News Column

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Quarter of Fiscal 2015 versus First Quarter of Fiscal 2014

August 12, 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved. 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, for the year ended March 28, 2014. 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 included herein and the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014. The following discusses the Company's financial condition and results of operations as of and for the first three months of July 4, 2014, and the comparable period 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 clients' technology investments through best-in-class industry solutions, domain expertise and global scale.



The Company's reportable segments are as follows:

Global Business Services (GBS) - GBS provides end-to-end applications

services; consulting; and industry-aligned software and solutions to

enterprise clients around the world. GBS manages and industrializes clients'

application ecosystem through its Applications Services offering. The company

has formed a number of strategic partnerships with leading technology

companies such as HCL Technologies and SAP to deliver world-class solutions

to its customers . These partnerships will enable clients to modernize and

move enterprise workloads to next generation cloud infrastructure, while

leveraging the benefits of mobility, social networking and big data. The GBS

consulting business assists clients in achieving greater value from current

IT assets as well as aiding in the direction of future IT investments. GBS

software and solutions include vertically-aligned solutions and process-based

intellectual property. Clients include major global enterprises in the

insurance, banking, healthcare, life sciences, manufacturing and a host of

diversified industries. Key competitive differentiators for GBS include its

global scale, depth of industry expertise, strong partnerships with leading

technology companies, vendor and product independence and end-to-end 39

-------------------------------------------------------------------------------- capabilities. Changing business issues such as globalization, fast-developing economies, government regulation, and growing concerns around risk, security, and compliance drive demand for these GBS offerings.



Global Infrastructure Services (GIS) - GIS provides managed and virtual

desktop solutions, unified communications and collaboration services, data

center management, cyber security, compute and managed storage solutions to

commercial clients globally. GIS also delivers next-generation hybrid Cloud

infrastructure solutions to clients. The company integrates public cloud

offerings from Amazon Web Services, Microsoft, and VMware, with its

industry-leading private cloud solution, BizCloud. The CSC Agility Platform

enables enterprises to manage, monitor, and automate applications over

heterogeneous and hybrid clouds. The GIS portfolio of standard offerings

delivers measurable results while reducing business risk and operational

costs for clients. Collaboration with key alliance partners helps CSC to

determine the best technology road map for clients and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions.



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 of leading the

next generation of IT services, NPS is leveraging our commercial best practices and next-generation offerings to bring more cost-effective IT solutions to government agencies which 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. Demand

for NPS offerings are driven by evolving government priorities such as: 1) migration to next-generation IT solutions, which includes hybrid cloud infrastructure, application modernization and orchestration, 2) mission intelligence driven by big data solutions, 3) health IT and informatics, and 4) cyber security. 40

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Overview

The key operating results for the first quarter of fiscal 2015 include:

Revenues for the first quarter of fiscal 2015 were $3,237 million, and

decreased $17 million, or 0.5%. On a constant currency basis(1), revenues

decreased $63 million, or 1.9%, compared to the first quarter of fiscal

2014.



Operating income(2) for the first quarter of fiscal 2015 was $304 million,

compared to $332 million for the first quarter of fiscal 2014. The first

quarter fiscal 2015 operating income margin was 9.4% compared to 10.2% for

the same period of prior year. Earnings before interest and taxes(3) (EBIT) for the first quarter of fiscal 2015 was $248 million compared to $269 million for the first



quarter of fiscal 2014. EBIT margin was 7.7% compared to 8.3% in the prior

year.



Income from continuing operations before taxes was $214 million for the

first quarter of fiscal 2015, as compared to $234 million in the first quarter of fiscal 2014.



(Loss) income from discontinued operations, net of taxes, was $(8) million

for the first quarter of fiscal 2015, as compared to $16 million in the same period of fiscal 2014. (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 Principles

(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 and mark-to-market adjustment to pension expense.

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, mark-to-market adjustment to pension expense, interest and

other income (expense). A reconciliation of consolidated operating income

to income from continuing operations before taxes is as follows:

Quarter Ended (Amounts in millions) July 4, 2014 June 28, 2013 Operating income $ 304$ 332 Corporate G&A (56 ) (64 ) Pension net actuarial gains (losses) (1 ) - Interest expense (39 ) (39 ) Interest income 5 4 Other income, net 1 1 Income from continuing operations before taxes $ 214$ 234 (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 (Amounts in millions) July 4, 2014 June 28, 2013



Earnings before interest and taxes $ 248$ 269 Interest expense

(39 ) (39 ) Interest income 5 4 Taxes on income (55 ) (73 )



Income from continuing operations $ 159$ 161

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Net income attributable to CSC common stockholders was $146 million,

compared with $174 million in the prior year.



