UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
 
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended December 28, 2007
 
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________________ to _________________
 
Commission File No. 1-4850
 
 
COMPUTER SCIENCES CORPORATION
                              (Exact name of registrant as specified in its charter)
 
Nevada
95-2043126
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
2100 East Grand Avenue
 
El Segundo, California
90245
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant's Telephone Number, Including Area Code: (310) 615-0311
 
          Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X ]   No [  ]
 
          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).  
 
Large accelerated filer [X]                        Accelerated filer [   ]                              Non-accelerated filer [   ]
 
          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).  Yes [   ]   No [X]
 
          158,698,789 shares of Common Stock, $1.00 par value, were outstanding on January 25, 2008.
 
 

 
 

 COMPUTER SCIENCES CORPORATION
INDEX TO FORM 10-Q

   
PAGE
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
 
Consolidated Condensed Statements of Income, Third Quarter and Nine Months Ended December 28, 2007 and December 29, 2006
 1
     
 
Consolidated Condensed Balance Sheets December 28, 2007 and March 30, 2007
 2
     
 
Consolidated Condensed Statements of Cash Flows, Nine Months Ended December 28, 2007 and December 29, 2006, as restated
 3
     
 
Notes to Consolidated Condensed Financial Statements
 4
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
35
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
52
     
Item 4.
Controls and Procedures
53
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
55
     
Item 1A.
Risk Factors
58
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
58
     
Item 6.
Exhibits
59













i


 
 

 

PART I, ITEM 1. FINANCIAL STATEMENTS
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)

   
Third Quarter Ended
   
Nine Months Ended
 
(In millions except per-share amounts)
 
Dec. 28, 2007
   
Dec. 29, 2006
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
         
As Restated (1)
 
                         
Revenues
  $ 4,160.0     $ 3,640.6     $ 12,015.1     $ 10,810.8  
                                 
Costs of services (excludes depreciation and amortization)
    3,301.6       2,901.0       9,653.5       8,674.0  
Selling, general and administrative
    240.2       227.9       721.9       682.0  
Depreciation and amortization
    307.1       262.0       878.3       789.2  
Interest expense
    51.1       56.3       129.1       160.2  
Interest income
    (7.5 )     (8.3 )     (25.8 )     (41.8 )
Special items
    17.5       42.0       92.4       279.9  
Other income
    (16.3 )     (14.5 )     (41.9 )     (27.2 )
Total costs and expenses
    3,893.7       3,466.4       11,407.5       10,516.3  
                                 
Income before taxes
    266.3       174.2       607.6       294.5  
Taxes on income
    87.3       60.7       244.7       151.4  
Net income
  $ 179.0     $ 113.5     $ 362.9     $ 143.1  
                                 
Earnings per share:
                               
  Basic
  $ 1.07     $ 0.66     $ 2.12     $ 0.81  
                                 
  Diluted
  $ 1.05     $ 0.65     $ 2.08     $ 0.79  

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.






See accompanying notes.

 
1

 

COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)

(In millions except shares)
 
Dec. 28, 2007
   
March 30, 2007
 
           
ASSETS
           
Cash and cash equivalents
  $ 589.1     $ 1,050.1  
Receivables, net
    4,608.4       4,187.4  
Prepaid expenses and other current assets
    1,793.6       1,464.0  
Total current assets
    6,991.1       6,701.5  
Property and equipment, net
    2,656.7       2,539.1  
Outsourcing contract costs, net
    941.5       1,029.5  
Software, net
    527.0       513.3  
Goodwill
    3,697.4       2,500.1  
Other assets
    547.8       456.7  
Total assets
  $ 15,361.5     $ 13,740.2  
                 
LIABILITIES
               
Short-term debt and current maturities of long-term debt
  $ 571.4     $ 93.7  
Accounts payable
    659.1       855.7  
Accrued payroll and related costs
    820.7       732.5  
Other accrued expenses
    1,759.3       2,014.1  
Deferred revenue
    1,025.7       1,025.5  
Income taxes payable and deferred income taxes
    210.2       934.6  
Total current liabilities
    5,046.4       5,656.1  
                 
Long-term debt, net
    2,515.1       1,412.2  
Income tax liabilities and deferred income taxes
    1,127.4          
Other long-term liabilities
    1,121.4       1,131.9  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $1.00 per share; authorized 750,000,000 shares; issued 171,739,768 (2008) and 181,105,129 (2007)
    171.7       181.1  
Additional paid-in capital
    1,892.0       1,876.3  
Earnings retained for use in business
    4,008.6       4,140.9  
Accumulated other comprehensive income (loss)
    (150.3 )     (304.3 )
      5,922.0       5,894.0  
Less common stock in treasury, at cost, 8,101,652 shares (2008) and 7,787,140 shares (2007)
    (370.8 )     (354.0 )
Total stockholders' equity
    5,551.2       5,540.0  
Total liabilities and stockholders' equity
  $ 15,361.5     $ 13,740.2  
 

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.
 
See accompanying notes.

 
2

 

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


   
Nine Months Ended
 
(In millions)
 
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
Cash flows from operating activities:
           
 Net income
  $ 362.9     $ 143.1  
 Adjustments to reconcile net income to net cash provided by   operating activities:
               
    Depreciation, amortization and other non-cash charges
    994.3       908.1  
    Gain on disposition
    (6.3 )     (20.7 )
    Changes in assets and liabilities, net of effects of acquisitions:
               
          Increase in assets
    (639.1 )     (488.8 )
          Decrease in liabilities
    (213.3 )     (4.5 )
Net cash provided by operating activities
    498.5       537.2  
Investing activities:
               
    Purchases of property and equipment
    (644.2 )     (550.6 )
    Acquisitions, net of cash acquired
    (1,315.6 )     (131.3 )
    Outsourcing contracts
    (87.7 )     (69.4 )
    Software
    (129.6 )     (114.1 )
    Other investing cash flows
    18.0       227.1  
Net cash used in investing activities
    (2,159.1 )     (638.3 )
Financing activities:
               
    Borrowings of commercial paper, net
    205.1       497.4  
    Borrowings under lines of credit
    456.6       440.7  
    Repayments on lines of credit
    (472.2 )     (452.1 )
    Principal payments on capital leases and long-term debt
    (29.3 )     (25.8 )
    Proceeds from debt issuance
    1,400.0          
    Proceeds from stock option and other common stock transactions
    82.4       72.6  
    Excess tax benefit from stock-based compensation
    10.6       3.1  
    Repurchase of common stock, net of settlement
    (474.9 )     (1,000.0 )
    Other financing cash flows
    1.8       (2.3 )
Net cash provided by (used in) financing activities
    1,180.1       (466.4 )
                 
Effect of exchange rate changes on cash and cash equivalents
    19.5       2.8  
                 
Net decrease in cash and cash equivalents
    (461.0 )     (564.7 )
Cash and cash equivalents at beginning of year
    1,050.1       1,290.7  
Cash and cash equivalents at end of period
  $ 589.1     $ 726.0  

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.

See accompanying notes.

