UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
(Mark One)

 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2017

OR
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from to

Commission File No.: 001-37494

 
CSRA INC.
 
(Exact name of Registrant as specified in its charter)
 
Nevada
 
47-4310550
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3170 Fairview Park Drive
 
 
Falls Church, Virginia
 
22042
(Address of principal executive offices)
 
(zip code)
 
 
 
Registrant’s telephone number, including area code: (703) 641-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) x Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth Company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).  o  Yes  x No 
163,923,601 shares of Common Stock, $0.001 par value, were outstanding on February 2, 2018.
 






CSRA INC.



TABLE OF CONTENTS
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
Consolidated and Condensed Balance Sheets as of March 31, 2017 and December 29, 2017
 
Consolidated and Condensed Statements of Operations for the Three and Nine Months Ended December 29, 2017 and December 30, 2016
 
Consolidated and Condensed Statements of Comprehensive Income for the Three and Nine Months Ended December 29, 2017 and December 30, 2016
 
Consolidated and Condensed Statements of Cash Flows for the Nine Months Ended December 29, 2017 and December 30, 2016
 
Notes to Consolidated and Condensed Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Default Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits






PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
     CSRA INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS (unaudited)
 
 
As of
(Dollars in millions, shares in thousands)
 
December 29, 2017
 
March 31, 2017
Current assets
 
 
 
 
Cash and cash equivalents
 
$
80

 
$
126

Receivables, net of allowance for doubtful accounts of $26 and $24, respectively
 
945

 
748

Prepaid expenses and other current assets
 
119

 
126

Total current assets
 
1,144

 
1,000

 
 
 
 
 
Intangible and other assets
 
 
 
 
Goodwill
 
2,522

 
2,335

Customer-related and other intangible assets, net of accumulated amortization of $284 and $244, respectively
 
854

 
775

Software, net of accumulated amortization of $103 and $89, respectively
 
72

 
81

Other assets
 
86

 
87

Total intangible and other assets
 
3,534

 
3,278

 
 
 
 
 
Property and equipment, net of accumulated depreciation of $669 and $694, respectively
 
622

 
610

Total assets
 
$
5,300

 
$
4,888

 
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
120

 
$
187

Accrued payroll and related costs
 
212

 
181

Accrued expenses and other current liabilities
 
611

 
487

Current capital lease liability
 
50

 
44

Current maturities of long-term debt
 
86

 
72

Dividends payable
 
17

 
21

Total current liabilities
 
1,096

 
992

 
 
 
 
 
Long-term debt, net of current maturities
 
2,651

 
2,511

Noncurrent capital lease liability
 
210

 
172

Deferred income tax liabilities
 
170

 
272

Other long-term liabilities
 
522

 
582

 
 
 
 
 
Commitments and contingent liabilities (Note 13)
 

 

 
 
 
 
 
Equity
 
 
 
 
Stockholders’ Equity:
 
 
 
 
Common stock, $0.001 par value, 750,000 shares authorized, 164,350 and 163,570 shares issued, and 163,827 and 163,216 shares outstanding, respectively
 

 

Additional paid-in capital
 
141

 
134

Accumulated earnings
 
456

 
165

Accumulated other comprehensive income
 
28

 
31

Total stockholders’ equity
 
625

 
330

Noncontrolling interests
 
26

 
29

Total equity
 
651

 
359

Total liabilities and equity
 
$
5,300

 
$
4,888

See accompanying notes to Consolidated and Condensed Financial Statements (unaudited)


1



CSRA INC.
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS (unaudited)


    
 
 
 Three Months Ended
 
 Nine Months Ended
(Dollars in millions, except per share amounts)
 
December 29, 2017
 
December 30, 2016
December 29, 2017
 
December 30, 2016
 
 
 
 
 
 
 
 
 
Total revenue 
 
$
1,309

 
$
1,222

 
$
3,810

 
$
3,739

 
 
 
 
 
 
 
 
 
Cost of services
 
1,063

 
1,000

 
3,064

 
3,023

Selling, general and administrative expenses
 
56

 
52

 
156

 
163

Acquisition, integration, and other costs
 
3


5

 
17

 
18

Depreciation and amortization
 
59


61


175


189

Operating expenses
 
1,181

 
1,118

 
3,412

 
3,393

 
 
 
 
 
 
 
 
 
Operating income
 
128

 
104

 
398

 
346

Net benefit of defined benefit plans
 
20

 
137

 
61

 
186

Interest expense, net
 
(29
)
 
(36
)
 
(88
)
 
(95
)
Other expense, net
 
(2
)

(1
)
 
(5
)
 
(3
)
Income before income taxes
 
117

 
204

 
366

 
434

Income tax (benefit) expense
 
(75
)
 
76

 
16

 
158

Net income
 
192

 
128

 
350

 
276

Less: noncontrolling interests
 
4

 
2

 
9

 
9

Net income attributable to CSRA common stockholders
 
$
188

 
$
126

 
$
341

 
$
267

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.15

 
$
0.77

 
$
2.08

 
$
1.63

Diluted
 
$
1.14

 
$
0.76

 
$
2.07

 
$
1.62

 
 
 
 
 
 
 
 
 
Common share information (weighted averages, in thousands):
 
 
 
 
 
 
 
 
Common shares outstanding— basic
 
163,780

 
163,325

 
163,570

 
163,413

Dilutive effect of stock options and equity awards
 
1,364

 
1,563

 
1,490

 
1,388

Common shares outstanding— diluted
 
165,144

 
164,888

 
165,060

 
164,801

 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30


See accompanying notes to Consolidated and Condensed Financial Statements (unaudited)


2



CSRA INC.
CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


 
 
 Three Months Ended
 
 Nine Months Ended
(Dollars in millions)
 
December 29, 2017
 
December 30, 2016
December 29, 2017
 
December 30, 2016
 
 
 
 
 
 
 
 
 
Net income
 
$
192

 
$
128

 
$
350

 
$
276

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes, related to:
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
(3
)
 
(2
)
 
(6
)
 
(6
)
Foreign currency translation adjustments

 

 
1

 

 
1

Unrealized gain on derivatives
 
5

 
18

 
3

 
15

Other comprehensive income (loss), net of taxes
 
2

 
17

 
(3
)
 
10

 
 
 
 
 
 
 
 
 
Comprehensive income
 
194

 
145

 
347

 
286

Less: comprehensive income attributable to noncontrolling interest, net of taxes
 
4

 
2

 
9

 
9

Comprehensive income attributable to CSRA common stockholders
 
$
190

 
$
143

 
$
338

 
$
277


See accompanying notes to Consolidated and Condensed Financial Statements (unaudited)




3

CSRA INC.
CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (unaudited)


(Dollars in millions)
 
Nine Months Ended
 
December 29, 2017
 
December 30, 2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
350

 
$
276

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
175

 
191

Pension settlement and actuarial gains
 

 
(114
)
Stock based compensation
 
11

 
25

Excess tax benefit from stock based compensation
 
(2
)
 
(3
)
Deferred income taxes
 
(102
)
 

 Net loss on dispositions of business and assets
 
10

 
2

Other non-cash items, net
 
14

 
1

Changes in assets and liabilities, net of acquisitions and dispositions:
 
 
 
 
(Increase) decrease in assets
 
(91
)
 
26

Decrease in defined benefit plan liability
 
(59
)
 
(68
)
    Increase in other liabilities
 
7

 
98

Other operating activities, net
 
3

 
4

Cash provided by operating activities
 
316

 
438

 
 
 
 
 
Cash flows used in investing activities:
 
 
 
 
Purchases of property and equipment
 
(94
)
 
(98
)
Software purchased and developed
 
(11
)
 
(16
)
Payments for acquisitions, net of cash acquired
 
(335
)


Proceeds from disposals of assets
 
36

 
9

Other investing activities, net
 
23

 
(13
)
Cash used in investing activities
 
(381
)
 
(118
)
 
 
 
 
 
Cash flows provided by (used in) financing activities:
 
 
 
 
Borrowing on Revolving Credit Facility
 
220

 

Repayments of Revolving Credit Facility
 
(220
)
 
(50
)
Borrowings of long term debt
 
384

 
234

Payments of long-term debt
 
(233
)
 
(379
)
Debt issuance cost
 
(4
)
 
(4
)
Proceeds from stock options and other common stock activity, net
 
3

 
2

 Repurchase of common stock
 
(16
)
 
(29
)
 Dividends paid
 
(50
)
 
(51
)
 Payments on lease liability
 
(30
)
 
(32
)
Payments to noncontrolling interest
 
(12
)
 
(8
)
 Other financing activities, net
 
(23
)
 
29

Cash provided by (used in) financing activities
 
19

 
(288
)
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(46
)
 
32

Cash and cash equivalents at beginning of period
 
126

 
130

Cash and cash equivalents at end of period
 
$
80

 
$
162

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for taxes
 
$
99

 
$
61

Cash paid for interest
 
81

 
79

Capital expenditures in accounts payable and other liabilities
 
18

 
10

Capital expenditures through capital lease obligations

 
79

 
85

Non-cash transactions related to financing activities
 

 
32

Deferred tax liability
 
103

 
55

See accompanying notes to Consolidated and Condensed Financial Statements (unaudited)


4

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Note 1—Description of the Business, Basis of Presentation and Recent Accounting Pronouncements

