News Column

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter and Nine Months of Fiscal 2014 versus Third Quarter and Nine Months of Fiscal 2013

January 31, 2014

All statements and assumptions in this quarterly report on Form 10-Q and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved. Forward-looking information contained in these statements include, among other things, statements with respect to the Company's financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, management's assessment of estimates related to profitability of its long-term contracts and estimates related to impairment of contract-specific assets, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of the Company's control, which could cause actual results to differ materially from the results described in such statements. These forward looking statements should be read in conjunction with the Company's Annual Report on Form 10-K. The reader should specifically consider the various risks discussed in the Risk Factors section included elsewhere herein. Forward-looking statements in this quarterly report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law. General The following discussion and analysis provides information management believes relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (CSC or the Company). The discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto and the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 2013 . The following discusses the Company's financial condition and results of operations as of and for the quarter and nine months ended December 27, 2013 , and the comparable periods of the prior fiscal year. Reportable Segments CSC is a global leader of information technology (IT) and professional services and solutions. The Company's mission is to enable superior returns on its client's technology investments through best-in-class industry solutions, domain expertise and global scale. During fiscal 2013, the Company focused its strategy on leading the next generation of IT services and solutions. CSC has undertaken numerous organizational and operational changes to align the company's leadership, assets, and operating model with this strategy. The new operating model supports the execution of CSC's strategy by facilitating the effective development, sales and support of a portfolio of next generation offerings for commercial and government clients. The redesigned operating model, which came into effect at the beginning of fiscal 2014, resulted in a change to the Company's reportable segments for fiscal 2014 and going forward. The Company's new reportable segments are as follows: Global Business Services (GBS) - GBS is uniquely positioned to help clients understand and exploit industry trends of IT modernization and virtualization of the IT stack (which consists of hardware, software, networking, storage and computing assets). The segment comprises three units: Consulting, Industry Software & Solutions , and Applications Services. The Consulting business is a global leader in helping large organizations, public-sector entities, and local businesses innovate, transform, and create sustainable competitive advantage through a 46 -------------------------------------------------------------------------------- combination of industry, business process, technology, systems integration and change management expertise. Industry Software & Solutions is a leader in industry-based software, services, and business process services and outsourcing. The software solutions and process-based intellectual property power mission-critical transaction engines in insurance, banking, healthcare and life sciences. Applications Services optimizes and modernizes clients' application portfolio and information services sourcing strategy, enabling clients to capitalize on emerging services such as cloud, mobility, and big data within new commercial models such as the agile "as a Service - Economy" (aaS). Key competitive differentiators for GBS include its global scale, solution objectivity, depth of industry expertise and end-to-end solutions. Changing business issues such as globalization, fast-developing economies, government regulation, and growing concerns around risk, security, and compliance drive demand for these GBS offerings. Global Infrastructure Services (GIS) - GIS provides managed and virtual desktop solutions, mobile device management, unified communications and collaboration services, data center management, compute and managed storage solutions to commercial clients globally. GIS also delivers CSC's next generation Cloud offerings, including secure Infrastructure as a Service (IaaS), private Cloud solutions, CloudMail and Storage as a Service ( SaaS ). These offerings are designed to provide a rich portfolio of standardized offerings that have predictable outcomes and measurable results while reducing business risk and operating costs for clients. To provide clients with uniquely differentiated offerings and expanded market coverage, GIS also collaborates with a select number of strategic partners. This collaboration helps CSC determine the best technology, road map and opportunities to differentiate solutions, augment capabilities, and jointly deliver impactful solutions. The Company seeks to capitalize on an emerging market trend - to rebundle the IT stack on virtualized infrastructure. GIS offerings are designed for any enterprise - from national, multinational and global enterprises. North American Public Sector (NPS) - NPS delivers IT, mission, and operations-related services to the Department of Defense , civil agencies of the U.S. federal government, as well as other foreign, state and local government agencies. Commensurate with the Company's strategy, NPS is leveraging CSC's commercial best practices and next-generation technologies to bring scalable and more cost-effective IT solutions to government agencies that are seeking efficiency through innovation. This approach is designed to yield lower implementation and operational costs as well as a higher standard of delivery excellence. Evolving government priorities such as: 1) IT efficiency, which includes data center consolidation and next generation cloud technologies, 2) cyber security, 3) immigration reform, 4) mission intelligence driven by big data solutions, and 5) health IT and informatics, drive demand for NPS offerings. Segment results for the third quarter and first nine months of fiscal 2013 have been recast to reflect the change in reportable segments. In addition, segment results for the third quarter and first nine months of fiscal 2013 have been adjusted from amounts previously reported to reflect discontinued operations (see Note 3 to the Consolidated Condensed Financial Statements). 