corporate headquarters in El
Segundo, California, in June 2009.
9
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
7 – Pension and Other Benefit Plans
The Company and its
subsidiaries offer a number of pension and postretirement healthcare and life
insurance benefit plans. The components of net periodic benefit cost
for defined benefit pension and postretirement benefit plans are as
follows:
Quarter
Ended
|
||||||||||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||||||||||
Pensions
|
U.S.
Plans
|
Non-U.S.
Plans
|
U.S.
Plans
|
Non-U.S.
Plans
|
||||||||||||
Service
cost
|
$ | 2 | $ | 9 | $ | 29 | $ | 11 | ||||||||
Interest
cost
|
42 | 27 | 37 | 24 | ||||||||||||
Expected
return on assets
|
(40 | ) | (23 | ) | (42 | ) | (27 | ) | ||||||||
Amortization
of unrecognized net loss and other
|
1 | 6 | - | 4 | ||||||||||||
Net periodic
pension cost
|
$ | 5 | $ | 19 | $ | 24 | $ | 12 |
Nine
Months Ended
|
||||||||||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||||||||||
Pensions
|
U.S.
Plans
|
Non-U.S.
Plans
|
U.S.
Plans
|
Non-U.S.
Plans
|
||||||||||||
Service
cost
|
$ | 30 | $ | 25 | $ | 87 | $ | 35 | ||||||||
Interest cost | 125 | 81 | 111 | 84 | ||||||||||||
Expected
return on assets
|
(118 | ) | (68 | ) | (128 | ) | (94 | ) | ||||||||
Amortization
of unrecognized net loss and other
|
5 | 17 | 3 | 11 | ||||||||||||
Pension
curtailment
|
(13 | ) | - | - | - | |||||||||||
Net periodic
pension cost
|
$ | 29 | $ | 55 | $ | 73 | $ | 36 |
On
May 20, 2009, the Company’s Board of Directors adopted a “freeze” amendment to
the Computer Sciences Corporation Employee Pension Plan (the Plan) whereby
effective July 10, 2009, the further accrual of all benefits ceased for most
participants in the Plan. As a result of this plan amendment, the
Company remeasured the Plan’s pension expense for fiscal 2010 to reflect a) a
new discount rate of 7.5%, b) the year-to-date increase in plan assets and c)
the change in amortization basis to the expected average remaining life of plan
participants. The discount rate is derived from averaging two independent
third-party sources: the AON Yield Curve and the Citigroup Pension Discount
Curve - Above Median. Both yield curves are constructed to parallel the bond
portfolio that would be constructed for a plan similar in size and timing of
payments to the Company’s. This remeasurement resulted in a $115
million reduction to the pension benefit obligation, which improved the funded
status of the Plan. Additionally, the Company recognized a benefit
resulting from the reversal of a prior service credit of $13 million in the
quarter ended July 3, 2009.
The service cost
for U.S. pension plans during the quarter ended January 1, 2010, decreased by
$27 million when compared to the quarter ended January 2, 2009, due mainly to
the freeze of the Plan. Similarly, the service cost for U.S. pension
plans decreased by approximately $57 million between the nine months ended
January 1, 2010, and the nine months ended January 2, 2009, due mainly to the
freeze of the Plan.
10
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
The Company has
entered into formal consultation with its workforce and their union
representatives regarding changes it proposes to make to its defined benefit
pension plans in the United Kingdom. It is expected that consultation
will continue through the Company's fourth quarter, after which a decision will
be made on how to proceed.
The Company expects
to contribute approximately $135 million to its defined benefit pension during
fiscal 2010. During the quarter ended January 1, 2010, the Company
contributed $39 million to its defined benefit pension plans. During
the first nine months of fiscal 2010, the Company contributed approximately $118
million to its defined benefit pension plans.
(Amounts in
millions)
|
Quarter
Ended
|
|||||||||||||||
January
1, 2010
|
January
2, 2009
|
|||||||||||||||
Other
Postretirement Benefits
|
U.S.
Plans
|
Non-U.S.
Plans(a)
|
U.S.
Plans
|
Non-U.S.
Plans
|
||||||||||||
Service
cost
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Interest
cost
|
3 | - | 2 | - | ||||||||||||
Expected
return on assets
|
(1 | ) | - | (1 | ) | - | ||||||||||
Amortization
of unrecognized net loss
|
2 | - | 2 | - | ||||||||||||
Net provision
for postretirement benefits
|
$ | 4 | $ | - | $ | 3 | $ | - |
(Amounts in
millions)
|
Nine
Months Ended
|
|||||||||||||||
January
1, 2010
|
January
2, 2009
|
|||||||||||||||
Other
Postretirement Benefits
|
U.S.
Plans
|
Non-U.S.
Plans(a)
|
U.S.
Plans
|
Non-U.S.
Plans
|
||||||||||||
Service
cost
|
$ | - | $ | - | $ | 2 | $ | - | ||||||||
Interest
cost
|
9 | - | 8 | 1 | ||||||||||||
Expected
return on assets
|
(3 | ) | - | (5 | ) | - | ||||||||||
Amortization
of unrecognized net loss and other
|
6 | - | 3 | - | ||||||||||||
Net provision
for postretirement benefits
|
$ | 12 | $ | - | $ | 8 | $ | 1 |
(a)
Amounts are immaterial for non-U.S. plans.
The Company expects
to contribute approximately $10 million to its postretirement benefit plans
during fiscal 2010. During the quarter ended January 1, 2010, the
Company contributed $2 million to its postretirement benefit
plans. During the first nine months of fiscal 2010, the Company
contributed $6 million to the postretirement benefit plans.
11
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
8 – Income Taxes
The effective tax
rate for the third quarter ended and nine months ended was 25.8% and 22.6% for
fiscal year 2010, and 38.0% and (18.2%) for fiscal year 2009,
respectively. The increase in the fiscal year 2010 rate is primarily
due to favorable settlements of open audit years that were recognized during the
second quarter of fiscal year 2009. During the second quarter of
fiscal year 2010, the Company recorded a tax benefit related to the reversal of
a valuation allowance associated with branch net operating loss carryforwards
and the remeasurement of an uncertain tax position for foreign tax credits as a
result of an audit settlement. The recognition of this benefit
resulted in a decrease to the effective tax rate for the third quarter ended and
nine months ended of 4.7% and 6.8% for fiscal year 2010, respectively. In
addition, the fiscal year 2009 effective tax rates reflect the reclassification
of prior year income from noncontrolling interests to a separate line following
the adoption of a new accounting standard at the beginning of fiscal year
2010.
As
of January 1, 2010, in accordance with ASC 740-10 (FASB Interpretation No. 48),
the Company's liability for uncertain tax positions was $472 million, which is
included in noncurrent liabilities on the Company’s balance sheet, including
interest of $85 million and penalties of $26 million. The Company’s
liability for uncertain tax positions at January 1, 2010 includes $272 million
related to amounts that, if recognized, would affect the effective tax rate
(excluding related interest and penalties).
The total amount of
uncertain tax positions decreased by approximately $32 million compared to
fiscal year end 2009, primarily due to settlements with state taxing authorities
and taxing authorities in foreign jurisdictions which also resulted in the
remeasurement of an uncertain tax position for foreign tax credits.
Tax Examination
Status
The Company is
currently under examination in several tax jurisdictions. A summary
of the tax years that remain subject to examination in certain of the Company’s
major tax jurisdictions are:
Jurisdiction:
|
Tax Years
that Remain Subject to Examination (Fiscal Year
Ending):
|
United States
– Federal
|
2005 and
forward
|
United States
– Various states
|
2001 and
forward
|
Canada
|
2004 and
forward
|
France
|
2005 and
forward
|
Germany
|
2006 and
forward
|
United
Kingdom
|
2008 and
forward
|
12
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
It is reasonably
possible that during the next 12 months the Company may settle certain tax
examinations, have lapses in statutes of limitations, or voluntarily settle
income tax positions in negotiated settlements for different amounts than the
Company has accrued as uncertain tax positions. The Company may need
to accrue and ultimately pay additional amounts for tax positions that
previously met a more likely than not standard if such positions are not
upheld. Conversely, the Company could settle positions with the tax
authorities for amounts lower than have been accrued or extinguish a position
through payment. The Company believes the outcomes which are
reasonably possible within the next twelve months may result in a reduction of
the liability for uncertain tax positions in the amount of $21 million,
excluding interest, penalties and tax carryforwards.
13
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
9 – Stock Incentive Plans
As
of January 1, 2010, the Company had outstanding stock option and equity awards
issued pursuant to various shareholder-approved plans. For the
quarter and nine months ended January 1, 2010, and January 2, 2009, the Company
recognized stock-based compensation expense as follows:
Quarter
Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Cost of
services
|
$ | 3 | $ | 3 | ||||
Selling,
general and administrative
|
12 | 10 | ||||||
Total
|
$ | 15 | $ | 13 | ||||
Total net of
tax
|
$ | 9 | $ | 8 |
Nine
Months Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Cost of
services
|
$ | 11 | $ | 11 | ||||
Selling,
general and administrative
|
38 | 36 | ||||||
Total
|
$ | 49 | $ | 47 | ||||
Total net of
tax
|
$ | 30 | $ | 29 |
The Company’s
overall stock-based compensation granting practice has not changed year over
year and there have been no material changes in the underlying assumptions in
the fair value calculations.
The Company uses
the Black-Scholes-Merton model in determining the fair value of options
granted. The weighted average grant date fair values of stock options
granted during the nine months ended January 1, 2010, and January 2, 2009, were
$15.15 and $15.86 per share, respectively. In calculating the
compensation expense for its stock incentive plans, the Company used the
following weighted average assumptions:
Nine
Months Ended
|
|||
January
1, 2010
|
January
2, 2009
|
||
Risk-free
interest rate
|
2.20%
|
3.21%
|
|
Expected
volatility
|
41%
|
36%
|
|
Expected
lives
|
4.14
years
|
4.07
years
|
During the nine
months ended January 1, 2010, and January 2, 2009, the Company realized income
tax benefits of $12 million and $6 million, respectively, and an excess tax
benefit of $7 million and $1 million, respectively, related to all of its stock
incentive plans.
14
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Employee
Incentive Plans
The Company has
three stock incentive plans which authorize the issuance of stock options,
restricted stock and other stock-based incentives to employees upon terms
approved by the Compensation Committee of the Board of Directors. The
Company issues authorized but previously unissued shares upon the exercise of
stock options, the granting of restricted stock and the redemption of restricted
stock units (RSUs). At January 1, 2010, 9,147,036 shares of CSC
common stock were available for the grant of future stock options, equity awards
or other stock-based incentives to employees.
Stock
Options
The Company’s
standard vesting schedule for stock options is one-third on each of the first
three anniversaries of the grant date. Stock options are generally
granted for a term of ten years. Information concerning stock options
granted under stock incentive plans is as follows:
As
of January 1, 2010
|
||||||||||||||||
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual
Life
|
Aggregate
Intrinsic Value
|
|||||||||||||
Outstanding
as of April 3, 2009
|
18,294,562 | $ | 47.15 | 5.53 | $ | 23 | ||||||||||
Granted
|
2,856,430 | 42.53 | ||||||||||||||
Exercised
|
(1,972,472 | ) | 40.89 | |||||||||||||
Canceled/forfeited
|
(245,909 | ) | 49.91 | |||||||||||||
Expired
|
(1,363,336 | ) | 57.09 | |||||||||||||
Outstanding
as of January 1, 2010
|
17,569,275 | 46.29 | 6.05 | 198 | ||||||||||||
Vested and
expected to vest in the future as of January 1, 2010
|
17,225,695 | 46.32 | 6.05 | 194 | ||||||||||||
Exercisable
as of January 1, 2010
|
12,124,330 | 46.34 | 4.83 | 136 |
The total intrinsic
value of options exercised during the nine months ended January 1, 2010, and
January 2, 2009, was $24 million and $4 million, respectively. The
total intrinsic value of stock options is based on the difference between the
fair market value of the Company’s common stock less the applicable exercise
price. The cash received from stock options exercised during the nine
months ended January 1, 2010, and January 2, 2009, was $79 million and $12
million, respectively.
As
of January 1, 2010, there was $57 million of total unrecognized compensation
expense related to unvested stock options, net of expected
forfeitures. The cost is expected to be recognized over a
weighted-average period of 1.87 years.
15
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Other
Equity Awards
Other Equity
Awards, including restricted stock and RSUs, generally vest over periods of
three to five years. Restricted stock awards consist of shares of
common stock of the Company issued at a price of $0. Upon issuance to
an employee, shares of restricted stock become outstanding, receive dividends
and have voting rights. The shares are subject to forfeiture and to restrictions
which limit the sale or transfer during the restriction period. Upon
the vesting date, RSUs are automatically redeemed for shares of CSC common stock
and dividend equivalents. If prior to the redemption in full of the
RSU, the employee’s status as a full-time employee is terminated, then the RSU
is automatically cancelled on the employment termination date and any unvested
shares are forfeited.