Description of the Business

CSRA Inc. (“CSRA” or the “Company”), a provider of IT and professional services, delivers IT, mission, and operations-related services across the U.S. government, including to the Department of Defense (“DoD”), Department of Homeland Security (“DHS”), the intelligence community, civil and healthcare agencies, and to state and local government agencies through two business segments: (1) Defense and Intelligence, and (2) Civil.
Basis of Presentation
The accompanying unaudited Consolidated and Condensed Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017. The interim period unaudited Consolidated and Condensed Financial Statements are presented as described below.
In May 2017, CSRA executed an agreement for the acquisition of NES Associates, LLC (“NES”), a consulting firm that provides IT services to the U.S. government. On July 3, 2017, CSRA completed its acquisition of NES, which resulted in NES becoming a wholly owned subsidiary of CSRA. In October 2017, CSRA announced that it had executed an agreement to acquire Praxis Engineering Technologies LLC (”Praxis”), a consulting and solutions firm dedicated to the practical application of software and systems engineering technologies. On November 17, 2017, CSRA completed the acquisition of Praxis, which resulted in Praxis becoming a wholly owned subsidiary of CSRA. See Note 4—Acquisitions for additional information.
All intercompany transactions and balances have been eliminated. Certain information and disclosures normally required for annual financial statements have been condensed or omitted pursuant to SEC rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation of the results of the interim period presented have been included.
CSRA reports its results based on a fiscal year convention comprised of four thirteen-week quarters. Every fifth year includes an additional week in the first quarter to prevent the fiscal year from moving from an approximate end of March date.
Contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of CSRA’s contracts, developing total revenue and costs at completion estimates requires significant judgment. Contract costs include direct labor and billable expenses, allocation of allowable indirect costs, and warranty obligations. CSRA recognizes revenue and billable expenses from these transactions on a gross basis because it is the primary obligor on contracts with customers. The contracts that required estimates-at-completion (“EACs”) using the percentage-of-completion method were approximately 36%, and 38% of CSRA’s revenue for the nine months ended December 29, 2017, and December 30, 2016, respectively.
CSRA’s income before income taxes and noncontrolling interest for the three and nine months ended December 29, 2017 and December 30, 2016 included the following gross favorable and unfavorable adjustments due to changes in estimated profitability on fixed price contracts accounted for under the percentage-of-completion method.


5

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


 
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
 
December 29, 2017
 
December 30, 2016
 
December 29, 2017
 
December 30, 2016
Gross favorable
 
$
21

 
$
13

 
$
52

 
$
40

Gross unfavorable
 
(5
)
 
(8
)
 
(16
)
 
(24
)
Total net adjustments, before taxes and noncontrolling interests
 
$
16

 
$
5

 
$
36

 
$
16

Unbilled recoverable amounts under contracts in progress do not have an allowance for credit losses and, therefore, any adjustments to these amounts related to credit quality are accounted for as a reduction of revenue. Unbilled amounts under contracts in progress resulting from sales, primarily to the U.S. and other governments, that are expected to be collected after one year totaled $17.3 million and $15.6 million as of December 29, 2017 and March 31, 2017, respectively.

Depreciation expense was $38.0 million and $33.5 million for the three months ended December 29, 2017 and December 30, 2016, respectively. Depreciation expense was $111.1 million and $96.8 million for the nine months ended December 29, 2017 and December 30, 2016, respectively.
Earnings Per Share
The computation of diluted earnings per share excludes stock options, whose effect, if included, would be anti-dilutive. The number of shares related to such stock awards was 274,785 and 283,643 for the three and nine months ended December 29, 2017, respectively.
Use of Estimates

GAAP requires management to make estimates and assumptions that affect certain amounts reported in the unaudited Consolidated and Condensed Financial Statements and accompanying notes. These estimates are based on management’s best knowledge of historical experience, current events, and other assumptions that management considers reasonable. Actual results could differ from those estimates.

Amounts subject to significant judgment and/or estimates include, but are not limited to: determining the fair values of assets acquired and liabilities assumed, derivative instruments and non-financial assets such as internally developed software for internal use; costs to complete fixed-price contracts, certain deferred costs, collectability of receivables, deferred tax assets and liabilities, reserves for tax benefits, including valuation allowances on deferred tax assets, loss accruals for litigation, and inputs used for computing share-based compensation.
Reclassifications
Historically, the Company recognized separation and merger costs in connection with our separation from Computer Sciences Corporation (now known as DXC Technology) (“CSC”) and our subsequent merger with SRA International Inc. (“SRA”) as a separate operating expense. In the second quarter of fiscal year 2018, CSRA began to combine these costs with separately identifiable acquisition costs and fees paid to third parties for completed acquisitions as well as integration, transition, and other costs for integrating the businesses. These expenses are presented as acquisition, integration, and other costs on the unaudited Consolidated and Condensed Statements of Operations. Prior periods have been revised to conform to the current period presentation.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. The accounting guidance for fair value measurements establishes a three level hierarchy that prioritizes inputs as follows:
Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities.


6

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Level 2— Quoted prices for similar assets or liabilities or quoted market prices for identical or similar assets in markets that are not active.     
Level 3— Valuations derived from techniques where one or more significant inputs are unobservable.
Assets and liabilities valued using the fair value measurement guidance on a recurring basis include: pension assets and derivative instruments (consisting of interest rate swap contracts, total return swaps, and foreign currency forward exchange contracts). Pension assets are valued using model based pricing methods that use observable market data and are, therefore, considered Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use observable interest rate yield curves as inputs. Total return swaps are settled on the last day of every fiscal month. Therefore, the value of any total return swaps outstanding as of any balance sheet date is not material. The inputs used to estimate the fair value of the Company's derivative instruments are classified as Level 2. No significant assets or liabilities are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.
Assets and liabilities measured at fair value on a non-recurring basis include: those acquired in a business combination, equity-method investments, and long-lived assets. These assets and liabilities are recognized at fair value if deemed to be impaired or if reclassified as assets held for sale. The fair values in these instances are then determined using Level 3 inputs.
The Company’s financial instruments include cash, trade receivables, vendor payables, derivative financial instruments, and debt. As of December 29, 2017, the carrying value of cash, trade receivables, and vendor payables approximated their fair value. The carrying amounts of the Company’s financial instruments with short-term maturities are deemed to approximate their market values. The carrying amount of the Company’s long-term debt, excluding capital leases, was $2.7 billion and $2.5 billion at December 29, 2017 and March 31, 2017, respectively, and approximated its fair value on those dates based on recent trading activity, which is classified as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use observable interest rate yield curves, which are considered Level 2 inputs. There were no transfers between levels of the fair value hierarchy during the three and nine months ended December 29, 2017 or December 30, 2016.
Recent Accounting Pronouncements
Newly-Adopted Accounting Standards
On December 22, 2017, the Tax Cuts and Jobs Acts (the “Tax Act”) was enacted into law. The Tax Act includes numerous significant changes to the U.S. Corporate tax laws such as: the reduction of the statutory tax rate from 35% to 21%; repeal of the corporate alternative minimum tax; changes to business tax exclusions, deductions and credits; and significant revision of international tax provisions. Shortly thereafter, the Securities and Exchange Commission issued guidance for accounting for taxes in Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on the application of accounting for income taxes (under ASC 740) in cases where the calculation of certain effects of the changes in tax laws or tax rates are incomplete upon issuance of an entity's financial statements for the reporting period in which the Tax Act is enacted. Under SAB 118, in the financial reporting period during which the Tax Act is enacted, the income tax effects of the Tax Act (for those changes where calculations are incomplete) would be reported as provisional based on a reasonable estimate, and are to be subject to adjustment during a "measurement period" until the accounting under guidance in ASC 740 is complete. When provisional amounts are used, supplemental disclosures should be provided, such as the reasons for the incomplete accounting and other information relevant to why the Company was not able to complete the accounting in a timely manner. CSRA has used the guidance in SAB 118 when determining the impact of the Tax Act on the Company’s consolidated financial statements. See Note 8—Income Taxes for further information.
In March 2017, the FASB issued ASU No. 2017-07-Compensation- Retirement Benefits (Topic 715) (“ASU 2017-07”), which changes the presentation of net periodic pension and post-retirement costs. The guidance requires that service costs associated with pension and post-retirement plans be presented in the same financial statement line item as the compensation cost for the related employees. All other net benefit costs must be reported separately from income from operations (if presented). The standard is effective for the first interim period within annual periods


7

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


beginning after December 15, 2017, with early adoption permitted. Since CSRA’s defined benefit pension and post-retirement plans (the “Plans”) are frozen, historical service costs consist of administrative expenses. CSRA chose to early adopt this standard during the first quarter of the fiscal year ending March 30, 2018. As a result, net benefit costs of the Plans have been presented as a separate line item on the Company’s statements of operations. The prior periods have been revised to conform to the current period presentation.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). Its main provisions are: (a) removing step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation; and (b) eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. ASU 2017-04 is effective for all public business entities for fiscal years beginning after December 15, 2019, with early adoption permitted on or after January 1, 2017. The Company adopted ASU 2017-04 on July 1, 2017, which coincided with its annual assessment for the impairment of goodwill. The adoption had no impact on CSRA’s financial results for the period.
Standards Issued But Not Yet Effective
The following ASUs were recently issued but have not yet been adopted by CSRA:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements and some cost guidance included in the Accounting Standards Codification (ASC). Upon adoption, ASU 2014-09 will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements.
The new standard requires us to identify contractual performance obligations and determine when revenue should be recognized. This requirement and other provisions of the standard could change the method or timing of revenue recognition for our firm-fixed-price and, to a lesser extent, cost-reimbursable-plus-fee contract portfolio. The Company’s implementation project team is taking an integrated approach to analyzing the standard’s impact on our contract portfolio including a review of accounting policies and practices, evaluating the effects of the requirements on our contracts and business practices, and assessing the need for system and internal control changes or enhancements. These activities and the Company’s evaluation of the quantitative effect of adoption will continue to the end of the fiscal year.
The Company identified likely effects related to the treatment of option years as discrete contracts and the grouping of promised goods and services into performance obligations for the purpose of recognizing revenue under the new standard. As a result, gross favorable and unfavorable adjustments due to changes in contract estimates are anticipated to result in smaller revenue adjustments than before adoption of the ASU. Anticipated losses on contracts will continue to be recognized in the period in which they are identified.
In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, resulting in a one-year deferral of the effective date of ASU 2014-09. The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to the beginning balance of retained earnings at the effective date. The Company plans to adopt the standard on March 31, 2018 (the first day of fiscal year 2019), and to implement the standard using the modified retrospective method, whereby the cumulative effect will be recognized at the date of adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes the current guidance related to accounting for leases. The guidance requires lessees to recognize most leases on-balance sheet as a right of use asset and lease liability. ASU 2016-02 also requires expanded qualitative and quantitative disclosures to provide financial statement users with additional information on the amount, timing, and uncertainty of cash flows arising from CSRA leases. The standard must be adopted using the modified retrospective approach, and will be effective for the first interim period within annual periods beginning after December 15, 2019, with early adoption permitted. CSRA is currently evaluating the impact of adoption on its policies, procedures, business practices, including internal controls, and financial statements.