47 -------------------------------------------------------------------------------- Overview The key operating results for the third quarter and first nine months of fiscal 2014 include: Revenues for the third quarter of fiscal 2014 decreased $308 million , or 8.7%, to $3,228 million , and on a constant currency basis(1), decreased $302 million , or 8.5%, as compared to the third quarter of fiscal 2013. For the first nine months of fiscal 2014, revenues decreased $1,023 million, or 9.6%, to $9,669 million , and on a constant currency basis, revenues decreased $988 million , or 9.2%, as compared to the first nine months of fiscal 2013. Operating income(2) for the third quarter of fiscal 2014 increased to $316 million as compared to operating income of $260 million for the third quarter of fiscal 2013. The operating income margin increased to 9.8% from last year's third quarter margin of 7.4%. For the first nine months, operating income increased to $963 million as compared to operating income of $673 million for the first nine months of fiscal 2013. The operating income margin increased to 10.0% from 6.3% for the comparable period of fiscal 2013. Earnings before interest and taxes(3) (EBIT) increased to $255 million as compared to EBIT of $197 million for the third quarter of fiscal 2013. EBIT margin improved to 7.9% from last year's third quarter margin of 5.6%. EBIT increased to $749 million as compared to EBIT of $479 million for the first nine months of fiscal 2013. EBIT margin improved to 7.7% from last year's margin of 4.5% for the comparable period. (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 that used by other companies. CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment general and administrative (G&A) expense, excluding corporate G&A. Operating margin is defined as operating income as a percentage of revenue. Management compensates for the limitations of this non-GAAP measure by also reviewing income from continuing operations before taxes, which includes costs excluded from the operating income definition such as corporate G&A, interest and other income (expense). A reconciliation of consolidated operating income to income from continuing operations before taxes is as follows: Quarter Ended Nine Months Ended (Amounts in millions) December 27, 2013 December 28, 2012 December 27, 2013 December 28, 2012 Operating income $ 316 $ 260 $ 963 $ 673 Corporate G&A (66 ) (56 ) (198 ) (186 ) Interest expense (38 ) (57 ) (112 ) (147 ) Interest income 4 4 11 14 Other income (expense), net 5 (7 ) (16 ) (8 ) Income from continuing operations before taxes $ 221 $ 144 $ 648 $ 346 (3) Earnings before interest and taxes (EBIT) is a non-GAAP measure that provides useful information to investors regarding the Company's results of operations as it provides another measure of the Company's profitability, and is considered an important measure by financial analysts covering CSC and its peers. The Company's definition of such measure may differ from that used by other companies. CSC defines EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to income from continuing operations is as follows: Quarter Ended Nine Months Ended (Amounts in millions) December 27, 2013 December 28, 2012 December 27, 2013 December 28, 2012 Earnings before interest and taxes $ 255 $ 197 $ 749 $ 479 Interest expense (38 ) (57 ) (112 ) (147 ) Interest income 4 4 11 14 Taxes on income (70 ) (30 ) (206 ) (95 ) Income from continuing operations $ 151 $ 114 $ 442 $ 251 48 -------------------------------------------------------------------------------- Income from continuing operations before taxes was $221 million for the third quarter of fiscal 2014, as compared to $144 million in the third quarter of fiscal 2013, an increase of $77 million . Income from continuing operations before taxes was $648 million , compared to $346 million in the first nine months of fiscal 2013, an increase of $302 million . (Loss) income from discontinued operations, net of taxes, was $(5) million for the third quarter of fiscal 2014, as compared to $399 million in the same period of fiscal 2013. Income from discontinued operations, net of taxes, was $72 million for the first nine months of fiscal 2014, as compared to $442 million in the same period of fiscal 2013. Net income attributable to CSC common stockholders was $141 million , a decrease of $369 million from last year's third quarter. Net income attributable to CSC common stockholders was $500 million , a decrease of $180 million from the first nine months of fiscal 2013. Diluted earnings (loss) per share (EPS) for the third quarter of fiscal 2014, was $0.94 , a decrease of $2.33 as compared to $3.27 for the same period in the prior fiscal year. Diluted EPS was comprised of $0.98 from continuing operations and $(0.04) from discontinued operations, as compared to $0.71 and $2.56 , respectively, for the same period in the prior fiscal year. For the first nine months of fiscal 2014, diluted EPS was $3.31 , a decrease of $1.05 as compared to $4.36 for the same period in the prior fiscal year. Diluted EPS was comprised of $2.83 from continuing operations and $0.48 from discontinued operations, as compared to $1.52 and $2.84 , respectively, for the same period in the prior fiscal year. The Company announced total contract awards(4)(5) of $3.3 billion for the third quarter of fiscal 2014, including $2 billion for GBS, $0.7 billion for GIS and $0.6 billion for NPS. Total contract awards for the third quarter of fiscal 2013 were $2.9 billion , including $1.2 billion for GBS, $1.1 billion for GIS and $0.6 billion for NPS. Total backlog(6) at the end of the third quarter of fiscal 2014 was $30.7 billion, as compared to $31.6 billion in the prior year. Of the total $30.7 billion backlog, $2.7 billion of the backlog at the end of the third quarter is expected to be realized as revenue in the remainder of fiscal 2014. Of the total $30.7 billion backlog, $9.1 billion is not yet funded. Days Sales Outstanding (DSO)(7) was 76 days at December 27, 2013 , an increase from 75 days at the end of the third quarter of the prior fiscal year. Debt-to-total capitalization ratio(8) was 43.1% at December 27, 2013 , a decrease of 3.3 percentage points from 46.4% at March 29, 2013 . Cash provided by operating activities was $1,012 million for the first nine months of fiscal 2014, as compared to $1,078 million in the prior year. Cash used in investing activities was $377 million for the first nine months of fiscal 2014, as compared to cash provided of $474 million in the prior year. Cash used in financing activities was $393 million for the first nine months of fiscal 2014, as compared to $433 million provided in the prior year. Free cash flow(9) of $401 million for the first nine months of fiscal 2014 decreased $56 million as compared to $457 million for the first nine months of fiscal 2013. (4) The Company deployed a new global order input system at the beginning of fiscal 2014 to enhance "lead-to-order" management. This new system permits better and more comprehensive tracking of awards, and enabled the implementation of a revised methodology for reporting new bookings. Fiscal 2013 awards have been recast to be consistent for comparison purposes. (5) Business awards for GIS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. Effective fiscal 2014, GBS' policy of tracking awards was made consistent with the existing GIS policy. 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. CSC's business awards, for all periods presented, have been recast to exclude the awards relating to businesses that have been sold. (6) 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, 49 -------------------------------------------------------------------------------- availability of customer funding and other factors. Backlog estimates for government contracts include both the funded and unfunded portions and all of the option periods. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements. CSC's backlog, for all periods presented, have been recast to exclude the backlog relating to discontinued operations. (7) 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 income tax receivables and long-term receivables. (8) Debt-to-total capitalization ratio is defined as total current and long-term debt divided by total debt and equity, including noncontrolling interest. (9) Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. CSC defines free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities) and (3) payments on capital leases and other long-term asset financings. 