XNYS:CSC Computer Sciences Corp Annual Report 10-K Filing - 3/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No.: 1-4850

COMPUTER SCIENCES CORPORATION
     
 
(Exact name of Registrant as specified in its charter)
 
Nevada
95-2043126
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3170 Fairview Park Drive
 
Falls Church, Virginia
22042
(Address of principal executive offices)
(zip code)
 
 
Registrant's telephone number, including area code: (703) 876-1000
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class:
Name of each exchange on which registered
Common Stock, $1.00 par value per share
New York Stock Exchange
Preferred Stock Purchase Rights
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     x Yes  o No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      o Yes  x   No  
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o   No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o   No     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
o Yes  x   No
As of September 30, 2011, the aggregate market value of stock held by non-affiliates of the Registrant was approximately $4,154,635,958.
There were 155,201,837 shares of the Registrant’s common stock outstanding as of May 4, 2012.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after March 30, 2012, are incorporated by reference into Part III hereof.



TABLE OF CONTENTS

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

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


i


PART I

Item 1.
Business

INTRODUCTION AND HISTORY

General

Computer Sciences Corporation, a Nevada corporation (CSC or the Company), is one of the world leaders in the information technology (IT) and professional services industry. Since it was founded more than 50 years ago in 1959, the Company has helped clients use IT more efficiently in order to improve their operations and profitability, focus on core competencies, and achieve business results such as increased agility and top-line growth.

The Company’s clients generally comprise governments and commercial enterprises that rely upon the use of information services and associated systems for the conduct of their operations. These clients commonly engage with industry specialists for the development, deployment, and ongoing operation of IT services and IT-enabled business operations.

CSC’s business strategy centers on maintaining proficiency and favorable cost profiles related to designing, implementing, and/or operating critical information-based systems for our clients. Increasingly, these systems serve highly-interconnected user populations (which are increasingly mobile in nature), and rely upon complex sources of data and high-performance computing and storage assets.

CSC offers a broad array of services to clients in the commercial and government markets and specializes in applying contemporary practices towards the employment of IT in order to achieve the strategic objectives of its customers. CSC’s service offerings include IT and business process outsourcing, emerging services such as cloud computing and cybersecurity protection, and a variety of other IT and professional services.

IT outsourcing involves operating all or a portion of a customer’s technology infrastructure, including systems analysis, applications development, network operations, end-user computing and data center management. CSC also provides business process outsourcing, managing key transactional business functions for clients, such as procurement and supply chain, call centers and customer relationship management, credit services, claims processing and logistics. In addition, CSC provides an array of emerging services in the areas of Infrastructure as a Service (IaaS), Software as a Service (SaaS), Business Process as a Service (BPaaS), Platform as a Service (PaaS), Cyber Security Managed Services and other emerging technologies and associated service delivery models.

IT and professional services include systems integration, management consulting, technology consulting and other professional services. Systems integration encompasses designing, developing, implementing and integrating complete information systems. Consulting and professional services include advising clients on the strategic acquisition and utilization of IT and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering.

The Company also licenses sophisticated software systems including SaaS offerings for the financial services, healthcare and other industry-specific markets and provides a broad array of end-to-end business solutions that meet the needs of large commercial and government clients. The Company focuses on delivering results by combining industry-specific knowledge and process design and improvement expertise with innovative, high-quality global delivery models to provide flexible and scalable solutions. To do so, CSC draws on its vast experience in designing, building and maintaining large, complex, mission-critical systems and applies this knowledge to today’s business challenges.

While it maintains more than 100 vendor alliances to have access to the latest technology, CSC generally does not operate through exclusive agreements with hardware or software providers and believes this vendor neutrality enables it to better identify and manage solutions specifically tailored to each client’s needs.

Major Markets

CSC provides its services to clients around the world and in many commercial industries, as well as to governments of the U.S. federal, state, and local segments, in addition to other governments. The Company delivers these services through three broad service lines or sectors: North American Public Sector (NPS), Managed Services Sector (MSS), and Business

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Solutions and Services (BSS). Geographically, CSC has major operations throughout North America, Europe, Asia and Australia. Segment and geographic information are included in Note 15 to the Consolidated Financial Statements for the year ended March 30, 2012. For a discussion of risks associated with our foreign operations, see Item 1A "Risk Factors".

The Company’s NPS line of business, providing IT-related and mission/operations-related services to the U.S. federal government since 1961, is a leading federal contractor and is one of its major IT service providers. CSC serves a broad federal customer base, including most civil departments and branches of the military, as well as the Department of Homeland Security and NASA. The Company provides a broad spectrum of services to the U.S. federal government, ranging from traditional systems integration and outsourcing to complex project management and technical services. Key offerings include enterprise modernization, telecommunications and networking, managed services, base and range operations, and training and simulation.

The Company’s MSS line of business provides information systems outsourcing services to clients in a broad array of industries, including aerospace and defense, automotive, chemical and natural resources, consumer goods, financial services, healthcare, manufacturing, retail and distribution, telecommunications, and technology. CSC's services are delivered through allocation of resources located both on a client's premises and through CSC's leveraged service centers around the world.

The Company’s BSS line of business also serves a broad array of industries, providing industry specific solutions in areas such as consulting and systems integration, business process outsourcing, and intellectual property-based software to chemical, energy and natural resources; financial services; technology and consumer; manufacturing; healthcare; and public sector organizations. In addition, BSS provides professional technology staffing services in Australia, computer equipment repair and maintenance services in Asia, and credit reporting services in the United States.

During the last three fiscal years, the Company’s revenue mix by line of business was as follows:

 
2012
 
2011
 
2010
North American Public Sector
36
 %
 
37
 %
 
38
 %
Managed Services Sector
42

 
41

 
41

Business Solutions and Services
23

 
23

 
22

Subtotal
101

 
101

 
101

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

Fiscal 2012 Overview

During fiscal 2012, CSC announced new business contract awards, or bookings, valued at approximately $19.3 billion, comprised of $9.5 billion in MSS segment awards, $6 billion of NPS awards and $3.8 billion of awards with BSS. For NPS, announced values for indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. The bookings value of MSS announced awards is estimated at the time of contract signing and includes optional contract years. New contract bookings are recorded using then existing projections of service volumes and then existing currency exchange rates, and are not subsequently adjusted for volume or currency fluctuations. The announced values for BSS line of business awards are based on firm commitments.

A weak global economy throughout much of fiscal 2012 continued to cause soft demand for IT discretionary spending, which affects demand for the Company's products and services and in turn, may have an impact on the financial condition of the Company. Therefore, the Company continues to closely monitor client demand in order to appropriately respond to changing environments. The response of professional and IT service providers, including CSC, has been to continue exercising cost discipline, with careful management of headcount, capital expenditures, and other resources. Many of our government customers continue to experience uncertainty about their fiscal budgets due to the Budget Control Act of 2011. As a result, large program awards are delayed and customers are shifting to smaller and shorter term contracts.

In future periods, CSC’s results of operations and financial condition may be negatively affected by conditions in the various global markets in which the Company operates, or client budget constraints. The current economic environment increases the pressure on both businesses and governments around the world to adapt.

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Economic conditions could impact the credit quality of CSC's receivables portfolio and, therefore, the level of provision for bad debts. CSC continues to review credit policies and collection efforts in both the origination of new business and the evaluation of existing projects.

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

Currency fluctuations will continue to have an effect on both revenue and profit. The Company’s hedging program, however, attempts to mitigate some balance sheet risk, economic risk, and margin erosion.

Acquisitions and Divestitures

Acquisitions

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

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

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

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

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

Divestitures

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

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

Competition

The IT and professional services markets in which CSC competes are not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those offered by the Company. Some of these are large industrial firms, including computer manufacturers and major aerospace firms that may have greater financial resources than CSC and, in some cases, may have greater capacity to perform

3


services similar to those provided by the Company. In addition, the increased importance of offshore labor centers has brought a number of foreign-based firms into competition with CSC. Offshore IT outsourcers selling directly to end-users have captured an increasing share of awards as they compete directly with U.S. domestic suppliers of these services. The Company continues to increase resources in offshore locations to somewhat mitigate this market development.

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

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

EMPLOYEES

The Company has offices worldwide, and as of March 30, 2012, had approximately 98,000 employees. The services provided by CSC require proficiency in many fields, such as computer sciences, programming, telecommunications networks, mathematics, physics, engineering, astronomy, geology, operations, research, finance, economics, statistics and business administration.