 
3

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 1 – Basis of Presentation

Computer Sciences Corporation (CSC or the Company) has prepared the unaudited consolidated condensed financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles for the United States have been condensed or omitted pursuant to such rules and regulations.  It is recommended that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended March 30, 2007.  In the opinion of the Company, the unaudited consolidated condensed financial statements included herein reflect all adjustments necessary to present fairly the financial position, the results of operations and the cash flows for such interim periods.  The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Restatement of Unaudited Consolidated Condensed Financial Statements

The Company has restated the accompanying consolidated condensed statements of income and cash flows for the three and nine months ended December 29, 2006.  The restatement relates to 1) the correction of errors relating to the accounting for income taxes, 2) the recognition of revenue for the sale of licenses for a software product, 3) the correction of errors related to the accounting for foreign currency translation on certain intracompany balances and 4) the correction of miscellaneous immaterial errors and the reclassification of foreign currency gains and losses and losses on the disposal of certain assets to other income.  These adjustments increased the reported income before taxes by $2.3 for the quarter ended December 29, 2006 and decreased reported income before taxes $4.6 for the nine months ended December 29, 2006.  These adjustments decreased net income by $1.3 and $9.9 for the three and nine months ended December 29, 2006, respectively.

Income Taxes

The Company identified errors related to the accounting for income taxes in prior periods.  The errors affecting income tax expense for the three and nine months ended December 29, 2006 were related to the accounting for U.S. income tax liabilities related to foreign operations, income tax errors related to foreign operations, accounting for uncertain tax positions, the reporting of certain general and administrative costs in the Company’s U.S. federal tax return and other miscellaneous income tax accounting errors.  The Company also identified a number of other errors related to income taxes which did not affect income tax expense but did result in the accrual of interest and penalties which had not been previously recorded for the first, second, and third quarters of fiscal 2007.  As a result, the Company has restated the accompanying consolidated condensed financial statements for the quarter and nine months ended December 29, 2006 to record additional penalties, interest and income tax expense.
 

 
4

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 1 – Basis of Presentation (continued)

Revenue Recognition

The Company determined that it did not correctly apply the provisions of Statement of Position 97-2, “Software Revenue Recognition” with respect to the sale of licenses for a software product.  As a result, the Company overstated revenue and unbilled receivables and understated deferred revenue related to this product in fiscal years prior to 2005 and understated revenue for subsequent periods.  The Company has restated the accompanying consolidated condensed financial statements for the quarter and nine months ended December 29, 2006 to record additional revenue and the related tax effects.

Foreign Currency

The Company identified errors in accounting for the effect of foreign currency exchange rate movements on intracompany balances.  These errors include improperly recording foreign currency gains and losses in the cumulative translation adjustment account.  These foreign currency gains and losses were primarily from long-term intracompany notes and should have been recorded in income.  The Company has restated the accompanying consolidated condensed financial statements for the quarter and nine months ended December 29, 2006 to record foreign currency gains and losses on intracompany balances.

Other

The Company identified errors related to non-income tax related state taxes in prior periods.  In addition, the Company has reclassified immaterial gains and losses from the disposition of immaterial businesses, the disposition of non-operating assets and investment securities, as well as foreign currency gains and losses, from cost of services to other income.



 
5

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 1 – Basis of Presentation (continued)

Summary of Adjustments to the Consolidated Condensed Financial Statements

The following tables present the effects of the restatement adjustments on the Company’s previously reported consolidated condensed statements of income for the three and nine months ended December 29, 2006:

   
Three Months Ended December 29, 2006
 
         
Adjustments
       
   
As Reported
   
Revenue
Recognition
   
Income Tax
   
Foreign Currency
   
Other
   
As Restated
 
Revenues
  $ 3,636.9     $ 3.7                       $ 3,640.6  
                                           
Costs of services (excludes depreciation and
  amortization)
    2,903.1                         $ (2.1 )     2,901.0  
Selling, general and administrative
    227.9                                   227.9  
Depreciation and amortization
    262.0                                   262.0  
Interest expense
    38.4             $ 17.9                     56.3  
Interest income
    (8.4 )             .1                     (8.3 )
Special items
    42.0                                     42.0  
Other (income)/expense
                          $ (16.4 )     1.9       (14.5 )
Total costs and expenses
    3,465.0               18.0       (16.4 )     (0.2 )     3,466.4  
                                                 
(Loss) income before taxes
    171.9       3.7       (18.0 )     16.4       0.2       174.2  
Taxes on income
    57.1       1.5       (4.3 )     6.4               60.7  
Net (loss) income
  $ 114.8     $ 2.2     $ (13.7 )   $ 10.0     $ 0.2     $ 113.5  
Earnings per share:
                                               
  Basic
  $ 0.67     $ 0.01     $ (0.08 )   $ 0.06             $ 0.66  
  Diluted*
  $ 0.65     $ 0.01     $ (0.08 )   $ 0.06             $ 0.65  


   
Nine Months Ended December 29, 2006
 
         
Adjustments
       
   
As Reported
   
Revenue
Recognition
   
Income Tax
   
Foreign Currency
   
Other
   
As Restated
 
Revenues
  $ 10,798.3     $ 12.5                       $ 10,810.8  
                                           
Costs of services (excludes depreciation and
  amortization)
    8,682.5                         $ (8.5 )     8,674.0  
Selling, general and administrative
    682.0                                   682.0  
Depreciation and amortization
    789.2                                   789.2  
Interest expense
    107.4             $ 52.8                     160.2  
Interest income
    (41.8 )                                   (41.8 )
Special items
    279.9                                     279.9  
Other (income)/expense
                          $ (35.6 )     8.4       (27.2 )
Total costs and expenses
    10,499.2               52.8       (35.6 )     (0.1 )     10,516.3  
                                                 
(Loss) income before taxes
    299.1       12.5       (52.8 )     35.6       0.1       294.5  
Taxes on income
    146.1       4.9       (13.6 )     14.0               151.4  
Net (loss) income
  $ 153.0     $ 7.6     $ (39.2 )   $ 21.6     $ 0.1     $ 143.1  
Earnings per share:
                                               
  Basic
  $ 0.86     $ 0.04     $ (0.22 )   $ 0.12             $ 0.81  
  Diluted*
  $ 0.85     $ 0.04     $ (0.22 )   $ 0.12             $ 0.79  

*Amounts may not add due to rounding

 
6

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 1 – Basis of Presentation (continued)

The following table presents the effects of the restatement adjustments to the consolidated condensed statement of cash flow for the nine months ended December 29, 2006:

   
Nine Months Ended
December 29, 2006
 
   
As Reported
   
Adjustments
   
As Restated
 
                   
Cash flows from operating activities:
                 
Net income
  $ 153.0     $ (9.9 )   $ 143.1  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization  and other non-cash charges
    906.6       1.5       908.1  
Gain on dispositions, net of tax
    (20.7 )             (20.7 )
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
                       
Increase in assets
    (439.3 )     (49.5 )     (488.8 )
Decrease in liabilities
    (62.4 )     57.9       (4.5 )
Net cash provided by operating activities
  $ 537.2             $ 537.2  

Note 2 – Earnings Per Share

Basic and diluted earnings per share are calculated as follows:

   
Third Quarter Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
Net income
  $ 179.0     $ 113.5  
                 
Common share information:
               
  Average common shares outstanding for basic EPS
    166.826       172.362  
  Dilutive effect of common stock equivalents
    2.967       3.384  
Shares for diluted EPS
    169.793       175.746  
                 
  Basic EPS
  $ 1.07     $ 0.66  
                 
  Diluted EPS
  $ 1.05     $ 0.65  

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.


 
7

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 2 – Earnings Per Share (continued)

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
Net income
  $ 362.9     $ 143.1  
                 
Common share information:
               
  Average common shares outstanding for basic EPS
    170.907       177.330  
  Dilutive effect of common stock equivalents
    3.333       3.543  
  Shares for diluted EPS
    174.240       180.873  
                 
Basic EPS
  $ 2.12     $ 0.81  
                 
Diluted EPS
  $ 2.08     $ 0.79  

The computation of diluted EPS did not include stock options which were antidilutive, as their exercise price was greater than the average market price of the common stock of CSC during the periods presented.  The numbers of such options were 7,616,398 and 5,620,453 for the three months and 6,380,246 and 5,092,140 for the nine months ended December 28, 2007 and December 29, 2006, respectively.