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: Quarter Ended Nine Months Ended (Amounts in millions) December 27, 2013 December 28, 2012 December 27, 2013 December 28, 2012 Net cash provided by operating $ 529 $ 413 $ 1,012 $ 1,078 activities Net cash (used in) provided by investing activities (301 ) 840 (377 ) 474 Acquisitions, net of cash acquired 163 - 190 34 Business dispositions (13 ) (956 ) (245 ) (958 ) Short-term investments - - (5 ) - Payments on capital leases and other (54 ) (52 ) (174 ) (171 ) long-term asset financings Free cash flow $ 324 $ 245 $ 401 $ 457 Results of Operations Revenues Revenues for the GBS, GIS and NPS segments for the quarters and nine months ended December 27, 2013 and December 28, 2012 are as follows: Quarter Ended Percent (Amounts in millions) December 27, 2013 December 28, 2012 Change Change GBS $ 1,109 $ 1,220 $ (111 ) (9.1 )% GIS 1,154 1,191 (37 ) (3.1 ) NPS 990 1,157 (167 ) (14.4 ) Corporate 2 3 (1 ) - Subtotal 3,255 3,571 (316 ) (8.8 ) Eliminations (27 ) (35 ) 8 - Total Revenue $ 3,228 $ 3,536 $ (308 ) (8.7 )% 50 -------------------------------------------------------------------------------- Nine Months Ended (Amounts in millions) December 27, 2013 December 28, 2012 Change Percent Change GBS $ 3,233 $ 3,693 $ (460 ) (12.5 )% GIS 3,425 3,557 (132 ) (3.7 ) NPS 3,095 3,530 (435 ) (12.3 ) Corporate 9 9 - Subtotal 9,762 10,789 (1,027 ) (9.5 ) Eliminations (93 ) (97 ) 4 Total Revenue $ 9,669 $ 10,692 $ (1,023 ) (9.6 )% The major factors affecting the percent change in revenues for the quarter and nine months ended December 27, 2013 are presented as follows: Quarter Ended Approximate Impact of Currency Net Internal Acquisitions Fluctuations Growth Total GBS 0.1 0.1 % (9.3 )% (9.1 )% GIS 0.1 (0.6 ) (2.6 ) (3.1 ) NPS - % - (14.4 ) (14.4 ) Cumulative Net Percentage 0.1 % (0.2 )% (8.6 )% (8.7 )% Nine Months Ended Approximate Impact of Currency Net Internal Acquisitions Fluctuations Growth Total GBS - (0.3 )% (12.2 )% (12.5 )% GIS - (0.7 ) (3.0 ) (3.7 ) NPS 0.1 % - (12.4 ) (12.3 ) Cumulative Net Percentage 0.1 % (0.4 )% (9.3 )% (9.6 )% Global Business Services GBS segment revenue for the third quarter of fiscal 2014 decreased $111 million , or 9.1%, as compared to the same period of fiscal 2013, and decreased $112 million , or 9.2% in constant currency. For the first nine months, GBS revenue decreased $460 million or 12.5%, as compared to the same period of fiscal 2013, and decreased $452 million , or 12.2%, in constant currency. GBS revenue, for both the third quarter and first nine months of fiscal 2014, was unfavorably impacted by certain fiscal 2013 revenues that did not recur in fiscal 2014. These principally included revenues from the fiscal 2013 divestiture of the Company's Australian information technology staffing business unit ( Paxus ) of $61 million and $202 million , respectively (see Note 3 to the Consolidated Condensed Financial Statements), and $55 million of milestone revenue realized on the NHS contract during the first quarter of fiscal 2013. In addition, for the first nine months of fiscal 2014, GBS revenue was adversely impacted by adjustments of $23 million on certain contracts within the industry software and solutions (IS&S) group (see Note 4 to the Consolidated Condensed Financial Statements), and net year-over-year adverse revenue adjustments $1 million and $12 million , respectively, on contracts accounted for under the percentage-of-completion method. 51 -------------------------------------------------------------------------------- Excluding the effect of the items mentioned above, GBS revenue declined $51 million , or 4.2% and $161 million , or 4.4%, for the third quarter and first nine months of fiscal 2014, respectively. The revenue decreases for both the third quarter and the nine-month period were mainly attributable to GBS' efforts to reposition its consulting business to a partner-led model with industry specific offerings, and the overall economic conditions and associated business performance, primarily in Central Europe and Australia . GBS had contract awards of $2 billion in the third quarter and $4.5 billion in the first nine months of fiscal 2014, as compared to awards of $1.2 billion in the third quarter and $6.1 billion in the first nine months of fiscal 2013. Global Infrastructure Services GIS segment revenue for the third quarter of fiscal 2014 decreased $37 million , or 3.1%, as compared to the same period of fiscal 2013, and decreased $30 million , or 2.5% in constant currency. For the first nine months, GIS revenue decreased $132 million , or 3.7%, as compared to the same period of fiscal 2013, and decreased $105 million , or 3.0%, in constant currency. The decrease in GIS' revenue at constant currency for the third quarter was a result of net reduced revenue of $24 million from contracts that terminated or concluded, and reduced revenue of $40 million due to price-downs and contract modifications; partially offset primarily by increased revenue of $32 million from new and existing contracts. The decrease in GIS' revenue at constant currency for the first nine months was a result of reduced revenue of $82 million from contracts that terminated or concluded, and net reduced revenue of $166 million primarily due to price-downs, contract modifications and lower pass-through revenue; partially offset by increased revenue $141 million from new and existing contracts. GIS had contract awards of $0.7 billion in the third quarter and $2.4 billion in the first nine months of fiscal 2014 as compared to $1.1 billion and $2.5 billion in the same periods of fiscal 2013. One of the industry trends is a shift toward smaller contract awards. The Company is participating in this trend and is winning a higher volume of smaller value deals, and a reduced volume of larger deals which is driving the year-over-year trend in new contract awards. North American Public Sector NPS segment revenues were derived from the following sources: Quarter Ended (Amounts in millions) December 27, Percent December 27, 2013 2012(1)(2) Change Change Department of Defense $ 607 $ 726 $ (119 ) (16.4 )% Civil Agencies 338 368 (30 ) (8.2 ) Other (3) 45 63 (18 ) (28.6 ) Total 990 $ 1,157 (167 ) (14.4 )% 52 -------------------------------------------------------------------------------- Nine Months Ended (Amounts in millions) December 27, Percent December 27, 2013 2012(1)(2) Change Change Department of Defense $ 1,840 $ 2,158 $ (318 ) (14.7 )% Civil Agencies 1,112 1,189 (77 ) (6.5 ) Other (3) 143 183 (40 ) (21.9 ) Total 3,095 $ 3,530 (435 ) (12.3 )% (1) Certain fiscal 2013 amounts were reclassified from Department of Defense to Civil Agencies and Other to conform to current year presentation. (2) NPS revenues for fiscal 2013 have been adjusted from amounts previously reported to remove the revenue of the discontinued operation from the sale of the Company's Applied Technology Division. See Note 3 to the Consolidated Condensed Financial Statements. (3) Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment. NPS revenue for the third quarter of fiscal 2014 decreased $167 million , or 14.4%, and decreased $435 million , or 12.3%, for the first nine months of fiscal 2014, as compared to the same periods of fiscal 2013. For the third quarter of fiscal 2014, revenue from Department of Defense (DOD) contracts declined $119 million , or 16.4%. The revenue decrease on DOD contracts for the quarter was comprised of reduced revenue of $45 million on certain contracts with the Defense Information Systems Agency (DISA) and other DOD agencies that either had concluded or were winding down, reduced revenue of $87 million due to a net reduction in tasking on existing contracts, primarily with the U.S. Army and the Missile Defense Agency , as well as reductions relating to the U.S. federal government shutdown. These revenue decreases were partially offset by increased revenue of $17 million on a new task order with the Defense Intelligence Agency (DIA). Revenue from contracts with Civil Agencies also