Diluted earnings (loss) per share (EPS) for the first quarter of fiscal

2015, was $0.98, a decrease of $0.16 as compared to $1.14 for the same period in the prior fiscal year. Diluted EPS was comprised of $1.03 from continuing operations and $(0.05) from discontinued operations, as compared to $1.03 and $0.11, respectively, for the same period in the prior fiscal year. The Company announced total contract awards(4) of $2.7 billion for the



first quarter of fiscal 2015, including $1.2 billion for GBS, $1.2 billion

for GIS and $0.3 billion for NPS.



Days Sales Outstanding (DSO)(5) was 81 days at July 4, 2014, an increase

from 77 days at the end of the first quarter of the prior fiscal year. Net debt-to-total capitalization ratio(6) was 6.3% at July 4, 2014, a

decrease of 0.2% percentage points from 6.3% at March 28, 2014.



Cash provided by operating activities was $273 million for the first three

months of fiscal 2015, as compared to $213 million in the prior year. Cash

used in investing activities was $114 million for the first three months

of fiscal 2015, as compared to cash provided of $101 million in the prior

year. Cash used in financing activities was $181 million for the first

three months of fiscal 2015, as compared to $207 million provided in the prior year.



Free cash flow(7) of $70 million for the first three months of fiscal 2015

increased $79 million as compared to $(9) million for the first three

months of fiscal 2014. (4) Business awards for GBS & GIS are estimated at the time of contract



signing based on then existing projections of service volumes and currency

exchange rates, and include option years. 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.



(5) 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.

(6) Net debt-to-total capitalization ratio is defined as total current and long-term debt less total cash and cash equivalents divided by total debt and equity, including noncontrolling interest. (7) 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 (Amounts in millions) July 4, 2014 June 28, 2013 Net cash provided by operating $ 273 $ 213



activities

Net cash (used in) provided by investing activities (114 ) (101 ) Business dispositions (5 ) (56 ) Short-term investments - (5 ) Payments on capital leases and other (84 ) (60 ) long-term asset financings Free cash flow $ 70 $ (9 ) 42

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Results of Operations

Results of operations for the first quarter of fiscal 2015 were impacted by the following events:

During the first quarter of fiscal 2015, the Company changed its accounting

policy for the recognition of actuarial gains and losses for its defined

benefit pension and other post-retirement benefit plans and the calculation

of expected return on pension plan assets. Historically, the Company

recognized actuarial gains and losses in excess of 10% of the greater of the

market-related value of plan assets or the plans' projected benefit

obligations (the "corridor") as a component of accumulated other

comprehensive loss in its Consolidated Condensed Balance Sheets and,

depending on the benefit plan, the Company amortized these gains and losses

to earnings either over the remaining average service period for the active

participants or over the average remaining life expectancy of the inactive

participants. Additionally, for the Company's U.S. plans and the Australian

plan, the Company previously used a calculated value for the market-related

valuation of pension plan assets, reflecting changes in the fair value of

plan assets over a three-year and a one-year period, respectively. Under the

Company's new accounting policies, the Company recognizes changes in

actuarial gains and losses and the changes in fair value of plan assets in

earnings at the time of plan remeasurement, typically annually during the

fourth quarter of each year as a component of net periodic benefit expense

(and the Company no longer applies a corridor and, therefore, no longer

defers any gains or losses). The new accounting policies result in the

changes in actuarial gains and losses and the changes in fair value of plan

assets being recognized in earnings in the year they occur, rather than

amortized over time, and therefore recognized earlier than under the

Company's previous methods of accounting. The Company believes the new

pension accounting policies are preferable as they recognize the effects of

plan investment performance, interest rate changes, changes in actuarial

assumptions as a component of earnings in the year in which they occur rather

than amortized over time, and additionally, conform all plans to a consistent

policy for determining market-related value of plan assets. These changes

have been reported through retrospective application of the new accounting

methods to all periods presented. The remaining components of

pension/postretirement expense, primarily current period service and interest

costs and expected return on plan assets, will continue to be recorded on a

quarterly basis. In addition to the above mentioned accounting policy changes, the Company also changed the way in which it allocates the elements of net periodic pension (benefit) cost to its reportable segments to be aligned with changes in how the Company's chief operating decision maker evaluates segment performance. Historically, total net periodic pension (benefit) cost, including the amortization of deferred actuarial losses/(gains) and changes in fair value of plan assets were reported within operating income, as defined by the Company, and fully allocated to reportable segments. Under the new allocation approach, the net actuarial gains and losses component of the net periodic pension (benefit) cost (mark-to-market adjustments) are excluded entirely from the Company's definition of operating income and not allocated to the reportable segments. All of the other elements of net periodic pension (benefit) cost, excluding mark-to-market adjustments, will continue to be included within operating income of the Company's reportable segments. The Company has applied the change in the allocation approach retrospectively, adjusting segment reporting for all prior periods presented (see Note 15 to the unaudited Consolidated Condensed Financial Statements).



For the impact of change in the pension accounting method, see Note 2 to the unaudited Consolidated Condensed Financial Statements.

The Company reports its results based on a fiscal year convention that

comprises four thirteen-week quarters. Every fifth year includes an

additional week in the first quarter of the fiscal year to prevent the fiscal

year from moving from an approximate end of March date. As a result, the

first quarter of fiscal 2015 had an extra week. For the additional week, the

revenue impact consisted of two components. The first component of $39

million represents the amortization of fixed fee contracts, primarily in the

GIS segment. This amount will normalize in subsequent quarters and will have

no impact on total revenue for the fiscal year. The second is a variable

component, which represents volume-based revenue and is influenced by several

factors such as business mix, timing of vacations and number of holidays in

the period. The variable revenue component is difficult to estimate and

ranges from a very low amount to approximately $80 million, and is immaterial

to full year results. Despite the variable component of extra-week revenue,

CSC's costs during the extra week were largely fixed. At the upper end of the

revenue range, CSC believes that cost ratios and operating margin on the

incremental revenue would not be dissimilar to CSC's overall business.

However, at lower levels of incremental revenue, cost ratios may have been

higher and operating margin lower than CSC's overall business. 43

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Effective fiscal 2015, the Company changed its inter-company accounting

policy. Previously, inter-company transactions between segments were

generally reflected as inter-company revenue. Under the new policy,

inter-company transactions are now generally treated as cost transfers. The

new inter-company policy has been applied retrospectively, adjusting the

segment results for all prior periods. See Note 15 of the unaudited Consolidated Condensed Financial Statements.



Revenues

Revenues for the GBS, GIS and NPS segments for the quarters ended July 4, 2014 and June 28, 2013 are as follows:

Quarter Ended Percent (Amounts in millions) July 4, 2014 June 28, 2013 Change Change GBS $ 1,088 $ 1,054 $ 34 3.2 % GIS 1,131 1,147 (16 ) (1.4 ) NPS 1,018 1,053 (35 ) (3.3 ) Corporate - - - - Subtotal 3,237 3,254 (17 ) (0.5 ) Eliminations - - - - Total Revenue $ 3,237 $ 3,254 $ (17 ) (0.5 )%



The major factors affecting the percent change in revenues for the quarter ended July 4, 2014 are presented as follows:

Quarter Ended Approximate Impact of Currency Net Internal Acquisitions Fluctuations Growth Total GBS 0.1 % 2.3 % 0.8 % 3.2 % GIS 0.3 1.8 (3.5 ) (1.4 ) NPS - - (3.3 ) (3.3 ) Cumulative Net Percentage 0.1 % 1.4 %



(2.0 )% (0.5 )%

Global Business Services

GBS segment revenue for the first quarter of fiscal 2015 of $1,088 million, increased $34 million or 3.2%, compared to the same period of fiscal 2014. In constant currency, revenue increased $9 million or 0.9%. The favorable foreign currency impact was primarily due to movement in the U.S. dollar against the British pound and the euro. The revenue increases, in constant currency, for the first quarter were primarily attributable to higher software license revenue, an adverse fiscal 2014 revenue adjustments of $19 million that did not recur in fiscal 2015. These revenue increases were partially offset by a decline in GBS consulting business.



GBS had contract awards of $1.2 billion in both the first quarters of fiscal 2015 and fiscal 2014.