U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS

All of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and other materials required to be filed with or furnished to the U.S. Securities and Exchange Commission (SEC) on or after January 19, 1995, are available free of charge through the Company’s Internet website, www.csc.com, or through the CSC Investor Relations Office at 1-800-542-3070. As soon as reasonably practical after the Company has electronically filed such material with or furnished it to the SEC, these items can be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Periodic reports, proxy statements, information statements, and other information filed with or furnished by the Company to the SEC are available on the SEC’s website, www.sec.gov, or by calling the SEC at 1-800-SEC-0330 (1-800-732-0330).

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

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

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

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

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Item 1A.
Risk Factors

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

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

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

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

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

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

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

3.
We are currently in negotiations with the United Kingdom's NHS to modify the terms of our contractual relationship. Failure to conclude a satisfactory resolution could materially adversely affect our consolidated financial condition, results of operations and cash flows.

CSC and the NHS are parties to a £2.9 billion (approximately $5.4 billion at originally announced exchange rates) contract under which the Company is developing and deploying an integrated electronic patient records system. As a result of unresolved and continuing discussions between the Company and the NHS concerning possible modifications to such contract, the Company materially impaired its net investment in the contract and recorded a $1.5 billion contract charge as of December 31, 2011. In connection with continuing contract discussions, on

5


March 2, 2012, CSC and the NHS entered into a non-binding letter of intent (the “letter of intent”) pursuant to which the parties agreed to a set of high-level principles regarding contract scope modifications and value reductions and expressed their mutual intention to enter into a binding interim agreement (the “interim agreement”) reflecting such principles. The letter of intent also included a Lorenzo-related standstill agreement. Discussions concerning the interim agreement are still ongoing. The interim agreement, if agreed, will form the basis of an amendment and restatement of the existing NHS contract to be negotiated by the parties. Entry into the interim agreement, and ultimately the amendment, will require U.K. government approvals. There can be no assurance that such approvals will be obtained. While the parties intended to conclude a binding interim agreement by March 30, 2012, as previously disclosed, no agreement has yet been reached. The parties have continued discussions concerning the interim agreement. The previously disclosed Lorenzo related standstill agreement remains in effect through June 1, 2012.

There can be no assurance that CSC and NHS will enter into the interim agreement or any amendment to the existing agreement or if the parties do not enter into the interim agreement or an amendment by June 1, 2012 that the Lorenzo-related standstill arrangement will be extended. Likewise, there can be no assurance that if the interim agreement or any amendment are negotiated and entered into, that such documents as finally negotiated will be on terms favorable to CSC or as provided in the letter of intent.  

A significant delay in entering into the interim agreement or any amendment to the existing agreement or the execution of the interim agreement or any amendment on terms unfavorable to CSC could result in additional costs to CSC, which could be material. Failure to enter into the interim agreement, any amendment or other contract modifications could lead to material litigation between the Company and the NHS, including possible claims for breach of contract. Any of the foregoing circumstances could have a material adverse effect on CSC's consolidated financial position, results of operations and cash flows.

See Note 16 to the Consolidated Financial Statements for further discussion concerning the foregoing matters.

4.
Our largest customer, the U.S. federal government, accounts for a significant portion of our revenue and earnings.

Our NPS segment generated approximately 36% of our revenue for fiscal 2012. While the pipeline for government projects continues to be generally less affected by economic downturns, the U.S. budget deficit, including deficit reduction measures, the cost of ongoing military conflicts, the cost of rebuilding infrastructure as a result of natural disasters, and the costs of other one-time adverse events such as the recent financial industry liquidity crisis, may reduce the U.S. federal government's demand and available funds for information technology projects, adversely impacting our NPS segment and our business. In addition, federal government budget uncertainty has resulted in a delay in government contract awards. Our revenue could be adversely affected by significant changes in federal spending priorities or policies, including:

decreases in spending by federal agencies we support;
changes in funding priorities;
use of government employees for services previously provided by third party contractors;
failure of Congress to pass legislation necessary to fund pending projects or to continue to fund projects that extend over multiple years; or
delays in payment of invoices due to policy changes.

Any of these events could result in reductions to existing contracts and fewer future projects, which could adversely affect our results of operations and financial condition.

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

Federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts. Our exposure to the risks inherent in the government contracting process is material. These risks include government audits of billable contract costs and reimbursable expenses, project funding and requests for equitable adjustment, compliance with government reporting requirements as well as the consequences if improper or illegal activities are discovered.


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

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

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

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

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

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

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

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

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

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

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

We intend to identify strategic acquisitions that will allow us to expand our operations. However, we may be unable to identify attractive candidates or complete acquisitions on terms favorable to us. In addition, our ability to successfully integrate the operations we acquire and leverage these operations to generate revenue and earnings growth will significantly impact future revenue and earnings as well as investor returns. Integrating

7


acquired operations is a significant challenge and there is no assurance that the Company will be able to manage the integrations successfully. Failure to successfully integrate acquired operations may adversely affect our cost structure thereby reducing our margins and return on investment.

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

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

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

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

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

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

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

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

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

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

We are engaged in providing services under contracts with agencies of the U.S. government. These contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. government investigate whether our operations are being conducted in accordance with these requirements.

8


These investigations may include a review of our performance on contracts, pricing practices, cost structure and compliance with applicable laws and regulations. U.S. government investigations of us, whether related to the Company's federal government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. In addition, we could suffer serious reputational harm.

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

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

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

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

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

For fiscal 2012, approximately 38% of our recognized revenues were denominated in currencies other than the U.S. dollar. The exposure to currencies other than the U.S. dollar may impact our results as they are expressed in U.S. dollars. In particular, the uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations and the related European financial restructuring efforts may cause the value of the euro to fluctuate. Currency variations also contribute to variations in sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro with another currency, sales in that country or in Europe generally may be adversely affected until stable exchange rates are established. While currency risk, including exposure to fluctuations in currency exchange rates, is partially mitigated by largely matching costs with revenues in a given currency, our exposure to fluctuations in other currencies against the U.S. dollar increases as revenue in currencies other than the U.S. dollar increase and as more of the services we provide are shifted to lower cost regions of the world. We believe that the percentage of our revenue denominated in currencies other than the U.S. dollar will continue to represent a significant portion of our revenue. Also, we believe that some of our ability to match revenue and expenses in a given currency will decrease as more work is performed at offshore locations.

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

9



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

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

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

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

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

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

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

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

A significant portion of our application outsourcing and software development activities have been shifted to India, and we plan to continue to expand our presence there and in other lower cost locations. As such, we are exposed to the risks inherent to operating in India including (1) a highly competitive labor market for skilled workers which may result in significant increases in labor costs as well as shortages of qualified workers in the future, (2) the possibility that the U.S. federal government or the European Union may enact legislation which may provide significant disincentives to customers to offshore certain of their operations which would reduce the demand for the services we provide in India and may adversely impact our cost structure and profitability. In addition, India has recently experienced civil unrest and acts of terrorism and has been involved in confrontations with Pakistan. If India continues to experience this civil unrest or if its conflicts with Pakistan escalate, our operations in India could be adversely affected.

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

Our contracts are increasingly complex, and in some instances, require that we partner with other parties including software and hardware vendors to provide the complex solutions required by our customers. Our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' delivery schedules. If we or our partners fail to deliver services or products on time,

10


our ability to complete the contract may be adversely affected, which may have a material and adverse impact on our revenue and profitability.

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

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

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

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

The recently proposed international tax provisions and expiring temporary tax provisions may adversely affect our results. The Company has significant operations overseas, and the new proposals may adversely affect our costs and margins. Also, some of these proposals may cause the Company to be less globally competitive as a U.S. tax liability would increase costs of doing business globally.

The India Finance Bill of 2012 (the “Indian Finance Bill”) has been approved by both houses of the Indian Parliament and, if signed into law, could have an adverse material impact on the Company's tax liabilities.

25.
We may be adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.

The credit markets have historically been volatile and therefore it is not possible for the Company to predict the ability of its clients and customers to access short-term financing and other forms of capital. If a disruption in the credit markets were to occur, it could also pose a risk to 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.

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

We enter into foreign currency forward contracts and options with a number of counterparties. As of March 30, 2012, we had outstanding foreign currency forward contracts with a notional value of $2,138 million and outstanding option contracts with a notional value of $785 million. The terms of these contracts are often customized and complex. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur significant losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.



