UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________

Commission File No.: 001-38033
DOWNLOADA02.JPG
DXC TECHNOLOGY COMPANY
 
(Exact name of Registrant as specified in its charter)
 
Nevada
61-1800317
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1775 Tysons Boulevard
 
Tysons, Virginia
22102
(Address of principal executive offices)
(zip code)
 
 
Registrant's telephone number, including area code: (703) 245-9675

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    x Yes  o No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one).

Large Accelerated Filer      x                             Accelerated Filer o
Non-accelerated Filer o (do not check if a smaller reporting company)        Smaller reporting company o     
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o Yes   x    No

285,268,745 shares of common stock, par value $0.01 per share, were outstanding as of October 23, 2017.


TABLE OF CONTENTS

Item
 
 
Page
 
 
 
 
 
 
 
1.
 
2.
 
3.
 
4.
 
 
 
 
 
 
 
 
 
 
 
 
1.
 
1A.
 
2.
 
3.
 
4.
 
5.
 
6.
 




PART I

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Financial Statements
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 




1

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
 
Three Months Ended
 
Six Months Ended
(in millions, except per-share amounts)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Revenues
 
$
6,163

 
$
1,871

 
$
12,076

 
$
3,801

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
4,312

 
1,363

 
9,100

 
2,784

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
672

 
293

 
1,082

 
598

Depreciation and amortization
 
537

 
167

 
898

 
333

Restructuring costs
 
192

 
25

 
382

 
82

Interest expense
 
78

 
29

 
154

 
54

Interest income
 
(16
)
 
(8
)
 
(32
)
 
(18
)
Other expense (income), net
 
1

 
3

 
(80
)
 
5

Total costs and expenses
 
5,776

 
1,872

 
11,504

 
3,838

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
387

 
(1
)
 
572

 
(37
)
Income tax expense (benefit)
 
122

 
(22
)
 
134

 
(38
)
Net income
 
265

 
21

 
438

 
1

Less: net income attributable to non-controlling interest, net of tax
 
9

 
6

 
23

 
7

Net income (loss) attributable to DXC common stockholders
 
$
256

 
$
15

 
$
415

 
$
(6
)
 
 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.90

 
$
0.11

 
$
1.46

 
$
(0.04
)
Diluted
 
$
0.88

 
$
0.10

 
$
1.43

 
$
(0.04
)
 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.18

 
$
0.14

 
$
0.36

 
$
0.28



The accompanying notes are an integral part of these condensed consolidated financial statements.





2


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

 
 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
265

 
$
21

 
$
438

 
$
1

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax (1)
 
(45
)
 
44

 
109

 
(6
)
 
Cash flow hedges adjustments (2)
 
(2
)
 
14

 
(5
)
 
9

 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost, net of tax (3)
 
(3
)
 
(4
)
 
(7
)
 
(7
)
 
Pension and other post-retirement benefit plans, net of tax
 
(3
)
 
(4
)
 
(7
)
 
(7
)
Other comprehensive (loss) income, net of taxes
 
(50
)
 
54

 
97

 
(4
)
Comprehensive income (loss)
 
215

 
75

 
535

 
(3
)
 
 
Less: comprehensive income attributable to non-controlling interest
 
36

 
6

 
28

 
7

Comprehensive income (loss) attributable to DXC common stockholders
 
$
179

 
$
69

 
$
507

 
$
(10
)
        

(1)  
Tax expense related to foreign currency translation adjustments was $5 and $2 respectively, for the three and six months ended September 30, 2017, and  $0 and $1 for the three and six months ended September 30, 2016, respectively.
(2)  
Tax benefit related to cash flow hedge adjustments was $3 and $3 , respectively, for the three and six months ended September 30, 2017.
(3)  
Tax benefit related to amortization of prior service costs was $2  and  $2 , respectively, for the three and six months ended September 30, 2017, and $1 and $3 for the three and six months ended September 30, 2016.





The accompanying notes are an integral part of these condensed consolidated financial statements.



3

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
As of
(in millions, except per-share and share amounts)
 
September 30, 2017
 
March 31, 2017 (1)
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,671

 
$
1,263

Receivables, net of allowance for doubtful accounts of $27 and $26
 
5,676

 
1,643

Prepaid expenses
 
610

 
223

Other current assets
 
483

 
118

Total current assets
 
9,440

 
3,247

 
 
 
 
 
Intangible assets, net of accumulated amortization of $2,731 and $2,293
 
8,004

 
1,794

Goodwill
 
9,158

 
1,855

Deferred income taxes, net
 
386

 
381

Property and equipment, net of accumulated depreciation of $3,497 and $2,816
 
3,745

 
903

Other assets
 
2,443

 
483

Total Assets
 
$
33,176

 
$
8,663

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
2,200

 
738

Accounts payable
 
1,666

 
410

Accrued payroll and related costs
 
825

 
248

Accrued expenses and other current liabilities
 
3,235

 
998

Deferred revenue and advance contract payments
 
1,325

 
518

Income taxes payable
 
186

 
38

Total current liabilities
 
9,437

 
2,950

 
 
