Saturday, 18 May 2013

CSC to pay almost US$100 million to settle Class Action lawsuit

 Bloomberg has reported that Computer Sciences Corp. (CSC) has agreed to pay $97.5 million to settle the class-action lawsuit over alleged false statements about accounting and the company’s performance on a multibillion-dollar contract. A proposed settlement was filed in US federal court and is subject to approval by a judge.

Investors alleged that Computer Sciences officials “made false or misleading statements or omitted to disclose material facts” about the effectiveness of internal controls over financial reporting and about the company’s performance on a $5.4 billion electronic patient records contract with the U.K.’s National Health Service (NHS) , according to a memo filed in support of the settlement.
The “false statement and omissions caused the price of CSC common stock to be artificially inflated” and subsequently declined “when truthful corrective information was disclosed,” lawyers for the plaintiffs said in the memo.

Fuller details are given on:

This is good news for CSC as it removes a major uncertainty which could have deterred a potential investor or acquirer from buying into CSC.

However, US$97 million is a large sum for one group of CSC shareholders to have to pay to another group of shareholders who brought the lawsuit. Additionally, former CEO Michael W Laphen and former CFO Michael Mancuso were also named defendants in the lawsuit.  Is there any chance CSC will try to recover some of the US$97 million from these two?   We do not think so, as CSC will not have admitted any wrongdoing and this will preclude any recovery. So we can just add the whole US$97 million to the already significant cost of Mr Laphen’s period of mismanagement of CSC.  

But even if CSC cannot recover any part of the US$97 million settlement, previous CSC management, specifically Messrs Laphen, Mancuso and former Europe President Guy Hains should  be required to pay back the large bonuses, share options etc awarded to them for  a “performance” which we now know was just smoke. We now know the company was not in fact profitable even though it was reported as being profitable and huge compensation was paid out on that basis. 

Specifically, Guy Hains received $2.2million in 2012 yet he personally led the botched NHS IT project which led to the lawsuit. As President Europe he also had oversight responsibility for the Nordics during the time of their inappropriate accounting practices. Mike Laphen received $20.9million in 2012 just when the company results collapsed.

How anyone can get such large packages for leading the company into the abyss is beyond explanation. That they are not required to reimburse any part even when it is proved that they should never earned those amounts at all is equally beyond explanation.

Friday, 17 May 2013

Is it a case of "Back To The Future" as CSC announces Q4 FY13 earnings?

When CSC announced its Q3 FY13 profit 3 months ago, the markets were impressed and the stock price jumped 10% We were less impressed, and questioned where CSC was going. We thought the situation may not be as good as Mike Lawrie’s articulate and polished performance suggested. The reasons for our questions and concerns are outlined in our blog postings of February 6th and 11th 2013.  

Part of the answer was provided this week when CSC announced its Q4 FY13 earnings and saw its shares slump 15% in the following couple of days. .

Earnings per shareat US$1.27coutstripped Analyst expectations, primarily due to the impact of the company’s Cost Take-Out program.  Operating Profit was US$212 million or 5.7%.  Cash flow was good, helped by certain business dispositions.  So much for the positive news.

Revenue at US$3.70bn was a big disappointment, being 7.2% lower than the corresponding quarter of FY12. The revenue decline impacted all business segments; North American Public Sector declined by 7%,  Managed Services by 4% and Business Solutions by 12%.  Additionally, the revenue was below the Analyst consensus estimate of US$3.86bn, and even below the estimate of the least optimistic analyst.

New Business bookings presented an even gloomier picture. The new business won in FY13 was only US$13.8bn, down 25% from US$18.8bn in FY12. The Q4 FY13 performance, totaling only US$2.9bnwas fully 50% below the level of Q4 FY12.  Mike Lawrie did not seem optimistic about any significant near-term improvement.   There can be no sustainable revenue growth with a book/bill ratio below 1.0 and under developed (through lack of investment) services and products.

In some respects, it was as if CSC were heading back to the old days of  earnings announcements which ought to have   been left behind. This was because:

  • The  New Business bookings are disappointing
  • The  unpleasant surprise of revenue below expectations in areas of the business considered to be 'solid'.    
  • CSC fell back to its habit of explaining during the Analyst call that “without this impact and excluding that item, the profit would have been……………” 
  • CSC shares suffered a significant drop following the results announcement.
  • There was waffling from Mike Lawrie and Paul Saleh initially regarding revenue and new business, but especially in the Q&A session of the Analyst call.  Paul Saleh did not seem assured or convincing when some Analysts pressed him to explain and reconcile profitability and cash flow in its FY14 Guidance.

So where does this leave CSC?

On the one hand there is a determined and articulate CEO who has driven cost reduction and improved profitability for now, who has replaced some of the non-performing senior management of the previous rĂ©gime, and who seems to take the tough decisions his predecessor avoided.

On the other hand, we hear about demoralized employees, organizational confusion and a major change program which has run out of steam. As a consequence, CSC is not selling. The Q4 FY13 results support that view.

All of which leads to the same conclusion as 3 months ago, namely that we question CSC’s ability to achieve sustainable longer-term performance.  We hope Mike Lawrie will start to prove us wrong by turning in vastly improved revenue and new business numbers, and soon.

Thursday, 16 May 2013

Disappearances and new appearances

Has another CSC top executive disappeared? And is it because of CSC’s Q4 FY13 sales performance?

Just a month ago, Peter Allen, Executive Vice President for Global Sales & Marketing was hosting CSC’Global Sales Conference (GSC) in Dallas, Texas. Summaries of the conference are publicly available on:

But curiously, Peter Allen seems to have disappeared in the past 30 days. The CSC website showsthat the current EVP for Global Sales and Marketing and for Regional Operations is a certain John P Maguire.

So what has happened to Peter Allen? It is hard to know, as there has been no announcement of his leaving.  And who is John P Maguire? Hard to know, as there does not seem to be any public announcement of his arrival.

Peter Allen has been leading CSC’s efforts to re-focus its sales force over the past 12 months. It seems unusual to change leaders at this crucial stage in the company’s change program. It is also almost embarrassing to put up on YouTube several videos of the GSC led by an executive who left the company within 30 days.

Maybe Peter Allen resigned of his own volition.  Maybe.

Alternately, was CSC’s Q4 FY13 revenue shortfall a much bigger shock and disappointment within CSC than Mike Lawrie intimated during the May 15 Analyst Conference? And has Peter Allen disappeared because of that?

Thursday, 2 May 2013

CSC Italy and a Pig In A Poke

News reaches us that the company CSC sold its Italian division to, Deda Group, plans to put some hundreds of people on "Cassa Mobilita" from this summer.

Cassa Mobilita is the scheme whereby companies in Italy can temporarily lay off staff with the government  paying them up to 60% of the salary as a kind of temporary unemployment benefit. At the end of the term the people have to be taken back on.

One wonders if Deda Group knew they would have to do this when they bought CSC Italy or were they sold a Pig In A Poke? The Italians know this term as 'comprare a scatola chiusa'.  The Latin phrase "caveat emptor" might also be appropriate to the situation.

posted by Will Scarlett