A
portion of the Other Equity Awards granted during the nine months ended January
1, 2010, consisted of performance-based RSUs. The number of units
that ultimately vest pursuant to such awards is dependent upon the Company’s
achievement of certain specified performance criteria over a two or three-year
period. Awards are redeemed for shares of CSC common stock and
dividend equivalents upon the filing with the SEC of the Annual Report on Form
10-K for the last fiscal year of the performance period. Compensation
expense during the performance period is estimated at each reporting date using
management’s expectation of the probable achievement of the specified
performance criteria and is adjusted to the extent the expected achievement
changes. In the table below, such awards are reflected at the number
of shares to be redeemed upon achievement of target performance
measures.
During the nine
months ended January 1, 2010, nine senior executives were awarded service-based
RSUs for which the shares are redeemable over the ten anniversaries following
the executive’s termination, provided the executive remains a full-time employee
of the Company until reaching the earlier of age 65 or age 55 or over with at
least ten years of service and after termination complies with certain
non-competition covenants during the ten-year period.
Information
concerning Other Equity Awards granted under stock incentive plans is as
follows:
As
of January 1, 2010
|
||||||||
Number
of Shares
|
Weighted
Average Fair Value
|
|||||||
Outstanding
as of April 3, 2009
|
881,504 | $ | 49.41 | |||||
Granted
|
627,542 | 42.31 | ||||||
Released/Redeemed
|
(164,553 | ) | 49.52 | |||||
Forfeited/Canceled
|
(189,825 | ) | 47.34 | |||||
Outstanding
as of January 1, 2010
|
1,154,668 | $ | 45.88 |
As
of January 1, 2010, there was $31 million of total unrecognized compensation
expense related to unvested restricted stock awards and restricted stock
units. The cost is expected to be recognized over a weighted-average
period of 2.19 years.
16
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Nonemployee
Director Incentives
The Company has one
stock incentive plan which authorizes the issuance of stock options, restricted
stock and other stock-based incentives to nonemployee directors upon terms
approved by the Company’s Board of Directors. As of January 1, 2010,
28,700 shares of CSC common stock remained available for the grant to
nonemployee directors of future RSUs or other stock-based
incentives.
Generally, RSU
awards to nonemployee directors vest in full as of the next annual meeting of
the Company’s stockholders following the date they are granted and are issued at
a price of $0. Information concerning RSUs granted to nonemployee
directors is as follows:
As
of January 1, 2010
|
||||||||
Number
of Shares
|
Weighted
Average
Fair
Value
|
|||||||
Outstanding
as of April 3, 2009
|
113,021 | $ | 45.96 | |||||
Granted
|
20,800 | 48.97 | ||||||
Redeemed
|
(600 | ) | 37.81 | |||||
Forfeited/canceled
|
- | - | ||||||
Outstanding
as of January 1, 2010
|
133,221 | $ | 46.47 |
When a holder of
RSUs ceases to be a director of the Company, the RSUs are automatically redeemed
for shares of CSC common stock and dividend equivalents with respect to such
shares. The number of shares to be delivered upon redemption is equal
to the number of RSUs that are vested at the time the holder ceases to be a
director. At the holder’s election, the RSUs may be redeemed (i) as
an entirety, upon the day the holder ceases to be a director, or (ii) in
substantially equal amounts upon the first five, ten or fifteen anniversaries of
such termination of service.
As
of January 1, 2010, there was $1 million of total unrecognized compensation
expense related to unvested nonemployee director RSUs. The cost is
expected to be fully recognized as of the 2010 annual stockholders’
meeting.
17
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
10 – Dividends
No dividends were
paid or declared during the periods presented.
18
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
11 – Cash Flows
Cash payments for
interest on indebtedness were $148 million and $159 million for the nine months
ended January 1, 2010, and January 2, 2009, respectively. Net cash
payments for taxes on income were $294 million and $223 million for the nine months
ended January 1, 2010, and January 2, 2009, respectively. Noncash
investing activities included capital lease obligations of $38 million and $43
million for the nine months ended January 1, 2010, and January 2, 2009,
respectively.
19
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
12 – Stockholders’ Equity and Comprehensive Income
The components in
stockholders’ equity are as follows:
(Amounts in
millions)
|
Total
Equity
|
CSC
Equity
|
Noncontrolling
Interest
Equity
|
|||||||||
Balance at
March 28, 2008
|
$ | 5,621 | $ | 5,462 | $ | 159 | ||||||
Net
income
|
740 | 733 | 7 | |||||||||
Common
stock
|
1 | 1 | - | |||||||||
Additional
paid in capital
|
59 | 59 | - | |||||||||
Foreign
currency translation adjustment
|
(552 | ) | (552 | ) | - | |||||||
Unfunded
pension adjustment
|
1 | 1 | - | |||||||||
Common stock
in treasury
|
(3 | ) | (3 | ) | - | |||||||
Distributions
and other (proceeds on sale)
|
(84 | ) | (26 | ) | (58 | ) | ||||||
Balance at
January 2, 2009
|
$ | 5,783 | $ | 5,675 | $ | 108 | ||||||
(Amounts in
millions)
|
Total
Equity
|
CSC
Equity
|
Noncontrolling
Interest
Equity
|
|||||||||
Balance at
April 3, 2009
|
$ | 5,618 | $ | 5,510 | $ | 108 | ||||||
Net
income
|
570 | 558 | 12 | |||||||||
Common
stock
|
2 | 2 | - | |||||||||
Additional
paid in capital
|
133 | 133 | - | |||||||||
Foreign
currency translation adjustment
|
374 | 374 | - | |||||||||
Unfunded
pension adjustment
|
48 | 48 | - | |||||||||
Common stock
in treasury
|
(3 | ) | (3 | ) | - | |||||||
Distributions
and other (proceeds on sale)
|
(62 | ) | (1 | ) | (61 | ) | ||||||
Balance at
January 1, 2010
|
$ | 6,680 | $ | 6,621 | $ | 59 |
20
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
The components of
comprehensive income, net of tax, are as follows:
Quarter
Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Net income
attributable to CSC common shareholders
|
$ | 211 | $ | 161 | ||||
Foreign
currency translation adjustment
|
19 | (237 | ) | |||||
Comprehensive
income (loss)
|
$ | 230 | $ | (76 | ) |
Nine
Months Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Net income
attributable to CSC common shareholders
|
$ | 558 | $ | 733 | ||||
Foreign
currency translation adjustment
|
374 | (552 | ) | |||||
Unfunded
pension adjustment
|
48 | 1 | ||||||
Comprehensive
income
|
$ | 980 | $ | 182 |
The components of
accumulated other comprehensive losses are as follows:
As
of
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
April
3, 2009
|
||||||
Foreign
currency translation adjustment
|
155 | (219 | ) | |||||
Unfunded
pension adjustment
|
(737 | ) | (785 | ) | ||||
Accumulated
Other Comprehensive Loss
|
$ | (582 | ) | $ | (1,004 | ) |
Accumulated other
comprehensive loss presented on the accompanying consolidated condensed balance
sheets consist of accumulated foreign currency translation adjustments and
unamortized benefit plan costs. The unfunded pension adjustment is attributable
to the pension curtailment effective May 20, 2009, as discussed in Note 7. The
foreign currency translation adjustment is due to appreciation in foreign
currency-denominated assets and liabilities, primarily British Pound and Euro
movements of 11% and 9%, respectively.
21
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
13 – Segment Information
CSC provides
information technology and business process outsourcing, consulting and systems
integration services and other professional services to its
customers. The Company targets the delivery of these services within
three broad service lines or sectors: North American Public Sector
(NPS), Managed Services Sector (MSS), and Business Solutions and Services
(BSS). The Company’s organization has continued to evolve, and
management decided to consolidate and streamline the management and reporting
structure.
At
the start of fiscal 2010, the Company changed its internal organization
structure, including a change to further strengthen market position by
consolidating its application management services business, including all
offshore activity with its outsourcing business. These changes have resulted in
changes to the Company’s reportable segments.
Consequently, the
Company’s reportable segments in fiscal 2010 are as follows:
·
|
North
American Public Sector (NPS) – The NPS segment
operates principally within a regulatory environment subject to
governmental contracting and accounting requirements, including Federal
Acquisition Regulations, Cost Accounting Standards and audits by various
U.S. Federal agencies. In fiscal 2009, NPS was treated as a
reportable segment and continues to be a reportable segment in fiscal
2010.
|
·
|
Managed
Services Sector (MSS) – The MSS segment provides large-scale outsourcing
solutions offerings as well as midsize services delivery to customers
globally. In fiscal 2009, Global Outsourcing Services (GOS) was
considered a separate operating and reportable segment. In
fiscal 2010, the name of the segment was changed to Managed Services
Sector; and the Applications and Technology Services (ATS) unit was moved
from the Business Solutions & Services – Other (BS&S - Other)
segment to MSS due to the fact that its services, particularly its
applications management, are more aligned with the Company’s outsourcing
services rather than consulting services. ATS results are no longer
reported separately to the Chief Operating Decision Maker (CODM) but are
included with the MSS segment.
|
·
|
Business
Solutions & Services (BSS) – The BSS segment provides industry
specific consulting and systems integration services, business process
outsourcing, and intellectual property (IP) – based software
solutions. These service offerings and clientele
overlap. In fiscal 2009, there were three reportable segments:
BS&S - Consulting, BS&S - Financial Services and BS&S -
Other. As a result of the reorganization in fiscal 2010,
the BSS line of service is now a single operating segment with one sector
president reporting to the CODM, and financial information is provided on
a sector level only. Based on this change, BSS is considered a
reportable segment in fiscal 2010. Furthermore, most of the India
operating segment, which was part of the BS&S – Other segment in
fiscal 2009, has been moved to the MSS operating segment and renamed ATS
as discussed above.
|
22
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Based on the above
changes, the Company has recast prior periods reportable segments to be
comparable with fiscal 2010. The following tables summarize operating
results by reportable segment:
NPS
|
MSS
|
BSS
|
Corporate
|
Eliminations
|
Total
|
|||||||||||||||||||
(Amounts
in millions)
|
||||||||||||||||||||||||
Fiscal
2010
|
||||||||||||||||||||||||
Quarter Ended
January 1, 2010
|
||||||||||||||||||||||||
Revenues
|
$ | 1,477 | $ | 1,618 | $ | 887 | $ | 4 | $ | (33 | ) | $ | 3,953 | |||||||||||
Operating
income (loss)
|
140 | 175 | 81 | (19 | ) | - | 377 | |||||||||||||||||
Depreciation
and amortization
|
33 | 207 | 37 | 3 | - | 280 | ||||||||||||||||||
Fiscal
2009
|
||||||||||||||||||||||||
Quarter Ended
January 2, 2009
|
||||||||||||||||||||||||
Revenues
|
$ | 1,476 | $ | 1,607 | $ | 893 | $ | 4 | $ | (28 | ) | $ | 3,952 | |||||||||||
Operating
income (loss)
|
118 | 180 | 83 | (10 | ) | - | 371 | |||||||||||||||||
Depreciation
and amortization
|
33 | 210 | 36 | 3 | - | 282 |
NPS
|
MSS
|
BSS
|
Corporate
|
Eliminations
|
Total
|
|||||||||||||||||||
(Amounts
in millions)
|
||||||||||||||||||||||||
Fiscal
2010
|
||||||||||||||||||||||||
Nine Months
Ended January 1, 2010
|
||||||||||||||||||||||||
Revenues
|
$ | 4,617 | $ | 4,761 | $ | 2,589 | $ | 13 | $ | (88 | ) | $ | 11,892 | |||||||||||
Operating
income (loss)
|
403 | 435 | 205 | (60 | ) | (1 | ) | 982 | ||||||||||||||||
Depreciation
and amortization
|
99 | 606 | 110 | 10 | - | 825 | ||||||||||||||||||
Fiscal
2009
|
||||||||||||||||||||||||
Nine Months
Ended January 2, 2009
|
||||||||||||||||||||||||
Revenues
|
$ | 4,464 | $ | 5,308 | $ | 2,934 | $ | 12 | $ | (90 | ) | $ | 12,628 | |||||||||||
Operating
income (loss)
|
344 | 405 | 229 | (44 | ) | 1 | 935 | |||||||||||||||||
Depreciation
and amortization
|
105 | 671 | 126 | 10 | - | 912 |
A reconciliation of
consolidated operating income to income before taxes is as follows:
Quarter
Ended
|
Nine
Months Ended
|
|||||||||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
January
1, 2010
|
January
2, 2009
|
||||||||||||
Operating
income
|
$ | 377 | $ | 371 | $ | 982 | $ | 935 | ||||||||
Corporate
G&A
|
(48 | ) | (47 | ) | (123 | ) | (140 | ) | ||||||||
Interest
expense
|
(50 | ) | (68 | ) | (158 | ) | (191 | ) | ||||||||
Interest
income
|
6 | 12 | 20 | 31 | ||||||||||||
Other
income/(expense)
|
6 | (5 | ) | 15 | (9 | ) | ||||||||||
Income before
taxes
|
$ | 291 | $ | 263 | $ | 736 | $ | 626 |
23
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
14 – Goodwill and Other Intangible Assets
The Company tests
goodwill for impairment on an annual basis, as of the first day of the second
fiscal quarter, and between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. A significant amount of judgment is
involved in determining if an indicator of impairment has occurred between
annual testing dates. Such indicators include: a significant decline
in expected future cash flows; a sustained, significant decline in market
capitalization; a significant adverse change in legal factors or in the business
climate; unanticipated competition; the testing for recoverability of a
significant asset group within a reporting unit; and reductions in growth
rates. No adverse change in these factors has occurred in the third
quarter of 2010 that would indicate a significant impact on the recoverability
of goodwill and as a result, we concluded that an interim test of goodwill
impairment is not needed.