11


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

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

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

28.
Catastrophic events or climate conditions may disrupt CSC's business.

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

Item 1B.
Unresolved Staff Comments

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


12


Item 2.
Properties

Following is a summary of properties owned and leased by CSC or its subsidiaries as of March 30, 2012:

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

 
Computer and General Office
Falls Church, Virginia
 
401,000

 
General Office
Copenhagen, Denmark
 
368,000

 
Computer and General Office
Aldershot, United Kingdom
 
211,000

 
General Office
Newark, Delaware
 
176,000

 
Computer and General Office
Chennai, India
 
168,000

 
Computer and General Office
Daleville, Alabama
 
150,000

 
General Office
Norwich, Connecticut
 
144,000

 
Computer and General Office
Petaling Jaya, Malaysia
 
126,000

 
Computer and General Office
Meriden, Connecticut
 
118,000

 
Computer and General Office
Moorestown, New Jersey
 
99,000

 
General Office
Berkeley Heights, New Jersey
 
95,000

 
Computer and General Office
Maidstone, United Kingdom
 
79,000

 
Computer and General Office
Jacksonville, Illinois
 
60,000

 
General Office
Chesterfield, United Kingdom
 
51,000

 
General Office
Vadodara, India
 
47,000

 
General Office
Singapore, Singapore
 
46,000

 
General Office
Tunbridge Wells, United Kingdom
 
43,000

 
Computer and General Office
Sterling, Virginia
 
41,000

 
General Office
Various other U.S. and foreign locations
 
58,000

 
General Office


13


Properties Leased
 
Approximate
Square Footage
 
General Usage
Washington, D.C. area
 
2,648,000

 
Computer and General Office
India
 
2,492,000

 
General Office
Texas
 
771,000

 
Computer and General Office
Australia & other Pacific Rim locations
 
651,000

 
Computer and General Office
New Jersey
 
607,000

 
General Office
Denmark
 
561,000

 
General Office
Germany
 
536,000

 
General Office
Georgia
 
503,000

 
General Office
United Kingdom
 
465,000

 
Computer and General Office
California
 
422,000

 
General Office
Florida
 
361,000

 
General Office
Michigan
 
255,000

 
General Office
France
 
242,000

 
General Office
New York
 
229,000

 
General Office
Ohio
 
226,000

 
General Office
North Carolina
 
216,000

 
General Office
Illinois
 
212,000

 
General Office
Wisconsin
 
208,000

 
General Office
Alabama
 
174,000

 
General Office
Minnesota
 
172,000

 
General Office
Connecticut
 
166,000

 
Computer and General Office
Canada
 
158,000

 
General Office
Iowa
 
157,000

 
General Office
Delaware
 
154,000

 
General Office
Missouri
 
141,000

 
General Office
Sweden
 
139,000

 
General Office
China
 
129,000

 
General Office
Spain
 
126,000

 
General Office
Kansas
 
114,000

 
General Office
Pennsylvania
 
104,000

 
General Office
Italy
 
101,000

 
General Office
Bulgaria
 
101,000

 
General Office
Various other U.S. and foreign locations
 
1,092,000

 
Computer and General Office

Upon expiration of its leases, the Company expects to obtain renewals or to lease alternative space. Lease expiration dates range from fiscal 2013 through 2028. We believe that all of the properties are well-maintained, suitable and adequate to meet current and anticipated requirements.

Item 3.
Legal Proceedings

The information required by this Item is set forth in Note 19, Commitments & Contingencies of the Notes to the Consolidated Financial Statements under the caption “Contingencies”, contained in Part II - Item 8 of this filing. Such information is incorporated herein by reference and made a part hereof.

Item 4.
Mine Safety Disclosures

Not applicable.


14


Executive Officers of the Registrant

Name
 
Age
 
Year First
Elected as
an Officer
 

Term as an
Officer
 
Position Held With the Registrant
 

Family
Relationship
J. Michael Lawrie
 
58
 
2012
 
Indefinite
 
President and Chief Executive Officer
 
None
Michael J. Mancuso
 
69
 
2008
 
(1)
 
Vice President and Chief Financial Officer(1)
 
None
Peter Allen
 
51
 
2010
 
Indefinite
 
President, Global Sales and Marketing
 
None
James D. Cook
 
59
 
2010
 
Indefinite
 
President, Business Solutions and Services Sector
 
None
Donald G. DeBuck
 
54
 
2001
 
Indefinite
 
Vice President and Controller
 
None
William L. Deckelman, Jr.
 
54
 
2008
 
Indefinite
 
Vice President, General Counsel and Secretary
 
None
Guy Hains
 
60
 
2010
 
Indefinite
 
President, International
 
None
Peter F. Minan
 
50
 
2012
 
Indefinite
 
Vice President, Internal Audit
 
None
Randy E. Phillips
 
54
 
2008
 
Indefinite
 
Vice President, Corporate Development
 
None
James W. Sheaffer
 
66
 
2010
 
Indefinite
 
President, North American Public Sector
 
None

Business Experience of Executive Officers

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

Michael J. Mancuso was elected Vice President and Chief Financial Officer in 2008. In June 2006, after 13 years' service, Mr. Mancuso retired from General Dynamics Corporation, a company engaged in the field of mission-critical information systems and technologies, land and expeditionary combat systems, armaments and munitions, shipbuilding and marine systems and business aviation. Mr. Mancuso had served as Senior Vice President and Chief Financial Officer of General Dynamics from 1994 to his retirement. Before joining General Dynamics, Mr. Mancuso spent seven years with United Technologies, where he served as Vice President and Chief Financial Officer for the Commercial Engine Business of the Pratt & Whitney Group. He joined United Technologies Defense and Space Systems Group in 1986 as Group Financial Manager, moved to the Aerospace and Defense Section in 1989 as Director, Financial Planning and Analysis, and spent three years as Vice President, Finance and Administration for the Hamilton Standard Division. His background also includes 21 years with General Electric. Mr. Mancuso currently serves on the board of directors for The Shaw Group Inc. and SPX Corporation. Mr. Mancuso retired from CSC as of the date of the filing of this Annual Report on Form 10-K.

Peter Allen has served as the Acting President of Managed Services Sector since September 2011, and President of Global Sales and Marketing since February 2010. He also served as President of Strategy and Business Development for Managed Services Sector from October 2009 to February 2010. Mr. Allen was a Managing Partner at Technology Partners International, Inc. (TPI) from July 2001 to October 2009. Mr. Allen served as the Chairman of Data Dimensions Inc. from January 2000 to June 2001 and Chief Executive Officer and President from December 1998 to June 2001.
    
James D. Cook was appointed President, Business Solutions and Services Sector in 2009. Mr. Cook has previously served as CSC’s President, Financial Services Sector from 2001 to 2009. Prior to joining CSC in 1995, Mr. Cook held a wide range of executive positions at Philip Morris, Kraft Foods, General Electric, and Chase Manhattan Bank.


15


Donald G. DeBuck was elected Vice President and Controller in 2001. Mr. DeBuck also served as CSC's interim Chief Financial Officer from January 2008 through November 2008. He was Assistant Corporate Controller from 1998 to 2001, and Vice President of Finance and Administration for CSC's Communications Industry Services organization from 1996 to 1998.

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

Guy Hains was appointed President, CSC International in 2009. Since his joining CSC in 1994, Mr. Hains has had a range of senior operational positions, including serving as Region President for UK, Holland and Scandinavia and as CSC's EMEA President from 2004 to 2009.

Peter F. Minan was elected Vice President, Internal Audit in March 2012. Mr. Minan recently retired from KPMG LLP, an international public accounting and advisory firm, after 28 years. While with KPMG, Mr. Minan held a number leadership positions in audit, accounting and operations. Most recently, he was partner-in-charge for KPMG's U.S. Climate Change and Sustainability Assurance Services and served as global lead audit partner for Fortune 500 multinational companies. Previously, he was national managing partner, U.S. Audit, and partner-in-charge of KPMG's Washington, DC/Baltimore audit practice.

Randy E. Phillips was elected Vice President, Corporate Development in 2008. Prior to joining CSC, Mr. Phillips served as President of China Corporate Development at Alcoa, Inc. since May 2006. From 2003 to 2006 Mr. Phillips served as Director of Corporate Development at Alcoa. Prior to joining Alcoa, he served as Vice President of Corporate Development at TRW Inc. from 1996 to 2003.

James W. Sheaffer was appointed President, North American Public Sector (NPS) in 2005. Mr. Sheaffer has previously served as Vice President for CSC's business area serving the United States Department of Treasury, including the Internal Revenue Service (2003-2005). Prior to joining the Company, Mr. Sheaffer spent 27 years at American Management Systems Inc, where he held a variety of senior executive positions.