Note 3 – Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109," effective March 31, 2007.  FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  FIN 48 also provides guidance on the accounting for and disclosure of liabilities for uncertain tax positions, interest and penalties.


 
8

 

 As a result of the implementation of FIN 48, the Company adjusted the estimated value of its uncertain tax positions by recognizing additional liabilities totaling $171.4 as a reduction to earnings retained for use in business and $1.5 as an adjustment to additional paid-in-capital.  Upon the adoption of FIN 48, the estimated value of the Company’s uncertain tax positions was a liability of $1,415 resulting from unrecognized net tax benefits including interest and penalties of $370 and net of $126 of related tax carryforwards.  Of the $1,415 liability for uncertain tax positions, $346 was recorded in current liabilities as income taxes payable and deferred income taxes, and approximately $1,069 was recorded in non-current liabilities as income tax liabilities and deferred income taxes in the consolidated condensed balance sheet.  If the Company’s positions are sustained by the taxing authority in favor of the Company, approximately $515 (excluding interest and penalties) of uncertain tax position liabilities would favorably impact the Company’s effective tax rate.

Prior to the adoption of FIN 48, the Company’s policy was to classify penalties as an operating expense, and interest on tax overpayments and underpayments as interest in arriving at pretax income.  Upon adoption of FIN 48, the Company elected to change its accounting policy and classify interest expense on overpayments and underpayments and uncertain tax positions and penalties in the income tax provision.  As of the date of adoption of FIN 48 the Company had accrued $211 of interest and $159 of penalties related to income tax matters.  The Company accrued an additional $21.3 ($13.3 net of tax) of interest and penalties and $69.4 ($43.3 net of tax) of interest and penalties in the third quarter and nine months year to date ended December 28, 2007 increasing its income tax provision and the liability for uncertain tax positions.  During the third quarter and nine months ended December 28, 2007, the Company reduced income tax expense and the liability for uncertain tax positions by $23.0 ($18.6 net of tax) and $53.9 ($39.7 net of tax), respectively .  Of this amount, $30.7 ($21.1 net of tax) results from the reversal of accrued penalties and interest as a result of filing applications for changes in accounting methods with the Internal Revenue Service (IRS), which precludes the IRS from making assessments related to the associated unrecognized tax benefits.  The remaining amount of $23.0 ($18.6, net of tax) primarily relates to the remeasurement of tax and interest for various IRS matters for fiscal years 1995 to 1999.



 
9

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 3 – Income Taxes (continued)

Tax Examination Status

During the next 12 months, it is reasonably possible the Company’s liability for uncertain tax positions may change by a significant amount as a result of the following:

·  
The Company completed its settlement discussions with the IRS subject to administrative review with respect to the examination of fiscal years 1995 through 1999.  The statute of limitations is expected to close on these years in the second quarter of fiscal 2009.  The nature of the significant items subject to examination includes bad debt deductions, property transactions, and credits.

·  
The Company’s U.S. federal income tax returns for fiscal years 2000 and beyond remain subject to examination by the IRS. The IRS commenced an examination of fiscal years 2000 through 2004 federal income tax returns beginning in fiscal year 2007, and the Company expects to reach a settlement by December 31, 2008.  Accordingly, the Company has agreed to extend the statute of limitations for these tax years through December 31, 2008.  The nature of the significant items subject to examination include accounting methods, depreciation and amortization, research credits, and international tax issues.

·  
In the first quarter of fiscal year 2009 the Company may file applications for changes in accounting methods with the IRS associated with certain unrecognized tax benefits, which could result in a reduction of the associated liabilities.

The Company’s significant foreign jurisdictions including the United Kingdom, Australia, Germany and Canada are subject to examination for various years beginning in fiscal year 2001.  The Company is currently under examination in Canada, UK, and Germany.

Conclusion of the above matters could result in settlements for different amounts than the Company has accrued as uncertain tax benefits.  If a position for which the Company concluded was more likely than not and was subsequently not upheld, then the Company would need to accrue and ultimately pay an additional amount.  Conversely, the Company could settle positions with the tax authorities for amounts lower than have been accrued or extinguish a position through payment.  The Company believes the outcomes which are reasonably possible within the next 12 months range from no change to a reduction of the liability for unrecognized tax benefits of approximately $520, before the impact of penalties and interest.


 
10

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 4 – Debt

The Company issued approximately $1,400 of commercial paper to finance the acquisition of Covansys Corporation.  The outstanding commercial paper was classified as long-term as the Company intends and has the ability to refinance the commercial paper long-term utilizing the long-term credit agreement described below.  The weighted average interest rate on the commercial paper was 5.37% and 5.55% for the quarter and nine months ended December 28, 2007, respectively.

On June 25, 2007, the Company entered into a credit agreement for $1,000 with Bank of America, N.A., Barclays Bank PLC, and Merrill Lynch Capital Corporation.  This agreement expires June 24, 2008.  On July 12, 2007, the Company entered into a long-term credit agreement for a $1,500 commercial paper backup which replaced the existing $1,000 line of credit entered into on August 26, 2006.  The long-term line of credit was used by the Company as a commercial paper backup for the Covansys acquisition financing.


 
11

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 5 – Stock Incentive Plans

The Company has various stock incentive plans which are more fully described in Note 14 of the Company’s 2007 Annual Report filed on Form 10-K/A.  For the three and nine months ended December 28, 2007 and December 29, 2006, the Company recognized stock-based compensation expense as follows:

   
Three Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
Cost of services
  $ 3.7     $ 3.4  
Selling, general and administrative
    8.6       10.8  
Total
  $ 12.3     $ 14.2  
Total net of tax
  $ 7.7     $ 9.4  

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
Cost of services
  $ 10.7     $ 10.9  
Selling, general and administrative
    26.6       36.0  
Special items
    10.4          
Total
  $ 47.7     $ 46.9  
Total net of tax
  $ 29.7     $ 31.0  

The charge to special items of $10.4 ($6.3 net of tax) for the nine months ended December 28, 2007 relates to accelerated expense associated with the Company’s former CEO whose retirement was effective July 30, 2007.  See Note 13, Special Items.

The Company uses the Black-Scholes-Merton model in determining the fair value of options granted.  The weighted average fair values of stock options granted during the nine months ended December 28, 2007 and December 29, 2006 were $17.88 and $16.66 per share, respectively.  In calculating the actual and pro forma compensation expense for its stock incentive plans, the Company used the following weighted average assumptions:

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
Risk-free interest rate
    4.66 %     4.84 %
Expected volatility
    32 %     28 %
Expected lives
 
4.14 years
   
4.08 years
 

Employee Incentive Plans

The Company has four stock incentive plans which authorize the issuance of stock options, restricted stock and other stock-based incentives to employees upon terms approved by the Compensation Committee of the Board of Directors.  The Company issues authorized but previously unissued shares upon the exercise of stock options, the granting of restricted stock and the redemption of restricted stock units (RSUs).  The Company’s standard vesting schedule for stock options and stock awards (restricted stock and RSUs) is one third on each of the first three anniversaries of the grant date, except for certain stock awards where one third of the shares vest on each of the third, fourth and fifth anniversaries of the grant date.  Stock options are generally granted for a term of ten years.  At December 28, 2007, 14,150,078 shares of CSC common stock were available for the grant of future stock options, stock awards or other stock-based incentives to employees.