experienced a year-over-year decline of $30 million for the third quarter of fiscal 2014. Revenue decrease on contracts with Civil Agencies for the third quarter was primarily due to a net reduction in scope and tasking on existing contracts of $40 million , primarily on contracts with the Internal Revenue Service, the Department of Transportation , the Department of Health and Human Services (DHHS) and NASA . These revenue decreases were partially offset by an adverse revenue adjustment in fiscal 2013 of $12 million from a contract settlement with the U.S. government that did not recur. The revenue decrease on contracts with non-federal agencies for the third quarter of fiscal 2014 of $18 million was comprised primarily of development efforts winding down and adjustments accounted for under percentage-of-completion accounting on a contract with the State of North Carolina along with decreases on a Citizenship and Immigration contract with the Canadian government. For the first nine months of fiscal 2014, DOD contracts declined $318 million , or 14.7%. The revenue decrease on DOD contracts for the year to date was comprised of reduced revenue of $134 million on certain contracts with the National Security Agency (NSA), DISA, and other DOD agencies that either had concluded or were winding down, and reduced revenue of $227 million due to a net reduction in tasking on existing contracts, primarily with the U.S. Army , Missile Defense Agency , U.S. Navy and other DOD agencies. These revenue decreases were partially offset by increased revenue of $34 million on new contracts with the NSA and the DIA. Revenue from contracts with Civil Agencies also experienced a year-over-year decline of $77 million for the first nine months of fiscal 2014. Revenue decrease on contracts with Civil Agencies for the year to date was primarily due to a net reduction in scope and tasking on existing contracts of $59 million , primarily on contracts with the Internal Revenue Service, the DHHS and the Department of Homeland Security (DHS), and reduced revenue of $41 million due to the programs winding down or ending with the Department of Energy and the EPA . These revenue decreases were partially offset by a favorable year-over-year impact of $21 million of revenue adjustments on certain contracts with the DHS and the Department of State accounted for under the percentage-of-completion method. The revenue decrease on contracts with non-federal agencies for the year to date of $40 million was comprised primarily of development efforts winding down and adjustments accounted for under percentage-of-completion accounting on a contract with the State of North Carolina along with decreases on a Citizenship and Immigration contract with the Canadian government. 53 -------------------------------------------------------------------------------- The Company expects the trend of reduced contract scopes, including reduced tasking to continue in the near term. During the quarter and nine months ended December 27, 2013 , NPS had contract awards of $0.6 billion and $3.4 billion , respectively, as compared to $0.6 billion and $2.5 billion in the comparable periods in the prior year. Costs and Expenses The Company's total costs and expenses were as follows: Quarter Ended Amount Percentage of Revenue Percentage (Amounts in millions) December 27, 2013 December 28, 2012 December 27, 2013 December 28, 2012 of Revenue Change Costs of services (excludes depreciation & amortization and restructuring costs) $ 2,362 $ 2,767 73.2 % 78.2 % (5.0 )% Selling, general and administrative 354 271 11.0 7.7 3.3 Depreciation and amortization 251 268 7.8 7.6 0.2 Restructuring costs 11 26 0.3 0.7 (0.4 ) Interest expense, net 34 53 1.1 1.5 (0.4 ) Other (income) expense, net (5 ) 7 (0.2 ) 0.2 (0.4 ) Total $ 3,007 $ 3,392 93.2 % 95.9 % (2.7 )% Nine Months Ended Amount Percentage of Revenue Percentage December 28, (Amounts in millions) December 27, 2013 December 28, 2012 December 27, 2013 2012 of Revenue Change Costs of services (excludes depreciation & amortization and restructuring costs) $ 7,156 $ 8,447 74.1 % 79.1 % (5.0 )% Selling, general and administrative 962 846 9.9 7.9 2.0 Depreciation and amortization 753 801 7.8 7.5 0.3 Restructuring costs 33 111 0.3 1.0 (0.7 ) Interest expense, net 101 133 1.0 1.2 (0.2 ) Other (income) expense, net 16 8 0.2 0.1 0.1 Total $ 9,021 $ 10,346 93.3 % 96.8 % (3.5 )% Costs of Services Costs of services (COS), excluding depreciation and amortization and restructuring charges, as a percentage of revenue decreased 5.0 percentage points for the third quarter of fiscal 2014 and decreased 5.0 percentage points for the first nine months of fiscal 2014, as compared to same periods of the prior fiscal year. Overall, the fiscal 2014 COS ratio for the Company, for the third quarter and the first nine months, was favorably impacted by lower headcount resulting from management's restructuring efforts that were directed to align resources to support business needs, including the assessment of management span of control and layers. In addition, the COS ratio was favorably impacted by certain commercial account management previously engaged in the contract delivery activities (which rolled up under COS) in fiscal 2013, being redirected to focus on sales activities in fiscal 2014. The GBS COS ratio for the first nine months of fiscal 2014 benefited from the fiscal 2013 adverse NHS contract-related adjustment, to recognize no margins, not recurring in fiscal 2014. In addition, the GBS ratio for both the third quarter and nine months benefited from year-over-year net favorable cost adjustments of $42 million and $61 million , respectively, partially offset by net adverse revenue adjustments of $1 million and $12 million , respectively, on contracts accounted under percentage-of-completion method. 54 -------------------------------------------------------------------------------- The GIS COS ratio for the third quarter and nine months of fiscal 2014 benefited from the continuing focus on delivery on certain key contracts resulted in better margins including reduced start-up issues on new contracts. This reduction is mainly driven by ongoing operational improvements on focus accounts, the positive effects of restructuring taken over previous periods and the continued focus on cost reductions driven by standardization of products and processes. The NPS COS ratio for the third quarter and nine months of fiscal 2014 benefited from the year-over-year net favorable cost adjustments of $21 million and $5 million , respectively, and net favorable revenue adjustments of $14 million and $38 million , respectively, on contracts accounted for under the percentage-of-completion method. Selling, General and Administrative Selling, general and administrative (SG&A) expense, excluding restructuring charges, as a percentage of revenue increased 3.3 percentage points for the third quarter of fiscal 2014, and increased 2.0 percentage points for the first nine months as compared to the similar periods of the prior year. The increase in the SG&A ratio, for both the third quarter and the nine month period, was primarily due to management's decision to create a dedicated global commercial sales force in line with the overall business strategy. As per this strategy, certain account-focused executives in the commercial space, who were previously engaged in the contract delivery activities which rolled up under COS in fiscal 2013, were redirected to focus on sales activities in fiscal 2014. In addition, the Company made new investments in its commercial sales force by making incremental hires of sales personnel. The reduced bid and proposal spending within NPS, mainly due to focus towards higher margin targets, partially offset the increase in SG&A costs. The