The following table
summarizes the changes in the carrying amount of goodwill by segment for the
nine months ended January 1, 2010:
(Amounts in
millions)
|
NPS
|
MSS
|
BSS
|
Total
|
||||||||||||
Balance as of
April 3, 2009
|
$ | 692 | $ | 1,871 | $ | 1,221 | $ | 3,784 | ||||||||
Additions
|
2 | - | 10 | 12 | ||||||||||||
Foreign
currency translation
|
- | 84 | 41 | 125 | ||||||||||||
Balance as of
January 1, 2010
|
$ | 694 | $ | 1,955 | $ | 1,272 | $ | 3,921 |
During the first
quarter of fiscal 2010, the Company revised its segment reporting structure as
discussed in Note 13. As a result of this revision, the April 3, 2009
balances have been modified to reflect this change.
The addition to
goodwill of $12 million consisted of $10 million related to an acquisition of an
immaterial business, as well as other insignificant adjustments totaling $2
million. As part of the Company’s reorganization, three insignificant operations
were transferred between reporting units. Consequently, $44 million
of goodwill was transferred from the MSS reporting segment to the BSS reporting
segment.
The foreign
currency translation amount relates to the impact of foreign currency
adjustments in accordance with ASC 830-10 (SFAS No. 52), “Foreign Currency
Translation.”
A
summary of amortizable intangible assets as of January 1, 2010, and April 3,
2009, is as follows:
As
of January 1, 2010
|
||||||||||||
(Amounts in
millions)
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Net
|
|||||||||
Software
|
$ | 1,677 | $ | 1,208 | $ | 469 | ||||||
Outsourcing
contract costs
|
2,101 | 1,450 | 651 | |||||||||
Customer and
other intangible assets
|
397 | 225 | 172 | |||||||||
Total
intangible assets
|
$ | 4,175 | $ | 2,883 | $ | 1,292 |
24
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
As
of April 3, 2009
|
||||||||||||
(Amounts
in millions)
|
Gross
Carrying Value
|
Accumulated Amortization
|
Net
|
|||||||||
Software
|
$ | 1,558 | $ | 1,082 | $ | 476 | ||||||
Outsourcing
contract costs
|
1,925 | 1,241 | 684 | |||||||||
Customer and
other intangible assets
|
402 | 200 | 202 | |||||||||
Total
intangible assets
|
$ | 3,885 | $ | 2,523 | $ | 1,362 |
Amortization related to intangible
assets was $116 million
and $120 million for the
quarter and $325 million
and $387 million for the
nine months ended January
1, 2010, and January 2, 2009, respectively. Estimated
amortization expense related to intangible assets as of January 1, 2010, for the
fourth quarter fiscal 2010 through fiscal 2014, is as follows: $115
million, $336 million, $273 million, $200
million and $139 million, respectively.
25
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
15 – Commitments and Contingencies
The primary
financial instruments which potentially subject the Company to concentrations of
credit risk are accounts receivable. The Company’s customer base includes
Fortune 500 companies, the U.S. federal and other governments and other
significant, well-known companies operating in North America, Europe and the
Pacific Rim. Credit risk with respect to accounts receivable is minimized
because of the nature and diversification of the Company’s customer base.
Furthermore, the Company continuously reviews its accounts receivables and
records provisions for doubtful accounts as needed.
The Company's
credit risk is also affected by the risk of customers which become subject to
bankruptcy proceedings; however, because most of these proceedings involve
business reorganizations rather than liquidations and the nature of the
Company's services are often considered essential to the operational continuity
of these customers, the Company is generally able to avoid or mitigate
significant adverse financial impact in these cases. As of January 1,
2010, the Company had $20 million
of accounts receivable, $13 million of allowance for doubtful accounts, and
$1 million of fixed assets with customers involved in bankruptcy
proceedings.
In the normal
course of business, the Company may provide certain clients, principally
governmental entities, with financial performance guarantees, which are
generally backed by standby letters of credit or surety bonds. In
general, the Company would only be liable for the amounts of these guarantees in
the event that nonperformance by the Company permits termination of the related
contract by the Company’s client. As of January 1, 2010, the Company
had $339 million of outstanding letters of credit and surety bonds relating
to these performance guarantees. The Company believes it is in compliance with
its performance obligations under all service contracts for which there is a
financial performance guarantee, and the ultimate liability, if any, incurred in
connection with these guarantees will not have a material adverse affect on its
consolidated results of operations or financial position.
The Company
guarantees working capital credit lines established with local financial
institutions for its non-U.S. business units. Generally, guarantees
have one-year terms and are renewed annually. CSC guarantees up to
$710 million of such working capital lines, and the amount of the maximum
potential payment is $90 million, representing the amount of the related
outstanding subsidiary debt as of January 1, 2010. The $90 million outstanding
debt is reflected in the Company’s consolidated financial
statements.
The Company
generally indemnifies its software license customers from claims of infringement
on a United States patent, copyright, or trade secret. CSC’s
indemnification covers costs to defend customers from claims, court awards or
related settlements. The Company maintains the right to modify or
replace software in order to eliminate any
infringement. Historically, CSC has not incurred any significant
costs related to customer software license
indemnification. Management considers the likelihood of incurring
future costs to be remote and the Company has not recorded a related
liability.
26
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
CSC is engaged in
providing services under contracts with the U.S. government. The
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. government investigate whether the Company's
operations are being conducted in accordance with these
requirements. U.S. government investigations of the Company, whether
related to the Company's federal government contracts or conducted for other
reasons, could result in administrative, civil or criminal liabilities,
including repayments, fines or penalties being imposed upon the Company, or
could lead to suspension or debarment from future U.S. government
contracting. The Company believes it has adequately reserved for any
losses which may be experienced from these investigations.
In
accordance with prescribed federal regulations, the Company converted 16
submitted Requests for Equitable Adjustment (REAs) to interest bearing claims
under the Contract Disputes Act (CDA) totaling approximately $900 million on two
U.S. federal contracts in order to initiate the claims litigation process and
trigger the statutory interest provision of the CDA. On August 27, 2009,
the government agreed to settle the smaller set of claims with
CSC. As a result of the settlement and other contractual
arrangements, the Company expects the deferred costs related to the smaller set
of claims will be fully recovered. On December 24, 2009, the
Government made a partial payment of $35 million on one of the remaining 14
claims. Thereafter, CSC filed an amended complaint with the Armed
Services Board of Contract Appeals (ASBCA), the forum in which the claims are
litigated, reducing the amount of its claims by $35 million. Included in current
assets on the Company's balance sheet are approximately $379 million of unbilled
receivables, reflecting the $35 million payment, and $227 million of deferred
costs related to the remaining 14 claims which total approximately $678 million
associated with one contract. The Company does not record any profit element
when it defers costs associated with such REAs/claims. CSC has
requested payment for customer-caused delays and certain related out-of-scope
work directed or caused by the customer in support of its critical missions.
Notwithstanding the government’s breaches and delays, CSC was obligated under
applicable federal acquisition law to continue performance as directed by the
government; otherwise, refusal to perform would have placed CSC at risk for a
termination for default under the applicable provisions of the Federal
Acquisition Regulations. The Company believes it has valid bases for
pursuing recovery of the remaining REAs/claims supported by outside counsel’s
evaluation of the facts and assistance in the preparation of the
claims. The Company remains committed to vigorous pursuit of its
claimed entitlements and associated value, and continues to believe based on
review of applicable law and other considerations that recovery of at least its
net balance sheet position is probable. However, the Company’s
position is subject to the ongoing evaluation of new facts and information which
may come to the Company’s attention during the discovery phase of the
litigation.
27
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
During the first
quarter of fiscal 2008, the U.S. federal contracting officer for the contract
with the remaining set of claims denied the claims and issued a $42.3 million
counterclaim. The Company disagrees with the government’s denials
both factually and contractually. In contrast to the Company’s
claims’ submission, the government’s counter-claim was submitted with no
verifiable evidence, no citation to any supporting evidence and no explanation
of its method for calculating value. Because of these disputes, the
Company initiated litigation at the ASBCA, one of the two forums available for
litigation of CDA claims, on September 11, 2007, with regard to the larger of
the two sets of claims and the counterclaim. Decisions of the ASBCA
may be appealed to the Court of Appeals for the federal Circuit and that court’s
ruling may be appealed to the U.S. Supreme Court. During the third
quarter of fiscal 2008, the Company and its litigation team undertook a standard
review of the value of the claims associated with this
contract. Value is subject to periodic, routine adjustment as new
facts are uncovered, because of contract modifications and funding changes,
ordinary rate adjustments, and/or estimated cost data being replaced with actual
costs. On December 21, 2007, as a result of the review, the Company
amended the complaint it filed with the ASBCA on September 11, 2007, and
adjusted its value downward, with such reduction reflected in the value of the
claims and was further adjusted downward to reflect the $35 million payment
during the third quarter of fiscal 2010 as noted above. The discovery
phase of this litigation began in the first half of fiscal year
2009. Discovery in the litigation will continue through fiscal year
2010 and trial is tentatively scheduled to begin in the fourth quarter of fiscal
year 2011.
Interest on the
remaining set of claims is accruing but will only be recognized in the financial
statements when paid. Resolution of the REA claims/amounts depends on
individual circumstances, negotiations by the parties and prosecution of the
claims. The Company will pursue appeals as necessary and is unable to
predict the timing of resolution of recovery of these claims; however,
resolution of the claims may take years.
Several
shareholders of the Company have made demands on the Board of Directors of the
Company or filed purported derivative actions against both the Company, as
nominal defendant, as well as certain of CSC's executive officers and
directors. These actions generally allege that certain of the
individual defendants breached their fiduciary duty to the Company by
purportedly “backdating” stock options granted to CSC executives, improperly
recording and accounting for allegedly backdated stock options, producing and
disseminating disclosures that improperly recorded and accounted for the
allegedly backdated options, engaging in acts of corporate waste, and committing
violations of insider trading laws. They allege that certain of the
defendants were unjustly enriched and seek to require them to disgorge their
profits. These actions have been filed in both federal and state
court in Los Angeles as follows.
A
state law claim, Allbright v.
Bailey et al., Case No. BC353316, was filed on June 1, 2006 and was
consolidated with a subsequently filed case, Jones v. Bailey et al., Case
No. BC354686. In July 2008, Superior Court Judge Carl West dismissed
the consolidated case with prejudice. The statutory time for filing a notice of
appeal has passed.
28
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
On
August 23, 2006, Laborers'
International Union v. Bailey, et al., CV 06-5288, a shareholder
derivative action, was filed in U.S. District Court in Los Angeles alleging
backdating of stock option grants to various senior executives at CSC and naming
CSC as a nominal defendant and various current and former directors and officers
as individual defendants. Thereafter, two additional nearly identical
derivative suits were filed in the same court. All three federal
derivative actions were ultimately consolidated into one action entitled In re CSC Shareholder
Derivative Litigation, CV 06-5288. On July 24, 2007, Judge
Mariana Pfaelzer granted a motion to dismiss based on demand futility and
dismissed an amended complaint with prejudice. Following an ex parte
application by defendants, Judge Pfaelzer issued a corrected order dated August
9, 2007, reflecting the same ruling. Plaintiffs appealed the decision
to the Ninth Circuit which affirmed the judgment of dismissal. The judgment is
now final.
On
September 24, 2007, a stockholder made a demand to the Board of Directors to
cause the Company to pursue claims against certain individuals, including
current and former officers and directors of CSC, with respect to alleged stock
option backdating. Action on this demand was delayed until the
decision of the Ninth Circuit in the foregoing federal derivative case became
final. On March 2, 2009, the stockholder made a renewed demand to the
Board. On May 20, 2009, the Board formed a special committee
comprised solely of independent directors not named in the stockholder demand to
investigate and review the demand and recommend to the Board how to respond
thereto. On February 8, 2010, the report of the special committee
reported the results of its review to the Board.