 
12

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 5 – Stock Incentive Plans (continued)

Stock Options

Information concerning stock options granted under stock incentive plans is as follows:

   
Nine Months Ended December 28, 2007
 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Aggregate
Intrinsic
Value
 
                         
Outstanding at March 30, 2007
    17,060,082     $ 45.23       5.86     $ 140.2  
Granted
    3,421,966       55.21                  
Exercised
    (2,046,336 )     40.26                  
Canceled/Forfeited
    (414,273 )     52.38                  
Expired
    (137,498 )     55.43                  
Outstanding at December 28, 2007
    17,883,941       47.43       5.99       92.1  
Vested and expected to vest in the future at December 28, 2007
    17,581,010       47.30       5.99       92.0  
Exercisable at December 28, 2007
    12,280,048       44.51       4.66       88.2  

The total intrinsic value of options exercised during the nine months ended December 28, 2007 and December 29, 2006 was $34.4 and $33.5, respectively.  The total intrinsic value of stock options is based on the difference between the fair market value of our common stock at December 28, 2007 (for options outstanding), or date of exercise, less the applicable exercise price.

The cash received from stock options exercised during the nine months ended December 28, 2007 and December 29, 2006, was $82.4 and $72.6, respectively.  During the nine months ended December 28, 2007 and December 29, 2006, the Company realized income tax benefits of $24.9 and $10.9, respectively, and an excess tax benefit of $10.6 and $3.1, respectively, related to the exercise of these stock options.

As of December 28, 2007, there was $67.8 of total unrecognized compensation expense related to unvested stock options, net of expected forfeitures.  The cost is expected to be recognized over a weighted-average period of 2.16 years.

Stock Awards

Stock awards consist of restricted stock and restricted stock units (RSUs).  Restricted stock awards consist of shares of common stock of the Company issued at a price of $0.  Upon issuance to an employee, shares of restricted stock become outstanding, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period.  The restrictions on shares of CSC restricted stock normally lapse on the first, second and third anniversaries of the date of issuance for awards issued in lieu of cash bonuses, and on the third, fourth and fifth anniversaries for all others.

 
13

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 5 – Stock Incentive Plans (continued)

The RSUs vest on the first, second and third anniversaries of the date of issuance for those issued in lieu of cash bonuses, and on the third, fourth and fifth anniversaries for all others.  Upon the vesting date, the RSUs are automatically redeemed for shares of CSC common stock and dividend equivalents.

Information concerning stock awards granted under stock incentive plans is as follows:

   
Nine Months Ended December 28, 2007
 
   
Number of Shares
   
Weighted Average Fair Value
 
Outstanding at March 30, 2007
    1,143,017     $ 48.30  
Granted
    193,212       54.99  
Released/Redeemed
    (594,025 )     47.69  
Forfeited/Canceled
    (44,206 )     49.95  
Outstanding at December 28, 2007
    697,998       50.57  

As of December 28, 2007, there was $25.6 of total unrecognized compensation expense related to unvested restricted stock awards and restricted stock units.  The cost is expected to be recognized over a weighted-average period of 3.03 years.

Nonemployee Director Incentives

The Company has two stock incentive plans which authorize the issuance of stock options, restricted stock and other stock-based incentives to nonemployee directors upon terms approved by the Company’s Board of Directors.  At December 28, 2007, 71,100 shares of CSC common stock remained available for the grant to nonemployee directors of future RSUs or other stock-based incentives.

Generally, RSU awards to nonemployee directors vest in full as of the next annual meeting of the Company’s stockholders following the date they are granted and are issued at a price of $0.  Information concerning RSUs granted to nonemployee directors is as follows:

   
Nine Months Ended December 28, 2007
 
   
Number of Shares
   
Weighted Average Fair Value
 
Outstanding at March 30, 2007
    73,321     $ 44.44  
Granted
    19,300       50.61  
Redeemed
    (600 )     37.81  
Forfeited/Canceled
               
Outstanding at December 28, 2007
    92,021       45.78  


 
14

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 5 – Stock Incentive Plans (continued)

When a holder of RSUs ceases to be a director of the Company, the RSUs are automatically redeemed for shares of CSC common stock and dividend equivalents with respect to such shares.  The number of shares to be delivered upon redemption is equal to the number of RSUs that are vested at the time the holder ceases to be a director.  At the holder’s election, which must be made within 30 days after the date of the award, the RSUs may be redeemed (i) as an entirety, upon the day the holder ceases to be a director, or (ii) in substantially equal amounts upon the first five, ten or fifteen anniversaries of such termination of service.

As of December 28, 2007, there was $1.0 of total unrecognized compensation expense related to unvested nonemployee director RSUs.  The cost is expected to be fully recognized as of the annual stockholders’ meeting on August 4, 2008.

Note 6 – Other Income

For the three and nine months ended December 28, 2007 and December 29, 2006, the components of other income were as follows:

   
Third Quarter Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
Foreign exchange gain
  $ (11.7 )   $ (16.3 )
Other
    (4.6 )     1.8  
     Total
  $ (16.3 )   $ (14.5 )

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
Foreign exchange gain
  $ (37.3 )   $ (35.6 )
Other
    (4.6 )     8.4  
     Total
  $ (41.9 )   $ (27.2 )

The Company offsets, to the extent possible, remeasurement gains and losses on certain non-functional currency monetary assets and liabilities, with forward contracts denominated in the same currency as the exposure from the asset or liability.  The Company does not enter into forward contracts for speculative or trading purposes.  Gains and losses from settlement and remeasurement of the forward contracts are recorded in Other income.  As of December 28, 2007, the notional amount of forward contracts outstanding was approximately $1,380.

Note 7 – Depreciation

Included in the consolidated condensed balance sheets are the following accumulated depreciation amounts:

   
Dec. 28, 2007
   
Mar. 30, 2007
 
Property and equipment
  $ 3,517.7     $ 3,073.8  


 
15

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 8 – Dividends

No dividends were paid during the periods presented. At December 28, 2007 and March 30, 2007, there were 171,739,768 and 181,105,129 shares, respectively, of $1.00 par value common stock issued.  The Company had 8,101,652 and 7,787,140 shares of treasury stock as of December 28, 2007 and March 30, 2007, respectively.

Note 9 - Cash Flows

Cash payments for interest on indebtedness were $127.8 and $113.8 for the nine months ended December 28, 2007 and December 29, 2006, respectively.  Cash payments for taxes on income were $336.8 and $202.0, net of refunds, for the nine months ended December 28, 2007 and December 29, 2006, respectively.

Note 10 - Comprehensive Income
 
The components of comprehensive income, net of tax, are as follows:

   
Third Quarter Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
Net income
  $ 179.0     $ 113.5  
Foreign currency translation adjustment
    9.8       46.3  
Unrealized gain on available for sale securities
    .1       1.3  
Reclassification adjustment for gains realized in net income
    (2.2 )     -  
Comprehensive income
  $ 186.7     $ 161.1  
                 

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
Net income
  $ 362.9     $ 143.1  
Foreign currency translation adjustment
    151.2       163.2  
Unfunded pension adjustment
    4.5       (1.2 )
Unrealized gain on available for sale securities
    .5       1.5  
Reclassification adjustment for gains realized in net income
    (2.2 )     (6.9 )
Comprehensive income
  $ 516.9     $ 299.7  

Accumulated other comprehensive income presented on the accompanying consolidated condensed balance sheets consists of accumulated foreign currency translation adjustments, minimum pension liability adjustments, and net unrealized gain on available for sale securities.

(1)
See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.

