CSC’s UK revenues were essentially flat in FY11 at c£1.2b ($1,869m), despite mounting problems with its NHS IT contracts. The full extent of the issues with CSC’s £2.9b NHS contracts is revealed in its 10k, which it finally filed with the SEC yesterday. Delays to the rollout of Lorenzo and resultant missed milestones clearly had an impact this year including a $46m revenue decline in FY11 (following a similar $49m decline the previous year) and a near $370m reduction in cash flows from advance contract payments. As at the first of April, CSC has a net investment in the contract/s of just over $1b.
Even in the best case scenario, the ongoing contract negotiations with the NHS will also affect the future value of the contracts. According to the filing, CSC’s discussions with the NHS in its fiscal Q4 set out plans to modify the scope of its contracts (again) and reduce the total contract value by £764m to c£2.1b, although also extending it by a year to June 2017. The expected modifications will hit the profitability of the contract, but CSC is quick to point out it will “nonetheless remain profitable” and it expects to recover its investment.
However, as we’ve said before, the real risk for CSC is what would happen if the government decides to cut its losses and terminate the contract. CSC warns in its 10k: “Future events could result in a charge to reduce the contract profitability recognized to date and impair the Company’s net investment in the contract, a reduction in future profitability or a material adverse impact on the Company’s cash flows.” And this is not a vague hypothesis but a real possibility. The 10k confirms that in February the NHS formally notified CSC that it believed the company was in breach of contract when it missed the Pennine deployment milestone (see CSC’s NHS IT future in doubt as key Trust says No to Lorenzo). At the time the NHS said it was considering termination of all or part of the contract although it has since clarified that this is only one option available. CSC has disputed the alleged breach and both parties are still working to find a replacement for the Pennine Trust and on finalising the terms of their long-awaited MOU. We await the next instalment of the sorry saga with bated breath…