8

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230)(“ASU 2016-18”). This guidance requires the inclusion of restricted cash and restricted cash-equivalent balances in the statement of cash flows. The ASU does not define "restricted cash" and "restricted cash equivalents." The Company will be required to include its restricted cash balance (currently classified within Prepaid expenses and other current assets) in the Cash and cash equivalents balance presented in the statement of cash flows using a retrospective transition method for each period presented. A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must also discuss the nature of the restrictions. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption, including during an interim period, is permitted. The Company has not yet determined an implementation date for this ASU.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which is intended to improve the transparency and understandability of information conveyed to financial statements users about an entity’s risk management activities and reduce the complexity and simplify the application of hedge accounting by companies. The impact of adopting this standard on CSRA’s financial position and results of operations is not expected to be material, but the Company will continue to evaluate until implementation. The standard is effective for fiscal years beginning after December 15, 2018 and interim period within those fiscal years for public entities.
Other recently issued ASUs effective after December 29, 2017 are not expected to have a material effect on CSRA’s financial statements.
Note 2—Sale of Receivables
CSRA is the seller of certain accounts receivable under a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd., The Bank of Nova Scotia, and Mizuho Bank, Ltd., each as Purchaser, for the continuous non-recourse sale of CSRA’s eligible trade receivables. On August 8, 2017, the term of the Purchase Agreement under which the Company sells certain of its accounts receivable was extended for one year, to August 7, 2018.
Under the Purchase Agreement, CSRA sells eligible receivables, including billed receivables and certain unbilled receivables arising from cost plus fixed fee (“CPFF”) and time and materials (“T&M”) contracts, up to $450.0 million outstanding at any time. CSRA has no retained interests in the sold receivables and only performs collection and administrative functions for the Purchaser for a servicing fee.
CSRA accounts for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognizes the sold receivables from its unaudited Consolidated and Condensed Balance Sheets. The fair value of the sold receivables approximated their book value due to their short-term nature. CSRA estimated that its servicing fee was at fair value and, therefore, no servicing asset or related liability was recognized at either December 29, 2017 or March 31, 2017.



9

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


We have amended the Purchase Agreement periodically to broaden the eligibility of receivables for sale under it. In the period when the receivables become eligible for sale, the proceeds from such sales will increase operating cash flow. The table below provides receivable sales activity, including initial sales of newly eligible receivables during the periods presented.
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
December 29, 2017
 
December 30, 2016
 
December 29, 2017
 
December 30, 2016
Sales of billed receivables
$
470

 
$
545

 
$
1,322

 
$
1,482

Sales of unbilled receivables
329

 
294

 
940

 
850

Total sales of receivables
$
799

 
$
839

 
$
2,262

 
$
2,332

Collections of sold receivables
$
680

 
$
790

 
$
2,127

 
$
2,192

Operating cash flow effect, net of collections and fees from sales
118

 
47

 
130

 
137

As of December 29, 2017 and March 31, 2017, there was $13.9 million and $37.0 million, respectively, of cash collected by CSRA, but not remitted to purchasers, which represents restricted cash and is included within Prepaid expenses and other current assets on our unaudited Consolidated and Condensed Balance Sheets. CSRA incurred purchase discount and administrative fees of $4.5 million and $2.7 million for the nine months ended December 29, 2017 and December 30, 2016, respectively. These fees were recorded within Other expense, net in the unaudited Consolidated and Condensed Statements of Operations.
Concentrations of Risk
The primary financial instruments, other than derivatives, that potentially subject the Company to concentrations of credit risk are accounts receivable. The Company’s primary customers are the U.S. government and prime contractors under contracts with the U.S. government. The Company continuously reviews its accounts receivable and records provisions for doubtful accounts as needed.
Note 3—Derivative Instruments
Derivatives Designated for Hedge Accounting
Interest-rate swaps
The Company uses derivative financial instruments to manage interest rate risk related to its Term Loan A Facilities (as defined in Note 7—Debt, below). The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on Term Loan Facilities (as defined in Note 7—Debt, below) that have variable index-based interest rates. To accomplish these objectives, the Company uses pay-fixed interest rate swaps as part of its interest rate risk management strategy. As of both December 29, 2017 and March 31, 2017, the Company had outstanding pay-fixed interest rate derivatives with a notional value of $1.4 billion, which were designated as a cash flow hedge of interest rate risk. The swap positions consist of a $1.1 billion notional swap agreement maturing in November 2020 and $300 million in aggregate notional swap agreements maturing in March 2018.


10

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies, which subjects its cash flows and earnings to exposure related to changes in foreign currency exchange rates. The exposure arises primarily from purchases from or sales to third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of forecasted cash flows related to transactions denominated in foreign currencies. During fiscal year 2018, the Company began hedging certain of these forecasted cash flows. As of December 29, 2017, the Company had outstanding foreign currency forward exchange contracts with notional amounts totaling $11.2 million. Neither the fair value of these derivatives at December 29, 2017 nor the gain or loss reclassified into earnings from AOCI during the nine months ended December 29, 2017 was significant. We do not expect amounts that will be reclassified into earnings within the next twelve months to be significant. The notional values consist primarily of contracts for the Mexican peso, Columbian peso, and Canadian dollar, and are stated in U.S. dollar equivalents.
Fair Value of Derivative Instruments
The fair values of derivative instruments are presented on a gross basis as none of the Company’s derivative contracts are subject to master netting arrangements. The fair value of the Company’s derivative financial instruments was an asset of $22.2 million and $18.2 million as of December 29, 2017 and March 31, 2017, respectively. These derivative instruments are classified by their short- and long-term components based on the fair value of the anticipated timing of their cash flows. For net asset positions, the current portion is included in Prepaid expenses and other current assets and the long-term portion is included in Other assets in the unaudited Consolidated and Condensed Balance Sheets. There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during either the nine months ended December 29, 2017 or December 30, 2016. Cash flows associated with derivative contracts are recorded in operating activities in the unaudited Consolidated and Condensed Statements of Cash Flows.
Under applicable agreements relating to the Company’s interest rate swaps, a counterparty could declare the Company to be in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default.
Concentrations of Risk
The Company is subject to counterparty risk in connection with its derivative contracts. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The Company mitigates this credit risk by seeking to enter into agreements with credit-worthy counterparties. As of both December 29, 2017 and March 31, 2017, there was one interest rate swap counterparty with greater than a 10% concentration of our total exposure.
Note 4—Acquisitions
Fiscal Year 2018 Acquisitions
On July 3, 2017, CSRA acquired NES for a base price of $105.0 million, less $0.9 million of working capital adjustments. The consideration consisted of $100.9 million in cash and $3.2 million deposited in escrow on behalf of the seller. CSRA recorded the assets acquired and liabilities assumed at their estimated fair value, and recorded the difference between the fair value of the net assets acquired and the purchase consideration as goodwill. See Note 5—Goodwill and Other Intangible Assets for further discussion of the measurement considerations for acquired intangible assets.


11

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


The following table presents the estimated fair values of assets acquired and liabilities assumed in our acquisition of NES as of July 3, 2017:
Preliminary allocation (in millions):
 
Amount
 Cash, accounts receivable and other current assets
 
$
28

 Property, equipment and other long-term assets
 
4

 Intangibles—customer relationships, backlog and other intangibles assets
 
25

 Accounts payable and other current liabilities
 
(15
)
 Total identified net assets acquired
 
42

 
 
 
 Goodwill
 
62

 
 
 
 Total purchase consideration and liabilities paid at closing
 
$
104

The Company provisionally recorded the assets acquired and liabilities assumed of NES at their estimated fair values. As of December 29, 2017, the Company had not finalized the determination of fair values associated with NES’s current assets and liabilities but expects to do so by the first quarter of fiscal year 2019.
On November 17, 2017, CSRA acquired Praxis for $235 million in cash, subject to closing adjustments. Praxis is a consulting and solutions firm dedicated to the practical application of software and systems engineering technologies to the U.S. government.
The following table presents the estimated fair values of assets acquired and liabilities assumed in our acquisition of Praxis as of November 17, 2017:
Preliminary allocation (in millions):
 
Amount
 Cash, accounts receivable and other current assets
 
$
49

 Property, equipment and other long-term assets
 
2

 Intangibles—customer relationships, backlog and other intangibles assets
 
95

 Accounts payable and other current liabilities
 
(36
)
 Total identified net assets acquired
 
110

 
 
 
 Goodwill
 
125

 
 
 
 Total purchase consideration and liabilities paid at closing
 
$
235

Due to the recency of the Praxis acquisition, the preliminary purchase price allocation was recorded on a provisional basis and is subject to change as the Company completes its analysis of the fair value at the date of the transaction, which could have a material impact.
Goodwill associated with the NES and Praxis acquisitions is tax-deductible. Pro forma financial information for the NES and Praxis acquisitions has not been presented as the revenue and operating income of NES and Praxis included in the Company’s unaudited Consolidated and Condensed Statement of Operations for the period, on a combined basis, was not material the Company’s consolidated results.
Note 5—Goodwill and Other Intangible Assets
In connection with acquisitions of other businesses, CSRA recognized goodwill and other intangible assets, which includes customer relationships, backlog, and contract-related intangibles. In addition, the Company records acquired and developed software technology as an intangible asset.