 
16

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 11 – Segment Information
 
CSC provides information technology outsourcing, consulting and systems integration services and other professional services. Based on the criteria of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” CSC aggregates operating segments into two reportable segments, North American Public Sector and Global Commercial.  The North American Public Sector segment operates principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. Federal agencies.  The December 29, 2006 reportable segments have been restated to reflect a change in the composition of the Global Commercial and North American Public Sector segments as a result of realigning certain consulting and systems integration business lines.
 
Information on reportable segments is as follows:
 
   
Global Commercial
   
North American Public Sector
   
Corporate
   
Total
 
Third Quarter Ended, December 28, 2007
                       
Revenues
  $ 2,725.0     $ 1,435.0           $ 4,160.0  
Earnings (loss) before special items, other income, interest and taxes
    223.8       101.7     $ (14.4 )     311.1  
  Assets
    11,214.2       3,643.9       503.4       15,361.5  
                                 
Third Quarter Ended, December 29, 2006 - As Restated (1)
                               
Revenues
    2,319.8       1,320.8               3,640.6  
Earnings (loss) before special items, other income, interest and taxes (2)
    183.1       89.3       (22.7 )     249.7  
 Assets
    8,725.8       3,657.5       780.7       13,164.0  

   
Global Commercial
   
North American Public Sector
   
Corporate
   
Total
 
Nine Months Ended, December 28, 2007
                       
Revenues
  $ 7,709.4     $ 4,305.7           $ 12,015.1  
Earnings (loss) before special items, other income, interest and taxes
    541.5       263.2     $ (43.3 )     761.4  
                                 
Nine Months Ended, December 29, 2006 - As Restated (1)
                               
Revenues
    6,823.2       3,987.6               10,810.8  
Earnings (loss) before special items, other income, interest and taxes (2)
    439.8       278.2       (52.4 )     665.6  

(1)  
See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.
(2)  
Prior period Earnings (loss) before special items, interest and taxes has been reclassified to exclude other income (expense) related to certain items in conformance with the current quarter presentation.


 
17

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 11 – Segment Information (continued)

A reconciliation of earnings before special items, other income, interest and taxes to income before taxes is as follows:

   
Third Quarter Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
             
Earnings before special items, other income, interest and taxes
  $ 311.1     $ 249.7  
Interest expense
    (51.1 )     (56.3 )
Interest income
    7.5       8.3  
Special items
    (17.5 )     (42.0 )
Other income
    16.3       14.5  
Income before taxes
  $ 266.3     $ 174.2  

   
Nine Months Ended
 
   
Dec. 28, 2007
   
Dec. 29, 2006
 
         
As Restated (1)
 
             
Earnings before special items, other income, interest and taxes
  $ 761.4     $ 665.6  
Interest expense
    (129.1 )     (160.2 )
Interest income
    25.8       41.8  
Special items
    (92.4 )     (279.9 )
Other income
    41.9       27.2  
Income before taxes
  $ 607.6     $ 294.5  

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.


 
18

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 12 – Goodwill and Other Intangible Assets

A summary of the changes in the carrying amount of goodwill by segment for the nine months ended December 28, 2007 is as follows:

   
Global Commercial
   
North American Public Sector
   
Total
 
Balance as of March 30, 2007, As Restated (1)
  $ 1,854.3     $ 645.8     $ 2,500.1  
Additions (Adjustments)
    1,129.8       (.3 )     1,129.5  
Foreign currency translation
    67.8               67.8  
Transfers
    (33.7 )     33.7          
Balance as of December 28, 2007
  $ 3,018.2     $ 679.2     $ 3,697.4  

(1)           See Note 1, "Basis of Presentation," in Notes to Consolidated Condensed Financial Statements.

The addition to goodwill for the period relates to the acquisition of Covansys Corporation.  See footnote 15 for further details.  The foreign currency translation amount relates to the impact of foreign currency adjustments in accordance with SFAS No. 52, “Foreign Currency Translation.”

A summary of amortizable intangible assets as of December 28, 2007 and March 30, 2007 is as follows:

   
December 28, 2007
 
   
Gross
Carrying Value
   
Accumulated Amortization
   
Net
 
Software
  $ 1,478.0     $ 951.0     $ 527.0  
Outsourcing contract costs
    2,083.8       1,142.3       941.5  
Other intangible assets
    355.8       136.1       219.7  
   Total intangible assets
  $ 3,917.6     $ 2,229.4     $ 1,688.2  

   
March 30, 2007
 
   
Gross
Carrying Value
   
Accumulated Amortization
   
Net
 
Software
  $ 1,343.6     $ 830.3     $ 513.3  
Outsourcing contract costs
    2,197.4       1,167.9       1,029.5  
Other intangible assets
    189.1       108.0       81.1  
   Total intangible assets
  $ 3,730.1     $ 2,106.2     $ 1,623.9  


 
19

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 12 – Goodwill and Other Intangible Assets (continued)

Amortization related to intangible assets was $110.7 and $106.0 for the three months and $338.0 and $323.9 for the nine months ended December 28, 2007 and December 29, 2006, respectively.  Estimated amortization expense related to intangible assets as of March 30, 2007, adjusted for the acquisition of Covansys, for each of the subsequent five years, fiscal 2008 through fiscal 2012, is as follows: $459, $439, $329, $243, and $103, respectively.

Note 13 – Special Items

Special items totaling $17.5 and $92.4 were recorded during the quarter and nine months ended December 28, 2007, respectively.  For the third quarter and nine months ended December 28, 2007 special items consisted of: (1) a $17.5 and $70.0 restructuring charge, respectively (see discussion below), and (2) a $22.4 charge related to the retirement of the Company’s chairman and chief executive officer recorded during the first quarter of fiscal 2008.  During fiscal 2007, special items totaling $42.0 and $279.9 were recorded for the third quarter and nine months ended December 29, 2006, respectively.  For the third quarter and nine months ended December 29, 2006, special items consisted of:  (1) a $42.0 and $297.2 restructuring charge for the third quarter and nine months year to date, respectively, (see discussion below), (2) a year to date $1.0 true-up of an estimate related to the fiscal 2006 Nortel impairment charge and (3) an $18.3 gain from the redemption of DynCorp International preferred stock recorded during the first quarter of fiscal 2007.

As previously announced in a Form 8-K filed on May 25, 2007, the Company and its former Chairman and Chief Executive Officer, Van B. Honeycutt, entered into a retirement agreement pursuant to which Mr. Honeycutt resigned as Chief Executive Officer effective May 21, 2007, and as Chairman July 30, 2007, and will receive, as a separation benefit, a lump sum cash payment of $11.2 on January 31, 2008 as well as certain other benefits through December 3, 2009.  As a result of Mr. Honeycutt’s retirement, recognition of the expense associated with his unvested stock-based compensation was accelerated resulting in stock based compensation of $12.2, of which $10.4 was recorded in Special Items and $1.8 was recorded as additional paid in capital.  The total pre-tax charge recorded in Special Items, including the lump sum cash payment and other benefits and the charge for accelerated vesting of employee stock-based compensation, was $22.4 ($13.6 net of tax or 8 cents per share).

Restructuring

In April 2006, the Company announced a restructuring plan to be carried out during fiscal 2007 and 2008.  The objectives of the plan are to 1) streamline CSC’s worldwide operations and 2) leverage the increased use of lower cost global resources.  Restructuring charges consist predominantly of severance and related employee payments resulting from terminations.  During the third quarter of fiscal 2007 the Company evaluated facility consolidation opportunities and other areas where operations could be streamlined and costs reduced consistent with the plan objectives, resulting in additional lease termination, asset impairment and other charges.