 
 
 
Long-term debt, net of current maturities
 
6,325

 
2,225

Non-current deferred revenue
 
806

 
286

Non-current income tax liabilities and deferred tax liabilities
 
2,117

 
423

Other long-term liabilities
 
1,984

 
613

Total Liabilities
 
20,669

 
6,497

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $.01 per share, authorized 1,000,000 shares, none issued as of September 30, 2017 and March 31, 2017
 
—

 
—

Common stock, par value $.01 per share, authorized 750,000,000 shares, issued 285,942,540 as of September 30, 2017 and 141,298,797 as of March 31, 2017
 
3

 
1

Additional paid-in capital
 
12,158

 
2,219

Retained earnings (accumulated deficit)
 
110

 
(170
)
Accumulated other comprehensive loss
 
(70
)
 
(162
)
Treasury stock, at cost, 762,677 and 0 shares as of September 30, 2017 and March 31, 2017
 
(61
)
 
—

Total DXC stockholders’ equity
 
12,140

 
1,888

Non-controlling interest in subsidiaries
 
367

 
278

Total Equity
 
12,507

 
2,166

Total Liabilities and Equity
 
$
33,176

 
$
8,663

          
(1)  
Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.


The accompanying notes are an integral part of these condensed consolidated financial statements.

4

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
438

 
$
1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
904

 
339

Share-based compensation
 
58

 
35

Unrealized foreign currency exchange losses
 
4

 
90

Other non-cash charges, net
 
15

 
—

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Decrease in assets
 
78

 
64

Increase (decrease) in liabilities
 
46

 
(287
)
Net cash provided by operating activities
 
1,543

 
242

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(123
)
 
(143
)
Payments for outsourcing contract costs
 
(176
)
 
(49
)
Software purchased and developed
 
(86
)
 
(78
)
Cash acquired through Merger
 
974

 
—

Payments for acquisitions, net of cash acquired
 
(152
)
 
(434
)
Proceeds from sale of assets
 
20

 
9

Other investing activities, net
 
(20
)
 
(26
)
Net cash provided by (used in) investing activities
 
437

 
(721
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings of commercial paper
 
1,182

 
1,163

Repayments of commercial paper
 
(1,067
)
 
(1,058
)
Borrowings under lines of credit
 
—

 
920

Repayment of borrowings under lines of credit
 
(335
)
 
(529
)
Borrowings on long-term debt, net of discount
 
615

 
107

Principal payments on long-term debt
 
(1,552
)
 
(188
)
Proceeds from bond issuance
 
647

 
—

Proceeds from stock options and other common stock transactions
 
92

 
42

Taxes paid related to net share settlements of share-based compensation awards
 
(66
)
 
(12
)
Repurchase of common stock
 
(66
)
 
—

Dividend payments
 
(72
)
 
(39
)
Other financing activities, net
 
1

 
(30
)
Net cash (used in) provided by financing activities
 
(621
)
 
376

Effect of exchange rate changes on cash and cash equivalents
 
49

 
(21
)
Net increase (decrease) in cash and cash equivalents
 
1,408

 
(124
)
Cash and cash equivalents at beginning of year
 
1,263

 
1,178

Cash and cash equivalents at end of period
 
$
2,671

 
$
1,054


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated
Other
Comprehensive (Loss)
Income
Treasury Stock (3)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Reported balance at March 31, 2017
151,932

 
$
152

$
2,565

$
(170
)
$
(162
)
$
(497
)
$
1,888

$
278

$
2,166

Recapitalization adjustment (1)
(10,633
)
 
(151
)
(346
)
 
 
497

—

 
—

Recast balance at March 31, 2017
141,299

 
$
1

$
2,219

$
(170
)
$
(162
)
$
—

$
1,888

$
278

$
2,166

Business acquired in purchase, net of issuance costs (2)
141,741

 
2

9,848



 
 
9,850

61

9,911

Net Income
 
 
 
 
415

 
 
415

23

438

Other comprehensive income
 
 
 
 
 
92

 
92

5

97

Share-based compensation expense
 
 
 
57

 
 
 
57

 
57

Acquisition of treasury stock
 
 
 
 
 
 
(61
)
(61
)
 
(61
)
Share repurchase program
(842
)
 


(36
)
(30
)
 
 
(66
)
 
(66
)
Stock option exercises and other common stock transactions
3,745

 


70

 
 

70

 
70

Dividends declared
 
 
 
 
(105
)
 
 
(105
)
 
(105
)
Balance at September 30, 2017
285,943

 
$
3

$
12,158

$
110

$
(70
)
$
(61
)
$
12,140

$
367

$
12,507

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Reported balance at April 1, 2016
148,747

 
$
149

$
2,439

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

Recapitalization adjustment (1)
 
 
(147
)
147

 
 