(1) 
Paul N. Saleh has been appointed as Vice President and Chief Financial Officer.  Mr. Saleh joined CSC on May 23, 2012 and his service as the Company's Chief Financial Officer commenced upon the retirement of Michael J. Mancuso. Prior to joining the Company, Mr. Saleh, 55, served as the Chief Financial Officer of Gannett Co. Prior to his tenure at Gannett Co., from 2008 to 2010, Mr. Saleh was a Managing Partner at Menza Partners, an operational and financial advisory group focusing on media, telecommunications, and technology industries.  Prior to that, he served as Chief Financial Officer of Nextel Communications from 2001 to 2007 and as Interim Chief Executive Officer of Sprint Nextel until 2008.  He served as Senior Vice President and Chief Financial Officer of Walt Disney International where he held various other senior positions from 1997 to 2001. 

16


PART II

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

(a)
Holders

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

As of May 4, 2012, the number of registered shareholders of Computer Sciences Corporation’s common stock was 7,044. The table shows the high and low sales prices of the Company’s common stock as reported on the composite tape of the New York Stock Exchange for each quarter during the last two fiscal years.
 
 
2012
 
2011
Fiscal Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
51.43

 
$
36.30

 
$
55.86

 
$
44.04

2nd
 
38.41

 
25.60

 
47.18

 
39.61

3rd
 
33.12

 
22.80

 
50.01

 
44.44

4th
 
33.80

 
23.27

 
56.61

 
45.45


Cash dividends declared on our common stock for each quarter of fiscal 2012 and fiscal 2011 are included in Selected Quarterly Financial Data (Unaudited) of this Annual Report on Form 10-K. We expect to return excess cash flow to our stockholders from time to time through our common stock repurchase program described below or the payment of dividends. However, there can be no assurance that share repurchases will occur or future dividends will be declared or paid. Our share repurchase program and the declaration and payment of future dividends, the amount of any such share repurchases or dividends, and the establishment of record and payment dates for dividends, if any, are subject to final determination by our Board of Directors after its review of the then current strategy and financial performance and position, among other things.

(b) Purchases of Equity Securities

The following table provides information on a monthly basis for the fourth quarter ended March 30, 2012, 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
 
Approximate
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or Programs (2)
December 31, 2011 to January 27, 2012
 
6,998
 
$24.16
 
 
$935,013,016
January 28, 2012 to February 24, 2012
 
1,285
 
$32.96
 
 
$935,013,016
February 25, 2012 to March 30, 2012
 
2,959
 
$31.55
 
 
$935,013,016

(1)
No shares of common stock in the quarter ended March 30, 2012 were tendered by employees in lieu of cash due to the Company in connection with the exercise of stock options. The Company accepted 11,242 shares of its common stock in the quarter ended March 30, 2012 from employees in lieu of cash due to the Company in connection with the issuance of shares of common stock related to vested RSUs. Such shares of common stock are stated at cost and held as treasury shares.

(2)
On December 13, 2010, the Company publicly announced that its board of directors approved a new share repurchase program authorizing up to $1 billion in share repurchases of the Company’s outstanding common stock. CSC expects to implement the program through purchases made in open market transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, and applicable state and federal legal requirements. Share repurchases will be funded with available cash. The timing, volume, and nature of share repurchases will be at the discretion of management, and may be suspended or discontinued at any time. CSC’s Board has not established an end date for the new repurchase program. The approximate amount for which shares may yet be purchased under this program at March 30, 2012 is $935 million.

The Company did not repurchase any shares of its common stock in the fiscal quarter ended March 30, 2012.

17



(c)
Performance Graph

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


CSC Total Shareholder Return
(Period Ended March 30, 2012)




Indexed Return Chart (2007 = 100)
 
Return 2008
 
Return 2009
 
Return 2010
 
Return 2011
 
Return 2012
 
CAGR
CSC Common Stock
-21.73
 %
 
-1.59
 %
 
35.12
%
 
-7.61
 %
 
-37.74
 %
 
-9.74
 %
S&P 500 Index
-5.62
 %
 
-34.23
 %
 
42.85
%
 
15.36
 %
 
8.00
 %
 
2.01
 %
S&P North American Technology Services Index
-10.81
 %
 
-16.29
 %
 
38.71
%
 
19.67
 %
 
15.35
 %
 
7.40
 %

Assumes $100 invested on March 31, 2007, in Computer Sciences Corporation Common Stock, the S&P 500 Index, and the S&P North American Technology Services Index, formerly the Goldman Sachs Technology Services Index. Indexed amounts and return percentages follow CSC fiscal years.

(d)
Equity Compensation Plans

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


18


Item 6.
Selected Financial Data

COMPUTER SCIENCES CORPORATION

 
 
Five Year Review
Amounts in millions, except per share amounts
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
 
April 3, 2009
 
March 28, 2008
Total assets
 
$
11,189

 
$
16,120

 
$
16,455

 
$
15,619

 
$
15,880

Debt
 
 
 
 
 
 
 
 
 
 
Long-term, net of current maturities
 
1,486

 
2,409

 
3,669

 
4,173

 
2,635

Short-term
 
43

 
29

 
21

 
32

 
310

Current maturities
 
1,211

 
141

 
54

 
30

 
529

Total
 
2,740

 
2,579

 
3,744

 
4,235

 
3,474

Stockholders’ equity
 
2,834

 
7,560

 
6,508

 
5,618

 
5,621

Working capital
 
347

 
3,379

 
4,300

 
3,691

 
1,333

Property and equipment
 
 
 
 
 
 
 
 
 
 
At cost
 
6,144

 
6,349

 
5,972

 
5,770

 
6,260

Accumulated depreciation and amortization
 
3,703

 
3,853

 
3,731

 
3,417

 
3,495

Property and equipment, net
 
$
2,441

 
$
2,496

 
$
2,241

 
$
2,353

 
$
2,765

Current assets to current liabilities
 
1.1:1

 
1.8:1

 
2.0:1

 
1.9:1

 
1.2:1

Debt to total capitalization
 
49.2
%
 
25.4
%
 
36.5
%
 
43.0
%
 
38.2
%
 
 
 
 
 
 
 
 
 
 
 
Book value per share
 
$
18.28

 
$
48.94

 
$
42.27

 
$
37.08

 
$
37.19

Stock price range (high)
 
$
51.43

 
$
56.61

 
$
58.36

 
$
50.52

 
$
63.76

Stock price range (low)
 
$
22.80

 
$
39.61

 
$
35.95

 
$
23.93

 
$
36.91




19



 
 
Five Year Review
 
 
Fiscal Year
Amounts in millions, except per-share amount
 
2012(4)
 
2011(4)
 
2010(4)
 
2009
 
2008
Revenues
 
$
15,877

 
$
16,042

 
$
15,921

 
$
16,432

 
$
16,190

Costs of services (excludes depreciation and amortization, contract charge, settlement charge and restructuring costs of $137 (2012))
 
13,406

 
12,925

 
12,618

 
13,000

 
12,883

Costs of services – specified contract charge (excludes amount charged to revenue of $204)(1)
 
1,281

 

 

 

 

Costs of services – settlement charge (excludes amount charged to revenue of $42)(2)
 
227

 

 

 

 

Selling, general and administrative
 
1,141

 
965

 
981

 
1,071

 
962

Depreciation and amortization
 
1,152

 
1,073

 
1,095

 
1,179

 
1,192

Restructuring costs
 
140

 

 

 

 
134

Goodwill impairment(3)(6)
 
2,745

 

 

 
4

 
-

Interest, net
 
138

 
131

 
225

 
220

 
150

Special items(7)
 

 

 

 

 
22

Other (income) expense, net
 
(6
)
 
(20
)
 
(20
)
 
8

 
(58
)
Total costs and expenses
 
20,224

 
15,074

 
14,899

 
15,482

 
15,285

(Loss) income from continuing operations before taxes
 
(4,347
)
 
968

 
1,022

 
950

 
905

Taxes on income (benefit)
 
(121
)
 
243

 
192

 
(173
)
 
367

(Loss) income from continuing operations
 
(4,226
)
 
725

 
830

 
950

 
905

Income (loss) from discontinued operations
 
1

 
34

 
4

 
(173
)
 
367

Net (loss) income
 
(4,225
)
 
759

 
834

 
1,123

 
559

Less:
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest, net of tax
 
17

 
19

 
17

 
8

 
14

Net (loss) income attributable to CSC common shareholders
 
$
(4,242
)
 
$
740

 
$
817

 
$
1,115

 
$
545

Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(27.38
)
 
$
4.57

 
$
5.35

 
$
7.37

 
$
3.13

Discontinued operations
 
0.01

 
0.22

 
0.01

 
-

 
0.13

 
 
$
(27.37
)
 
$
4.79

 
$
5.36

 
$
7.37

 
$
3.26

Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(27.38
)
 