On August 15, 2006, a federal ERISA class action involving allegations of backdating stock options at the Company was filed in the U.S. District Court in the Eastern District of New York, entitled Quan, et al. v. CSC, et al., CV 06-3927. On September 21, 2006, a related ERISA class action was filed in the same court entitled Gray, et al. v. CSC, et al., CV 06-5100. The complaints named as defendants the Company, the Company’s Retirement and Employee Benefits Plans Committee and various directors and officers, and alleged various violations of the ERISA statute. The two ERISA actions were consolidated and, on February 28, 2007, plaintiffs filed an amended ERISA class action complaint. On January 8, 2008, the District Court granted a motion to transfer the consolidated cases to the United States District Court in Los Angeles, California. Upon arrival in the Central District of California, the two cases were consolidated before Judge Otero in Case No. CV 08-2398-SJO. Defendants filed a motion to dismiss and plaintiffs filed their memorandum in opposition to the motion. Plaintiffs also filed a motion for class certification, and defendants filed their memorandum in opposition to the motion on August 11, 2008. Defendants’ motion to dismiss was denied, as was plaintiffs’ motion for class certification. However, plaintiffs later filed a renewed motion for class certification which was granted on December 29, 2008. Discovery closed on April 28, 2009. Defendants and plaintiffs each filed motions for summary judgment on May 4, 2009, and supplemental briefs thereafter.
On
July 13, 2009, the District Court entered an Order granting summary judgment in
favor of the Company and the other defendants. On July 28, 2009,
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Ninth Circuit, On August 10, 2009,
the CSC defendants filed a notice of cross appeal regarding recovery of
costs. Plaintiffs filed their opening appellate brief on September 9,
2009 and defendants filed their opposition brief on the merits and brief on
costs on October 30, 2009. Plaintiffs’ reply brief on the merits and opposition
brief on costs was filed on December 14, 2009. The CSC defendants’
reply brief on the issue of costs was filed on January 11, 2010. The
Ninth Circuit has not yet scheduled oral
argument.
29
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
On
May 29, 2009, a class action lawsuit entitled Shirley Morefield vs. Computer
Sciences Corporation, et al., Case # A-09-591338-C, was brought in state
court in Clark County, Nevada, against the Company and certain current and
former officers and directors asserting claims for declarative and injunctive
relief related to stock option backdating. The alleged factual basis
for the claims is the same as that which was alleged in the prior derivative
actions discussed above. The defendants deny the allegations in the
Complaint. On June 30, 2009, the Company removed the case to the
United States District Court for the District of Nevada, Case No.
2:09-cv-1176-KJD-GWF. On July 29, 2009, the plaintiffs filed a motion
to remand the case to state court, and that motion is now fully briefed and
awaiting decision. The federal court has suspended further activity
pending a ruling on the remand motion.
In
addition to the matters noted above, the Company is currently party to a number
of disputes which involve or may involve litigation. The Company
consults with legal counsel on those issues related to litigation and seeks
input from other experts and advisors with respect to such matters in the
ordinary course of business. Whether any losses, damages or remedies
ultimately resulting from such matters could reasonably have a material effect
on the Company's business, financial condition, results of operation, or cash
flows will depend on a number of variables, including, for example, the timing
and amount of such losses or damages (if any) and the structure and type of any
such remedies. For these reasons, it is not possible to make reliable
estimates of the amount or range of loss that could result from these other
matters at this time. Company management does not, however, presently
expect any of such other matters to have a material impact on the consolidated
financial statements of the Company.
Litigation is
inherently uncertain and it is not possible to predict the ultimate outcome of
the matters discussed above. It is possible that the Company's
business, financial condition, results of operations, or cash flows could be
affected by the resolution of this matter. Whether any losses,
damages or remedies ultimately resulting from a proceeding could reasonably have
a material effect on the Company's business, financial condition, results of
operations, or cash flows will depend on a number of variables, including, for
example, the timing and amount of such losses or damages, if any, and the
structure and type of any such remedies. Depending on the ultimate
resolution of these matters, some may be material to the Company's operating
results for a particular period if an unfavorable outcome results, although such
a material unfavorable result is not presently expected, and all other
litigation, in the aggregate, is not expected to result in a material adverse
impact to the consolidated condensed financial
statements.
30
COMPUTER
SCIENCES CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
Note
16 – Recent Accounting Pronouncements
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements-a consensus of the FASB Emerging Issues Task Force,” which amends
Topic 605: Revenue Recognition. This Update addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. The
amendments in the Update establish a selling price hierarchy for determining the
selling price of a deliverable and eliminate the residual method of allocation.
The selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available.
Vendors will be required to determine their best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. The amendments in the Update will
become effective prospectively in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. The Company is
currently evaluating the effect that implementation of the new standard will
have on its financial position, results of operations and cash
flows.
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements
that include Software Elements-a consensus of the FASB Emerging Issues Task
Force,” which amends Topic 985: Software to exclude from the scope all tangible
products containing both software and non-software components that function
together to deliver the product’s essential functionality. In
addition, if the software contained on the tangible product is essential to the
tangible product’s functionality, the software is excluded from the scope of the
software revenue guidance. The amendments in the Update will become effective
prospectively in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Company is currently evaluating the effect
that implementation of the new standard will have on its financial position,
results of operations and cash flows.
In
December 2008, the FASB issued FSP FAS 132(R)-1, later codified in ASC
715-20-65, “Employers’ Disclosures about Postretirement Benefit Plan Assets,”
which amends SFAS 132(R) to require more detailed disclosures about employers’
plan assets, including employers’ investment strategies, major categories of
plan assets, concentrations of risk within plan assets, and valuation techniques
used to measure the fair value of plan assets. The required
disclosures will be provided in CSC’s financial statements for the fiscal year
2010 on Form 10-K.
In
December 2009, the FASB issued ASU 2009-16, which formally codifies SFAS No.
166, “Accounting for Transfers of Financial Assets – an amendment of FASB
Statement 140,” which is a revision to Statement 140. Statement 166
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. The statement will become effective at the beginning of
CSC’s fiscal 2011 and is not expected to have a material effect on CSC’s
financial statements.
In
December 2009, the FASB issued ASU 2009-17, which formally codifies
SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which is
a revision to FIN 46 (R), and changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another entity is based
on, among other things, the other entity’s purpose and design and the reporting
entity’s ability to direct the activities of the other entity that most
significantly impact the other entity’s economic
performance. Statement 167 will require a reporting entity to provide
additional disclosures about its involvement with variable interest entities and
any significant changes in risk exposure due to that involvement. A
reporting entity will be required to disclose how its involvement with a
variable interest entity affects the reporting entity’s financial
statements. The statement will become effective at the beginning of
CSC’s fiscal 2011 and is not expected to have a material effect on CSC’s
financial statements.
31
In
January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements." Specifically, ASU 2010-06 amends Codification Subtopic
820-10 to now require:
·
|
A reporting
entity should disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers; and
|
·
|
In the
reconciliation for fair value measurements using significant unobservable
inputs, a reporting entity should present separately information about
purchases, sales, issuances and
settlements.
|
In
addition, ASU 2010-06 clarifies the following existing disclosures:
·
|
A reporting
entity should provide fair value measurement disclosures for each class of
assets and liabilities, where a class is a subset of assets or
liabilities within a line item in the statement of financial position;
and
|
·
|
A reporting
entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair
value measurements.
|
The Statement will
become effective for CSC's fourth quarter ended April 2, 2010, except for the
disclosures about purchases, sales, issuances and settlements, which will become
effective at the beginning of CSC's fiscal 2012 and is not expected to have a
material effect on CSC's financial statements.
32
PART
I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third
Quarter and First Nine Months of Fiscal 2010 versus
Third
Quarter and First Nine Months of Fiscal 2009
All
statements and assumptions in this quarterly report on Form 10-Q and in the
documents attached or incorporated by reference that do not directly and
exclusively relate to historical facts constitute "forward-looking statements"
within the meaning of the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements represent current
expectations and beliefs of CSC, and no assurance can be given that the results
described in such statements will be achieved.
Forward-looking
information contained in these statements include, among other things,
statements with respect to the Company's financial condition, results of
operations, cash flows, business strategies, operating efficiencies or
synergies, competitive positions, 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 the Company's control, which could cause actual results to differ materially
from the results described in such statements. These forward looking
statements should be read in conjunction with our Annual Report on Form
10-K. The reader should specifically consider the various risks
discussed in the Risk Factors section of our Annual Report on Form
10-K.
Forward-looking statements in this
quarterly report on Form 10-Q speak only as of the date hereof, and
forward-looking statements in documents attached or incorporated by reference
speak only as to the date of those documents. The Company 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 hereof or to reflect the occurrence of unanticipated events, except as
required by law.
General
The following
discussion and analysis provides information management believes relevant to an
assessment and understanding of the consolidated results of operations and
financial condition of Computer Sciences Corporation (CSC or the
Company). The discussion should be read in conjunction with the
interim consolidated condensed financial statements and notes thereto and the
Company's Annual Report on Form 10-K for the year ended April 3,
2009. The following discusses the Company's results of operations and
financial condition as of and for the third quarter and nine months ended
January 1, 2010, and the comparable periods for the prior fiscal
year.
33
Third
Quarter Overview
Key operating
results for the third quarter include:
·
|
Third quarter
revenues were approximately flat at $4.0 billion compared to the prior
year and down 4.1% on a constant currency basis. Revenues were down 5.8%,
to $11.9 billion for the first nine months, and also down 4.1% in constant
currency as compared to the prior
year.
|
·
|
Net income
attributable to CSC common shareholders for the third quarter was $211
million, an increase of 31.1% or $50 million as compared to the prior
year. For the nine months, net income attributable to CSC
common shareholders was $558 million, a decrease of 23.9% or $175 million
as compared to the prior year period. The prior year nine month
results include a net $370 million reduction to income tax expense as a
result of the conclusion of the IRS examination of the Company’s
consolidated U.S. tax returns for fiscal years 2000 through
2004.
|
·
|
Diluted
earnings per share were $1.36 for the fiscal 2010 third quarter, an
increase from $1.06 in the prior year. Diluted earnings per share were
$3.62 for the fiscal 2010 nine months year to date, a decrease from $4.80
for the nine months of fiscal 2009, which contained significant tax
benefits.
|
·
|
Business
awards of $6.8 billion and $14.9 billion were announced for the third
quarter and nine months of fiscal 2010, compared to $2.7 billion and $12.7
billion for the prior fiscal year periods. For the third quarters of
fiscal 2010 and 2009, respectively, NPS was awarded $.8 billion and
$1.2 billion, MSS was awarded $5.2 billion and $.7 billion, and BSS was
awarded $.8 billion and $.8 billion. During the fiscal 2010 fourth
quarter, a protest against the awarding to CSC of a $493 million second
quarter award by the Transportation Security Administration (TSA) was
upheld, which is included in NPS' year-to-date awards. The Company
is currently under a stop work order on this contract. TSA has
decided to re-open discussions to all offerors within the competitive
range.
|
·
|
DSO of 88
days improved 5 days compared to 93 days at the end of the third quarter
of the prior fiscal year.(1)
|
·
|
Debt-to-total
capitalization ratio(2)
at fiscal 2010 third quarter-end improved to 39.2% compared to
43.0% at fiscal year-end 2009.
|
·
|
ROI for the
four quarters ended January 1, 2010, was 11.1%, down from 12.9% for the
comparable prior fiscal period driven by reduced investment base turnover
as a result of higher average debt.(3)
|
·
|
Cash provided
by operating activities was $407 million for the nine months, compared to
cash provided of $928 million for the first nine months of fiscal
2009.
|
·
|
Cash used in
investing activities was $514 million for the nine months, compared to
cash used of $838 million for the first nine months of fiscal year
2009.
|
·
|
Cash provided
by financing activities was $114 million for the nine months, compared to
cash provided of $953 million for the first nine months of fiscal year
2009.
|
34
·
|
Free cash
flow for the nine months was $140 million outflow as compared to $170
million inflow for the first nine months of fiscal 2009,(4)
a decrease of $310 million.
|
(1)
|
DSO
for the quarter is calculated as total receivables at quarter-end divided
by revenue-per-day. Revenue-per-day equals total revenues for
the last quarter divided by the number of days in the fiscal quarter.