12

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Goodwill
Goodwill is allocated to each reportable segment based on the relative fair value of net assets acquired. The following table summarizes the changes in the carrying amount of goodwill by segment for the nine months ended December 29, 2017:
(Dollars in millions)
 
Defense and Intelligence
 
Civil
 
Total
Balance as of March 31, 2017
 
$
815

 
$
1,520

 
$
2,335

Acquisition of NES
 
62

 

 
62

Acquisition of Praxis
 
125

 

 
125

Balance as of December 29, 2017
 
$
1,002

 
$
1,520

 
$
2,522

During the nine months ended December 30, 2016, we made adjustments related to the acquisition of SRA, which resulted in a $2.6 million increase in goodwill, $0.3 million of which related to the Defense and Intelligence segment and $2.3 million to the Civil segment.
Testing for Goodwill Impairment
The Company tests for impairment annually on the first day of the second fiscal quarter, and between annual tests if an event occurs, or circumstances change, that would “more likely than not” reduce the fair value of a reporting unit below its carrying amount. At the end of each annual and quarterly period, CSRA determines if any such events or changes occurred that require goodwill to be tested for impairment.
On July 1, 2017, the Company performed its annual test of impairment and concluded qualitatively that the fair value of each reporting unit significantly exceeded its carrying value. As of December 29, 2017, CSRA determined there were no indicators that required management to perform an interim goodwill impairment assessment test. There were no accumulated impairment losses at either December 29, 2017 or March 31, 2017.
Other Intangible Assets
Other intangible assets consist primarily of customer relationships, backlog, and technology. Acquired intangible assets have been recorded at their fair value using various discounted cash flow valuation techniques that incorporated Level 3 inputs as described under the fair value hierarchy of ASC 820, Fair Value Measurements (“ASC 820”). These unobservable inputs reflect CSRA’s assumptions about the assumptions market participants would use in pricing an asset on a non-recurring basis.
In connection with the acquisitions of NES and Praxis, the Company identified $24.8 million and $94.5 million, respectively, of intangible assets, representing customer relationships, backlog, and contract intangibles. The fair value measurements of these intangibles were primarily based on significant inputs not observable in the market and represent a Level 3 measurement. The income approach was primarily used to value intangible assets; this approach indicates value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a rate of return that reflects the time value of money.


13

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


A summary of amortizing intangible assets, including preliminary fair values of those recorded in the NES and Praxis acquisitions, are:
 
 
As of
December 29, 2017
(Dollars in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Acquisition-related intangibles:
 
 
 
 
 
 
Customer-related intangibles
 
$
1,064

 
$
(214
)
 
$
850

Backlog
 
67

 
(66
)
 
1

Other intangible assets
 
7

 
(4
)
 
3

Subtotal-acquisition-related intangibles:
 
1,138

 
(284
)
 
854

Software
 
175

 
(103
)
 
72

Total intangible assets
 
$
1,313

 
$
(387
)
 
$
926


 
 
As of
March 31, 2017
(Dollars in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Acquisition-related intangibles:
 
 
 
 
 
 
Customer-related intangibles
 
$
948

 
$
(175
)
 
$
773

Backlog
 
65

 
(65
)
 

Other intangible assets
 
6

 
(4
)
 
2

Subtotal-acquisition-related intangibles:
 
1,019

 
(244
)
 
775

Software
 
170

 
(89
)
 
81

Total intangible assets
 
$
1,189

 
$
(333
)
 
$
856

Customer-related intangibles, backlog, and software are amortized to expense. Amortization expense for the three and nine months ended December 29, 2017 was $21.0 million and $63.8 million, respectively, compared to $26.8 million and $91.8 million, respectively, for the three and nine months ended December 30, 2016.
As of December 29, 2017, estimated amortization for the remaining three months of fiscal year 2018 is $24.1 million; and for each of fiscal years 2019, 2020, 2021, and 2022 is $92.7 million, $85.8 million, $77.2 million, and $70.3 million, respectively.
Purchased and internally developed software for external and internal use, net of accumulated amortization, consisted of:
 
 
As of
(Dollars in millions)
 
December 29, 2017
 
March 31, 2017
Purchased software
 
$
67

 
$
73

Internally developed software
 
5

 
8

Total software
 
$
72

 
$
81

Amortization expense related to purchased software for the three and nine months ended December 29, 2017 was $5.9 million, and $17.8 million, respectively, compared to the three and nine months ended December 30, 2016 of $3.5 million and $10.4 million, respectively. Amortization expense related to internally developed software for the three and nine months ended December 29, 2017 was $0.0 million, and $5.6 million, respectively, compared to the three and nine months ended December 30, 2016 of $0.5 million and $1.4 million, respectively.


14

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


As of December 29, 2017, estimated amortization related to software for the remaining three months of fiscal year 2018 is $5.5 million; and for each of the fiscal years 2019, 2020, 2021, and 2022 and thereafter is $21.7 million, $19.0 million, $14.0 million, and $12.0 million, respectively.
Note 6—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
 
 
As of
(Dollars in millions)
 
December 29, 2017
 
March 31, 2017
Accrued contract costs
 
$
318

 
$
239

Deferred revenue
 
160

 
153

Accrued expenses
 
109

 
81

Other
 
24

 
14

Total
 
$
611

 
$
487

Note 7—Debt
CSRA maintains the following debt facilities: (1) a senior secured revolving credit facility (the “Revolving Credit Facility”) with a committed borrowing capacity of $700 million; (2) a senior secured tranche A1 Term loan facility (the “Tranche A1 Facility”); (3) a senior secured tranche A2 Term loan facility (the “Tranche A2 Facility” and, together with the Tranche A1 Facility, the “Term Loan A Facilities”); and (4) a senior secured term loan B facility (the “Term Loan B Facility” and, together with the Term Loan A Facilities, the “Term Loan Facilities”).
The following is a summary of CSRA’s outstanding debt, as of December 29, 2017 and March 31, 2017.
 
December 29, 2017
 
March 31, 2017

(Dollars in millions)

Interest Rate(1)
Outstanding Balance
 
Interest Rate(1)
Outstanding Balance
Revolving Credit Facility, due November 2022
2.98% - 3.24%
$

 
2.18% - 2.20%
$

Tranche A1 Facility, due November 2019
2.61% - 2.98%
389

 
2.06% - 2.41%
570

Tranche A2 Facility, due November 2022
2.73% - 3.1%
1,528

 
2.18% - 2.53%
1,580

Term Loan B Facility, due November 2023
3.16% - 3.55%
849

 
3.28% - 3.75%
466

Capitalized lease liability
2.35% - 13.77%
260

 
2.35% - 15.09%
216

Total debt
 
3,026

 
 
2,832

     Less: unamortized debt issuance costs
 
(29
)
 
 
(33
)
     Less: current portion of long-term debt and capitalized lease liability
 
(136
)
 
 
(116
)
Total long-term debt, net of current maturities
 
$
2,861

 
 
$
2,683

(1) Represents the range of the lowest and highest interest rate during the period for each facility. Capitalized lease rates are the lowest and highest rates among all leases outstanding during the period. The December 29, 2017 column represents the range during the nine month period then ended and the March 31, 2017 column represents the range during the fiscal year then ended.
June Credit Agreement Amendments
On June 15, 2017, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) among the Company, the guarantors party thereto, The Bank of Tokyo-Mitsubishi UFJ, Ltd, as pro-rata administrative agent, Royal Bank of Canada, as term loan B administrative agent, certain replacement and


15

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


incremental term loan B lenders and the other lenders party thereto. Pursuant to the Second Amendment, the credit facilities were amended to provide for, among other things:
(a) a reduction of 0.5% in the interest rate margin applicable to the Term Loan B Facility (as defined under the Second Amendment of the Credit Agreement), to LIBOR plus 2.00% on Eurocurrency Rate Advances;
(b) an increase of $183.7 million in the unpaid principal balance of the Term Loan B Facility to a total of $650.0 million; and
(c) quarterly repayments of $0.5 million commencing September 30, 2017 through December 31, 2022 and quarterly repayments thereafter of $2.4 million (subject to reduction for any mandatory or voluntary prepayments) until the maturity date of the Term Loan B Facility.
The additional borrowings under the Term Loan B Facility were immediately applied to repay $180.6 million of the unpaid principal balance of the Tranche A1 Facility; to pay accrued and unpaid interest on amounts repaid on the Tranche A1 Facility and on the Term Loan B Facility; and to pay fees and expenses incurred in connection with the transaction. The Company wrote-off $1.7 million of deferred financing fees related to the portion of the loans deemed extinguished, which are recorded in interest expense; and recorded an additional $1.5 million of deferred financing costs related to fees paid in connection with the Second Amendment.
December Credit Agreement Amendments
On December 29, 2017, the Company entered into a Third Amendment to Credit Agreement (the “Third Amendment”) among the Company, the guarantors party thereto, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as pro rata administrative agent, Royal Bank of Canada, as term loan B administrative agent, certain incremental term loan B lenders, and the other lenders party thereto. Pursuant to the Third Amendment, the credit facilities were amended to provide for, among other things:
(a) an increase of $200.0 million in the unpaid principal balance of the Term Loan B Facility to a total of $849.0 million;
(b) an extension of each of the respective maturity dates of the Revolving Credit Facility and the Tranche A2 Facility by one year; and
(c) quarterly repayments with respect to the Term Loan B facility of $1 million commencing March 31, 2018 through December 31, 2022 and quarterly repayments thereafter of $3.25 million until the maturity date of the Term Loan B Facility, subject to reductions as a result of the application of voluntary or mandatory prepayments made by the Company.
The additional borrowings under the Term Loan B Facility were immediately applied to repay in full the aggregate principal amount of advances outstanding under the Revolving Credit Facility of $150 million and to pay fees and expenses incurred in connection with the Third Amendment.
During the first quarter of fiscal year 2018, the Company made a mandatory repayment of $10.8 million on its Term Loan Facilities. On June 30, 2017, the Company drew $55.0 million under its Revolving Credit Facility in order to fund in part the settlement of its purchase of NES in July 2017. In September 2017, the Company made a mandatory principal repayment of $20.9 million on the Term Loan Facilities. In November 2017, the Company drew an additional $165 million under its Revolving Credit Facility in order to fund in part the settlement of its purchase of Praxis. In December 2017, the Company made a mandatory principal repayment of $20.9 million on the Term Loan Facilities, and voluntarily paid off $70.0 million of its outstanding Revolving Credit Facility. The repayments noted in this paragraph are separate from, and in addition to, the application of the proceeds of the increased borrowings under the Term Loan B Facility in June and December 2017, as discussed above.