 
20

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 13 – Special Items (continued)

Workforce reductions, including some voluntary terminations, in the first nine months of fiscal 2008 and 2007 were approximately 730 and 4,000, respectively.  Total headcount increased by 50 employees in the third quarter of fiscal 2008 as workforce reductions were offset by new hires, compared to a reduction of approximately 1,100 employees in the third quarter of fiscal 2007.

Termination-related charges of $12.7 and $53.0 were recorded in the third quarter and nine months ended of 2008, respectively, compared to termination-related charges of $24.1 and $274.8 in 2007, respectively.  Other costs, which were primarily related to vacant space, of $4.8 and $17.0 were also recorded during the third quarter and nine months ended of 2008, respectively, compared to other costs of $17.7 and $22.3 in 2007, respectively.  All of the restructuring charge in the third quarter of 2008 was incurred in the Global Commercial reporting segment.  Additional restructuring charges of approximately $56.0 are expected to be incurred in the remainder of fiscal 2008, however, higher than anticipated voluntary termination may reduce the charge.  Restructuring charges of $333.4 were recorded in fiscal year 2007.

A majority of the planned headcount reductions were scheduled to take place in Europe.  For the third quarter of fiscal 2008, European headcount had a net increase of approximately 130 employees as workforce reductions were offset by new hires.  Approximately 500 European reductions have taken place in the first nine months against a plan of approximately 1,000 for the full fiscal year 2008.  Approximately 60 and 170 reductions were made in North America in the third quarter and nine months ended of fiscal 2008, respectively, against a plan of 300 for the full fiscal year 2008.  The balance of the reductions is planned in Australia and Asia.

Restructuring-related pre-tax cash payments of approximately $33.6 were made in the third quarter of fiscal 2008 ($121.9 year to date).  Restructuring-related pre-tax cash payments of approximately $44.3 were recorded in the third quarter of fiscal 2007 ($151.6 year to date).  Included in the restructuring charges are pension benefit augmentations that are due to certain employees in accordance with legal or contractual obligations, which will be paid out over several years as part of normal pension distributions. Such liabilities are included in the consolidated pension liability account.

See the following table for a summary of fiscal 2008 third quarter and year to date activity (in millions):

Three months ended December 28, 2007:

   
Liability
as of
Sept. 28, 2007
   
Total pre-tax
charges
recorded
3rd quarter
fiscal 2008
   
Less
Payments
   
Other(1)
   
Restructuring
liability as of
Dec. 28, 2007
 
Workforce reductions
  $ 63.8     $ 12.7     $ (26.5 )   $ .6     $ 50.6  
Other
    38.3       4.8       (7.1 )     (2.5 )     33.5  
Total
  $ 102.1     $ 17.5     $ (33.6 )   $ (1.9 )   $ 84.1  


 
21

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 13 – Special Items (continued)

Nine months ended December 28, 2007:

   
Liability as of
March 30, 2007
   
Total pre-tax
charges
recorded
year-to-date
fiscal 2008
   
Less
Payments
   
Other(1)
   
Restructuring
liability as of
Dec. 28, 2007
 
Workforce reductions
  $ 93.5     $ 53.0     $ (99.5 )   $ 3.6     $ 50.6  
Other
  $ 38.8       17.0       (22.4 )     .1       33.5  
Total
  $ 132.3     $ 70.0     $ (121.9 )   $ 3.7     $ 84.1  

(1)  
Primarily foreign currency translation adjustments.

Note 14 – Contracts with the U.S. Federal Government

During the second quarter of fiscal 2008, the Company amended a contract with the IRS in connection with a long-term systems modernization effort resulting in a forward loss of approximately $8.1.  In addition, the Company recorded a charge of approximately $33.9, to reduce precontract costs by approximately half to an amount which is probable of recovery for a combined charge of $42 which is included in cost of services.

Note 15 – Acquisitions

On July 2, 2007, CSC acquired all the outstanding shares of Covansys Corporation (Covansys), a publicly held U.S. global consulting and technology services company headquartered in Farmington Hills, Michigan, for a cash purchase price of approximately $1.3 billion net of acquired cash.  The acquisition extends CSC’s ability to offer strategic outsourcing and technology solutions in the healthcare, financial services, retail and distribution, manufacturing, telecommunications and high-tech industries.  The acquisition of Covansys will increase the Company’s delivery capabilities in India and accelerate development of strategic offshore offerings.

The acquisition was accounted for under the purchase method and, accordingly, Covansys’ results of operations have been included with the Company’s from the date of acquisition.  The purchase price of the acquisition was allocated to the net assets acquired based on preliminary estimates of fair values at the date of acquisition and are subject to future adjustments.  The preliminary value estimates for intangible and fixed assets will be finalized no later than the end of the first quarter of fiscal 2009.  Based on the preliminary estimates of fair value, approximately $168 was allocated to identifiable intangible assets and approximately $1.1 billion was allocated to goodwill.  The amount of goodwill is primarily attributable to the increased delivery capabilities and penetration of certain industry segments anticipated to be provided by the acquisition as described above.


 
22

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 15 – Acquisitions (continued)

The following unaudited pro forma information presents consolidated results of operations as if the Covansys acquisition occurred at the beginning of each period presented.  Pro forma results include adjustments related to interest expense and depreciation and amortization resulting from the acquisition.  Covansys’ proforma results for the first three months of the nine months ended December 28, 2007 include nonrecurring costs of $4.0 related to acquisition activities and costs of being a standalone public company prior to the acquisition by CSC.  The pro forma information may not necessarily be indicative of the results of operations had the Covansys acquisition actually taken place at the beginning of each period presented. Further, the pro forma information may not be indicative of future performance.

   
As Reported
   
Pro forma
 
(In millions except per-share amounts)
 
Third Quarter Ended
   
Third Quarter Ended
 
   
December 28, 2007
   
December 29, 2006
   
December 28, 2007
   
December 29, 2006
 
Revenue
  $ 4,160.0     $ 3,640.6     $ 4,160.0     $ 3,757.5  
                                 
Net Income
  $ 179.0     $ 113.5     $ 179.6     $ 105.2  
                                 
Basic Earnings Per Share
   $ 1.07      $ 0.66      $ 1.07      $ 0.61  
                                 
Fully Diluted Earnings Per Share
   $ 1.05      $ 0.65      $ 1.05      $ 0.60  

   
As Reported
   
Pro forma
 
(In millions except per-share amounts)
 
Nine Months Ended
   
Nine Months Ended
 
   
December 28, 2007
   
December 29, 2006
   
December 28, 2007
   
December 29, 2006
 
Revenue
  $ 12,015.1     $ 10,810.7     $ 12,134.7     $ 11,156.4  
                                 
Net Income
  $ 362.9     $ 143.1     $ 343.6     $ 117.5  
                                 
Basic Earnings Per Share
   $ 2.12      $ 0.81      $ 2.01      $ 0.67  
                                 
Fully Diluted Earnings Per Share
   $ 2.08      $ 0.79      $ 1.97      $ 0.65  

As a result of the Covansys acquisition on July 2, 2007, the Company has incurred and will incur future costs to consolidate facilities, involuntarily terminate employees and other costs to integrate Covansys into the Company.  Generally accepted accounting principles require that these costs, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired.  The facility consolidations relate to the rationalization of Covansys office space in the U.S. and internationally where space will be vacated and subleased if possible.  Involuntary terminations relate to approximately 37 Covansys employees.  As of December 28, 2007, 15 employees had been terminated.  Consolidation and integration plans are still being finalized in the various geographies where Covansys operates; therefore, the estimated integration liabilities are subject to change as plans become finalized.  The components of the estimated acquisition integration liabilities included in the purchase price allocation for Covansys are presented in the following table.