Total receivables includes unbilled receivables but excludes tax
receivables.
|
(2)
|
Debt-to-total
capitalization is defined as total current and long-term debt divided by
total debt and equity, including noncontrolling
interest.
|
(3)
|
ROI
is calculated by multiplying profit margin by the investment base
turnover. The profit margin used is a) the last four quarters’
adjusted net income available to CSC common shareholders (net income
available to CSC common shareholders adjusted to exclude interest expense
and special items, net of their corresponding tax effects), divided by b)
the last four quarters’ revenues. Investment base turnover
equals the last four quarters’ revenues divided by average debt and equity
during the last four quarters. It should be noted that the
adjusted net income figure available to CSC common shareholders is not
identical to net income available to CSC common shareholders as determined
in accordance with U.S. Generally Accepted Accounting Principles (GAAP)
and is therefore reconciled to the GAAP measure in the table
below. The Company’s calculation of ROI may not be comparable
with other companies’ measures using the same or similar
terms. Management compensates for any limitations of this
non-GAAP measure by reviewing a number of metrics, including GAAP measures
such as EPS, operating and investing cash flows, and the debt-to-total
capitalization ratio.
|
Adjusted
Net Income Reconciliation
|
Twelve
Months Ended
|
|||||||
(Amounts
in millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Adjusted
Net Income
|
$ | 1,143 | $ | 1,200 | ||||
Less:
|
||||||||
Interest
expense
|
227 | 248 | ||||||
Special
items
|
63 | |||||||
Taxes
(excluding effect of Interest Expense and Special Items)
|
(24 | ) | (26 | ) | ||||
Income
Before Taxes as Reported
|
$ | 940 | 915 |
(4)
|
The
following is a reconciliation of free cash flow to the most directly
comparable GAAP financial
measure:
|
Nine
Months Ended
|
||||||||
(Amount
in millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Free
cash flow
|
$ | (140 | ) | $ | 170 | |||
Net
cash used in investing activities
|
514 | 838 | ||||||
Acquisitions
|
(5 | ) | (100 | ) | ||||
Business
dispositions
|
14 | - | ||||||
Capital
lease payments
|
24 | 20 | ||||||
Net
cash provided by operating activities
|
$ | 407 | $ | 928 | ||||
Net
cash used in investing activities
|
$ | (514 | ) | $ | (838 | ) | ||
Net
cash provided by financing activities
|
$ | 114 | $ | 953 |
The
reader should note free cash flow is a non-GAAP measure and the Company's
definition of such measure may differ from other companies. We define free cash
flow as equal to the sum of (1) operating cash flows, (2) investing cash flows,
excluding business acquisitions and dispositions, purchase or sale of available
for sale securities, and (3) capital lease payments.
|
However,
CSC’s free cash flow measure does not distinguish operating cash flows
from investing cash flows as they are required to be presented in
accordance with GAAP, and should not be considered a substitute for
operating and investing cash flows as determined in accordance with
GAAP. Free cash flow is one of the factors CSC management uses
in reviewing the overall performance of the
business. Management compensates for the limitations of this
non-GAAP measure by also reviewing the GAAP measures of operating,
investing and financing cash flows as well as debt levels measured by the
debt-to-total capitalization ratio.
|
35
Reportable
Segments
CSC provides
information technology and business process outsourcing, consulting and systems
integration services and other professional services to its
customers. The Company targets the delivery of these services within
three broad service lines or sectors: North American Public Sector
(NPS), Managed Services Sector (MSS), and Business Solutions and Services
(BSS).
The Company’s
organization has continued to evolve, and management decided to consolidate and
streamline the management and reporting structure. Therefore, at the
start of fiscal 2010, the Company changed its internal organization structure,
including a change to further strengthen market position with consolidating its
application management services business, including all offshore activity, with
its outsourcing business. These changes have resulted in changes to
the Company’s reportable segments.
Consequently, the
Company’s reportable segments in fiscal 2010 are as follows:
·
|
North
American Public Sector – The NPS segment
operates principally within a regulatory environment subject to
governmental contracting and accounting requirements, including Federal
Acquisition Regulations, Cost Accounting Standards and audits by various
U.S. Federal agencies. In fiscal 2009, NPS was treated as a
reportable segment and continues to be a reportable segment in fiscal
2010.
|
·
|
Managed
Services Sector – The MSS segment provides large-scale outsourcing
solutions offerings as well as midsize services delivery to customers
globally. In fiscal 2009, Global Outsourcing Services (GOS) was
considered a separate operating and reportable segment. In
fiscal 2010, the name of the segment was changed to Managed Services
Sector; and the Applications & Technology Services (ATS) unit was
moved from the Business Solutions & Services – Other (BS&S -
Other) segment to MSS due to the fact that its services, particularly its
applications management, are more aligned with the Company’s outsourcing
services rather than consulting services. ATS results are no longer
reported separately to the Chief Operating Decision Maker (CODM) and are
included with the MSS segment.
|
·
|
Business
Solutions & Services – The BSS segment provides industry specific
consulting and systems integration services, business process outsourcing,
and intellectual property (IP) – based software
solutions. These service offerings and clientele
overlap. In fiscal 2009, multiple operating segments that
reported directly into the CODM were aggregated into three reportable
segments: BS&S- Consulting, BS&S- Financial Services and BS&S-
Other. As a result of the reorganization for fiscal 2010, the
BSS line of service is now a single operating segment with one sector
president reporting directly to the CODM with financial information
provided at the consolidated BSS sector level. Based on this
change, BSS is considered a reportable segment in fiscal 2010.
Furthermore, most of the India operating segment, which was part of the
BS&S – Other reportable segment in fiscal 2009, has been moved to the
MSS operating segment and renamed ATS as noted
above.
|
Based on the above
changes, the Company recast the prior period’s reportable segments to be
comparable with fiscal 2010.
36
Results
of Operations
Revenues
Quarter
Ended
|
||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
Change
|
Percent
|
||||||||||||
NPS
|
$ | 1,477 | $ | 1,476 | $ | 1 | 0.1 | % | ||||||||
MSS
|
1,618 | 1,607 | 11 | 0.7 | ||||||||||||
BSS
|
887 | 893 | (6 | ) | (0.7 | ) | ||||||||||
Corporate
|
4 | 4 | - | - | ||||||||||||
Subtotal
|
3,986 | 3,980 | 6 | 0.2 | ||||||||||||
Eliminations
|
(33 | ) | (28 | ) | (5 | ) | 17.9 | |||||||||
Total
Revenue
|
$ | 3,953 | $ | 3,952 | $ | 1 | - | % |
Nine
Months Ended
|
||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
Change
|
Percent
|
||||||||||||
NPS
|
$ | 4,617 | $ | 4,464 | $ | 153 | 3.4 | % | ||||||||
MSS
|
4,761 | 5,308 | (547 | ) | (10.3 | ) | ||||||||||
BSS
|
2,589 | 2,934 | (345 | ) | (11.8 | ) | ||||||||||
Corporate
|
13 | 12 | 1 | 8.3 | ||||||||||||
Subtotal
|
11,980 | 12,718 | (738 | ) | (5.8 | ) | ||||||||||
Eliminations
|
(88 | ) | (90 | ) | 2 | (2.2 | ) | |||||||||
Total
Revenue
|
$ | 11,892 | $ | 12,628 | $ | (736 | ) | (5.8 | )% |
The factors
affecting the percent change in revenues for the third quarter and nine months
ended January 1, 2010, are as follows:
Quarter
Ended
|
||||||||||||||||
Acquisitions
|
Approximate
Impact of Currency Fluctuations
|
Net
Internal Growth
|
Total
|
|||||||||||||
NPS
|
0.5 | % | - | (0.4 | )% | 0.1 | % | |||||||||
MSS
|
- | 5.9 | % | (5.2 | ) | 0.7 | ||||||||||
BSS
|
1.0 | 7.8 | (9.5 | ) | (0.7 | ) | ||||||||||
Cumulative
Net Percentage
|
0.4 | % | 4.2 | % | (4.6 | )% | - |
37
Nine
Months Ended
|
||||||||||||||||
Acquisitions
|
Approximate
Impact of Currency Fluctuations
|
Net
Internal Growth
|
Total
|
|||||||||||||
NPS
|
0.7 | % | 0.0 | % | 2.7 | % | 3.4 | % | ||||||||
MSS
|
- | (3.4 | ) | (6.9 | ) | (10.3 | ) | |||||||||
BSS
|
0.6 | (1.4 | ) | (11.0 | ) | (11.8 | ) | |||||||||
Cumulative
Net Percentage
|
0.4 | % | (1.7 | )% | (4.5 | )% | (5.8 | )% |
Revenue for the
third quarter of fiscal 2010 remained approximately flat compared to the same
quarter in the prior year, with benefits from currency fluctuations offsetting
declines in BSS and MSS. Revenues for the nine months year to date in fiscal
2010 declined 5.8%, partly due to adverse currency fluctuations but primarily
driven by lower BSS and MSS revenues. Higher NPS revenues for the nine months
partially offset the BSS and MSS declines, which were the result of reduced
volumes, completed contracts, and reduced overall demand as discussed
below.
North
American Public Sector
The Company's North
American Public Sector revenues were generated from the following
sources:
Quarter
Ended
|
||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
Change
|
Percent
|
||||||||||||
Department
of Defense
|
$ | 1,074 | $ | 1,069 | $ | 5 | 0.5 | % | ||||||||
Civil
agencies
|
353 | 373 | (20 | ) | (5.4 | ) | ||||||||||
Other
(1)
|
50 | 34 | 16 | 47.1 | ||||||||||||
Total
North American Public Sector
|
$ | 1,477 | $ | 1,476 | $ | 1 | 0.1 | % |
Nine
Months Ended
|
||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
Change
|
Percent
|
||||||||||||
Department
of Defense
|
$ | 3,405 | $ | 3,130 | $ | 275 | 8.8 | % | ||||||||
Civil
agencies
|
1,062 | 1,217 | (155 | ) | (12.7 | ) | ||||||||||
Other
(1)
|
150 | 117 | 33 | 28.2 | ||||||||||||
Total
North American Public Sector
|
$ | 4,617 | $ | 4,464 | $ | 153 | 3.4 | % |
(1)
|
Other
revenues consist of state, local and select foreign government as well as
commercial contracts performed by the North American Public Sector
reporting segment.
|
NPS revenues were
materially unchanged in the third quarter of fiscal 2010 as compared to the same
period in the prior year. Department of Defense agency contract
award delays have been offset by a field operations contract that commenced in
the first quarter and contributed $48 million in the third quarter. A State
Medicaid program awarded in 2009 realized $11 million in the quarter and is
included in Other. The Department of Defense and Other increases
offset declines in Civil agencies from reduced customer funding on several
contracts.
38
For the nine months
ended January 1, 2010, revenues increased $153 million, or 3.4%, compared to
same period in the prior year, driven by a $275 million, or 8.8%, increase in
Department of Defense revenue. Approximately $130 million of the increase was
due to the commencement of the field operations contract in the first quarter of
fiscal 2010 and $65 million was due to revenue associated with a claim
settlement in the second quarter. Various other Department of Defense
increases were partially offset by the conclusions of various contracts, new
contract delays and protests in the first nine months of fiscal
2010.
Revenue from civil
agencies declined $155 million for the nine months, primarily the result of
contract conclusions and reduced funding on certain contracts with various civil
agencies. The resulting revenue reduction was only partially offset by new
business revenue on other civil agency contracts in fiscal 2010.
During the third
quarter and nine months of fiscal 2010, the Company announced federal contract
awards with a total value of $.8 billion and $5.7 billion, compared to $1.2
billion and $5.6 billion during the comparable periods in fiscal 2009,
respectively. During the fiscal
2010 fourth quarter, a protest against the awarding to CSC of a $493 million
second quarter award by the Transportation Security Administration (TSA) was
upheld, which is included in NPS’ year-to-date awards. The Company is
currently under a stop work order on this contract. TSA has decided
to re-open discussions to all offerors within the competitive
range.
Managed
Services Sector
MSS revenues
increased $11 million, or .7%, in the third quarter fiscal 2010 as compared to
the same prior fiscal year period. MSS revenue had $95 million of favorable
currency movements for the third quarter primarily in Europe. Offsetting these
currency movements were $84 million in reduced revenues during the third
quarter, with $75 million in the Americas, from reduced scope, volumes, and
project demand.
MSS revenue
decreased $547 million, or 10.3%, for the first nine months fiscal 2010 compared
to the same prior fiscal year period. MSS revenue had $178 million of
unfavorable currency movements for the nine months, primarily in Europe. The
remaining $369 million decline for the nine months was due to reduced scope and
project work on existing clients, and several contract conclusions and
terminations. MSS has experienced pressures relating to decreased
client project work and customer discretionary spending which have driven
revenues lower. In order to mitigate these pressures, MSS has instituted actions
such as staff reductions, improved staff utilization, travel and facility
reductions, and shifting efforts to lower cost geographies. Partly
offsetting these revenue declines were significant new contracts, and increased
scope and project work in the manufacturing, technology, consumer and public
sector industries.
During the third
quarter and nine months of fiscal 2010, MSS had contract awards of $5.2 billion
and $6.6 billion, compared to $.7 billion and $4.2 billion in the same prior
fiscal periods.
Business
Solutions and Services
BSS revenues
decreased $6 million or 0.7% in the third quarter fiscal 2010 as compared to the
same prior fiscal period. BSS revenues had $69 million of favorable currency
movements for the third quarter. The decrease in revenues, excluding the
currency benefit, was a result of approximately $40 million reduction from the
sale of a previously consolidated majority-owned reseller business in Hong Kong,
a decrease of $39 million in scope and project reductions on core consulting
contracts, and non-consulting based operations of $9 million. Partially
offsetting these revenue declines were minor consulting improvements and
milestone achievements.
39
BSS revenues
decreased $345 million, or 11.8% for the first nine months fiscal 2010, as
compared to the same prior fiscal period. BSS revenue had $41
million, or 1.4% of unfavorable currency movements for the nine months. Of the
remaining $304 million, or 10.4%, decline for the nine months, approximately $57
million was due to declines in an Australian staffing business, $54 million from
the extra week in the first quarter of fiscal 2009, approximately $40 million
from the sale of the reseller business in Hong Kong, $42 million from declines
in the financial services business including lower software license sales, $15
million from milestone timing on the NHS contract, and approximately $111
million from reduced demand in consulting work as new projects were delayed and
existing projects concluded. Partially offsetting the declines was $18 million
from an acquisition made in Brazil during the second quarter of fiscal
2010.