increase in the SG&A ratio, for both the third quarter and the nine-month period was also due to reduced revenues during these periods. Corporate general and administrative expenses for the third quarter and first nine months of fiscal 2014 were $66 million and $198 million , respectively, as compared to $56 million and $186 million during the same periods of the prior fiscal year. For the third quarter, the increase was primarily due to the increased incentive compensation. For the nine-month period, there were increased costs of $15 million associated with the Company's financial transformation project, higher stock-based compensation of $10 million , offset by reduced legal expenses of $21 million and lower outside professional services of $5 million . Depreciation and Amortization Depreciation and amortization (D&A) as a percentage of revenue increased 0.2 and 0.3 percentage points for the third quarter and first nine months of fiscal 2014, respectively, as compared to the same period of fiscal 2013, primarily due to reduced capital expenditures and also due to decreased revenues. Restructuring Costs Total restructuring costs recorded during the third quarter and nine months ended December 27, 2013 were $11 million and $33 million , respectively, as compared to $26 million and $111 million , respectively, in the comparable periods of the prior fiscal year. Restructuring costs for the first nine months of fiscal 2013 included $3 million for pension benefit augmentation. These amounts are owed to certain employees in accordance with legal or contractual obligations and will be paid out over several years as part of normal pension distributions. The fiscal 2014 third quarter restructuring expense included costs related with voluntary staff terminations in Europe and exit costs related to certain leased facilities in the U.K. , Canada and the U.S. Additional restructuring actions may be taken during fiscal 2014, which could result in additional charges (see Note 16 to the Consolidated Condensed Financial Statements). Income from Discontinued Operations (Loss) income from discontinued operations, net of taxes, was $(5) million and $72 million for the quarter and nine months ended December 27, 2013 , respectively, and $399 million and $442 million for the quarter and nine months ended December 28, 2012 , respectively. The income from discontinued operations represents the results of certain businesses, which have been either divested during fiscal 2014 and fiscal 2013 or are held-for-sale, and gains and loss on businesses 55 -------------------------------------------------------------------------------- divested. The divestitures are a part of the Company's ongoing service portfolio optimization initiative to focus on next-generation technology services (see Note 3 to the Consolidated Condensed Financial Statements). Interest Expense and Interest Income Interest expense for the third quarter and first nine months of fiscal 2014 was $38 million and $112 million , respectively, as compared to $57 million and $147 million , respectively, during the same periods of the prior fiscal year. The lower interest expense was primarily due to lower interest rate term notes and credit facility, issued during the third quarter of fiscal 2013, replacing the higher rate term notes which were redeemed during the fourth quarter of fiscal 2013. Interest income for the third quarter and first nine months of fiscal 2014 was $4 million and $11 million , respectively, as compared to $4 million and $14 million , respectively, during the same periods of the prior fiscal year. Interest income for first nine months of fiscal 2014 was lower as compared to fiscal 2013 due to lower cash balances in jurisdictions with higher interest rates. Other (Income) Expense, Net Other (income) expense, net primarily comprises gains and losses due to the impact of movement in foreign currency exchange rates on the Company's foreign currency denominated assets and liabilities and the related economic hedges, equity in earnings of unconsolidated affiliates, and other miscellaneous gains and losses from the sale of non-operating assets. Other (income) expense, net for the third quarter and first nine months of fiscal 2014 was $(5) million and $16 million , respectively, as compared to other expense, net of $7 million and $8 million , respectively, during the same periods of the prior fiscal year. The movement in other income/expense, for both the third quarter and the nine-month period, was mainly due to movement in exchange rates between the U.S. dollar and the Indian Rupee, used to fair value the Company's foreign currency forward and option contracts. Taxes The Company's effective tax rate (ETR) from continuing operations was 31.7% and 31.8% for the quarter and nine months ended December 27, 2013 , respectively, and 20.8% and 27.5% for the quarter and nine months ended December 28, 2012 , respectively. The following are the primary drivers of the ETR for the nine months ended December 27, 2013 and December 28, 2012 . For the tax impact of discontinued operations, see Note 3 to the Consolidated Condensed Financial Statements. During the third quarter and nine months ended December 27, 2013 , the Company recorded an income tax benefit of approximately $5.6 million relating to the settlement of audits for certain of its non-US jurisdictions, which reduced the ETR by 2.5% and 0.9%, respectively. During the second quarter of fiscal 2014, the Company recorded an income tax expense of $10 million related to the previous restructuring of an operating subsidiary. This expense increased the ETR for the nine months ended December 27, 2013 by 1.5%. During the third quarter and nine months ended December 28, 2012 , there was a decrease in valuation allowances in non-U.S. jurisdictions due to (i) a shift in the global mix of income which impacted the ETR by 7.6% and 3.2%, respectively and (ii) expected capital gains from the sale of certain other assets which impacted the ETR by 6.0% and 2.5%, respectively. During the second quarter of fiscal 2013, the Company released $6.4 million of its liability for uncertain tax positions related to prior year research and development credits which reduced the ETR for the nine months ended December 28, 2012 by 1.8%. There were no material changes to uncertain tax positions in the third quarter of fiscal 2014 compared to the fiscal 2013 year-end. 56 -------------------------------------------------------------------------------- The Finance Act of 2012 ("the Finance Act") was signed into law in India on May 28, 2012 . The Act provides for the taxation of indirect foreign investment in India , including on a retroactive basis. The Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized. The Finance Act has been challenged in the Indian courts. However, there is no assurance that such a challenge will be successful. CSC has engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations. The Indian tax authorities may seek to apply the provisions of the Finance Act to these prior transactions and seek to tax CSC directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. The Company believes that the Finance Act does not apply to these prior acquisitions and that it has strong defenses against any claims that might be raised by the Indian tax authorities. Earnings Per Share and Share Base Earnings per share (EPS) for the third quarter and first nine months of fiscal 2014, on a diluted basis, was $0.94 and $3.31 , respectively, a decrease of $2.33 and $1.05 from the comparable periods of fiscal 2013. The decrease in EPS was the result of decrease in income from discontinued operations, net of taxes of $404 million and $370 million for the quarter and nine months ended December 27, 2013 , offset by an increase