CSC facing $1.5 billion charge for U.K. health program

January 8, 2012

Last year was a rocky one for Falls Church-based information-technology giant CSC, and so far 2012 has not proven easier.

The company, which works in both the government and commercial sectors, is the focus of a Securities and Exchange Commission investigation and it is planning to record a $1.5 billion charge after running into difficulties with work it was doing for the United Kingdom. To top it off, CSC’s chairman and chief executive, Michael W. Laphen, said last year that he plans to retire by Oct. 31.

By the end of 2011, the company’s shares fell to levels not seen since the mid-1990s. Last week came another setback. Standard & Poor’s lowered the company’s corporate credit rating from A- to BBB+, while Fitch Ratings placed it on “watch negative.”

The SEC investigation began early last year and centers on accounting errors within the company unit that manages information-technology services for government agencies and commercial clients, particularly those in Scandinavia. The company’s audit committee launched an independent investigation in May.

CSC declined to comment for this story. But in a November filing with the SEC, the company said it expanded its own investigation to include operations in Australia, where it identified accounting errors and irregularities. As a result, some personnel in Australia have been suspended.

The investigation continues to grow. According to CSC’s filing, the inquiry now includes a review of the company’s accounting in its Americas outsourcing operation and some of its contracts that involve “percentage of completion” accounting methodology.

At the same time, the company has been wrestling with the U.K. National Health Service to revamp a major contract to develop an electronic patient records system. Government reviews have found that the larger health system modernization effort underlying CSC’s role was too ambitious and have called for rethinking the effort, and CSC has come under criticism for delays in its work.

Although CSC initially had negotiated with the NHS a new memorandum of understanding that would reduce the scope of its contract, more recent negotiations have proven unsuccessful. The company learned late last year that the government would not approve the agreement.

CSC said in an SEC filing that it expected discussions to resume this month, but the proposals on the table vary significantly from the memorandum of understanding. As a result, CSC said it will have to recognize a charge later this year of about $1.5 billion, equal to its total investment in the contract as of Nov. 30, 2011. The company has withdrawn its fiscal 2012 financial guidance.

The negotiations with NHS come as many governments seek to cut costs and take harder looks at existing programs, limiting the opportunities for new work.

The “challenge at the NHS project just creates another set of distractions that the company needs to work through,” said Nathan Rozof, vice president for research at Morgan Stanley, which has a business relationship with CSC.

Although the program represents a small percentage of CSC’s total revenue, he said it was expected to provide above-average profitability.

Still, Rozof and David Grossman, a managing director at Stifel Nicolaus, which also has a business relationship with CSC, said the larger problem is the confluence of difficulties the company is facing.

“The SEC thing is an open-ended thing,” Grossman said. “None of us know what the outcome’s going to be.”

To reassure investors, Rozof said CSC will need to resolve some of these issues.

“They need to get a new CEO in place who can provide a vision for the company’s path forward that’s credible,” he said. “They need to conclude these accounting investigations so we can have a good sense of that issue being in the background.”

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