16

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Interest expense consisted of:
 
 
 Three Months Ended
 
 Nine Months Ended
(Dollars in millions)
 
December 29, 2017
 
December 30, 2016
December 29, 2017
 
December 30, 2016
Contractual interest -Revolving and Term Loan Facilities
 
$
22

 
$
18

 
$
62

 
$
56

Amortization of debt issuance costs
 
2

 
2

 
6

 
8

Interest on derivatives and other
 
5

 
8

 
18

 
23

Loss on debt extinguishment
 

 
8

 
2

 
8

Total interest expense
 
$
29

 
$
36

 
$
88

 
$
95

CSRA’s costs incurred in connection with the issuance of its Term Loan Facilities are amortized using the effective interest method over the life of the respective loans. Unamortized debt issuance costs related to the Revolving Credit Facility are recorded with the carrying value of the debt and are amortized using the straight-line method.
Expected maturities of long-term debt, excluding future minimum capital lease payments are as follows:
(Dollars in millions)
 
Amount
Fiscal year:

 
 
Fourth quarter of fiscal year 2018
 
$
21

2019
 
85

2020
 
474

2021
 
86

2022
 
86

2023
 
1,188

Thereafter
 
826

Total
 
$
2,766

 
 
 

CSRA’s credit facilities contain representations, warranties, and covenants customary for arrangements of these types, as well as customary events of default. CSRA was in compliance with all financial covenants associated with its borrowings as of December 29, 2017.


17

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Note 8—Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Act. Among other provisions, this law significantly modifies the existing U.S. tax code for corporations, including a prospective change in the statutory tax rate from 35% to 21%, repeal of the corporate alternative minimum tax, changes to business tax deductions, and significant revision of international tax provisions. The change in the statutory tax rate is effective beginning January 1, 2018. As CSRA operates on a fiscal year calendar, the new rate is effective for the Company’s fourth quarter of fiscal year 2018. However, certain provisions of the new law, including asset depreciation rates for tax purposes, became effective at dates during the three months ended December 29, 2017 and the Company is required to evaluate its deferred tax assets and liabilities as of December 29, 2017 using the new statutory rates (subject to considerations in SAB 118). The Company’s net benefit for income taxes in the three months ended December 29, 2017 included a benefit of $100.7 million associated with: (a) the estimated net effect of these changes on CSRA’s deferred tax liabilities and assets at the end of the period; and to a much lesser extent (b) a change in the Company’s liability for an uncertain tax position. CSRA evaluated its deferred tax assets and liabilities on a provisional basis using management estimates. The impact of the Tax Act may differ from these estimates, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made. Any adjustments recorded to the provisional amounts through the third quarter of fiscal year 2019 will be included in income from operations as an adjustment to tax expense.

Excluding the net benefit associated with the evaluation of deferred tax items, our provision for taxes on current period income in the three months ended December 29, 2017 was recognized using reasonable estimates of income and the statutory rate of the Company for the full fiscal year. As the Company’s fiscal year end is March 30, 2018, the statutory federal corporate tax rate is prorated to 31.6%. The Company’s federal corporate statutory tax rate for fiscal year 2019 and beyond will be 21.0%. CSRA’s effective tax rate (“ETR”) was (64.1)% and 4.4% for the three and nine months ended December 29, 2017, respectively, compared to 37.3% and 36.4% for the three and nine months ended December 30, 2016, respectively.

CSRA is currently under examination in several tax jurisdictions. Tax years 2008 and forward remain subject to examination under both Federal and various state tax jurisdictions. One disputed matter remains unresolved in connection with the Internal Revenue Service’s (“IRS”) examination of SRA’s federal income tax return for 2011. The disputed matter concerns a $136.7 million worthless stock deduction for a disposed subsidiary. CSRA believes its tax positions are appropriate. The Company obtained a tax insurance policy in connection with its merger with SRA that limits CSRA’s exposure related to this dispute. It is reasonably possible that changes to CSRA’s unrecognized tax benefits could be significant; due to the uncertainty regarding the IRS administrative appeals process and possible outcomes, however, we estimate that the increases or decreases in our unrecognized benefits that may occur within the next 12 months will not be material.
Note 9—Pension and Other Post-retirement Benefit Plans
Certain employees of CSRA, its subsidiaries, and its former parent company are participants in employer-sponsored defined benefit and defined contribution plans, including pension and other post-retirement benefit (“OPEB”) plans. The assets and liabilities for the plans and the costs and benefits related to the plans’ participants are reflected in CSRA’s unaudited Consolidated and Condensed Financial Statements.
Defined Benefit Pension Plans
The largest U.S. defined benefit pension plan was frozen in fiscal year 2010 for most participants. All remaining participants have been frozen since 2016.
The net periodic pension benefit for CSRA pension plans includes the following components:
(Dollars in millions)
 
Three Months Ended
 
Nine Months Ended
December 29, 2017
 
December 30, 2016
 
December 29, 2017
 
December 30, 2016
Service cost (entirely administrative expenses)
 
$
4

 
$
3

 
$
11

 
$
9

Interest cost

23

 
25

 
69

 
76

Expected return on assets
 
(43
)
 
(47
)
 
(129
)
 
(145
)
Recognition of actuarial (gains) losses
 

 
(101
)
 

 
(101
)
Settlement gain
 

 
(13
)
 

 
(13
)
Net periodic pension benefit

$
(16
)
 
$
(133
)
 
$
(49
)
 
$
(174
)
The following table provides the pension plans’ projected benefit obligations, assets, and funding status:
 
 
As of
(Dollars in millions)
 
December 29, 2017
 
March 31, 2017
Net benefit obligation
 
$
(2,739
)
 
$
(2,787
)
Net plan assets
 
2,335

 
2,328

Net unfunded status
 
$
(404
)
 
$
(459
)

CSRA contributed $6.2 million to the defined benefit pension plans during the nine months ended December 29, 2017 for the funding of benefit payments made to plan participants. CSRA expects to make $2.1 million of additional contributions during the remaining three months of fiscal year 2018 for the funding of participants’ benefit payments.


18

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Other Post-retirement Benefit Plans
CSRA’s financial statements reflect the service costs related to current employees and certain former employees of CSC and the businesses constituting CSC’s North American Public Sector segment and the assets and liabilities for the plans. CSRA provides subsidized healthcare, dental, and life insurance benefits for certain U.S. employees and retirees, primarily for individuals employed prior to August 1992.
(Dollars in millions)
 
Three Months Ended
 
Nine Months Ended
December 29, 2017
 
December 30, 2016
 
December 29, 2017
 
December 30, 2016
Net periodic post-retirement (benefit) costs:
 
 
 
 
 
 
 
 
Interest cost
 
$
1

 
$
1

 
$
2

 
$
2

Expected return on assets
 
(1
)
 
(1
)
 
(4
)
 
(4
)
Amortization of prior service benefit
 
(4
)
 
(4
)
 
(10
)
 
(10
)
Net periodic benefit
 
$
(4
)
 
$
(4
)
 
$
(12
)
 
$
(12
)
The following table provides the OPEB plans’ projected benefit obligations, assets, and funding status:
(Dollars in millions)
 
As of
 
December 29, 2017
 
March 31, 2017
Net benefit obligation
 
$
(84
)
 
$
(86
)
Net plan assets
 
76

 
76

Net unfunded status
 
$
(8
)
 
$
(10
)
CSRA contributed $1.1 million to the OPEB plans during both the nine months ended December 29, 2017 and December 30, 2016. CSRA expects to make $0.4 million of additional contributions to this plan during the remaining three months of fiscal year 2018 for the funding of participants’ benefit payments.
Note 10—Share-Based Compensation Plans
Employee Incentives
Prior to the Company’s separation from CSC (the “Spin-Off”), there were two stock incentive plans under which employees were granted stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”). Some of these awards vested upon the Spin-Off, some continue to vest in accordance with their original terms, and some converted into a different type of equity award at separation. CSRA had a net receivable from CSC of $7.0 million at December 29, 2017 and $1.3 million as of March 31, 2017, related to the settlement of equity awards granted to employees prior to the Spin-Off.
On August 9, 2017, CSRA’s shareholders approved an increase in the number shares available for issuance under the Company’s 2015 Omnibus Incentive Plan of 4,483,000 shares. As of December 29, 2017, there were 11,179,870 available shares of CSRA common stock for the grant of future stock options, RSUs, PSUs or other share-based incentives to employees of CSRA. For the nine months ended December 29, 2017 and December 30, 2016, CSRA recognized share-based compensation expense within Selling, general and administrative expenses of $11.3 million and $25.1 million, respectively, including CSRA’s non-employee director grants, which totaled $1.2 million in both periods.