During the third
quarter and nine months of fiscal 2010, BSS had contract awards of $.8 billion
and $2.6 billion, compared to $.8 billion and $2.9 billion in the same prior
fiscal periods.
Costs
and Expenses
The Company's costs
and expenses were as follows:
Quarter
Ended
|
||||||||||||||||||||
Amount
|
Percentage
Of
Revenue
|
Percentage
Point
Change
|
||||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
January
1, 2010
|
January
2, 2009
|
||||||||||||||||
Cost of
services (excludes
depreciation and amortization)
|
$ | 3,105 | $ | 3,085 | 78.5 | % | 78.1 | % | 0.4 | % | ||||||||||
Selling,
general and administrative
|
239 | 261 | 6.0 | 6.6 | (0.6 | ) | ||||||||||||||
Depreciation
and amortization
|
280 | 282 | 7.1 | 7.1 | - | |||||||||||||||
Interest
expense, net
|
44 | 56 | 1.1 | 1.4 | (0.3 | ) | ||||||||||||||
Other
income
|
(6 | ) | 5 | (0.2 | ) | 0.1 | (0.3 | ) | ||||||||||||
Total
|
$ | 3,662 | $ | 3,689 | 92.5 | % | 93.3 | % | (0.8 | )% |
Nine
Months Ended
|
||||||||||||||||||||
Amount
|
Percentage
Of
Revenue
|
Percentage
Point
Change
|
||||||||||||||||||
(Dollars in
millions)
|
January
1, 2010
|
January
2, 2009
|
January
1, 2010
|
January
2, 2009
|
||||||||||||||||
Cost of
services (excludes
depreciation and amortization)
|
$ | 9,476 | $ | 10,097 | 79.7 | % | 80.0 | % | (0.3 | ) | ||||||||||
Selling,
general and administrative
|
732 | 824 | 6.1 | 6.5 | (0.4 | ) | ||||||||||||||
Depreciation
and amortization
|
825 | 912 | 6.9 | 7.2 | (0.3 | ) | ||||||||||||||
Interest
expense, net
|
138 | 160 | 1.2 | 1.3 | (0.1 | ) | ||||||||||||||
Other
income
|
(15 | ) | 9 | (0.1 | ) | 0.1 | (0.2 | ) | ||||||||||||
Total
|
$ | 11,156 | $ | 12,002 | 93.8 | % | 95.0 | % | (1.2 | ) |
40
Costs
of Services
The costs of
services (COS), as a percentage of revenue, increased .4 percentage points to
78.5% in the third quarter of fiscal 2010 from 78.1% in the prior fiscal year.
Higher ratios in the MSS and BSS segments resulted from revenue decreasing
faster than the implementation of cost containment measures. BSS COS
ratio also increased from a recent, small acquisition not completely offset by
ongoing cost reduction programs to reduce headcount, salaries, benefits,
subcontractor costs, and data center migration. Offsetting these higher ratios,
NPS improved its COS ratio mainly due to a $22.5 million estimate-at-completion
(EAC) favorable adjustment on a majority-owned contract, partly offset by a $8.5
million charge related to a contract to provide systems development and
implementation services to a government agency. A portion of the favorable EAC
adjustment is offset by an increased noncontrolling interest adjustment to
record the minority partner’s share of earnings.
COS decreased .3 percentage points to 79.7% in the nine months of fiscal 2010 from 80.0% in the prior fiscal year. The improvement was driven by NPS and MSS cost reduction programs implemented in fiscal 2010. MSS has made several efforts to reduce headcount in the Americas and the use of subcontractors in Europe, while increasing operations in off-shore, lower cost geographies. In addition, operational issues in the prior year in the Americas caused higher costs that were not repeated in the current year. Smaller improvements were also seen in NPS as revenue increased from the prior fiscal year. NPS also benefited by the favorable EAC adjustment of $22.5 million, offset by the $8.5 million charge in the third quarter of fiscal 2010. Offsetting these improvements, the BSS ratio increased as revenue declined faster than the implementation of cost containment measures.
Selling,
General and Administrative
Selling, general
and administrative (SG&A) expense declined .6% and .4% as a percentage of
revenue in the third quarter and nine months of fiscal 2010 compared to the same
prior fiscal year periods. For the third quarter, the effect of ongoing MSS and
BSS cost reduction actions were the primary driver of the improved SG&A as a
percentage of revenue, including decreases in headcount, salary, benefits, and
legal fees, as well as movement of certain administrative functions to lower
cost geographies. Partially offsetting these cost reductions were
higher severance costs for BSS in the Americas and increase in the allowance for
doubtful accounts in the first quarter. SG&A as a percentage of
revenue also improved in the nine months year to date from ongoing cost
containment measures, including movement of certain administrative functions to
lower cost geographies. Also offsetting percentage of revenue
declines was revenue that decreased faster than implementing the cost
containment measures over the nine months fiscal 2010 for BSS and
MSS.
41
Depreciation
and Amortization
Depreciation and
amortization (D&A) was approximately flat in amount and as a percentage of
revenue in the third quarter as compared to prior fiscal period. In the third
quarter, improved D&A in MSS was offset by slightly higher ratios in NPS and
BSS. Amortization of intangible assets, including deferred contract
costs and acquired customer-related intangibles, remained flat as normal
amortization was affected slightly with new additions. The flat
D&A ratio was also a result of reduced purchases of property and equipment,
reflecting efforts to limit capital spending in recent quarters relative to
revenue decreases in BSS and MSS.
D&A for the
nine months ended January 1, 2010 decreased .3% as a percentage of revenue as
compared to prior fiscal period. Improvement in the period was
primarily due to a shift in the business mix toward NPS which has lower D&A
as a percentage of revenue than MSS and BSS.
Interest
Expense, Net
Interest expense,
net of interest income, decreased $12 million and $22 million for the third
quarter and nine months ended January 1, 2010, compared to the prior fiscal
periods. The decrease was due to lower debt in the third quarter of
fiscal 2010 ($4.3 billion versus $4.4 billion), interest income from higher cash
and cash equivalents balance at January 1, 2010, versus January 2, 2009 ($2.4
billion versus $1.7 billion, respectively), and declining interest
rates.
Other
(Income)/Expense
Other
(income)/expense includes foreign currency exchange gains and losses including
gains and losses on currency forwards, hedging costs, equity in earnings of
unconsolidated affiliates, purchased options contracts, and gains and losses
from the sale of non-operating assets and immaterial business
operations. Other income increased $11 million and $24 million for
the third quarter and the nine months year to date, respectively, compared to
the prior year comparable periods. The change in the quarter and nine
months was primarily due to net foreign currency gains and losses and, for the
nine months, a miscellaneous gain on sale of non-operating assets during the
first quarter of fiscal 2010. The Company addressed the foreign currency
exchange rate volatility risk for fiscal 2010 by hedging intercompany balances
with forward contracts.
For the quarter and
nine months ended January 1, 2010, and January 2, 2009, the Company increased
its use of off-shore support and therefore its exposure to foreign currency
fluctuations. The Company’s efforts to manage the exposure to foreign
currency fluctuations has reduced the volatility of currency gains and losses
and the additional costs which resulted are reported in other (income)/expense
for these periods.
42
Taxes
The effective tax
rate for the third quarter ended and nine months ended was 25.8% and 22.6% for
fiscal year 2010, and 38.0% and (18.2%) for fiscal year 2009,
respectively. The increase in the fiscal year 2010 rate is primarily
due to favorable settlements of open audit years that were recognized during the
second quarter of fiscal year 2009. During the second quarter of
fiscal year 2010, the Company recorded tax benefits related to the reversal of a
valuation allowance associated with branch net operating loss carryforwards and
the remeasurement of an uncertain tax position for foreign tax credits as a
result of an audit settlement. The recognition of these benefits
resulted in a decrease to the effective tax rate for the third quarter ended and
nine months ended of 4.7% and 6.8% for fiscal year 2010, respectively. In
addition, the fiscal year 2009 effective tax rates reflect the reclassification
of prior year income from noncontrolling interests to a separate line following
the adoption of a new accounting standard at the beginning of fiscal year
2010.
As
of January 1, 2010, the Company's liability for uncertain tax positions was $472
million, including interest of $85 million and penalties of $26
million. The total amount of uncertain tax positions decreased by
approximately $32 million compared to fiscal year end 2009, primarily due to
settlements with state taxing authorities and taxing authorities in foreign
jurisdictions which also resulted in the remeasurement of an uncertain tax
position for foreign tax credits.
Interest expense is
expected to continue to accrue at approximately $3.2 million quarterly (net of
tax benefit) on existing uncertain tax positions, before the effect of
compounding or changes in interest rates, until payments are made or the
underlying uncertain tax positions are resolved in the Company’s
favor. The Company is unable to predict when these events may
occur.
Earnings
per Share
Earnings per share
on a diluted basis increased $.30 for the third quarter compared to the prior
fiscal quarter period. The increase in diluted earnings per share was the result
of an increase in net income attributable to CSC common shareholders of $50
million. The earnings per share increase was modified as a result of
an increase in the average share base outstanding (on a fully diluted basis) of
approximately 3.9 million shares in the third quarter of fiscal 2010. The
increase in the average share base outstanding resulted from additional common
stock equivalents based on the Company’s stock price appreciation on a year over
year basis.
Earnings per share
on a diluted basis decreased $1.18 for nine months compared to the prior fiscal
year period. Earnings per share decreased as a result of an increase
in the fiscal 2010 average share base outstanding (on a fully diluted basis) of
approximately 2.9 million shares in nine months of fiscal 2010. The increase in
the average share base outstanding resulted from additional common stock
equivalents based on the Company’s stock price appreciation on a year over year
basis. The decrease in earnings per share was also driven by an IRS
settlement and related tax benefit in the first nine months of fiscal
2009.
43
Financial
Condition
Cash
Flows
The Company’s cash
flows were as follows:
Nine
Months Ended
|
||||||||
(Amounts in
millions)
|
January
1, 2010
|
January
2, 2009
|
||||||
Net cash
provided by operating activities
|
$ | 407 | $ | 928 | ||||
Net cash used
in investing activities
|
(514 | ) | (838 | ) | ||||
Net cash
provided by financing activities
|
114 | 953 | ||||||
Effect of
exchange rate changes on cash and cash equivalents
|
123 | (69 | ) | |||||
Net increase
in cash and cash equivalents
|
130 | 974 | ||||||
Cash and cash
equivalents at beginning of year
|
2,297 | 699 | ||||||
Cash
and cash equivalents at quarter end
|
$ | 2,427 | $ | 1,673 |
Net cash provided
by operating activities for the nine months ended January 1, 2010, was $407
million compared to $928 million for the same period prior year. The
decrease in cash provided by operations was driven by lower income, and non-cash
charges, unrealized foreign currency exchange gains, and working capital
usage.
·
|
Net income
decreased $170 million in the first nine months of fiscal 2010 compared to
the prior fiscal period.
|
·
|
Depreciation
and other non-cash charges of $878 million were $109
million lower than the prior year period. Decreases were seen
in all segments, led by MSS which reports approximately two-thirds of the
Company’s depreciation and amortization. By asset type,
slightly over half of the decrease was in amortization of intangible
assets, including deferred contract costs and acquired customer-related
intangibles, as normal amortization outweighed the impact of new
additions. The remainder of the decrease was in depreciation of
property and equipment, reflecting the Company’s overall efforts to limit
capital spending.
|
44
·
|
Unrealized
foreign currency gains of $44 million reflect foreign currency exchange
rate trends. The Company continues to execute a hedging program
and, for income statement purposes, had largely offsetting realized
losses.
|
·
|
Net outflows
for operating assets of $173 million for the first nine months of fiscal
2010 versus the prior year nine months of $125 million were driven by
increased accounts receivable and other current assets, primarily work in
process.
|
·
|
Decreases in
operating liabilities of $883 million were $51 million greater than the
prior year nine months decrease of $832 million, driven primarily by lower
decreases for the period in deferred income and accounts
payable.
|
Net cash used in
investing activities of $514 million for the nine months was $324 million lower
than the prior year period amount used of $838 million. Purchases of
property and equipment of $437 million was $120 million lower as a result of
efforts to lower capital expenditures due to the company’s efforts to reduce
capital spending. Investing cash outflows also declined $95 million
due to reduced expenditures for acquisitions and a reduction of $23 million in
software capitalization compared to the first nine months of fiscal
2009.
Financing
activities for the first nine month period of fiscal 2010 decreased $839 million
from the prior fiscal year nine months, primarily driven by a decrease in net
borrowings of $911 million, offset by $75 million from stock
transactions. Financing activities in fiscal 2010 of $114 million
were primarily driven by net proceeds from stock transactions of $84 million and
net borrowings of $30 million. The prior fiscal year nine months of cash
provided by financing activities of $953 million included $1,647 million of net
borrowings under lines of credit, partially offset by repayments of $263 million
in net commercial paper and $443 million of other debt
repayments.
