Virginia-based Computer Sciences Corp. (CSC) announced that it has entered into a definitive settlement with the federal government in relation to a contract dispute. The case filed by Computer Sciences was pending with the Armed Services Board of Contract Appeals since November 2010.
At that time, the government and Computer Sciences agreed to put their claims on hold and enter non-binding discussions to resolve the claims and other issues related to the contract.
Per the settlement terms, Computer Sciences will receive a one-time cash compensation of $277.0 million as well as a five-year contract extension for an estimated value of $1.0 billion. The original contract for providing systems support is scheduled to expire by this year end.
The settlement will attract a pre-tax legal expense of $250.0 million, which the company expects to record in its second quarter 2012 results. This will pull the earnings estimate down by $1.15 a share.
However, we think that the payment received on the settlement would provide sufficient support to the earnings estimate. The contract renewal amount is also significant and would no doubt have a positive impact on the company’s revenue.
The company reported decent first quarter 2012 results on the strength of its new businesses. However, we remain concerned about the intense competition in the IT and cloud computing space from both small and big players such as Accenture plc (ACN) and Hewlett-Packard Company (HPQ).
Apart from competition, macro uncertainty is taking a toll on Computer Sciences’ fundamentals. Delays in NHS (National Health Services) contracts and fewer government deals due to regulatory spending cuts are making matters worse. Additionally, the demand for its products in Europe could remain weak in the near term.
Currently, Computer Sciences has a Zacks #5 Rank, implying a short-term Strong Sell recommendation.
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