19

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Stock Options
Information concerning stock options of CSRA during the nine months ended December 29, 2017 was as follows.
 
 
Number of Option Shares
 
Weighted Average Exercise Price per share
Outstanding as of March 31, 2017
 
1,996,898

 
$
24.29

Granted
 

 

 Less:
 
 
 
 
Exercised
 
185,031

 
23.00

Canceled/Forfeited
 
89,600

 
23.92

Expired
 
9,369

 
28.49

Outstanding as of December 29, 2017
 
1,712,898

 
24.37

 
 
 
 
 
Expected to vest in the future as of December 29, 2017
 
730,968

 
25.03

Exercisable as of December 29, 2017
 
981,930

 
23.88

As of December 29, 2017, unrecognized compensation expense related to unvested stock options totaled $2.9 million. This cost is expected to be recognized over a weighted-average period of 1.3 years.
RSUs and PSUs    
Information concerning RSUs and PSUs of CSRA during the nine months ended December 29, 2017, was as follows.
 
 
Number of Restricted Stock Units
 
Weighted Average Fair Value
Outstanding as of March 31, 2017
 
857,914

 
$
26.95

Granted
 
683,335

 
30.39

Less:
 
 
 
 
Vested
 
97,097

 
29.10

Canceled/Forfeited
 
109,170

 
28.10

Outstanding as of December 29, 2017
 
1,334,982

 
28.46

As of December 29, 2017, total unrecognized compensation expense related to unvested RSUs and PSUs totaled $20.7 million. This cost is expected to be recognized over a weighted-average period of 2.1 years.

Note 11—Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)

Dividends Declared
In May 2017, CSRA announced that its Board of Directors had declared a quarterly cash dividend of $0.10 per share. The total qualifying shares were 163,760,678 shares, with a total dividend payout of $16.4 million. Payment of the dividend was made on July 12, 2017 to CSRA stockholders of record at the close of business on June 15, 2017.
In August 2017, CSRA announced that its Board of Directors had declared a quarterly cash dividend of $0.10 per share. The total qualifying shares were 163,604,848 shares, with a total dividend payout of $16.4 million. Payment of the dividend was made on October 3, 2017 to CSRA stockholders of record at the close of business on August 29, 2017.


20

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


In December 2017, CSRA announced that its Board of Directors had declared a quarterly cash dividend of $0.10 per share. The total qualifying shares were 163,828,550 shares, with a total dividend payout of $16.4 million. Payment of the dividend was made on January 25, 2018 to CSRA stockholders of record at the close of business on January 4, 2018.
Share Repurchase Program
On November 30, 2015, the Board authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which CSRA, from time to time, purchases shares of its common stock for an aggregate purchase price not to exceed $400 million.
During the three months ended June 30, 2017, the Company repurchased 450,000 shares of CSRA common stock for aggregate consideration of $14.3 million, at an average price of $31.71 per share. During the three months ended September 29, 2017, the Company paid $1.6 million for 50,000 shares of CSRA common stock (at an average price of $31.77 per share). The Company did not repurchase shares of CSRA common stock during the three months ended December 29, 2017.
As of December 29, 2017, CSRA remained authorized to repurchase $305.1 million of common stock pursuant to the Share Repurchase Program with an expiration date of March 31, 2019.
Accumulated Other Comprehensive Income (Loss)

The following tables show the activity in the components of other comprehensive income (loss), including the respective tax effects, and reclassification adjustments for the three and nine months ended December 29, 2017 and December 30, 2016, respectively.
 
 
For the Three Months Ended December 29, 2017
 
For the Three Months Ended December 30, 2016
(Dollars in millions)
 
Before Tax Amount
 
Tax Impact
 
Net of Tax Amount
 
Before Tax Amount
 
Tax Impact
 
Net of Tax Amount
Foreign currency translation adjustments
 
$

 
$

 
$

 
$
1

 
$

 
$
1

Unrealized gain on derivatives
 
7

 
(2
)
 
5

 
30

 
(12
)
 
18

Amortization of prior service credit
 
(4
)
 
1

 
(3
)
 
(3
)
 
1

 
(2
)
Total other comprehensive income (loss)
 
$
3

 
$
(1
)
 
$
2

 
$
28

 
$
(11
)
 
$
17

 

 
 
For the Nine Months Ended December 29, 2017
 
For the Nine Months Ended December 30, 2016
(Dollars in millions)
 
Before Tax Amount
 
Tax Impact
 
Net of Tax Amount
 
Before Tax Amount
 
Tax Impact
 
Net of Tax Amount
Foreign currency translation adjustments
 
$

 
$

 
$

 
$
2

 
$
(1
)
 
$
1

Unrealized gain on derivatives
 
4

 
(1
)
 
3

 
25

 
(10
)
 
15

Amortization of prior service credit
 
(10
)
 
4

 
(6
)
 
(10
)
 
4

 
(6
)
Total other comprehensive income (loss)
 
$
(6
)
 
$
3

 
$
(3
)
 
$
17

 
$
(7
)
 
$
10

The following tables show the changes in Accumulated other comprehensive (loss) income for the nine months ended December 29, 2017 and December 30, 2016, respectively.
 
 
Nine month ended December 29, 2017
 
Nine months ended December 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Cash Flow Hedge
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive (Loss) Income
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedge
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive (Loss) Income
Balance, beginning of period
 
$
11

 
$
20

 
$
31

 
$

 
$
(7
)
 
$
28

 
$
21

Other comprehensive income, net of taxes
 
3

 

 
3

 
1

 
15

 

 
16

Amounts reclassified from accumulated other comprehensive income, net of taxes and noncontrolling interests
 

 
(6
)
 
(6
)
 

 

 
(6
)
 
(6
)
Balance, end of period
 
$
14

 
$
14

 
$
28

 
$
1

 
$
8

 
$
22

 
$
31


Note 12—Segment Information
CSRA’s reportable segments are as follows:
Defense and Intelligence—provides services to the DoD, National Security Agency, branches of the Armed Forces and other DoD and intelligence agencies.
Civil—provides services to various federal agencies within the Department of Homeland Security, Department of Health and Human Services and other federal civil agencies, as well as various state and local government agencies.
Beginning in fiscal year 2018, we revised Segment operating income to exclude the Net benefit of defined benefit plans coincident with our adoption of ASU 2017-07. The prior period has been revised to conform to the current period presentation.
The following table summarizes operating results and total assets by reportable segment.
(Dollars in millions)
 
Defense and Intelligence
 
Civil
 
Subtotal
 
Corporate(1)
 
Total
As of December 29, 2017
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
2,447

 
$
2,682

 
$
5,129

 
$
171

 
$
5,300

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 29, 2017
 
 
 
 
 
 
 
 
Revenue
 
$
605

 
$
704

 
$
1,309

 
$

 
$
1,309

Segment operating income (loss)(2)
 
70

 
88

 
158

 
(30
)
 
128

Depreciation and amortization expense
 
42

 
17

 
59

 

 
59

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended December 29, 2017
 
 
 
 
 
 
 
 
Revenue
 
$
1,687

 
$
2,123

 
$
3,810

 
$

 
$
3,810



21

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Segment operating income (loss)(2)
 
203

 
283

 
486

 
(88
)
 
398

Depreciation and amortization expense
 
122

 
53

 
175

 

 
175

 
 
 
 
 
 
 
 
 
 
 
As of December 30, 2016
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,970

 
$
2,594

 
$
4,564

 
$
322

 
$
4,886

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 30, 2016
 
 
 
 
 
 
 
 
Revenue
 
$
556

 
$
666

 
$
1,222

 
$

 
$
1,222

Segment operating income (loss)(2)
 
37

 
91

 
128

 
(24
)
 
104

Depreciation and amortization expense
 
35

 
26

 
61

 

 
61

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended December 30, 2016
 
 
 
 
 
 
 
 
Revenue
 
$
1,699

 
$
2,040

 
$
3,739

 
$

 
$
3,739

Segment operating income (loss)(2)
 
149

 
270

 
419

 
(73
)
 
346

Depreciation and amortization expense
 
103

 
86

 
189

 

 
189

(1) Total assets allocated to the Corporate Segment at December 29, 2017 consist of the following: (a) $57 million of cash, (b) $46 million of accounts receivable, (c) $31 million of property, plant, and equipment, net, (d) $19 million of other current assets; and (e) $18 million of other long-term assets.
(2) Segment operating income (loss) for the corporate segment includes corporate general and administrative expenses as well as Acquisition, integration, and other costs. The fiscal year 2018 periods include approximately $10 million of loss recognized on the sale of the Company’s corporate headquarters building.
Segment operating income provides useful information to CSRA’s management for assessment of CSRA’s performance and results of operations and is one of the financial measures utilized to determine executive compensation.
Note 13—Commitments and Contingencies
Commitments
Sale-Leaseback Transaction
On November 2, 2017, CSRA closed a sale-leaseback transaction with MCPII 3170 Fairview, LLC, pursuant to which the Company sold its corporate headquarters building in Falls Church, Virginia, and simultaneously leased back a significant portion of the building. The lease has a 12-year term with two subsequent renewal options of five-years each. The lease qualifies as a capital lease, as the present value of the minimum lease payments exceeds 90% of the fair value of the portion of the property leased by CSRA. The gross sale price was $33.1 million and the Company recognized a loss of approximately $10 million in accordance with accounting guidance for leasing activities (ASC 840). The loss recognized on the sale is included in Selling, general and administrative expenses within the Company’s unaudited Consolidated and Condensed Statement of Operations. Payments under the lease are accounted for as interest and principal payments under the capital lease using a 12 year amortization term. Pursuant to the lease, the landlord agreed to provide a substantial tenant improvement allowance, and in addition, to perform certain renovations and improvements to the property.
As of December 29, 2017, CSRA has the following future minimum lease payments under all of its capital leases, including both facilities and equipment for use on customer contracts:


22

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


(Dollars in millions)
 
Amount
Fiscal year:
 
 
2018 (fourth quarter)
 
$
22

2019
 
82

2020
 
78

2021
 
71

2022
 
69

2023 and thereafter
 
101

Total minimum lease payments
 
423

Less: amount representing interest and executory costs
 
(71
)
Less: amount representing maintenance, taxes, and insurance costs
 
(92
)
Present value of net minimum lease payments
 
260

Less: current maturities of capital lease liability
 
(50
)
Noncurrent capital lease liability
 
$
210

Letters of Credit and Surety Bonds
In the normal course of business, CSRA may provide certain customers, principally governmental entities, with financial performance guarantees, which are generally backed by stand-by letters of credit or surety bonds. In general, CSRA would only be liable for the amounts of these guarantees in the event that nonperformance by CSRA permits termination of the related contract by the customer. As of December 29, 2017 and March 31, 2017, CSRA had $22.9 million and $20.2 million, respectively, of outstanding letters of credit, and $12.2 million and $12.0 million, respectively of surety bonds related to these performance guarantees. CSRA believes it is in compliance in all material respects with its performance obligations under all service contracts for which there is a financial performance guarantee and that the ultimate liability, if any, incurred in connection with these guarantees would not have a material adverse effect on its unaudited Consolidated and Condensed Financial Statements.
Indemnifications
CSRA generally indemnifies licensees of its proprietary software products against claims brought by third parties alleging infringement of intellectual property rights (including rights in patents, copyrights, trademarks, and trade secrets). Historically, CSRA has not incurred significant costs related to licensee software indemnifications.
Contingencies
CSRA accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated under applicable accounting guidance. CSRA believes it has appropriately recognized liabilities for any such matters. In addition to the matters noted below, CSRA is currently party to a number of disputes that involve or may involve litigation. CSRA assessed reasonably possible losses for all other such pending legal or other proceedings in the aggregate and concluded that the range of potential loss is not material.
U.S. Government Agency Reviews
CSRA is routinely subject to investigations and reviews relating to compliance with various laws and regulations relating to its role as a contractor to federal, state, and local government customers and in connection with performing services in countries outside of the U.S. Adverse findings in these investigations or reviews can lead to criminal, civil, or administrative proceedings, and CSRA could face penalties, fines, compensatory damages, and suspension or debarment from doing business with governmental agencies. In addition, CSRA could suffer serious reputational harm if allegations of impropriety were made against CSRA. Adverse findings could also have a material adverse effect on CSRA’s business and its unaudited Consolidated and Condensed Financial Statements due to CSRA’s reliance on government contracts.


23

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


U.S. government agencies, including the Defense Contract Audit Agency (“DCAA”), Defense Contract Management Agency (“DCMA”), and others, routinely audit and review a contractor’s performance on government contracts, indirect rates, pricing practices, and compliance with applicable contracting and procurement laws, regulations, and standards. These agencies also review the adequacy of the contractor’s compliance with government standards for its business systems including: a contractor’s accounting system, earned value management system, estimating system, materials management and accounting system, property management system, and purchasing system.
CSRA’s indirect cost audits by the DCAA (including audits of both CSRA LLC and SRA) remain open for several fiscal years. Although the Company recorded contract revenue based upon estimates of costs that the Company’s management believes will be approved upon final audit or review, management does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed these estimates, CSRA’s profitability would be adversely affected.
As of December 29, 2017 and March 31, 2017, CSRA has recorded a liability of $16.3 million and $16.5 million, respectively, for its current best estimate of net amounts to be refunded to customers for potential adjustments from such audits or reviews of contract costs. These amounts include potential adjustments related to both pre-separation and post-separation audits or reviews.
Legal Proceedings
The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business, including many matters that arose before the Company’s separation from CSC. See Note 21Commitments and Contingencies in CSRA’s Consolidated and Combined Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 for additional information. During the nine months ended December 29, 2017, the following significant developments arose with respect to these matters:
State of Maryland, Medicaid Enterprise Restructuring Project (“MERP”)
On September 15, 2017, the Maryland Department of Health (the “State”) issued a procurement officer's decision and Departmental Final Action (the “Final Action”) denying CSC’s remaining undecided claims against the State in the total amount of $83 million. In the Final Action, the State also purports to award itself approximately $521 million on its counterclaim. The State alleges a default by CSC under the contracts for MERP. CSC contests both the State’s allegation that it defaulted and the amount of State’s alleged damages. CSC timely filed a notice of appeal with the Maryland State Board of Contract Appeals (the “State Board”), which will consider CSC’s claims and the State’s counterclaim anew.
CSC’s claims against the State have been consolidated at the State Board. On January 12, 2018, CSC filed various strong dispositive motions at the State Board, one of which challenges the State Board’s jurisdiction over the State’s claims against CSC. CSC’s January 12, 2018, motions also request summary decision on the State’s claims should jurisdiction be found.  
On November 22, 2017, the State filed a fraud complaint in Maryland State Circuit Court alleging that CSC’s purported contractual nonperformance amounted to fraud under common law and the Maryland False Health Claims Act (the “Complaint”). In the Complaint, the State seeks penalties of $0.8 million, unspecified compensatory damages in excess of $500 million, which may be trebled under the Maryland False Health Claims Act, and punitive damages in excess of $500 million. The complaint also sets forth specified damages totaling approximately $44 million, which are also set forth in the State’s $521 million counter-claim filed with the State Board in September 2017. On December 29, 2017, CSC removed the case to the U.S. District Court for the District of Maryland and on January 5, 2018, filed several dispositive motions, including a Motion to Dismiss, or in the Alternative for a More Definite Statement, under Federal Rules of Civil Procedure 9(b) and 12(e). Management is continuing to correspond with the State to seek a mutually agreeable resolution to these matters.
 Management has evaluated the recoverability of its assets related to the MERP contract in light of these developments and concluded that no adjustments to its financial statements are required. Further, we have assessed the State’s counterclaim and have concluded that no reserve is required.


24

CSRA INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(unaudited)


Strauch et al. Fair Labor Standards Act Class Action
On June 30, 2017 the U.S. District Court for the District of Connecticut granted class certification for former employees classified as Associate Professionals or as Professionals working in the states of California and Connecticut who worked more than 40 hours per week. The Court denied class certification for all class members in North Carolina on the basis that North Carolina law is preempted by the Fair Labor Standards Act. In addition, class certification was denied as to former employees classified as Senior Professionals in California and Connecticut.  The Second Circuit denied the Company’s July 14, 2017 petition for review of the partial certification of the class. The case was tried in December 2017, resulting in a jury verdict in favor of the plaintiffs. The Court entered judgment on January 5, 2018, without specified damages. The Court noted that the judgment will be amended to include damages and fees when determined.
Southwest Asia Employment Contract Litigation
On June 28, 2017, the Fourth Circuit ruled against CSC on its appeal of the District Court’s award of attorneys’ fees to the Rishell plaintiff. The underlying judgment and attorney fees have been paid and this matter is now closed. No additional accrual for indemnification of fees was necessary.
In the separate case pending before the U.S. District Court for the Eastern District of Louisiana, on July 15, 2017, claims of 58 plaintiffs were dismissed, and the claims of the remaining 37 plaintiffs were limited, on the basis that these claims were untimely under Louisiana law. As the result of an October 2017 settlement conference, the parties reached an agreement in principle to settle the case for $0.6 million. The Company filed a motion to enforce the settlement on January 8, 2018. The range of the possible losses for which the Company would be required to indemnify CSC remains $0.6 million to $2.6 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following management discussion and analysis of financial condition and results of operations (“MD&A”) in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 and our unaudited Consolidated and Condensed Financial Statements and accompanying notes for the three and nine months ended December 29, 2017 included herein.
Unless the context otherwise requires, “CSRA,” “we,” “our” and “us” refer to CSRA Inc. and its consolidated and combined subsidiaries. We refer to the federal government of the United States of America, including its branches, departments, agencies, armed forces, elected and unelected officials, and employees (acting in their capacity as such), as the “U.S. government.”
Cautionary Note on Forward-looking Statements
All statements and assumptions contained in this Form 10-Q and in the documents attached or incorporated by reference herein that do not directly and exclusively relate to historical or current facts constitute “forward-looking statements.” Forward-looking statements often include words such as “aims,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating performance or financial performance or condition. These statements represent our current expectations and beliefs, and we can give no assurance that the results described will be achieved. Forward-looking information contained in these statements may include, among other things, statements related to our financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties, and other factors, many of which are outside of our control, which could cause actual results to differ materially from the results described in such statements. These factors include without limitation those set forth in Item 1A, Risk Factors in our Annual Report on Form 10-K.
Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to: reduced spending levels and changing budget priorities of our largest customer, the U.S. government; failure to maintain strong relationships with the U.S. government and other contractors and