Global Infrastructure Services

GIS segment revenues for the first quarter of fiscal 2015 decreased $16 million or 1.4%, compared to the same period of fiscal 2014. In constant currency, GIS revenue decreased $37 million or 3.2%. The favorable foreign currency impact was primarily due to movement in the U.S. dollar against the British pound and the euro. The decrease in GIS' revenue at constant currency for the first quarter was a result of net reduced revenue of $17 million from contracts that terminated or concluded, and reduced revenue of $76 million due to price-downs and contract modifications. These decreases were partially offset by increased revenue of $56 million from new and existing contracts. 44 --------------------------------------------------------------------------------



GIS had contract awards of $1.2 billion in the first quarter of fiscal 2015 compared to $0.9 billion in the same period of fiscal 2014.

North American Public Sector

NPS segment revenues were derived from the following sources:

Quarter Ended Percent (Amounts in millions) July 4, 2014 June 28, 2013 Change Change Department of Defense $ 562 $ 595 $ (33 ) (5.5 )% Civil Agencies 373 405 (32 ) (7.9 ) Other (1) 83 53 30 56.6 Total $ 1,018 $ 1,053 $ (35 ) (3.3 )%



(1) Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment.

NPS revenue of $1,018 million for the first quarter of fiscal 2015 decreased $35 million or 3.3%, compared to the same period of fiscal 2014. The year-over-year NPS revenue decrease was due to lower revenue on both Department of Defense (DOD) and Civil Agencies (Civil) contracts. These decreases were partially offset by a revenue increase from non-federal government contracts. The decrease in revenue from DOD contracts, included $14 million of reduced revenue on certain contracts that either had concluded or were winding down, and $20 million of reduced revenue attributable to a net reduction in tasking on existing contracts. The decrease in revenue from Civil contracts included $18 million due to reduced scope and tasking on existing contracts, and reduced revenue of $20 million due to programs winding down or ending. These revenue decreases were partially offset by net favorable adjustments of $5 million on contracts accounted for under the percentage-of-completion method.



Increased revenue on contracts with non-federal agencies was primarily due to revenue recognition of $24 million on a state contract that was previously deferred under software revenue guidance, and a favorable adjustment of $4 million on a contract accounted for under the percentage-of-completion method.

NPS had contract awards of $0.3 billion during the first quarter of fiscal 2015, as compared to $0.7 billion, during the comparable period in the prior year. The Company expects the trend of reduced contract scopes, including reduced tasking to continue in the near term.



Costs and Expenses

The Company's total costs and expenses were as follows:

Quarter Ended Amount Percentage of Revenue Percentage (Amounts in millions) July 4, 2014 June 28, 2013 July 4, 2014 June 28, 2013 of Revenue Change Costs of services (excludes depreciation & amortization and restructuring costs) $ 2,364$ 2,437 73.0 % 74.8 % (1.8 )% Selling, general and administrative 344 288 10.6 8.9 1.7 Depreciation and amortization 272 254 8.4 7.8 0.6 Restructuring costs 10 7 0.3 0.2 0.1 Interest expense, net 34 35 1.1 1.1 - Other income, net (1 ) (1 ) - - - Total $ 3,023$ 3,020 93.4 % 92.8 % 0.6 % 45

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Costs of Services

Costs of services (COS), excluding depreciation and amortization and restructuring charges, as a percentage of revenue decreased 1.8 percentage points for the first quarter of fiscal 2015 compared to same period of the prior fiscal year.

The overall decrease in the COS ratio was driven by decreases in all three segments. The GBS COS ratio decreased mainly due to higher year-over-year revenues. The GIS COS ratio benefited by $24 million due to a gain from the sale of certain intangible assets. The NPS COS ratio benefited from favorable year-over-year adjustments on contracts accounted for under the percentage-of completion method. These adjustments included a net $9 million favorable revenue impact and a net $6 million favorable cost impact. In addition, the COS ratio for all segments benefited from lower year-over-year headcount resulting from management's restructuring efforts that were directed to align resources to support business needs, lower incentive compensation expense, and a greater year-over-year pension benefit.



Selling, General and Administrative

Selling, general and administrative (SG&A) expense, excluding restructuring charges, as a percentage of revenue increased 1.7 percentage points for the first quarter of fiscal 2015. The higher SG&A ratio was primarily driven by higher GBS and GIS ratios, partially offset by decrease in the corporate ratio. The NPS ratio was mostly flat.