$
4.51

 
$
5.27

 
$
7.31

 
$
3.08

Discontinued operations
 
0.01

 
0.22

 
0.01

 
-

 
0.12

 
 
$
(27.37
)
 
$
4.73

 
$
5.28

 
$
7.31

 
$
3.20

 
 
 
 
 
 
 
 
 
 
 
Cash dividend per common share(5)
 
$
0.80

 
$
0.70

 
$

 
$

 
$

Average common shares outstanding
 
155.012

 
154.488

 
152.462

 
151.388

 
167.233

Average common shares outstanding assuming dilution
 
155.012

 
156.605

 
154.754

 
152.614

 
170.168


(1) 
Fiscal 2012 specified contract charge related to the Company’s contract with the U.K. National Health Service. See Note 16 of the Consolidated Financial Statements.
(2) 
Fiscal 2012 settlement charge related to the contract settlement with the Federal Government. See Note 17 of the Consolidated Financial Statements.
(3) 
Fiscal 2012 goodwill impairment charge related to MSS segment and two of the reporting units in the BSS segment. See Note 9 of the Consolidated Financial Statements.
(4) 
The Company recorded various out of period adjustments in fiscal 2012, 2011 and 2010 that should have been recorded in prior fiscal years. See Note 2 of the Consolidated Financial Statements.
(5) 
In Fiscal 2011, the Company implemented a regular quarterly dividend.
(6) 
Fiscal 2009 goodwill impairment charge related to an Asian reporting unit in the BSS segment.
(7) 
Fiscal 2008 special items represent charges for a global restructuring and for the retirement of the Company’s Chairman and Chief Executive Officer.

20


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

General

The following discussion and analysis provides information management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. This discussion should be read in conjunction with the Company's consolidated financial statements and associated notes as of and for the year ended March 30, 2012.

There are three primary objectives of this discussion:

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

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

Overview - includes a description of the Company's business, how it earns revenue and generates cash, as well as a discussion of the economic and industry factors, key business drivers, key performance indicators and fiscal 2012 highlights.

Results of Operations - discusses year-over-year changes to operating results for fiscal 2010 to 2012, describing the factors affecting revenue on a consolidated and reportable segment basis, including new contracts, acquisitions and divestitures and currency impacts, and also by describing the factors affecting changes in the major cost and expense categories.

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

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

Overview

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

The Company's reportable segments are as follows:

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

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

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

For additional information regarding our business segments, see Note 15 of the Consolidated Financial Statements.


21


Economic and Industry Factors

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

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

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

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

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

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

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

Business Drivers

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

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

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

control costs, particularly labor costs, subcontractor expenses and overhead costs including healthcare, pension

22


and general and administrative costs,
anticipate headcount needs to avoid staff shortages or excesses,
accurately estimate various factors incorporated in contract bids and proposals,
develop offshore capabilities and migrate compatible service offerings offshore, and
manage foreign currency fluctuations related to international operations.

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

timely management of receivables and payables,
investment opportunities available, particularly related to business acquisitions, dispositions and large outsourcing contracts, and
the ability to efficiently manage capital including debt and equity instruments.

Key Performance Indicators

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

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

Revenue growth: Year-over-year revenues tend to vary less than new contract wins, and reflect performance on both new and existing contracts. With a wide array of services offered, the Company is able to pursue additional work from existing customers. In addition, incremental increases in revenue will not necessarily result in linear increases in costs, particularly overhead and other indirect costs, thus potentially improving profit margins. Foreign currency fluctuations also impact revenue growth.

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

Cash flow: Primary drivers of the Company's cash flow are earnings provided by the Company's operations and the use of capital to generate those earnings. Also contributing to short term cash flow results are movements in current asset and liability balances. The Company also regularly reviews the U.S. Generally Accepted Accounting Principles (GAAP) cash flow measurements of operating, investing and financing cash flows, as well as the non-GAAP measure free cash flow.


23


Fiscal 2012 Highlights

Fiscal 2012 results were adversely impacted by certain large adjustments that reduced revenue and increased costs. These significant adjustments are listed below and described in detail later in this section and also in the Results of Operations section.
 
 
Impact of Adjustment
(Amounts in millions)
 
 Favorable/(Unfavorable)
 
 
Revenues
 
Costs
 
Loss from continuing operations before taxes
Specified contract charge
 
$
(204
)
 
$
(1,281
)
 
$
(1,485
)
Settlement charge
 
(42
)
 
(227
)
 
(269
)
Restructuring costs
 

 
(140
)
 
(140
)
Goodwill impairment
 

 
(2,745
)
 
(2,745
)
Asset impairments
 

 
(156
)
 
(156
)
Net adjustments on contracts accounted for under the percentage of completion method
 
(83
)
 
(148
)
 
(231
)
Legal and other fees on SEC and Audit Committee investigations
 

 
(67
)
 
(67
)
Transaction and transition costs associated with acquisition of iSOFT
 

 
(23
)
 
(23
)

The key operating results for fiscal 2012 include:

Revenues decreased $165 million or 1.0%, and decreased 2.9% on a constant currency basis(1). Of the 2.9% constant currency decrease, 1.5% was due to the reduction in revenue resulting from the charge associated with a U.K.’s National Health Service (NHS) contract and the settlement of claims associated with a U.S. Government contract. The revenue decrease was partially offset by an increase in revenue of 1.7% from the fiscal 2012 and fiscal 2011 acquisitions.

Loss from continuing operations before taxes was $4,347 million, compared to income from continuing operations before taxes of $968 million in fiscal 2011, a decrease of $5,315 million, or 549.1%.

Operating income(2) decreased 202.8% to a loss of $1,251 million as compared to operating income of $1,217 million in fiscal 2011, and operating income margins decreased to (7.9)% from 7.6% in the fiscal 2011.

Net loss attributable to CSC common shareholders was $4,242 million, a decrease of $4,982 million, or 673.2%, as compared to the prior year.

Diluted earnings (loss) per share (EPS) was $(27.37) for fiscal 2012, a decrease of $32.10 as compared to the prior year. For fiscal 2012, diluted EPS was comprised of $(27.38) from continuing operations and $0.01 from discontinued operations, as compared to $4.51 and $0.22, respectively, in the prior year.

During the second quarter, the Company reached a definitive settlement agreement with the U.S. government in its contract claims asserted under the Contract Disputes Act of 1978 (CDA), and recorded a pre-tax charge of $269 million, which included a $42 million reduction of revenue. The charge reflected the write-down of claim related assets (unbilled receivables and deferred costs), offset by cash received of $277 million and the estimated fair value of a contract extension of $45 million.

During the third quarter, the Company recorded a charge associated with the U.K. NHS contract of $1,485 million, which included a $204 million reduction of revenue.

The Company recorded a goodwill impairment charge of $2,745 million during fiscal 2012. In the second quarter, the Company recorded an estimated goodwill impairment charge of $2,685 million, of which $2,074 million related to the MSS segment and $611 million related to the BSS segment. During the third quarter, the Company recorded a $60 million goodwill impairment, all of which related to the BSS segment.

24



During the fourth quarter, the Company recorded restructuring costs of $140 million, of which $108 million is related to the MSS segment, $31 million is related to the BSS segment, and $1 million is related to the NPS segment.

During fiscal 2012, the Company recorded $231 million of net adverse adjustments on long-term contracts accounted for under the percentage-of-completion method and $156 million of impairments of assets related primarily to outsourcing contracts with service delivery issues.

The Company announced contract awards of $19.3 billion, including new MSS segment awards of $9.5 billion, NPS segment awards of $6.0 billion, and BSS segment awards of $3.8 billion. Total backlog(3) at the end of fiscal 2012 was $36.4 billion, an increase of $0.4 billion as compared to the backlog at the end of fiscal 2011 of $36.0 billion. Of the total $36.4 billion backlog, $10.2 billion is expected to be realized as revenue in fiscal 2013. Of the total $36.4 billion, $12.3 billion is not yet funded.

Days Sales Outstanding (DSO)(4) was 70 days at March 30, 2012, an improvement from 79 days at April 1, 2011.

Debt-to-total capitalization ratio(5) was 49.2% at year-end, an increase of 23.8% points from 25.4% at fiscal 2011 year end, reflecting the current year net loss attributable to CSC common shareholders of $4,242 million with corresponding impact on CSC stockholders' equity.

Cash provided by operating activities was $1,176 million, as compared to $1,564 million during fiscal 2011.

Cash used in investing activities was $1,308 million, as compared to $892 million during fiscal 2011.

Cash used in financing activities was $581 million, as compared to $1,676 million during fiscal 2011.