from continuing operations of $37 million and $191 million for the same periods. The decrease in income from discontinued operations was primarily due to the gain on disposition, net of taxes of $376 million recorded in the third quarter of fiscal 2013, that did not repeat in fiscal 2014. The increase in income from continuing operations was a result of the Company's fiscal 2013 cost reduction initiatives, partially offset by an increase in tax expense due to change in global mix of income and change in valuation allowances. Investigations and Out of Period Adjustments Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments As previously disclosed, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in its former Managed Services Sector (MSS) segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in the Company's investigation. On January 28, 2011 , the Company was notified by the SEC's Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has been expanded to other matters subsequently identified by the SEC , including matters specified in subpoenas issued to the Company from time to time by the SEC's Division of Enforcement as well as matters under investigation by the Audit Committee, as further described below. The Company is cooperating in the SEC's investigation. On May 2, 2011 , the Audit Committee commenced an independent investigation into the matters relating to the former MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC's Division of Enforcement , and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with such independent investigation. Independent counsel retained forensic accountants to assist with their work. Independent counsel also represents CSC on behalf of, and under the exclusive direction of, the Audit Committee in connection with the investigation by the SEC's Division of Enforcement . The Audit Committee's investigation was expanded to encompass (i) the Company's operations in Australia , (ii) certain aspects of the Company's accounting practices within its Americas Outsourcing operation, and (iii) certain of the Company's accounting practices that involve the percentage-of-completion accounting method, including the Company's contract with the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement 57 -------------------------------------------------------------------------------- by completing production of documents and providing any further information requested by the SEC's Division of Enforcement . In addition to the matters noted above, the SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with the NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are continuing to respond to SEC questions and to cooperate with the SEC's Division of Enforcement in its investigation of prior disclosures of the Company's contract with the NHS. The SEC's investigative activities are ongoing. In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company's conclusions relating to the materiality of such adjustments, and the Company's analysis of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting. The SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process. The investigation being conducted by the SEC's Division of Enforcement and the review of the Company's financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors, irregularities or other areas of review. As a result, we have incurred and may continue to incur significant legal and accounting expenditures. As the Company previously disclosed, certain of its non-U.S. employees and certain of its former employees, including certain former executives in the United States , have received Wells notices from the SEC's Division of Enforcement in connection with its ongoing investigation of the Company. The Company, through outside counsel, has been in discussions with the SEC Enforcement Staff concerning a potential resolution of the investigation involving the Company. However, to date those discussions have not resulted in a resolution. The Company received a Wells notice from the SEC's Division of Enforcement on December 11, 2013 . A Wells notice is not a formal allegation or a finding of wrongdoing; it is a preliminary determination by the SEC Enforcement Staff to recommend that the Commission file a civil enforcement action or administrative proceeding against the recipient. Under SEC procedures, a recipient of a Wells notice has an opportunity to respond in the form of a Wells submission that seeks to persuade the Commission that such an action should not be brought. The Company is availing itself of the Wells process by making a Wells submission to explain its views concerning such matters, which are aided by the Company Audit Committee's independent investigation and certain expert opinions of outside professionals. The Company made such a submission on January 14, 2014 . The Company is unable to estimate with confidence or certainty how long the SEC process will last or its ultimate outcome, including whether the Company will reach a settlement with the SEC and, if so, the amount of any related monetary fine and other possible remedies. In addition, the Company is unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of its 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 CSC, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows. Out of Period Adjustments Financial Impact Summary The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments in the first nine months of fiscal 2014, fiscal 2013 and fiscal 2012 is attributable to the following prior fiscal years: Increase/(Decrease) First Nine Months Fiscal 2014 (Amounts in millions) Fiscal 2012 Adjustments Fiscal 2013 Adjustments Adjustments Total Adjustments Fiscal 2014 $ - $ - $ (3 ) $ (3 ) Fiscal 2013 - 6 (1 ) 5 Fiscal 2012 79 7 - 86 Prior fiscal years (unaudited) (79 ) (13 ) 4 (88 ) See Note 14 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarter and nine months ended December 27, 2013 and December 28, 2012 , respectively. 58 -------------------------------------------------------------------------------- Fiscal 2014 Adjustments During the third quarter and through the first nine months of fiscal 2014, the Company recorded net pre-tax adjustments increasing income from continuing operations before taxes by $5 million and $3 million , respectively, that should have been recorded in prior fiscal years. The $5 million of pre-tax out of period adjustments consists of a $7 million increase to revenue (due to a $6 million adjustment to recognize revenue on previously delivered software products and services and a $1 million adjustment to recognize revenue on previously delivered outsourcing services), partially offset by a $2 million charge to cost of services (COS) (consisting of a $5 million increase to COS relating to previously delivered software products and services, offset by a $3 million decrease to COS as a result of a margin correction on long-term contracts accounted for under the percentage-of-completion method). Adjustments, net of tax, during the third quarter of fiscal 2014 that should have been recorded in prior fiscal years increased income from continuing operations by $4 million . Adjustments, net of tax, during the first nine months of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $18 million . The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the third quarter was a $1 million increase to tax expense and for the first nine months of fiscal 2014 was a $9 million increase in tax expense. The tax effect on the pre-tax adjustments for the first nine months of fiscal 2014 resulted in a disproportionate increase in tax expense due to taxes on increases in income in taxable jurisdictions, and absence of tax benefits on decreases in income in jurisdictions with net operating loss carry forwards. The out