The higher GBS and GIS ratios primarily resulted from management's efforts to expand market coverage through a larger dedicated global commercial sales force consistent with the overall business strategy surrounding next-generation IT services. Per this business strategy, certain account-focused executives, who were previously engaged in the contract delivery activities, and were included within COS, in the first quarter of fiscal 2014, were redirected to focus on sales activities effective the second quarter of fiscal 2014. In addition, the Company made new investments in its commercial sales force by making incremental hires of offering sales personnel. The Company also had increased spending on bid and proposal activity during the first quarter of fiscal 2015, as compared to the same period in the prior year. The increased sales costs were partially offset by lower pension costs. Corporate G&A for the first quarter of fiscal 2015 was $56 million, as compared to $64 million during the same period of the prior fiscal year. The decrease in corporate G&A expenses was mainly driven by lower outside professional services of $8 million, lower legal expenses of $3 million, partially offset by $5 million of higher costs associated with the Company's financial transformation project.



Depreciation and Amortization

Depreciation and amortization (D&A) as a percentage of revenue increased 0.6 percentage points for the first quarter fiscal 2015 as compared to the same period of fiscal 2014. The increase in the ratio was entirely driven by the higher GIS ratio, whereas the GBS ratio declined slightly and the NPS ratio was flat, year-over-year.



The GIS ratio increased mostly due to higher amortization related to the intangible assets acquired through the ServiceMesh acquisition, accelerated depreciation on certain contract related assets, and higher capital expenditure in GIS Americas.

Restructuring Costs Total restructuring costs recorded during the first quarter ended July 4, 2014 were $10 million, as compared to $7 million in the comparable period of the prior fiscal year. Restructuring costs for the first quarters of fiscal 2015 and 2014 included $1 million and $1 million, respectively, 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 2015 first quarter restructuring expense included costs related to further reduce headcount in order to align resources to support business needs in the U.S., Australia and in the U.K. Additional restructuring actions may be taken during fiscal 2015, which could result in additional charges (see Note 17 to the Consolidated Condensed Financial Statements). 46 --------------------------------------------------------------------------------



Interest Expense and Interest Income

There was no significant year-over-year change in interest expense and interest income. Interest expense was $39 million for the first quarter of both fiscal 2015 and fiscal 2014. Interest income was $5 million and $4 million, for the first quarter of fiscal 2015 and first quarter of fiscal 2014, respectively.



Other (Income) Expense, Net

Other (income) expense, net 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 for the first quarter of both fiscal 2015 and fiscal 2014 was $1 million. Other income for both the fiscal year periods resulted mainly due to favorable movement in foreign currency exchange rates.



Taxes

The Company's effective tax rate from continuing operations (ETR) was 25.7% and 31.2% for the first quarter ended July 4, 2014 and June 28, 2013, respectively. The ETR for the first quarter ended July 4, 2014 reflected the global mix of income and the change in valuation allowance in a non-U.S. jurisdiction, which decreased the ETR by 7.5%.The primary driver of the ETR for the first quarter ended June 28, 2013 was the change in valuation allowance in non-U.S. jurisdictions and the global mix of income. For the tax impact of discontinued operations, see Note 4 to the Consolidated Condensed Financial Statements. There were no material changes to uncertain tax positions in the first quarter of fiscal 2015 compared to the fiscal 2014 year-end. The IRS is examining the Company's federal income tax returns for fiscal years 2008 through 2010. The Company expects to reach a resolution no earlier than fiscal year 2016. The significant items subject to examination primarily relate to foreign exchange losses and other U.S. international tax issues. In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more likely than not standard if such positions are not upheld. Conversely, the Company could settle positions with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in the liability for uncertain tax positions of up to $22 million, excluding interest, penalties, and tax carryforwards. Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. A valuation allowance has been recorded against certain deferred tax assets due to uncertainties related to the ability to utilize these assets. The valuation allowance is based on historical earnings, estimates of taxable income by jurisdiction and the period over which the deferred tax assets will be recoverable. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors. Based on recent earnings in certain jurisdictions there is a reasonable possibility that, within fiscal 2015, sufficient positive evidence may become available to reach a conclusion that a portion of the valuation allowance will no longer be needed. As such, the Company may release a significant portion of its valuation allowance against its deferred tax assets within the next nine months. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded. Any such adjustment could materially impact the Company's financial position and results of operations. In May 2013, Finance Bill 2013 received the assent of the President of India and has been enacted as the 2013 Finance Act. There are various provisions in the 2013 Finance Act that may impact our India operations, including a tax on the buy-back of shares and an increase in the dividend distribution tax from 16.22% to 16.99%. The Company uses the lower undistributed tax rate to measure deferred taxes on inside basis differences, including undistributed earnings, of our India operations as these earnings are permanently reinvested. While the Company has no plans to do so, events may occur in the future that could effectively force management to change its intent not to repatriate our India earnings. If the Company changes its intent and repatriates such earnings, a dividend distribution tax will be incurred for distributions from India. These additional taxes will be recorded as tax expense in the period in which the dividend is declared. 47 -------------------------------------------------------------------------------- The Finance Act of 2012 (the 2012 Finance Act) was signed into law in India on May 28th, 2012. The Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 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 2012 Finance Act has been challenged in the Indian courts. However, there is no assurance that such 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 2012 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 2012 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.