 
23

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 15 – Acquisitions (continued)

   
Acquisition Integration Liabilities
   
Paid as of December 28, 2007
   
Balance Remaining at December 28, 2007
 
Facility consolidations
  $ 4.4     $ (0.6 )   $ 3.8  
Severance payments
    4.9       (1.7 )     3.2  
Other
    0.1               0.1  
     Total
  $ 9.4     $ (2.3 )   $ 7.1  

The Company is currently reviewing the preliminary fair value estimates of assets acquired and liabilities assumed, including valuations associated with identified intangible assets, exit and facility consolidation activities, litigation, assets and liabilities related to taxes and long-term contracts, and other matters unresolved at the time of acquisition.  Litigation issues include two pre-acquisition contingencies for which the Company is awaiting additional information to determine fair value at the acquisition date.  For one matter, CSC will evaluate employee job title mapping and classification after a review of labor and payroll detail records.  The second matter will require further review of compliance of regulatory filings in India.  Approximately $2 of liability has been preliminarily estimated for these two matters pending further review.  The Company is also in the process of evaluating accounting treatment for conformance.  Adjustments to the purchase price allocation are expected to be finalized no later than the first quarter of fiscal 2009.  There can be no assurance that such adjustments will not be material.

On December 22, 2006, CSC acquired all the outstanding shares of Datatrac Information Services, Inc. (Datatrac), a privately held U.S. government services and solutions provider headquartered in Richardson, Texas for an initial purchase price of $123.  The acquisition extends CSC's ability to offer comprehensive solutions in identity management and credentialing, a market segment of strategic importance to CSC's North American Public Sector operation.  It also expands the Company's capabilities in offering customer contact solutions to clients across the broad U.S. federal market and strengthens CSC’s ability to compete for work within the U.S. Department of Homeland Security and other government agencies.

Datatrac’s results of operations have been included with the Company’s from the date of acquisition, December 22, 2006.  The purchase price of the acquisition was allocated to the net assets acquired based on estimates of the fair values at the date of the acquisition.  There were no material purchase accounting adjustments to Datatrac’s assets and liabilities during the nine months ended December 28, 2007.  The pro forma impact on net income and earnings per share have not been disclosed for the current or comparable prior periods, as the amounts were immaterial to the financial statements as a whole.

The Datatrac stock purchase agreement contains an earn-out provision with additional consideration based on the Company’s success in winning the recompete for its Service Center Operation Team contract with the U.S. federal government.  However, the Company was not awarded this contract and as a result no consideration will be payable under the earn-out provision.

 
24

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 15 – Acquisitions (continued)

As a result of the Datatrac acquisition on December 21, 2006, the Company incurred costs to consolidate facilities and other costs to integrate Datatrac into the Company.  The facility consolidations related to the abandonment and sublease of Datatrac facilities. The components of the final acquisition integration liabilities included in the purchase price allocation for Datatrac are presented in the following table.

   
Acquisition Integration Liabilities
   
Paid as of December 28, 2007
   
Balance Remaining at December 28, 2007
 
Facility consolidations
  $ 6.0     $ .1     $ 5.9  
Other
    .1               .1  
Total
  $ 6.1     $ .1     $ 6.0  

As a result of the DynCorp acquisition on March 7, 2003, the Company incurred costs to exit and consolidate activities, involuntarily terminate employees, and other costs to integrate DynCorp into the Company.  The facility consolidations related to the abandonment and sublease of DynCorp facilities. The components of the final acquisition integration liabilities included in the purchase price allocation for DynCorp are presented in the following table.

   
Acquisition Integration Liabilities
   
Paid as of December 28, 2007
   
Balance Remaining at December 28, 2007
 
Severance payments
  $ 7.1     $ 7.1        
Facility consolidations
    66.7       59.9     $ 6.8  
Other
    6.1       3.5       2.6  
Total
  $ 79.9     $ 70.5     $ 9.4  

Note 16 – Share Repurchase Program

On June 29, 2006, the Company’s Board of Directors authorized a share repurchase program of up to $2,000.  In connection with the share repurchase program the Company entered into an accelerated share repurchase agreement and a collared accelerated share repurchase agreement on June 29, 2006 for a combined $1,000.  The Company received a $28.7 payment on July 6, 2007 as final settlement of the accelerated share repurchase agreement and approximately 2.7 million shares during July, 2007 as final settlement of the collared accelerated share repurchase agreement.

The Company also entered into a purchase agreement with Goldman, Sachs & Co to acquire up to an additional $1,000 in market value of outstanding common stock through open market repurchase transactions under a Rule 10b5-1 plan.  This share repurchase program is expected to be completed during fiscal 2009, but may be completed sooner depending upon market conditions.  During the third quarter and nine months year to date ended December 28, 2007, the Company acquired and retired approximately 5.9 million and 9.0 million outstanding shares for $320.1 and $488.9, respectively, under this plan.


 
25

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 17 – Commitments and Contingencies

The Company guarantees working capital credit lines established with local financial institutions for its non-U.S. business units.  Generally, guarantees have one-year terms and are renewed annually.  CSC guarantees up to $683.8 of such working capital lines; as of December 28, 2007, the amount of the maximum potential payment is $38.9, the amount of the related outstanding subsidiary debt. The $38.9 outstanding debt is reflected in the Company’s consolidated financial statements.

The Company generally indemnifies its software license customers from claims of infringement on a United States patent, copyright, or trade secret.  CSC’s indemnification covers costs to defend customers from claims, court awards or related settlements.  The Company maintains the right to modify or replace software in order to eliminate any infringement.  Historically, CSC has not incurred any significant costs related to customer software license indemnification.  Management considers the likelihood of incurring future costs to be remote.  Accordingly, the Company has not recorded a related liability.

In the course of business, discrepancies or claims may arise as to the use or reliability of various software products provided by the Company for its customers.  During 2005, the Company was named, along with other vendors to the insurance industry and dozens of insurance companies in Hensley, et al. vs. Computer Sciences Corporation, et al., filed as a putative nationwide class action in state court in Miller County, Arkansas shortly before President Bush signed the Class Action Fairness Act into law.  The plaintiffs allege the defendants conspired to wrongfully use software products licensed by the Company and the other software vendors to reduce the amount paid to the licensees' insured for bodily injury claims.  Plaintiffs also allege wrongful concealment of the manner in which these software programs evaluate claims and wrongful concealment of information about alleged inherent errors and flaws in the software.  Plaintiffs seek injunctive and monetary relief of less than $.075 for each class member, as well as attorney's fees and costs.  The Company is vigorously defending itself against the allegations.

Litigation is inherently uncertain and it is not possible to predict the ultimate outcome of the matters discussed above.  Considering the early stage of the Hensley case, the complicated issues presented by that matter, and the fact that no class has been certified, it is not possible at this time to make meaningful estimates of the amount or range of loss that could result from this matter.  It is possible that the Company's business, financial condition, results of operations, or cash flows could be affected by the resolution of this matter.  Whether any losses, damages or remedies ultimately resulting from this proceeding could reasonably have a material effect on the Company's business, financial condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages, if any, and the structure and type of any such remedies.  Depending on the ultimate resolution of these matters, some may be material to the Company's operating results for a particular period if an unfavorable outcome results, although such a material unfavorable result is not presently expected, and all other litigation, in the aggregate, is not expected to result in a material adverse impact to the consolidated condensed financial statements.