of period adjustments to tax expense for the third quarter and first nine months of fiscal 2014 resulted in no change and an increase to income tax expense of $12 million , respectively. The out of period adjustments to tax expense for the nine months ended December 27, 2013 , consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries recorded during the second quarter of fiscal 2014. In addition, during the third quarter of fiscal 2014, the Company recorded $7 million of pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first six months of fiscal 2014. The $7 million of pre-tax out of period adjustments consists primarily of a reduction of $7 million to COS (attributable to a $5 million reduction to accrued expenses, a $3 million reduction of costs related to a reversal of previously recognized software products and services, a $4 million pension accrual expense reduction, all partially offset by a $3 million reduction of margin on long-term contracts accounted for under the percentage-of-completion method, and a $2 million adjustment to recognize costs on previously delivered software products and services). In addition to the reduction to COS, a net $1 million adjustment was recorded to increase revenue on previously delivered software products and services and a $1 million increase in selling, general and administrative (SG&A) expenses was recognized related to a write-off of prepaid facility charges. Adjustments, net of tax, during the third quarter of fiscal 2014 increased income from continuing operations by $9 million that should have been recorded in the first six months of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments. During the second quarter of fiscal 2014, the Company recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $11 million that should have been recorded in prior fiscal years. The $11 million of pre-tax out of period adjustments consists of a $9 million reversal of revenue (due to deferral of revenue for undelivered elements on software contracts lacking vendor specific objective evidence and margin corrections on contracts under percentage of completion accounting), a $1 million charge to cost of sales for reversal of previously deferred costs and a $1 million charge to SG&A expense reversing excess capitalization associated with internal systems development. Adjustments, net of tax, during the second quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $20 million . The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments, and net out of period adjustments to tax expense that should have been recorded in prior fiscal years. The tax effect on the net pre-tax adjustments for the second quarter of fiscal 2014 was negligible. The out of period adjustments to tax expense for the second quarter of fiscal 2014 resulted in an increase to income tax expense of $9 million . The out of period adjustments to tax expense consist primarily of a $10 million increase in liabilities for uncertain tax positions associated with a tax restructuring of one of the Company's operating subsidiaries. In addition, during the second quarter of fiscal 2014, the Company recorded $17 million of pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2014. The $17 59 -------------------------------------------------------------------------------- million of pre-tax out of period adjustments consists of (1) a $13 million charge to cost of sales consisting of $6 million in adjustments to prepaid and accrued balances, a $4 million reversal of previously deferred costs and a $3 million reduction in work in process due to margin corrections on contracts under percentage-of-completion accounting; (2) a $3 million charge to SG&A expense primarily due to reversal of excess capitalization associated with internal systems development, partially offset by other adjustments; and (3) a $1 million charge to depreciation expense to correct the useful life for certain leasehold improvements. Adjustments, net of tax, during the second quarter of fiscal 2014 decreased income from continuing operations by $11 million that should have been recorded in the first quarter of fiscal 2014. The difference between the pre-tax and after tax impact is attributable to the tax effect of the net pre-tax adjustments. During the first quarter of fiscal 2014, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $9 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes is comprised of the following: net adjustments decreasing income from continuing operations before taxes by $13 million resulting primarily from revenues and costs in its GBS segment; net adjustments increasing income from continuing operations before taxes by $8 million resulting from the correction of payroll expenses within its GBS segment; and net adjustments increasing income from continuing operations before taxes by $14 million resulting primarily from adjustments identified by the Company late in the fiscal 2013 closing process. Adjustments recorded during the first quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $2 million . The difference between the pre-tax and after tax impact is attributable to the tax effect of the adjustments described above, and $2 million of tax expense related to net adjustments that should have been recorded in prior periods. The impact of out of period adjustments recorded during fiscal 2014 on select line items of the Consolidated Condensed Statements of Operations for the quarter and nine months ended December 27, 2013 , respectively, using the rollover method, is shown below: Quarter Ended December 27, 2013 Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 3,228 $ (8 ) $ 3,220 Costs of services (excludes depreciation and amortization and restructuring costs) 2,362 5 2,367 Selling, general and administrative 354 (1 ) 353 Depreciation and amortization 251 - 251 Restructuring costs 11 - 11 Interest expense 38 - 38 Other (income) expense (5 ) - (5 ) Income from continuing operations before taxes 221 (12 ) 209 Taxes on income 70 1 71 Income from continuing operations 151 (13 ) 138 Income from discontinued operations, net of taxes (5 ) - (5 ) Net income attributable to CSC common stockholders 141 (13 ) 128 EPS - Diluted Continuing operations $ 0.98 $ (0.09 ) $ 0.89 Discontinued operations (0.04 ) - (0.04 ) Total $ 0.94 $ (0.09 ) $ 0.85 60 -------------------------------------------------------------------------------- Nine Months Ended December 27, 2013 Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 9,669 $ 21 $ 9,690 Costs of services (excludes depreciation and amortization and restructuring costs) 7,156 23 7,179 Selling, general and administrative 962 - 962 Depreciation and amortization 753 (1 ) 752 Restructuring costs 33 2 35 Interest expense 112 - 112 Other (income) expense 16 - 16 Income from continuing operations before taxes 648 (3 ) 645 Taxes on income 206 (21 ) 185 Income from continuing operations 442 18 460 Income from discontinued operations, net of taxes 72 - 72 Net income attributable to CSC common stockholders 500 18 518 EPS - Diluted Continuing operations $ 2.83 $ 0.12 $ 2.95 Discontinued operations 0.48 - 0.48 Total $ 3.31 $ 0.12 $ 3.43 The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the nine months ended December 27, 2013 are related to the following consolidated balance sheet line items: Accounts receivable ( $1 million decrease); Prepaid expenses and other current assets ( $3 million increase); Property and equipment ( $1 million decrease); Software ( $1 million decrease); Other assets ( $1 million decrease); Accrued payroll and related costs ( $8 million decrease) Deferred revenue ( $21 million increase); and Accrued expenses and other current liabilities ( $17 million decrease). The Company has determined that the impact of the consolidated out of period