Income from Discontinued Operations

The income from discontinued operations represents the results of certain businesses, which have been either divested during fiscal 2014 or are held-for-sale, and gains and loss from businesses divested (see Note 4 to the Consolidated Condensed Financial Statements).

The (loss) income from discontinued operations, net of taxes, was $(8) million for the quarter ended July 4, 2014, as compared to $16 million for the quarter ended June 28, 2013, primarily due to the gain on sale of the Flood BPO business during the first quarter of fiscal 2014, which did not recur in fiscal 2015. The loss during the first quarter of fiscal 2015 is from the small software business in Europe, which is held for sale at July 4, 2014. Subsequent to the first quarter, this business was sold.



Earnings Per Share and Share Base

Earnings per share (EPS) for the first quarter of fiscal 2015, on a diluted basis, was $0.98, a decrease of $0.16 compared to the first quarter of fiscal 2014. The decrease in EPS was the result of a decrease in income from discontinued operations, net of taxes of $24 million for the three months ended July 4, 2014. The decrease in income from discontinued operations was primarily due to the gain on disposition, net of taxes of $12 million recorded in the first quarter of fiscal 2014, that did not repeat in fiscal 2015, and a decrease of $13 million in net loss from discontinued operations, net of taxes for the first quarter of fiscal 2015 compared to the comparable period in fiscal 2014.



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'sDivision 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'sDivision 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'sDivision 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'sDivision 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'sDivision of Enforcement by completing production of documents and providing any further information requested by the SEC'sDivision of Enforcement. In addition to the matters noted above, the SEC'sDivision of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosures 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'sDivision of Enforcement in its investigation of prior disclosures and accounting determinations with respect to the Company's contract with the NHS. The SEC's investigative activities are ongoing. In addition, the SEC'sDivision 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'sDivision of Enforcement and the review of the Company's financial disclosures by the SEC'sDivision 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'sDivision of Enforcement in connection with its ongoing investigation of the Company. The Company received a Wells notice from the SEC'sDivision 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 has been availing itself of the Wells process by making a Wells submission to explain its views concerning such matters, which are aided by the Audit Committee's independent investigation and certain expert opinions of outside professionals. The Company made such a submission on January 14, 2014 and a supplemental submission on April 9, 2014. The Company, through outside counsel, has been in continuing discussions with the SEC Enforcement Staff concerning a potential resolution of the staff's investigation involving the Company. However, to date those discussions have not resulted in a resolution. 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'sDivision 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. 48 --------------------------------------------------------------------------------



Out of Period Adjustments Financial Impact Summary

The rollover impact on the pre-tax income (loss) from continuing operations of the recorded out of period adjustments in the first quarter of fiscal 2015, fiscal 2014 and fiscal 2013 is attributable to the following prior fiscal years:

Increase/(Decrease)

First Quarter Fiscal (Amounts in millions) Fiscal 2013 Adjustments Fiscal 2014 Adjustments 2015 Adjustments Total Adjustments Fiscal 2015 $ - $ - $ (12 ) $ (12 ) Fiscal 2014 - (2 ) 13 11 Fiscal 2013 6 4 (1 ) 9 Prior fiscal years (unaudited) (6 ) (2 ) - (8 )



See Note 15 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarters ended July 4, 2014 and June 28, 2013, respectively.