 
26

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 17 – Commitments and Contingencies (continued)

As reflected by Form 8-K filings made by Sears Holdings Corporation (SHC) on May 13, 2005 (following merger with K-Mart Holding Corporation), and by the Company on May 16, 2005, SHC’s subsidiary, Sears, Roebuck and Co. (Sears), and the Company were in dispute over amounts due and owing following Sears’ termination of its Master Services Agreement (Agreement) with the Company on May 11, 2005.  The dispute has been settled as reflected in an 8-K filed October 25, 2007.  The settlement provides for Sears paying to the Company $75, which was received by the Company on January 8, 2008, as scheduled, and provides for the recovery of the Company’s net asset position, with no material impact to income.

CSC is engaged in providing services under contracts with the U.S. Government.  The contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether the Company's operations are being conducted in accordance with these requirements.  U.S. Government investigations of the Company, whether related to the Company's federal government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon the Company, or could lead to suspension or debarment from future U.S. Government contracting.  The Company believes it has adequately reserved for any losses which may be experienced from these investigations.

The Company has converted the 16 submitted Requests for Equitable Adjustment (REAs) to interest bearing claims under the Contract Disputes Act (CDA) totaling approximately $900 on two U.S. Federal contracts. Included in current assets on the Company's balance sheet are approximately $438 ($414 of which is subject to the claims) of unbilled receivables and $407 of deferred costs related to the claims associated with the two contracts.  The Company does not record any profit element when it defers costs associated with such REAs/claims. CSC has requested payment for customer-caused delays and certain related out-of-scope work directed or caused by the customers in support of their critical missions. Notwithstanding the Government’s breaches and delays, CSC was obligated under applicable federal acquisition law to continue performance as directed by the Government; otherwise, refusal to perform would have placed CSC at risk for a termination for default under the applicable provisions of the Federal Acquisition Regulations.  The Company believes it has valid bases for pursuing recovery of these REAs/claims supported by outside counsel’s evaluation of the facts and assistance in the preparation of the claims.


 
27

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 17 – Commitments and Contingencies (continued)

With respect to the larger set of claims, during the first quarter of fiscal 2008, the U.S. federal contracting officer for the contract with the larger set of claims denied the claims and issued a $42.3 counterclaim.  The Company disagrees with the Government’s denials both factually and contractually.  In contrast to the Company’s claims’ submission, the Government’s counter-claim was submitted with no verifiable evidence, no citation to any supporting evidence and no explanation of its method for calculating value.  Because of these disputes, the Company initiated litigation at the Armed Services Board of Contract Appeals (ASBCA), one of the two forums available for litigation of CDA claims, on September 11, 2007, with regard to the larger of the two sets of claims and the counterclaim.  Decisions of the ASBCA may be appealed to the Court of Appeals for the Federal Circuit and that court’s ruling may be appealed to the U.S. Supreme Court.  During the third quarter of fiscal 2008, the Company and its litigation team undertook a standard review of the value of the claims associated with this contract.  Value is subject to periodic, routine adjustment as new facts are uncovered, because of contract modifications and funding changes, ordinary rate adjustments, and/or estimated cost data being replaced with actual costs.  On December 21, 2007, as a result of the review, the Company amended the complaint it filed with the ASBCA on September 11, 2007, and adjusted its value downward, with such reduction reflected in the approximately $900 total value for both sets of claims noted above.  This adjustment is solely to the amount of damages claimed and does not affect the amounts recorded in the Company’s balance sheet.

With respect to the second set of claims, the Government issued its denial on November 15, 2007.  The Company is analyzing the decision and has until February 12, 2008, to initiate litigation in the ASBCA or until November 15, 2008, to initiate litigation in the U.S. Court of Federal Claims.  The Company intends to pursue collection of its claims through either the ASBCA or the U.S. Court of Federal Claims.

Interest on the claims is accruing but will only be recognized in the financial statements when paid. Resolution of the REA claims/amounts depends on individual circumstances, negotiations by the parties and prosecution of the claims.  The Company will pursue appeals as necessary and is unable to predict the timing of resolution of recovery of these claims; however, resolution of the claims may take years.

Several shareholders of the Company have made demands on the Board of Directors of the Company or filed purported derivative actions against both the Company, as nominal defendant, as well as certain of CSC's executive officers and directors.  These actions generally allege that certain of the individual defendants breached their fiduciary duty to the Company by purportedly “backdating” stock options granted to CSC executives, improperly recording and accounting for allegedly backdated stock options, producing and disseminating disclosures that improperly recorded and accounted for the allegedly backdated options, engaging in acts of corporate waste, and committing violations of insider trading laws.  They allege that certain of the defendants were unjustly enriched and seek to require them to disgorge their profits.  The Company and certain directors and other individuals have also been sued in a class action proceeding alleging violations of the ERISA statute related to claims of alleged backdating of stock options.  At this time it is not possible to make reliable estimates of the amount or range of loss that could result from these actions.

 
28

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 17 – Commitments and Contingencies (continued)

In addition to the matters noted above, the Company is currently party to a number of disputes which involve or may involve litigation.  The Company consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to such matters in the ordinary course of business.  Whether any losses, damages or remedies ultimately resulting from such matters could reasonably have a material effect on the Company's business, financial condition, results of operation, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies.  For these reasons, it is not possible to make reliable estimates of the amount or range of loss that could result from these other matters at this time.  Company management does not, however, presently expect any of such other matters to have a material impact on the consolidated financial statements of the Company.

Note 18 – Pension and Other Benefit Plans

The Company and its subsidiaries offer a number of pension and postretirement healthcare and life insurance benefit plans.  The components of net periodic benefit cost for defined benefit pension and postretirement benefit plans are as follows:
 
   
Three Months Ended
 
   
December 28, 2007
   
December 29, 2006
 
Pensions
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ 29.9     $ 21.9     $ 32.1     $ 23.3  
Interest cost
    32.5       30.9       29.1       25.8  
Expected return on assets
    (38.2 )     (36.7 )     (33.4 )     (31.1 )
Amortization of transition obligation
            .3               .3  
Amortization of prior service costs
    (.2 )     .1       .8       .1  
Amortization of unrecognized net loss
    3.7       5.5       4.1       3.4  
SFAS No. 88 settlement/curtailment
    .1       .2                  
Special termination benefit recognized
                            (.2 )
Net periodic pension cost
  $ 27.8     $ 22.2     $ 32.7     $ 21.6  

   
Nine Months Ended
 
   
December 28, 2007
   
December 29, 2006
 
Pensions
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ 89.7     $ 62.2     $ 96.3     $ 69.8  
Interest cost
    97.5       90.9       87.3       75.7  
Expected return on assets
    (114.6 )     (108.2 )     (100.2 )     (89.0 )
Amortization of transition obligation
            .9               .9  
Amortization of prior service costs
    .2       .3       2.4       .4  
Amortization of unrecognized net loss
    11.1       16.2       12.3       12.0  
SFAS No. 88 settlement/curtailment
    .1       .6               .7  
Special termination benefit recognized
                            6.5  
Net periodic pension cost
  $ 84.0     $ 62.9     $ 98.1     $ 77.0  


 
29

 

COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except per-share amounts)

Note 18 – Pension and Other Benefit Plans (continued)

   
Three Months Ended
 
   
December 28, 2007
   
December 29, 2006
 
Other Postretirement Benefits
 
U.S. Plans
   
Non-U.S. Plans
   
U.S. Plans
   
Non-U.S. Plans
 
Service cost
  $ .6     $ .1     $ .6     $ .1  
Interest cost
    2.5       .2       2.2       .1  
Expected return on assets
    (1.7 )             (1.6 )        
Amortization of transition obligation