Free cash flow(6) of $59 million in fiscal 2012 was down from $629 million in fiscal 2011, driven primarily by the Company's operating performance and net cash outflows associated with a U.K. NHS contract, partially offset by cash received from the U.S. government upon settlement of contract claims.

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

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

 
 
Twelve Months Ended
(Amounts in millions)
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
Operating (loss) income
 
$
(1,251
)
 
$
1,217

 
$
1,395

Corporate G&A
 
(219
)
 
(138
)
 
(168
)
Interest expense
 
(176
)
 
(168
)
 
(252
)
Interest Income
 
38

 
37

 
27

Goodwill impairment
 
(2,745
)
 

 

Other income (expense), net
 
6

 
20

 
20

(Loss) income from continuing operations before taxes
 
$
(4,347
)
 
$
968

 
$
1,022


(3) 
Backlog represents total estimated contract value of predominantly long-term contracts, based on customer commitments that the Company believes to be firm. Backlog value is based on contract commitments, management’s judgment and assumptions about volume of services, availability of customer funding and other factors. Backlog estimates for government contracts include both the funded and unfunded portions

25


and all of the option periods. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

For NPS, announced award values for competitive indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. Announced values for non-competitive IDIQ awards represent management’s estimate at the award date. Business awards for MSS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. BSS award values are based on firm commitments. Beginning in fiscal 2012, we revised our estimation of BSS awards to account for larger business solution and service awards. Prior period awards and backlog have been revised to conform to the current year presentation.

(4) 
DSO is calculated as total receivables at the fiscal period end divided by revenue-per-day. Revenue-per-day equals total revenues divided by the number of days in the fiscal period. Total receivables includes unbilled receivables but excludes tax receivables and long-term receivables.

(5) 
Debt-to-total capitalization ratio is defined as total current and long-term debt divided by total debt and equity, including noncontrolling interest.
 
(6) 
Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. We define free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities) and (3) payments on capital leases and other long-term asset financings.

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

A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:

 
 
Twelve Months Ended
(Amounts in millions)
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
Free cash flow
 
$
59

 
$
629

 
$
811

Net cash used in investing activities
 
1,308

 
892

 
790

Acquisitions, net of cash acquired
 
(374
)
 
(158
)
 
(5
)
Business dispositions
 
2

 
119

 
14

Short-term investments
 
4

 
(9
)
 

Payments on capital leases and other long-term asset financings
 
177

 
91

 
33

Net cash provided by operating activities
 
$
1,176

 
$
1,564

 
$
1,643

Net cash used in investing activities
 
$
(1,308
)
 
$
(892
)
 
$
(790
)
Net cash used in provided by financing activities
 
$
(581
)
 
$
(1,676
)
 
$
(487
)

The Company has developed a broad, long-term revenue base which includes customers spread across multiple industries and geographic regions as well as service lines. A significant amount of CSC’s revenue is derived from long-term contracts including information technology outsourcing, build and maintain engagements and U.S. federal government engagements. This provides the Company with a base of revenue during periods when contract awards may slow or the market for certain services softens.

The Company’s significant wins and scope extensions during fiscal 2012 included the following:

NPS:
U.S. Army ($1.0 billion)
State of Maryland ($297 million)
U.S. Citizenship and Immigration Services ($291 million)

MSS:
BAE Systems ($800 million)
Educational Testing Service (over $200 million)

BSS:
Financial services industry clients ($1.6 billion)
Technology and consumer services industry clients ($863 million)

26


Health services industry clients ($497 million)

Cash and cash equivalents at March 30, 2012, was approximately $1.1 billion, down from $1.8 billion at April 1, 2011, a $744 million decrease. The decrease was a result of financing and investing cash outflows of $581 million and $1,308 million, respectively, during fiscal 2012, offset by operating cash inflows of $1,176 million. Net loss adjusted for non-cash charges drove the operating cash inflows, higher purchases of property and equipment and business acquisitions drove the investing cash outflows, and a repayment on the Company’s credit facility drove the financing outflows.

Cash and cash equivalents at April 1, 2011, was approximately $1.8 billion, down from $2.8 billion at April 2, 2010, a $947 million decrease. The decrease was a result of financing and investing cash outflows of $1.7 billion cash and $892 million, respectively, during fiscal 2011, offset by operating cash inflows of $1.6 billion. Net income drove the operating cash inflows, higher purchases of property and equipment and business acquisitions drove the investing cash outflows, and a repayment on the Company’s credit facility drove the financing outflows.

Results of Operations
 
Revenues

Revenues for the NPS, MSS, and BSS segments for fiscal 2012, fiscal 2011, and fiscal 2010 are as follows:

 
 
Twelve Months Ended
 
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
(Amounts in millions)
 
Amount
 
Percent
Change
 
Amount
 
Percent
Change
 
Amount
NPS
 
$
5,703

 
(5.0
)%
 
$
6,002

 
(1.5
)%
 
$
6,095

MSS
 
6,618

 
0.5

 
6,583

 
2.0

 
6,451

BSS
 
3,677

 
3.0

 
3,570

 
2.5

 
3,483

Corporate
 
13

 
 
 
14

 


 
17

Subtotal
 
16,011

 
(1.0
)
 
16,169

 
0.8

 
16,046

Eliminations
 
(134
)
 
 
 
(127
)
 


 
(125
)
Total Revenue
 
$
15,877

 
(1.0
)%
 
$
16,042

 
0.8
 %
 
$
15,921


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

Twelve Months Ended
March 30, 2012 vs. April 1, 2011
 
Acquisitions
 
Approximate
Impact of
Currency
Fluctuations
 
Net Internal
Growth
 
Total
NPS
 
0.6
%
 

 
(5.6
)%
 
(5.0
)%
MSS
 
0.9

 
2.7
 %
 
(3.1
)
 
0.5

BSS
 
4.8

 
3.5

 
(5.3
)
 
3.0

Cumulative Net Percentage
 
1.7
%
 
1.9
 %
 
(4.6
)%
 
(1.0
)%
 
 
 
 
 
 
 
 
 
Twelve Months Ended
April 1, 2011 vs. April 2, 2010
 
Acquisitions
 
Approximate
Impact of
Currency Fluctuations
 
Net Internal
Growth
 
Total
NPS
 
0.2
%
 

 
(1.7
)%
 
(1.5
)%
MSS
 

 
(0.1
)%
 
2.1

 
2.0

BSS
 
0.9

 
(0.2
)
 
1.8

 
2.5

Cumulative Net Percentage
 
0.3
%
 
(0.1
)%
 
0.6
 %
 
0.8
 %



27


North American Public Sector

The Company’s North American Public Sector segment revenues were derived from the following sources:

 
 
Twelve Months Ended
 
 
March 30, 2012
 
April 1, 2011
 
April 2, 2010
Dollars in millions
 
Amount
 
Percent
Change
 
Amount
 
Percent
Change
 
Amount
Department of Defense(1)
 
$
3,863

 
(10.0
)%
 
$
4,290

 
(2.8
)%
 
$
4,414

Civil agencies(1)
 
1,618

 
7.3

 
1,508

 
2.4

 
1,473

Other (2)
 
222

 
8.8

 
204

 
(1.9
)
 
208

Total
 
$
5,703

 
(5.0
)%
 
$
6,002

 
(1.5
)%
 
$
6,095


(1) 
Certain fiscal 2011 and fiscal 2010 amounts were reclassified from Department of Defense to Civil Agencies to conform to the current year presentation.
(2) 
Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment.

Fiscal 2012

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

The decreases in revenue on DOD contracts, primarily with the U.S. Army and the U.S. Air Force, were due to a combination of completion of existing task orders, a contract termination and net reduction in scope and tasking on other existing contracts. In addition, revenue was adversely impacted by the contract claims settlement with the U.S. Federal Government in the second quarter of $42 million (see Note 17 to the Consolidated Financial Statements) and by a $14 million adjustment on a contract with the U.S. Air Force accounted for under the percentage of completion method due to a stop work order.

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

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

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

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

Fiscal 2011

NPS segment revenue decreased 1.5%, or $93 million, for fiscal 2011 as compared to fiscal 2010. Excluding two small acquisitions made at the end of the second and third quarters of fiscal 2011, revenue decreased 1.7%. DOD revenue

28


declined slightly despite higher revenues on several programs. The increases were offset by contract completions, the adverse effects from reduced tasking on two U.S. Army contracts, as well as from the impact of a one-time, $65 million revenue benefit in fiscal 2010 from a claim settlement that did not repeat in fiscal 2011. Civil declines came primarily from contracts with the DHHS, the Department of Transportation and the EPA that either ended or experienced reductions in customer spending.