Contractual Obligations
The Company has
contractual obligations for long-term debt, capital lease obligations, operating
lease obligations, minimum purchase obligations, bank debt and other obligations
as summarized in the Off Balance Sheet Arrangements and Contractual Obligations
section of the Company’s Annual Report on Form 10-K for the year ended April 3,
2009. In addition, the Company has liabilities related to
unrecognized tax benefits; however, the Company cannot reasonably estimate the
timing and amount of cash out flows for future tax settlements.
Liquidity
and Capital Resources
The balance of cash
and cash equivalents was $2.4
billion at January 1, 2010, and $2.3 billion at April 3, 2009. The increased
balance is primarily the result of working capital timing differences and the
effect of foreign currency translation on cash balances, primarily relating to
exchange rate movements in the British Pound and Euro. Equity increased by $1.1
billion during the nine months of fiscal 2010 primarily due to net income
attributable to CSC shareholders of $558
million, additional paid in capital of $133 million, and foreign currency
translation of $374 million and an unfunded pension adjustment of $48 million in
the accumulated other comprehensive income account.
At
the end of the third quarter of fiscal 2010, CSC’s ratio of debt to total
capitalization was 39.2%, down from 43.0% at the
end of fiscal year 2009. The improvement in the debt ratio for the third quarter
of fiscal 2010 was primarily the result of the increased equity of $1.1 billion
as discussed above, offset by accrued interest. The following table summarizes
the Company’s debt to total capitalization ratios as of the end of the third
quarter of fiscal 2010 and as of fiscal year end 2009.
45
As
of
|
||||||||
Dollars
in millions
|
January
1, 2010
|
April
3, 2009
|
||||||
Debt
|
$ | 4,307 | $ | 4,235 | ||||
Equity
|
6,680 | 5,618 | ||||||
Total
capitalization
|
$ | 10,987 | $ | 9,853 | ||||
Debt to total
capitalization
|
39.2 | % | 43.0 | % |
At
January 1, 2010, the Company had $90 million of short-term borrowings under
uncommitted lines of credit with foreign banks, $41 million of current
maturities and $4,176 million of long-term debt. The Company had no
outstanding commercial paper and an immaterial amount of available lines of
credit as of January 1, 2010.
The Company is
currently evaluating the early extinguishment of the $500 million 7.375% term
notes due in year 2011. Including the prepayment fees the amount will
be approximately $540 million.
The Company’s
contract with the United Kingdom’s National Health Service to deliver an
integrated electronic patient records system with an announced value of
approximately $5.4 billion is a large and complex contract and is included in
the BSS segment. As of January 1, 2010, the Company had a net
investment in the contract of approximately $1.0 billion, or 640 million pounds
sterling. Contract assets consist principally of contract work in
progress and unbilled receivables but also equipment, software and other assets.
The contract is currently profitable and the Company expects to recover its
investment; however, unforeseen future events to the extent they add costs
beyond those included in the Company’s current estimated costs to complete could
potentially adversely impact such recovery and the Company’s
liquidity.
Continued
uncertainty in the global economic conditions and the liquidity crisis also pose
a risk to the Company’s business as customers and suppliers may be unable to
obtain financing to meet payment or delivery obligations to the Company. In
addition, customers may decide to downsize, defer or cancel contracts which
could negatively affect revenue.
During this current
global economic downturn, the Company continues to actively monitor the
financial markets. Although the condition of the capital markets continues to be
volatile, the Company believes it will continue to have access to the capital
markets if the need arises. However, the volatility in the financial markets
could directly affect the cost and terms of any future bank
financing.
It
is management's opinion that the Company will be able to meet its liquidity and
cash needs for the foreseeable future through a combination of cash flows from
operating activities, cash balances, and other financing activities, including
the issuance of debt and/or equity securities, and/or the exercise of the put
option described in the Company's Form 10-K.
46
Recent
Accounting Pronouncements and Critical Accounting Estimates
Recent accounting
pronouncements and the anticipated impact to the Company are described in the
notes to the interim consolidated condensed financial statements included in
this Form 10-Q as well as in the Company's Annual Report on Form 10-K for the
year ended April 3, 2009.
The Company has
identified several critical accounting estimates which are described in
"Management's Discussion and Analysis" of the Company’s Annual Report on Form
10-K for fiscal 2009. An accounting estimate is considered critical
if both: (a) the nature of the estimates or assumptions is material due to the
levels of subjectivity and judgment involved, and (b) the impact of changes in
the estimates and assumptions would have a material effect on the consolidated
financial statements. The Company's critical accounting estimates
relate to: revenue recognition and cost estimation on long-term, fixed-price
contracts; revenue recognition on software license sales that require
significant customization; capitalization of outsourcing contract costs and
software development costs; assumptions related to purchase accounting and
goodwill; assumptions to determine retirement benefits costs and liabilities;
and assumptions and estimates used to analyze legal and tax
contingencies. Modifications to contract scope, schedule, and price
may be required on development contracts accounted for on a
percentage-of-completion basis and other contracts with the U.S. federal
government. Accounting for such changes prior to formal contract
modification requires evaluation of the characteristics and circumstances of the
effort completed and assessment of probability of recovery. If
recovery is deemed probable, the Company may, as appropriate, either defer the
costs until the parties have agreed on the contract change or recognize the
costs and related revenue as current period contract performance. The
Company routinely negotiates such contract modifications. For all
these estimates, we caution that future events may not develop as forecast, and
the best estimates routinely require adjustment.
47
PART
I, ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
For a discussion of
the Company's market risk associated with interest rates and foreign currencies
as of January 1, 2010, see "Quantitative and Qualitative Disclosures about
Market Risk" in the Part II, Item 7A, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of the Company's Annual Report
on Form 10-K for the fiscal year ended April 3, 2009. For the nine months ended
January 1, 2010, there has been no significant change in related market risk
factors.
48
PART
I, ITEM 4. CONTROLS AND PROCEDURES
“Disclosure
controls and procedures” are the controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports filed or submitted by it under the Securities Exchange Act of
1934, as amended (Exchange Act) is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission’s
rules and forms. “Disclosure controls and procedures” include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in its Exchange Act reports is accumulated and
communicated to the issuer’s management, including its principal executive and
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Under the direction
of the Company’s Chief Executive Officer and Chief Financial Officer, the
Company has evaluated its disclosure controls and procedures as of January 1,
2010. Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were effective as of January 1, 2010.
Changes
in Internal Controls
“Internal controls
over financial reporting” is a process designed by, or under the supervision of,
the issuer’s principal executive and financial officers, and effected by the
issuer’s board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in
accordance with generally accepted accounting principles and includes those
policies and procedures that:
(1)
|
pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the
issuer;
|
(2)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with
authorization of management and directors of the issuer;
and
|
(3)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuer’s assets that
could have a material effect on the consolidated financial
statements.
|
During the fiscal
quarter ended January 1, 2010, there was no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
49
Part
II. Other Information
Item
1. Legal Proceedings
CSC is engaged in
providing services under contracts with the U.S. government. The
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. government investigate whether the Company's
operations are being conducted in accordance with these
requirements. U.S. government investigations of the Company, whether
related to the Company's federal government contracts or conducted for other
reasons, could result in administrative, civil or criminal liabilities,
including repayments, fines or penalties being imposed upon the Company, or
could lead to suspension or debarment from future U.S. government
contracting. The Company believes it has adequately reserved for any
losses which may be experienced from these investigations.
In
accordance with prescribed federal regulations, the Company converted 16
submitted Requests for Equitable Adjustment (REAs) to interest bearing claims
under the Contract Disputes Act (CDA) totaling approximately $900 million on two
U.S. federal contracts in order to initiate the claims litigation process and
trigger the statutory interest provision of the CDA. On August 27, 2009,
the government agreed to settle the smaller set of claims with
CSC. As a result of the settlement and other contractual
arrangements, the Company expects the deferred costs related to the smaller set
of claims will be fully recovered. On December 24, 2009, the
Government made a partial payment of $35 million on one of the remaining 14
claims. Thereafter, CSC filed an amended complaint with the Armed
Services Board of Contract Appeals (ASBCA), the forum in which the claims are
litigated, reducing the amount of its claims by $35 million. Included in current
assets on the Company's balance sheet are approximately $379 million of unbilled
receivables, reflecting the $35 million payment, and $227 million of deferred
costs related to the remaining 14 claims which total approximately $678 million
associated with one contract. The Company does not record any profit element
when it defers costs associated with such REAs/claims. CSC has
requested payment for customer-caused delays and certain related out-of-scope
work directed or caused by the customer in support of its critical missions.
Notwithstanding the government’s breaches and delays, CSC was obligated under
applicable federal acquisition law to continue performance as directed by the
government; otherwise, refusal to perform would have placed CSC at risk for a
termination for default under the applicable provisions of the Federal
Acquisition Regulations. The Company believes it has valid bases for
pursuing recovery of the remaining REAs/claims supported by outside counsel’s
evaluation of the facts and assistance in the preparation of the
claims. The Company remains committed to vigorous pursuit of its
claimed entitlements and associated value, and continues to believe based on
review of applicable law and other considerations that recovery of at least its
net balance sheet position is probable. However, the Company’s
position is subject to the ongoing evaluation of new facts and information which
may come to the Company’s attention during the discovery phase of the
litigation.
50
During the first
quarter of fiscal 2008, the U.S. federal contracting officer for the contract
with the remaining set of claims denied the claims and issued a $42.3 million
counterclaim. The Company disagrees with the government’s denials
both factually and contractually. In contrast to the Company’s
claims’ submission, the government’s counter-claim was submitted with no
verifiable evidence, no citation to any supporting evidence and no explanation
of its method for calculating value. Because of these disputes, the
Company initiated litigation at the ASBCA, one of the two forums available for
litigation of CDA claims, on September 11, 2007, with regard to the larger of
the two sets of claims and the counterclaim. Decisions of the ASBCA
may be appealed to the Court of Appeals for the federal Circuit and that court’s
ruling may be appealed to the U.S. Supreme Court. During the third
quarter of fiscal 2008, the Company and its litigation team undertook a standard
review of the value of the claims associated with this
contract. Value is subject to periodic, routine adjustment as new
facts are uncovered, because of contract modifications and funding changes,
ordinary rate adjustments, and/or estimated cost data being replaced with actual
costs. On December 21, 2007, as a result of the review, the Company
amended the complaint it filed with the ASBCA on September 11, 2007, and
adjusted its value downward, with such reduction reflected in the value of the
claims was further adjusted downward to reflect the $35 million payment received
during the third quarter of fiscal 2010 as noted above. The discovery
phase of this litigation began in the first half of fiscal year
2009. Discovery in the litigation will continue through fiscal year
2010 and trial is tentatively scheduled to begin in the fourth quarter of fiscal
year 2011.
Interest on the
remaining set of claims is accruing but will only be recognized in the financial
statements when paid. Resolution of the REA claims/amounts depends on
individual circumstances, negotiations by the parties and prosecution of the
claims. The Company will pursue appeals as necessary and is unable to
predict the timing of resolution of recovery of these claims; however,
resolution of the claims may take years.
Several
shareholders of the Company have made demands on the Board of Directors of the
Company or filed purported derivative actions against both the Company, as
nominal defendant, as well as certain of CSC's executive officers and
directors. These actions generally allege that certain of the
individual defendants breached their fiduciary duty to the Company by
purportedly “backdating” stock options granted to CSC executives, improperly
recording and accounting for allegedly backdated stock options, producing and
disseminating disclosures that improperly recorded and accounted for the
allegedly backdated options, engaging in acts of corporate waste, and committing
violations of insider trading laws. They allege that certain of the
defendants were unjustly enriched and seek to require them to disgorge their
profits. These actions have been filed in both federal and state
court in Los Angeles as follows.
A
state law claim, Allbright v.
Bailey et al., Case No. BC353316 was filed on June 1, 2006 and was
consolidated with a subsequently filed case, Jones v. Bailey et al., Case
No. BC354686. In July 2008, Superior Court Judge Carl West dismissed
the consolidated case with prejudice. The statutory time for filing a notice of
appeal has passed.
On
August 23, 2006, Laborers'
International Union v. Bailey, et al., CV 06-5288, a shareholder
derivative action, was filed in U.S. District Court in Los Angeles alleging
backdating of stock option grants to various senior executives at CSC and naming
CSC as a nominal defendant and various current and former directors and officers
as individual defendants. Thereafter, two additional nearly identical
derivative suits were filed in the same court. All three federal
derivative actions were ultimately consolidated into one action entitled In re CSC Shareholder Derivative
Litigation, CV 06-5288. On July 24, 2007, Judge Mariana
Pfaelzer granted a motion to dismiss based on demand futility and dismissed an
amended complaint with prejudice. Following an ex parte application
by defendants, Judge Pfaelzer issued a corrected order dated August 9, 2007,
reflecting the same ruling. Plaintiffs appealed the decision to the
Ninth Circuit which affirmed the judgment of dismissal. The judgment is now
final.