Fiscal 2015 Adjustments

During the first quarter of fiscal 2015, the Company identified and recoded net adjustments increasing pre-tax income from continuing operations by $12 million that should have been recorded in prior fiscal years. The net impact of these adjustments on income from continuing operations before taxes for the first quarter ended fiscal 2015 primarily included lower fiscal 2014 variable compensation partially offset by certain adjustments related to cost of services that were identified late in the 2014 close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements. Adjustments recorded during the first quarter of fiscal 2015 that should have been recorded in prior fiscal years, increased net income attributable to CSC common shareholders by $2 million. The impact of out of period adjustments recorded during fiscal 2015 on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter ended July 4, 2014, using the rollover method, is shown below: Quarter Ended



July 4, 2014

Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 3,237 $ 7 $ 3,244 Costs of services (excludes depreciation and amortization and restructuring costs) 2,364 20 2,384 Selling, general and administrative 344 - 344 Depreciation and amortization 272 (1 ) 271 Restructuring costs 10 - 10 Interest expense 39 - 39 Interest income (5 ) - (5 ) Other (income) expense (1 ) - (1 ) Income from continuing operations before taxes 214 (12 ) 202 Taxes on income 55 (6 ) 49 Income from continuing operations 159 (6 ) 153 Loss from discontinued operations, net of taxes (8 ) 4 (4 ) Net income attributable to CSC common stockholders 146 (2 ) 144 EPS - Diluted Continuing operations $ 1.03$ (0.04 ) $ 0.99 Discontinued operations (0.05 ) 0.03 (0.02 ) Total $ 0.98$ (0.01 ) $ 0.97 49

-------------------------------------------------------------------------------- The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the quarter ended July 4, 2014 are related to the following line items of the unaudited Consolidated Balance Sheet: (Amounts in million) Increase/(Decrease) July 4, 2014 Accounts receivable Increase $ 5 Software Decrease 1 Other assets Decrease 3 Accrued expenses and other current liabilities Decrease 13 Deferred revenue Increase 2 The Company has determined that the impact of the consolidated out of period adjustments recorded in the first quarter of fiscal 2015 is immaterial to the consolidated results, financial position and cash flows for the current quarter and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015. Fiscal 2014 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. During periods subsequent to June 28, 2013, the Company recorded out of period adjustments with a net pre-tax impact to income from continuing operations of $9 million, primarily in Corporate, that should have been recorded in the first quarter of fiscal 2014. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the first quarter of fiscal 2014 would have been lower by $9 million. The impact of out of period adjustments recorded during fiscal 2014, and the first quarter of fiscal 2015, on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter ended June 28, 2013, using the rollover method, is shown below: 50 -------------------------------------------------------------------------------- Quarter Ended



June 28, 2013

Adjustments Amount Adjusted (Amounts in millions, except per-share Increase/ for Removal amounts) As Reported (Decrease) of Errors Revenue $ 3,254 $ 12 $ 3,266 Costs of services (excludes depreciation and amortization and restructuring costs) 2,437 24 2,461 Selling, general and administrative 288 4 292 Depreciation and amortization 254 - 254 Restructuring costs 7 2 9 Interest expense 39 - 39 Interest income (4 ) - (4 ) Other (income) expense (1 ) - (1 ) Income from continuing operations before taxes 234 (18 ) 216 Taxes on income 73 (15 ) 58 Income from continuing operations 161 (3 ) 158 Loss from discontinued operations, net of taxes 16 (1 ) 15 Net income attributable to CSC common stockholders 174 (4 ) 170 EPS - Diluted Continuing operations $ 1.03$ (0.02 ) $ 1.01 Discontinued operations 0.11 (0.01 ) 0.10 Total $ 1.14$ (0.03 ) $ 1.11 The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the quarter ended June 28, 2013 are related to the following unaudited Consolidated Balance Sheet line items: (Amounts in million) Increase/(Decrease) June 28, 2013 Accounts receivable Decrease $ 2 Prepaid expenses and other current assets Increase 10 Software Increase 4 Other assets Increase 5 Accrued payroll and related costs Decrease 6 Accrued expenses and other current liabilities Decrease 16 Deferred Revenue Increase 21



The Company determined that the impact of the consolidated out of period adjustments recorded in the first quarter of fiscal 2014 was immaterial to the consolidated results, financial position and cash flows for the quarter of fiscal 2014 and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2014.


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