One factor affecting the overall year-over-year revenue decline was an ongoing uncertainty among many government customers about their fiscal budgets and potential budget cuts due to ongoing congressional debates and temporary continuing resolutions on the current budget. Also impacting the year-over-year change is the increasing trend in contested awards, thereby slowing the ultimate start date of many contracts. For example, CSC won a significant award with the Transportation Security Administration in fiscal 2010 but protests resulted in numerous delays of up to ten months. Another factor affecting many government contractors is the recent renewed government initiative to insource personnel rather than use external providers. The impact was not significant on CSC’s results given the nature of the types of services we provide, and we expect a diminished impact in the future as government agencies revisit the costs and benefits of such an initiative.

During fiscal 2011, the Company announced federal contract awards with a total value of $5.5 billion compared to $7.1 billion during fiscal 2010.

Managed Services Sector

Fiscal 2012

MSS segment revenue increased $35 million, or 0.5% as compared to fiscal 2011. In constant currency, revenue decreased $140 million, or 2.2%. The foreign currency impact was primarily due to the movement in the U.S. dollar against the Australian Dollar, the British Pound, the Euro and the Swiss Franc. MSS' second quarter acquisition of AppLabs (see Note 4 to the Consolidated Financial Statements) provided revenue of $60 million, or 0.9% of the revenue growth.

Excluding the impact of foreign currency effects and the acquisition, fiscal 2012 net internal revenue decreased $200 million, or 3.1% as compared to the prior year. This decrease was primarily due to net volume and scope reductions of approximately $140 million and contract conclusions and terminations of approximately $270 million, partially offset by revenue from new contracts of approximately $200 million. In addition, revenue was impacted by certain one-time adjustments, including adverse adjustments on long-term contracts accounted for under the percentage-of-completion method of $48 million and missed service level metrics of $10 million due to delays on certain outsourcing contracts, partially offset by a favorable adjustment on termination of a contract of $15 million. The MSS year-over-year revenue trend was also adversely impacted by out of period adjustments. The out of period revenue decreases recorded in fiscal 2012 and fiscal 2011 were $7 million and $33 million, respectively (see Notes 2 and 15 to the Consolidated Financial Statements).

During fiscal 2012, the Company announced contract awards with a total value of $9.5 billion compared to $5.0 billion during fiscal 2011. Fiscal 2012 new contracts awards include $5.1 billion of successful recompetes.

Fiscal 2011

MSS segment revenue grew $132 million, or 2.0% in fiscal 2011, and increased 2.1% excluding foreign currency effects. The overall MSS growth was primarily from a combination of new client engagements won in fiscal 2010 and 2011, which generated approximately $521 million revenue in fiscal 2011, as well as growth on existing accounts which contributed $297 million in year over year growth. Partly offsetting the increases were contract conclusions and terminations of $272 million plus volume and scope reductions on existing accounts totaling $384 million.

During fiscal 2011, the Company announced contract awards with a total value of $5.0 billion compared to $8.7 billion during fiscal 2010.


29


Business Solutions & Services

Fiscal 2012

BSS segment revenue increased $107 million, or 3.0% as compared to fiscal 2011. In constant currency, revenue decreased $18 million, or 0.5%. The foreign currency impact was primarily due to the movement in the U.S. dollar against the Australian Dollar, the British Pound and the Euro. The acquisition of iSOFT and the other fiscal 2012 and fiscal 2011 acquisitions provided $171 million, or 4.8% of the year-over-year revenue increase. Excluding the effect of foreign currency movements and acquisitions, BSS fiscal 2012 revenue decreased $189 million, or 5.3% over the prior year.

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

During fiscal 2012, BSS had contract awards of $3.8 billion compared to $3.5 billion in fiscal 2011.

Fiscal 2011

BSS segment revenue increased $87 million, or 2.5% in fiscal 2011, and increased 2.7% excluding foreign currency effects. Acquisitions accounted for approximately $29 million or 0.9% of the year-over-year increase. The remaining growth resulted primarily from increases in the BSS consulting business in financial services, which grew $58 million year over year, and from other consulting operations which were up $30 million, excluding acquisitions. Additional growth came from an Asia hardware resale business and an Australian IT staffing operation which contributed $23 million. Offsetting the increases was a revenue decline on the NHS by $46 million due to delays in milestone deliverables.

The financial services group benefited from increased business process outsourcing services as well as from higher software and project-related services. Other than healthcare-related operations, other consulting operations grew $60 million and were up by double digit rates in select regions, including Europe’s western region, Brazil and Australia, and were also up slightly in the U.S., while down in other regions across Europe. Healthcare-related consulting operations were down $30 million, however, primarily due to the conclusion of a major contract with a large insurance company and continued uncertainty in the U.S. marketplace regarding healthcare reform.

During fiscal 2011, BSS had contract awards of $3.5 billion compared to $3.4 billion in fiscal 2010.


30


Costs and Expenses

The Company’s total costs and expenses were as follows:
 
 
Twelve Months Ended
 
Percentage of Revenue
Dollars in millions
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Costs of services (excludes depreciation and amortization, specified contract charge, settlement charge and restructuring costs of $137 (2012))
 
$
13,406

 
$
12,925

 
$
12,618

 
84.4
 %
 
80.6
 %
 
79.2
 %
Cost of services – specified contract charge (excludes amount charged to revenue of $204)
 
1,281

 

 

 
8.1

 

 

Cost of services – settlement charge (excludes amount charged to revenue of $42)
 
227

 

 

 
1.4

 

 

Selling, general and administrative (excludes restructuring costs of $3 (2012))
 
1,141

 
965

 
981

 
7.2

 
6.0

 
6.2

Depreciation and amortization
 
1,152

 
1,073

 
1,095

 
7.3

 
6.7

 
6.9

Restructuring costs
 
140

 

 

 
0.9

 

 

Goodwill impairment
 
2,745

 

 

 
17.2

 

 

Interest expense, net
 
138

 
131

 
225

 
0.9

 
0.8

 
1.4

Other (income) expense, net
 
(6
)
 
(20
)
 
(20
)
 

 
(0.1
)
 
(0.1
)
Total
 
$
20,224

 
$
15,074

 
$
14,899

 
127.4
 %
 
94.0
 %
 
93.6
 %

Fiscal 2012

Total costs and expenses as a percentage of revenue for fiscal 2012 were 127.4%, up from 94.0% in fiscal 2011. The increase in the total costs and expenses ratio was primarily due to the goodwill impairment charge, the specified contract charge and the settlement charge, all of which were recorded prior to the fourth quarter, and the restructuring costs recorded during the fourth quarter of fiscal 2012. The total costs and expenses ratio was also impacted by certain out-of-period adjustments recorded during fiscal 2012, 2011 and 2010, as described below.

Cost of services, excluding depreciation and amortization, the specified contract charge, the settlement charge and the fourth quarter restructuring costs of $137 million, as a percentage of revenue increased 3.8% points to 84.4% from 80.6% in fiscal 2011, primarily as a result of certain adverse fourth quarter adjustments recorded by MSS as further discussed below. Selling, general and administrative expenses, excluding restructuring charges of $3 million, as a percentage of revenue increased 1.2 percentage points primarily due to the legal fees associated with the SEC and the Audit Committee's investigations of $67 million. Depreciation and amortization as a percentage of revenue increased 0.6 percentage points primarily due to higher capital expenditures on existing and new contracts.

Fiscal 2011

Costs and expenses as a percentage of revenue for fiscal 2011 was 94.0%, up from 93.6% in fiscal 2010. Cost of services rose 1.4 percentage points as a result of adverse adjustments in MSS and BSS including out of period adjustments primarily in MSS as further discussed below. Selling, general and administrative expense ratio and depreciation and amortization ratio both improved 0.2 percentage points as a result of ongoing cost and capital expenditure reduction initiatives. Other income of $20 million was primarily due to equity in earnings of unconsolidated affiliates and other miscellaneous gains.


31


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

Background

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

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

The Audit Committee’s investigation has been expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (iii) certain of the Company’s accounting practices that involve the percentage of completion accounting method, including the Company’s contract with NHS. In the course of the Audit Committee's expanded investigation, accounting errors and irregularities have been identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or resigned. All of these investigative activities are ongoing.

Any out of period adjustments identified, including items that self corrected within a fiscal year, by the Company to date are hereinafter identified in Note 2 to the Consolidated Financial Statements.

