CSC May Take Earnings Hit From Broken Sears ContractCSC May Take Earnings Hit From Broken Sears Contract

Computer Sciences Corp. says it may have to take a charge against earnings to cover the costs of its broken outsourcing engagement with Sears Holdings Corp., the company disclosed in a Securities and Exchange Commission filing dated Monday.

Sears said Friday it was terminating the 10-year, $1.6 billion agreement because of CSC's "failure to perform" certain tasks stipulated by the contract. The deal was signed last year.

In its SEC filing, CSC said Sears' reasons for ending the deal are "contrived" and that Sears' merger with national retailer Kmart is what's really behind its desire to oust CSC.

CSC says it has already made considerable investments in its efforts to help Sears modernize its computing systems, including the purchase of software and equipment. CSC says it will seek to recover those investments in court, if necessary. However, the company says that if its courtroom efforts are unsuccessful, it "could experience a charge, which could be material, associated with the impairment of these assets."

Based on the deal's size, one analyst believes that CSC has likely spent millions on manpower and IT equipment intended for deployment at Sears. Cindy Shaw, an analyst at Moors & Cabot, estimates that CSC "may have already dropped more than $100 million on the contract."

CSC isn't the only IT vendor that could be hurt by Sears' decision to pull the plug on its outsourcing deal. CSC had previously tapped Level 3 Communications Inc. to provide Sears with an extensive digital voice network as part of the contract. The fate of Level 3's deal was not immediately clear. Officials from Sears and CSC declined to comment. Level 3 officials did not return phone calls.