25


subcontractors; possible delays or overturning of our U.S. government contract awards due to bid protests, which can result in loss of contract revenue, diminished opportunities, or failure to perform by other companies on which we depend to deliver products and services; failure of our customers to fund contracts or exercise their options to extend contracts, or our inability to execute awarded contracts successfully; failure to win recompetes of contracts we currently have; pricing pressure on new work, reduced profitability, or loss of market share due to intense competition and/or commoditization of services we offer; our failure to comply with complex laws and regulations, including, but not limited to, the False Claims Act, the Federal Acquisition Regulation, the Defense Federal Acquisition Regulation Supplement, and the U.S. Government Cost Accounting Standards; adverse results of audits and investigations conducted by the Defense Contract Audit Agency or any of the Inspectors General for various agencies with which we contract; failure to comply with complex network security, data privacy, or legal and contractual obligations, or the failure to protect sensitive information; challenges attracting and retaining key personnel or high-quality employees, particularly those with security clearances; changes in estimates used in recognizing revenue; failure to manage acquisitions or divestitures successfully, including identifying, evaluating, and valuing acquisition targets, integrating acquired companies, businesses, or assets, losses associated with divestitures and the inability to effect divestitures at attractive prices or on a desired timeline; and limitations as a result of our substantial indebtedness, which could adversely affect our financial health, operational flexibility and strategic plans.
Forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q, and forward-looking statements in documents attached or incorporated by reference speak only as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
Trademarks and Copyrights
CSRA owns or has rights to various trademarks, logos, service marks, and trade names used in connection with the operation of our business. We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, trade names, and copyrights referred to in this Form 10-Q are listed without the ™, ®, and © symbols; the omission of these symbols, however, does not constitute a waiver of any rights associated with the respective trademarks, service marks, trade names, and copyrights included or referred to in this Form 10-Q.
Introduction
Our MD&A is organized as follows:
Overview: A discussion of our business and overall analysis of financial and other highlights affecting CSRA, which we present to provide context for the remainder of our MD&A. The overview analysis compares the three and nine months ended December 29, 2017 to the three and nine months ended December 30, 2016;
Results of Operations: An analysis of our financial results comparing the three and nine months ended December 29, 2017 to the comparable prior-year periods. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations by segment;
Liquidity and Capital Resources: An analysis of changes in our cash flows and a discussion of our financial condition and liquidity;
Contractual Obligations: An overview of contractual obligations and off balance sheet arrangements; and
Critical Accounting Policies and Estimates: A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.


26


Overview
Business Overview
Every day CSRA makes a difference in how the government serves our country and our citizens. We deliver a broad range of innovative, next-generation IT solutions and professional services to help our customers modernize their legacy systems, protect their networks and assets, and improve the effectiveness and efficiency of mission-critical functions for our war fighters and our citizens. Our workforce of over 19,000 employees understands that success is a matter of perseverance, courage, adaptability, and experience.
Headquartered in Falls Church, Virginia, we deliver comprehensive offerings from concept through sustainment. We deliver IT and mission- and operations-related services across the U.S. government, including to the Department of Defense (“DoD”), intelligence and homeland security communities, and civil and healthcare agencies, as well as to state and local government agencies. We leverage deep domain-based customer intimacy and decades of experience in helping customers execute their missions with a fundamental understanding of their IT environments, which have earned us the ability to introduce next-generation technologies. We bring scalable and more cost-effective IT solutions to government agencies that are seeking to improve mission-critical effectiveness and efficiency through innovation.
This approach is designed to yield lower implementation and operational costs as well as a higher standard of delivery. Demand for our U.S. public sector offerings is driven by evolving government priorities such as: (1) the critical mission priorities of government agencies; (2) the government-wide mandate to improve efficiency and reduce cost; and (3) the government’s long-term shift to next-generation technologies.
CSRA’s reportable segments are:
Defense and Intelligence—provides services to the DoD, National Security Agency, branches of the Armed Forces, and other DoD and Intelligence agencies.
Civil —provides services to various federal agencies within the Department of Homeland Security, Department of Health and Human Services, and other federal civil agencies, as well as various state and local government agencies.
Financial Overview
During fiscal year 2018, we have completed the following significant transactions:
In June 2017, we completed an amendment of our credit facilities to reduce our interest rate on certain borrowings, and reallocate unpaid principal balances among portions of the credit facility
We used our positive cash flow to repurchase 500,000 shares of CSRA common stock for approximately $15.9 million, in aggregate, at an average price of $31.72 per share, and paid $49.7 million in dividends.
On July 3, 2017, we completed the acquisition of NES Associates, LLC (“NES”), which is a provider of IT services to the U.S. government. On June 30, 2017, we drew $55 million on our revolving credit facility in order to fund, in part, the settlement of its purchase of NES. NES became a wholly-owned subsidiary of CSRA at the beginning of the second quarter of fiscal year 2018.
On November 17, 2017, we completed the acquisition of Praxis Engineering Technologies LLC (“Praxis”) for approximately $235 million in cash, subject to closing adjustments. Praxis is a consulting and solutions firm dedicated to the practical application of software and systems engineering technologies to the U.S. government. We drew $165 million on our revolving credit facility in order to fund, in part, the settlement of our purchase of Praxis. Praxis became a wholly-owned subsidiary of CSRA during the third quarter of fiscal year 2018.


27


In November 2017, we executed and closed a sale-leaseback transaction of our corporate headquarters property in Falls Church, Virginia. Pursuant to the sale transaction, the gross sales price was $33.1 million and we recognized a loss of approximately $10 million on the sale of the property in the third quarter.
In December 2017, we completed a further amendment of our credit facilities to extend the maturity dates of a portion of our borrowings under our term loan A facilities and under our revolving credit facility by one year and to increase our borrowings under our term loan B Facility by $200 million. We used the additional borrowings under the term loan B facility to pay in full the outstanding borrowings under our revolving credit facility, and to pay fees and expenses associated with the amendment.
Key operating results for the third quarter and first nine months of fiscal years 2018 and 2017 include:
 
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
 
December 29, 2017

December 30, 2016
 
December 29, 2017
 
December 30, 2016
Total revenue
 
$
1,309

 
$
1,222

 
$
3,810

 
$
3,739

Operating income
 
128

 
104

 
398

 
346

Net income
 
192

 
128

 
350

 
276

Net income attributable to common shareholders
 
188

 
126

 
341

 
267

Non-GAAP measures:
 
 
 
 
 
 
 
 
Free cash flow(1)
 
133

 
191

 
223

 
266

Adjusted EBITDA(2)
 
201

 
188

 
604

 
586

(1) Free cash flow is a non-GAAP measure and our definition of free cash flow may differ from that used by other companies. We define free cash flow as equal to the sum of: (a) operating cash flows; (b) investing cash flows, excluding business acquisitions, dispositions (including those of non-operating assets), and investments; and (c) payments on capital leases and other long-term asset financings. For comparability between periods, free cash flow is further adjusted for: (i) non-recurring separation and merger-related payments; (ii) the amount of net proceeds received from the initial sale of billed and/or unbilled receivables at the time that we initially implemented the Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”); and (iii) the incremental net proceeds received from the initial sale of receivables when they first become eligible for sale under the Purchase Agreement. Free cash flow is not a substitute for operating and investing cash flows as determined in accordance with GAAP. Our management uses free cash flow in reviewing the overall performance of the business and motivating performance through incentive compensation for key business leaders. We believe that strong free cash flow is important to investors in our industry. Free cash flow provides both management and investors a measure of cash generated from operations that is available to fund acquisitions, repay debt, pay dividends, and repurchase our common stock. Management overcomes the limitations of this non-GAAP measure by also reviewing the GAAP measures of operating, investing, and financing cash flows.


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A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:
 
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
 
December 29, 2017

December 30, 2016
 
December 29, 2017
 
December 30, 2016
Net cash provided by operating activities
 
$
157

 
$
227

 
$
316

 
$
438

Net cash used in investing activities
 
(222
)
 
(27
)
 
(381
)
 
(118
)
Initial sales of qualifying accounts receivables(a)
 

 

 

 
(46
)
Payments for acquisitions, net of cash acquired
 
234

 

 
335

 

Net proceeds from disposition of corporate headquarters
 
(31
)
 

 
(31
)
 

Payments on capital lease liabilities
 
(10
)
 
(15
)
 
(30
)
 
(32
)
Separation and merger-related payments
 
5

 
6

 
14

 
24

Free cash flow
 
$
133

 
$
191

 
$
223

 
$
266

(a) For the nine months ended December 30, 2016, the amount relates to SRA International Inc. (“SRA”) unbilled receivables under the Purchase Agreement to which SRA was added to during the period. Billed receivables historically sold by SRA under a separate accounts receivable purchase agreement continue under the Purchase Agreement.
(2) Adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a non-GAAP measure. Our calculation of Adjusted EBITDA is based on our credit agreement, and may differ from other companies. We changed our Adjusted EBITDA measure in fiscal year 2017 to remove fully the costs and benefits associated with our legacy defined benefits plans. We exclude the costs and benefits of legacy defined benefit plans because participation in these plans has been frozen for several years and these costs are not included in the compensation of our employees. We believe Adjusted EBITDA provides useful information to investors regarding our results of operations, as it provides another measure of our profitability and our ability to service our debt and is considered an important measure by financial analysts covering CSRA and peer companies in our industry.
The following table presents a reconciliation of Net income to Adjusted EBITDA:
 
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
 
December 29, 2017
 
December 30, 2016
 
December 29, 2017
 
December 30, 2016
Net income
 
$
192

 
$
128

 
$
350

 
$
276

Interest expense, net
 
29

 
36

 
88

 
95

Income tax (benefit) expense
 
(75
)
 
76

 
16

 
158

Depreciation and amortization
 
59

 
61

 
175

 
189

Amortization for contract-related intangibles
 

 

 

 
3

Stock-based compensation
 
3

 
4

 
11

 
11

Foreign currency exchange loss
 
1

 

 
1

 
 
Net benefits of pension and OPEB plans
 
(20
)
 
(137
)
 
(61
)
 
(186
)
Other separation-related items (within SG&A and cost of services)
 
9

 
15

 
7

 
22

Acquisition, integration, and other costs
 
3

 
5