adjustments recorded in fiscal 2014 is immaterial to the consolidated results, financial position and cash flows for the third quarter and first nine months of fiscal 2014 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014. Fiscal 2013 Adjustments As previously reported, during the third quarter and through the first nine months of fiscal 2013, the Company identified and recorded net pre-tax adjustments decreasing income from continuing operations before taxes by $3 million and increasing income from continuing operations before taxes by $4 million , respectively, that should have been recorded in prior fiscal years ( $3 million and $13 million , net of tax and including discrete tax benefits). In addition, during the third quarter of fiscal 2013, the Company recorded $3 million of net pre-tax adjustments increasing income from continuing operations before taxes and $2 million of net pre-tax adjustments decreasing income from continuing operations before taxes that should have been recorded in the first and second quarters of fiscal 2013, respectively. The $3 million pre-tax out of period adjustments recorded in the third quarter of fiscal 2013 that should have been recorded in prior fiscal years, resulted primarily from correcting the useful lives of property and equipment that were inconsistent with established CSC accounting conventions. This error occurred in connection with a GIS contract in France . During the third quarter of fiscal 2013, the Company identified additional prior period errors related to the use of the percentage-of-completion accounting method on its NHS contract. Such errors, which were self-correcting, have no impact on income from continuing operations before taxes for fiscal 2013. Had such adjustments been recorded in fiscal 2012, income from continuing operations before taxes would have increased by $22 million . For fiscal 2011, income from 61 -------------------------------------------------------------------------------- continuing operations before taxes would have decreased by $3 million . For fiscal 2010, there would have been no impact on income from continuing operations before taxes. For fiscal 2009 and prior periods, income from continuing operations before taxes would have decreased by $19 million . During the second quarter of fiscal 2013, the Company identified and recorded net pre-tax adjustments increasing income from continuing operations before taxes by $8 million that should have been recorded in prior fiscal years ( $10 million , net of tax). In addition, during the second quarter of fiscal 2013, the Company recorded $2 million of net pre-tax adjustments increasing income from continuing operations before taxes that should have been recorded in the first quarter of fiscal 2013 and had no impact on prior fiscal years. The $8 million pre-tax out of period adjustments recorded in the second quarter of fiscal 2013 consisted primarily of $9 million of net adjustments increasing income from continuing operations before taxes related to the Company's investigation of the use of percentage-of-completion accounting on the NHS contract. Such adjustments result primarily from accounting errors identified by the Company related to costs incurred under the NHS contract. Based on information then known by the Company, the out of period adjustments recorded in the first quarter of fiscal 2013 were comprised of $6 million of net adjustments reducing income from continuing operations before taxes identified by the Company late in the fiscal 2012 closing process, which due to the immaterial amounts involved, were not included in the Company's consolidated fiscal 2012 financial statements. Also in the first quarter of fiscal 2013, the Company identified and recorded $5 million of net pre-tax adjustments increasing income from continuing operations that should have been recorded in prior fiscal years. The $5 million of net pre-tax adjustments consisted primarily of charges related to a $2 million software revenue recognition correction and a $2 million adjustment to prepaid expenses offset by credits primarily related to corrections of $10 million to reduce accrued expenses related to the restructuring costs recorded by the Company in fiscal 2012. The Company also recorded a $2 million tax benefit in the first quarter of fiscal 2013 related to prior periods. The $2 million tax benefit was attributable to the adjustment of the deferred tax liability related to intellectual property assets. During periods subsequent to December 28, 2012 , the Company recorded out of period adjustments primarily in its GBS and GIS segments that should have been recorded in the first nine months of fiscal 2013. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the third quarter and first nine months of fiscal 2013 would have decreased by $2 million and increased by $2 million , respectively. The impact of out of period adjustments recorded during fiscal 2013, and the first nine months of fiscal 2014, on select line items of the Consolidated Condensed Statements of Operations for the quarter and nine months ended December 28, 2012 , respectively, using the rollover method, is shown below: 62 -------------------------------------------------------------------------------- Quarter Ended December 28, 2012 Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 3,536 $ - $ 3,536 Costs of services (excludes depreciation and amortization and restructuring costs) 2,767 2 2,769 Selling, general and administrative 271 1 272 Depreciation and amortization 268 (3 ) 265 Restructuring costs 26 2 28 Interest expense 57 (1 ) 56 Other (income) expense 7 (1 ) 6 Income from continuing operations before taxes 144 - 144 Taxes on income 30 6 36 Income from continuing operations 114 (6 ) 108 Loss from discontinued operations, net of taxes 399 - 399 Net income attributable to CSC common stockholders 510 (6 ) 504 EPS - Diluted Continuing operations $ 0.71 $ (0.04 ) $ 0.67 Discontinued operations 2.56 - 2.56 Total $ 3.27 $ (0.04 ) $ 3.23 Nine Months Ended December 28, 2012 Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 10,692 $ 9 $ 10,701 Costs of services (excludes depreciation and amortization and restructuring costs) 8,447 16 8,463 Selling, general and administrative 846 (1 ) 845 Depreciation and amortization 801 (5 ) 796 Restructuring costs 111 1 112 Interest expense 147 - 147 Other (income) expense 8 - 8 Income from continuing operations before taxes 346 (2 ) 344 Taxes on income 95 10 105 Income from continuing operations 251 (12 ) 239 Loss from discontinued operations, net of taxes 442 - 442 Net income attributable to CSC common stockholders 680 (12 ) 668 EPS - Diluted Continuing operations $ 1.52 $ (0.08 ) $ 1.44 Discontinued operations 2.84 - 2.84 Total $ 4.36 $ (0.08 ) $ 4.28 63 -------------------------------------------------------------------------------- The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the nine months ended December 28, 2012 are related to the following consolidated balance sheet line items: Accounts receivable ( $5 million decrease); Prepaid expenses and other current assets ( $6 million increase); Property and equipment ( $7 million decrease); Outsourcing contract costs ( $1 million increase); Other assets ( $4 million increase); Accrued payroll and related costs ( $1 million decrease); Deferred revenue ( $4 million increase); and Accrued expenses and other current liabilities ( $6 million decrease). The Company determined that the impact of the consolidated out of period adjustments recorded in the third quarter of fiscal 2013 was immaterial to the consolidated results, financial position and cash flows for the third quarter of fiscal 2013 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2013.


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