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

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

During fiscal 2011, the Company recorded $52 million of pre-tax adjustments that should have been recorded in prior fiscal years. The total out of period adjustments recorded in fiscal 2011 were comprised of $92 million of charges reducing income from continuing operations before taxes originating out of the Company’s MSS operations in the Nordic region,

32


and $40 million of adjustments increasing income from continuing operations before taxes, with $36 million of the $40 million within MSS.

The Company recorded $79 million of out of period adjustments in fiscal 2012, which included $13 million of charges in the Nordic region, $23 million of charges in the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's BSS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s MSS and BSS segments, with $37 million and $26 million within MSS and BSS, respectively.

Certain additional items have been identified but not yet recorded related to the NHS contract that could have an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior fiscal years. Management does not believe that the effect of these additional items is material to the Company's financial statements. However, the investigation into these additional items is ongoing, and the amount could change and the allocation across years is likely to change.

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments is attributable to the following prior fiscal years:
 
 
Increase/(Decrease)
(Amounts in millions)
 
Fiscal 2011 Adjustments
 
Fiscal 2012 Adjustments
 
Total Adjustments
Fiscal 2012
 
$

 
$
79

 
$
79

Fiscal 2011
 
52

 
(29
)
 
23

Fiscal 2010
 
(48
)
 
(9
)
 
(57
)
Fiscal 2009 (unaudited)
 
(3
)
 
(27
)
 
(30
)
Prior fiscal years (unaudited)
 
(1
)
 
(14
)
 
(15
)

Nordic Region

As noted above, during fiscal 2011, the Company commenced an investigation into accounting irregularities in the Nordic Region. Based upon the Company's investigation, review of the underlying documentation for certain transactions and balances, review of contract documentation and discussions with Nordic personnel, the Company attributes the majority of the $92 million pre-tax adjustments recorded in the Nordic region in fiscal 2011 to accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries. The Company attributes the $13 million in pre-tax adjustments recorded in the Nordic region in fiscal 2012 to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than a $1 million operating lease adjustment noted in the first quarter of fiscal 2012 which was a refinement of an error previously corrected and reported in fiscal 2011.

Australia

In the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities have been identified. As a result, certain personnel in Australia have been reprimanded, suspended, terminated and/or resigned. Based upon the information developed to date, and the Company’s assessment of the same, the Company has identified and recorded during fiscal 2012, $23 million of adjustments reducing income from continuing operations before taxes relating to its operations in Australia. Such adjustments have been categorized as either intentional accounting irregularities (“intentional irregularities”) or other accounting errors (“Other Errors”). Other accounting errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation. The impact of the adjustments on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:

33


 
 
Increase/(Decrease)
(Amounts in millions)
 
FY08 &
Prior (unaudited)
 
FY09 (unaudited)
 
FY10
 
FY11
 
Total
Intentional irregularities
 
$
10

 
$
(7
)
 
$
(4
)
 
$
1

 
$

Other Errors
 
(7
)
 
(16
)
 
3

 
(3
)
 
(23
)
 
 
$
3

 
$
(23
)
 
$
(1
)
 
$
(2
)
 
$
(23
)

Americas Outsourcing

In the course of the independent investigation of Americas Outsourcing accounting practices, accounting conventions used by Americas Outsourcing relating to intraperiod cost allocations were determined to be unintentional accounting errors. The errors did not have an impact on a fiscal year basis. The Company also determined that other operating units employed similar practices and made necessary corrections. The Company has determined that the impact of these corrections was not material on any fiscal year.

In addition to the adjustments discussed above, a $1 million out of period adjustment related to an understatement of a fiscal 2011 management incentive compensation expense disclosed in the first quarter of fiscal 2012 has been determined by the Company to be a $3 million out of period adjustment as a result of the investigation. This item included multiple components, a portion of which the Company previously considered not to be related to out of period errors. Based on the results of the independent investigation, the Company now attributes these adjustments to Other Errors, which include both unintentional errors and errors for which the categorization is unclear.

NHS

In fiscal 2012, $25 million of out of period adjustments reducing income from continuing operations related to the Company's NHS contract were identified and recorded. During the course of the investigation in fiscal 2012 of the percentage of completion accounting method used on the Company's NHS contract, certain accounting errors were identified related to costs incurred under the contract, which resulted in errors in the recognition of income from continuing operations that would have reduced by approximately $24 million the $1.5 billion write-off recorded by the Company in the third quarter of fiscal 2012. Although the Company has concluded that these errors do not appear to have any impact on amounts charged to the NHS, the errors have impacted the operating income recognized on the NHS contract. The exclusion of certain costs incurred under the contract caused the estimated margin at completion, which determines the operating income that is booked when revenue milestones are achieved, to be overstated. Although the Company has concluded that there is no cumulative impact as a result of the $1.5 billion charge relating to the NHS contract recorded as of December 30, 2011, operating income from fiscal year 2007 through and including fiscal 2011 has been overstated by a total of approximately $24 million and, therefore, the charge taken by the Company as of December 30, 2011 was overstated by approximately the same amount.

Certain additional items have been identified but not yet recorded related to the NHS contract that could have an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior fiscal years. Management does not believe that the effect of these additional items is material to the Company's financial statements. However, the investigation into these additional items is ongoing, and the amount could change and the allocation across years is likely to change.

Certain CSC finance employees based in the United Kingdom were aware prior to fiscal 2012 of the aforementioned errors, but those employees failed to appropriately correct the errors. Therefore, the Company has classified these errors as intentional. Such categorization was provided to the Company through the independent investigation. As a result, certain personnel have been suspended and additional disciplinary actions are being considered.

In addition to the NHS accounting errors discussed above, the Company identified and recorded a $1 million adjustment in fiscal 2012 to write off contract acquisition costs that were inappropriately capitalized in fiscal year 2008. The Company has classified this error as unintentional.

The investigation also identified a transaction which was treated as a cost item but should have been treated as a reduction in revenue. This has resulted in an overstatement of revenue and an overstatement of operating costs from

34


fiscal 2008 to fiscal 2012 of $6 million.

The impact on income (loss) from continuing operations before taxes of the $25 million of out of period adjustments identified in fiscal 2012 related to the Company's NHS contract is attributable to the following prior fiscal years:
(Amounts in millions)
 
Increase/(Decrease)
Fiscal 2011
 
$
(8
)
Fiscal 2010
 
(4
)
Fiscal 2009 (unaudited)
 
(3
)
Prior fiscal years (unaudited)
 
(10
)

Fiscal 2012 Financial Impact Summary

As noted above, during fiscal 2012, the Company recorded various pre-tax adjustments reducing income from continuing operations before taxes by $79 million ($63 million, net of tax), that should have been recorded in prior fiscal years. The out of period adjustments recorded in fiscal 2012 were comprised principally of $13 million of charges in the Nordic region, $23 million of charges in the Company's operations in Australia, $25 million of charges originating from the NHS contract in the Company's BSS segment and $16 million in the NPS segment. The NPS adjustments were identified by the Company and were primarily related to percentage of completion accounting adjustments.

Certain additional items have been identified but not yet recorded related to the NHS contract that could have an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior years. Management does not believe that the effect of these additional items is material to the Company's financial statements. However, the investigation into these additional items is ongoing, and the amount could change and the allocation across years is likely to change.

The following table summarizes the cumulative effect on net income (loss) attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.

 
 
Quarter Ended
 
(Amounts in millions)
 
July 1, 2011
 
September 30, 2011
 
December 30, 2011
 
March 30, 2012
 
Total
Nordics adjustments
 
$
4

 
$
6

 
$
2

 
$
1

 
$
13

Australia adjustments
 

 
21

 
2

 

 
23

NHS adjustments
 

 
(1
)
 
28

 
(2
)
 
25

NPS adjustments
 
3

 

 
(4
)
 
17

 
16

Other adjustments
 
2

 
(7
)
 
6

 
1

 
2

Effect on income from continuing operations before taxes
 
9

 
19

 
34

 
17

 
79

Taxes on income
 
(2
)
 
(4
)
 
(2
)
 
(8
)
 
(16
)
Other income tax adjustments
 
1

 
14

 
(10
)
 
(5
)
 

Effect on net income attributable to CSC common shareholders
 
$
8

 
$
29

 
$
22

 
$
4

 
$
63


The following table summarizes the cumulative effect on fiscal 2012 of the net income (loss) attributable to CSC common shareholders of the consolidated out of period adjustments recorded in fiscal 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.

35


 
 
Quarter Ended
 
 
(Amounts in millions)
 
July 1,
2011
 
September 30,
2011
 
December 30,
2011
 
March 30,
2012
 
Total
Operating costs inappropriately capitalized
 
$
1

 
$

 
$

 
$

 
$
1

Misapplication of US GAAP
 
1