Friday, 26 August 2011

CSC settlement of dispute with US Government.... why yet another shock ??

Our previous blog mentioned that CSC would take a charge of $250m in Q2 FY2012 relating to its August 24 2011 settlement of a contract dispute with the US Government dating back to FY2007.

On August 10 2011, CSC said  in its Q1 FY2012 Form 10-Q SEC filing that it was "committed to vigorous pursuit of its claimed entitements (in this dispute) and believed that recovery of at least its net balance sheet value is probable".  CSC also stated that its position had been supported by outside counsel and reiterated as recently as May 20, 2011. 

CSC did give a caveat that they could not be sure of the outcome and that its position "is subject to the ongoing evaluation of new facts and information which may come to the Company's attention". This seems a normal and prudent proviso, but nothing alarming.

(Full details of this 10-Q filing can be found on the CSC website or on http://quote.morningstar.com/stock-filing/Quarterly-Report/2011/7/1/t.aspx?t=XNYS:CSC&ft=10-Q&d=04897c6169f6d037f5f041735459ba6d )


 So on August 10 2011 CSC gave the impression of being reasonably confident that there would be no significant write off arising from this dispute. Then just two weeks later, CSC announces a settlement which entails a $250million write-off, probably turning a Q2 FY2012 profit into a significant loss. And they announce it as if it is some kind of achievement for the company!! 

James Schaeffer, CSC President, North American Public Sector said in announcing the settlement. "We are pleased to be able to reach an equitable agreement with the Government while preserving our important role in a critical government program".

We have to ask what happened in the final two weeks of a 5 year old dispute to turn "vigorous pursuit of entitlements" into something which looks like capitulation or being out-negotiated?  What new facts and information came to light? What new evaluation was made? On August 10, we are led to believe that the balance sheet position was probably safe. Just two weeks later, we have  an "equitable agreement". which creates a write-off of $250million. 

Am I the only person perplexed by these events? Or is it just another in the long series of unpleasant surprises CSC shareholders have been getting recently?

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