51
On September 24,
2007, a stockholder made a demand to the Board of Directors to cause the Company
to pursue claims against certain individuals, including current and former
officers and directors of CSC, with respect to alleged stock option
backdating. Action on this demand was delayed until the decision
of the Ninth Circuit in the foregoing federal derivative case became
final. On March 2, 2009, the stockholder made a renewed demand to the
Board. On May 20, 2009, the Board formed a special committee
comprised solely of independent directors not named in the stockholder demand to
investigate and review the demand and recommend to the Board how to respond
thereto. On February 8, 2010, the report of the special committee
reported the results of its review to the Board.
On August 15, 2006, a federal ERISA class action involving allegations of backdating stock options at the Company was filed in the U.S. District Court in the Eastern District of New York entitled Quan, et al. v. CSC, et al., CV 06-3927. On September 21, 2006, a related ERISA class action was filed in the same court entitled Gray, et al. v. CSC, et al., CV 06-5100. The complaints named as defendants the Company, the Company’s Retirement and Employee Benefits Plans Committee and various directors and officers, and alleged various violations of the ERISA statute. The two ERISA actions were consolidated and, on February 28, 2007, plaintiffs filed an amended ERISA class action complaint. On January 8, 2008, the District Court granted a motion to transfer the consolidated cases to the United States District Court in Los Angeles, California. Upon arrival in the Central District of California, the two cases were consolidated before Judge Otero in Case No. CV 08-2398-SJO. Defendants filed a motion to dismiss and plaintiffs filed their memorandum in opposition to the motion. Plaintiffs also filed a motion for class certification, and defendants filed their memorandum in opposition to the motion on August 11, 2008. Defendants’ motion to dismiss was denied, as was plaintiffs’ motion for class certification. However, plaintiffs later filed a renewed motion for class certification which was granted on December 29, 2008. Discovery closed on April 28, 2009. Defendants and plaintiffs each filed motions for summary judgment on May 4, 2009, and supplemental briefs thereafter.
On
July 13, 2009, the District Court entered an Order granting summary judgment in
favor of the Company and the other defendants. On July 28, 2009,
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Ninth Circuit. On August 10, 2009, the CSC defendants filed a
notice of cross appeal regarding recovery of costs. Plaintiffs filed
their opening appellate brief on September 9, 2009 and defendants filed their
opposition brief on the merits and brief on costs on October 30, 2009.
Plaintiffs’ reply brief on the merits and opposition brief on costs was filed on
December 14, 2009. The CSC defendants’ reply brief on the issue of
costs was filed on January 11, 2010. The Ninth Circuit has not yet
scheduled oral argument.
On May 29, 2009, a
class action lawsuit entitled Shirley Morefield vs. Computer
Sciences Corporation, et al., Case # A-09-591338-C, was brought in state
court in Clark County, Nevada, against the Company and certain current and
former officers and directors asserting claims for declarative and injunctive
relief related to stock option backdating. The alleged factual basis
for the claims is the same as that which was alleged in the prior derivative
actions discussed above. The defendants deny the allegations in the
Complaint. On June 30, 2009, the Company removed the case to the
United States District Court for the District of Nevada, Case No.
2:09-cv-1176-KJD-GWF. On July 29, 2009, the plaintiffs filed a motion
to remand the case to state court, and that motion is now fully briefed and
awaiting decision. The federal court has suspended further activity
pending a ruling on the remand motion.
52
In
addition to the matters noted above, the Company is currently party to a number
of disputes which involve or may involve litigation. The Company
consults with legal counsel on those issues related to litigation and seeks
input from other experts and advisors with respect to such matters in the
ordinary course of business. Whether any losses, damages or remedies
ultimately resulting from such matters could reasonably have a material effect
on the Company's business, financial condition, results of operation, or cash
flows will depend on a number of variables, including, for example, the timing
and amount of such losses or damages (if any) and the structure and type of any
such remedies. For these reasons, it is not possible to make reliable
estimates of the amount or range of loss that could result from these other
matters at this time. Company management does not, however, presently
expect any of such other matters to have a material impact on the consolidated
financial statements of the Company.
Litigation is
inherently uncertain and it is not possible to predict the ultimate outcome of
the matters discussed above. It is possible that the Company's
business, financial condition, results of operations, or cash flows could be
affected by the resolution of this matter. Whether any losses,
damages or remedies ultimately resulting from a proceeding could reasonably have
a material effect on the Company's business, financial condition, results of
operations, or cash flows will depend on a number of variables, including, for
example, the timing and amount of such losses or damages, if any, and the
structure and type of any such remedies. Depending on the ultimate
resolution of these matters, some may be material to the Company's operating
results for a particular period if an unfavorable outcome results, although such
a material unfavorable result is not presently expected, and all other
litigation, in the aggregate, is not expected to result in a material adverse
impact to the consolidated condensed financial statements.
Item
1A. Risk Factors
Forward-looking
information contained in these statements include, among other things,
statements with respect to the Company’s financial condition, results of
operations, cash flows, business strategies, operating efficiencies or
synergies, competitive positions, 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 the Company’s control, which could cause actual results to differ
materially from the results described in such statements. These
forward looking statements should be read in conjunction with our Annual Report
on Form 10-K for the year ended April 3, 2009. The reader should
specifically consider the various risks discussed in the Risk Factors section of
our Annual Report on Form 10-K.
53
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a)
None
(b)
None
(c)
Purchases of Equity Securities
The following table
provides information on a monthly basis for the quarter ending January 1, 2010,
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
|
Maximum
Number (or Approximate Dollar Value) of Shares that May Yet be
Purchased Under the Plans or Programs
|
||||
October 3,
2009 to October 30, 2009
|
2,734
|
$51.78
|
-
|
$ -
|
||||
October 31,
2009 to November 27, 2009
|
-
|
$ -
|
||||||
November 28,
2009 to January 1, 2010
|
11,755
|
$56.34
|
-
|
$ -
|
(1)
|
The Company
accepted 3,902 shares of its common stock in the quarter ended January 1,
2010, from employees in lieu of cash due to the Company in connection with
the release of shares of common stock. Such shares of common
stock are stated at cost and held as treasury shares to be used for
general corporate purposes.
|
The Company
accepted 10,587 shares of its common stock in the quarter ended January 1, 2010,
from 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.
54
Item
6. Exhibits
Exhibit
Number
|
Description of Exhibit
|
2.1
|
Agreement and
Plan of Merger, dated as of April 25, 2007, by and among Computer Sciences
Corporation, Surfside Acquisition Corp. and Covansys Corporation
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K dated April 30, 2007)
|
3.1
|
Restated
Articles of Incorporation filed with the Nevada Secretary of State on June
11, 2003 (incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 28,
2003)
|
3.2
|
Certificate
of Amendment of Certificate of Designations of Series A Junior
Participating Preferred Stock (incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 3, 2003)
|
3.3
|
Bylaws,
amended and restated effective October 17, 2008 (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K dated October
17, 2008)
|
4.1
|
Indenture
dated as of March 3, 2008, for the 5.50% senior notes due 2013 and the
6.50% senior notes due 2018 (incorporated by reference to Exhibit 4.1 to
the Company’s current report on Form 8-K dated September 15,
2008)
|
10.1
|
1998 Stock
Incentive Plan(1)
(incorporated by reference to Exhibit 10.10 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 3,
1998)
|
10.2
|
2001 Stock
Incentive Plan(1)
(incorporated by reference to Appendix B to the Company's Proxy Statement
for the Annual Meeting of Stockholders held on August 13,
2001)
|
10.3
|
Schedule to
the 2001 Stock Incentive Plan for United Kingdom personnel(1)
(incorporated by reference to Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended April 2, 2004)
|
10.4
|
2004
Incentive Plan(1)
(incorporated by reference to Appendix B to the Company's Proxy Statement
for the Annual Meeting of Stockholders held on August 9,
2004)
|
10.5
|
2007 Employee
Incentive Plan(1) (incorporated
by reference to Appendix B to the Company Proxy Statement for the Annual
Meeting of Stockholders held on July 30, 2007)
|
10.6
|
Form of Stock
Option Agreement for employees(1)
(incorporated by reference to Exhibit 10.6 to the Company’s Annual Report
on Form 10-K for the fiscal year ended March 28, 2008)
|
10.7
|
Form of
Restricted Stock Agreements for employees(1)
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1,
2005)
|
55
Exhibit
Number
|
Description of Exhibit
|
10.8
|
Form of
Service-Based Restricted Stock Unit Agreement for Employees(1)
(incorporated by reference to Exhibit 10.8 to the Company’s Annual Report
on Form 10-K for the fiscal year ended March 28, 2008)
|
10.9
|
Form of
Performance-Based Restricted Stock Unit Agreement for Employees(1) (incorporated
by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K
for the fiscal year ended March 28, 2008)
|
10.10 | Form of Career Shares Restricted Stock Unit Agreement for Employees(1) (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2008) |
10.11
|
Form FY2006
Annual Management Incentive Plan 1 Worksheet(1)
(incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1,
2005)
|
10.12
|
Supplemental
Executive Retirement Plan, amended and restated effective December 3,
2007(1)
(incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K dated December 4, 2007)
|
10.13
|
Supplemental
Executive Retirement Plan No. 2, effective December 3, 2007(1)
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K dated December 4, 2007)
|
10.14
|
Excess Plan,
effective December 3, 2007(1)
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K dated December 4, 2007)
|
10.15
|
Deferred
Compensation Plan, amended and restated effective December 3, 2007(1)
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K dated December 4, 2007)
|
10.16
|
Severance
Plan for Senior Management and Key Employees, amended and restated
effective October 28, 2007(1)
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K dated November 1, 2007)
|
10.17
|
Management
Agreement with Michael W. Laphen, effective September 10, 2007(1)
(incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K dated September 10, 2007)
|
10.18
|
Senior
Management and Key Employee Severance Agreement dated August 11, 2003,
with Michael W. Laphen(1)
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K dated December 12,
2007)
|
56
Exhibit
Number
|
Description of Exhibit
|
10.19
|
Amendment No.
1 to Senior Management and Key Employee Severance Agreement dated December
10, 2007, with Michael W. Laphen(1)
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K dated December 12, 2007)
|
10.20 |
Form of
Indemnification Agreement for officers (incorporated by reference to
Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 1995)
|
10.21 |
Form of
Indemnification Agreement for directors (incorporated by reference to
Exhibit X(xxvi) to the Company's Annual Report on Form 10-K for the fiscal
year ended April 1, 1988)
|
10.22
|
1997
Nonemployee Director Stock Incentive Plan (incorporated by reference to
Appendix A to the Company's Proxy Statement for the Annual Meeting of
Stockholders held on August 11, 1997)
|
10.23
|
2006
Nonemployee Director Incentive Plan (incorporated by reference to Appendix
B to the Company’s Proxy Statement for the Annual Meeting of Stockholders
held on July 31, 2006)
|
10.24
|
Form of
Restricted Stock Unit Agreement for directors (incorporated by reference
to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 2005)
|
10.25
|
Form of
Amendment to Restricted Stock Unit Agreement with directors (incorporated
by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
dated December 6, 2005)
|
10.26
|
Credit
Agreement dated as of July 12, 2007 (incorporated by reference
to Exhibit 10.27 to the Company’s Current Report on Form 8-K dated
September 5, 2007)
|
10.27
|
Form of
Performance-Based Restricted Stock Unit Agreement (Replacement Grant)
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended July 3, 2009)
|
57
Exhibit
Number
|
Description of Exhibit
|
10.31
|
Form of
Senior Management and Key Employee Severance Agreement, as amended and
restated effective May 20, 2009(1)
|
31.1
|
Section 302
Certification of the Chief Executive Officer
|
31.2
|
Section 302
Certification of the Chief Financial Officer
|
32.1
|
Section 906
Certification of the Chief Executive Officer
|
32.2
|
Section 906
Certification of the Chief Financial Officer
|
99.1
|
Revised
Financial Information Disclosure as a result of the Company’s
restructuring (incorporated by reference to exhibits 99.01, 99.02 and
99.03 to the Company’s Current Report on Form 8-K filed December 16,
2008.)
|
101.INS
|
XBRL Instance
(3)
|
101.SCH
|
XBRL Taxonomy
Extension Schema (3)
|
101.CAL
|
XBRL Taxonomy
Extension Calculation (3)
|
101.LAB
|
XBRL Taxonomy
Extension Labels (3)
|
101.PRE
|
XBRL Taxonomy
Extension Presentation (3)
|
(1) Management
contract or compensatory plan or agreement
|
|
(2)
Confidential treatment has been requested pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended, for portions of
this exhibit that contain confidential
commercial and financial information.
|
|
(3) Furnished,
not filed.
|
|
58
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTER
SCIENCES CORPORATION
|
||
Date:
February 10, 2010
|
By:
|
/s/ Donald G. DeBuck |
Donald
G. DeBuck
|
||
Vice
President and Controller
|
||
(Principal
Accounting Officer)
|
||
59