 
—

 
—

Recast balance at April 1, 2016
148,747

 
$
2

$
2,586

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

Net loss
 
 
 
 
(6
)
 
 
(6
)
7

1

Other comprehensive loss
 
 
 
 
 
(4
)
 
(4
)


(4
)
Share-based compensation expense
 
 
 
35

 
 
 
35

 
35

Acquisition of treasury stock
 
 
 
 
 
 
(11
)
(11
)
 
(11
)
Stock option exercises and other common stock transactions
2,627

 


43

 
 
 
43

 
43

Dividends declared
 
 
 
 
(39
)
 
 
(39
)
 
(39
)
Non-controlling interest distributions and other
 
 
 
 
 
 
 
—

(11
)
(11
)
Non-controlling interest from acquisition
 
 
 
 
 
 
 
—

281

281

Divestiture of NPS
 
 
 
 
(2
)
 
 
(2
)
 
(2
)
Balance at September 30, 2016
151,374

 
$
2

$
2,664

$
(14
)
$
(115
)
$
(496
)
$
2,041

$
284

$
2,325

        
(1)  
Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.
(2)  
See Note 3 - " Acquisitions "
(3)  
762,677 treasury shares as of September 30, 2017



The accompanying notes are an integral part of these condensed consolidated financial statements.

6


DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 - Summary of Significant Accounting Policies

Business

DXC Technology Company (“DXC” or the "Company") is the world's leading independent, end-to-end IT services company. DXC’s mission is to enable superior returns on its clients' technology investments through best-in-class vertical industry solutions, domain expertise, strategic partnerships with key technology leaders and global scale. The Company helps lead its clients through their digital transformations to meet new business demands and customer expectations in a market of escalating complexity, interconnectivity, mobility, and opportunity. DXC strives to be a trusted IT partner to its clients by addressing their requirements and providing next-generation IT services that include applications modernization, cloud infrastructure, cyber security, and big data solutions.

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements (the "financial statements") include the accounts of DXC, its consolidated subsidiaries, and those business entities in which DXC maintains a controlling interest. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Other investments are accounted for by the cost method. Non-controlling interests are presented as a separate component within equity in the condensed consolidated balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the condensed consolidated statements of operations, and comprehensive income attributable to non-controlling interests are presented separately in the condensed consolidated statements of comprehensive income (loss). All intercompany transactions and balances have been eliminated.

As previously disclosed, effective April 1, 2017, Computer Sciences Corporation ("CSC") completed its previously announced combination with the Enterprise Services business of Hewlett Packard Enterprise Company ("HPES"), which resulted in CSC becoming a wholly owned subsidiary of DXC (the "Merger"). See Note 3 - " Acquisitions " for further information. DXC common stock began regular-way trading under the symbol "DXC" on the New York Stock Exchange on April 3, 2017. Because CSC was deemed the accounting acquirer in this combination for accounting purposes under GAAP (defined below), CSC is considered DXC's predecessor and the historical financial statements of CSC prior to April 1, 2017, are reflected in this Quarterly Report on Form 10-Q as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017 do not include the financial results of HPES, and therefore, are not directly comparable. Additionally, "Prepaid expenses" and "other current assets" previously aggregated within "prepaid expenses and other current assets" have been separately disclosed, and prior year amounts have been reclassified to conform to the current year presentation.

CSC used to report its results based on a fiscal year convention that comprises four thirteen-week quarters. However, effective April 1, 2017, DXC's fiscal year was modified to end on March 31 of each year with each quarter ending on the last calendar day.

The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports and accounting principles generally accepted in the United States ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in CSC's Annual Report on Form 10-K for the fiscal year ended March 31, 2017 ("fiscal 2017"), included in DXC's Annual Report on Form ARS for fiscal 2017. In the opinion of management, the accompanying financial statements of DXC contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

In connection with the preparation of the Company’s condensed consolidated financial statements for the three months ended September 30, 2017, the Company identified a classification error in the June 30, 2017 condensed consolidated statement of operations, which resulted in an understatement of $126 million to selling, general and administrative expense and an overstatement of $126 million to cost of services for the three months ended June 30, 2017. The classification error was corrected during the three months ended September 30, 2017. The Company believes that this

7
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


classification error is immaterial to the condensed consolidated statements of operations for the three months ended June 30, 2017 and September 30, 2017. This classification error had no impact on the condensed consolidated statement of operations for the six months ended September 30, 2017.


Note 2 - Recent Accounting Pronouncements

The following Accounting Standards Updates ("ASU") were recently issued but have not yet been adopted by DXC:

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815).” This amendment was issued to improve the financial reporting of hedge relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain improvements to simplify the application of hedge accounting. ASU 2017-12 will be effective for DXC in fiscal 2020 and early adoption is permitted. The ASU must be adopted by applying the standard to existing hedge instruments at the adoption date. DXC is currently evaluating the effect the adoption of ASU 2017-12 will have on its consolidated financial statements and notes thereto.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This amendment is intended to increase transparency and comparability among organizations by recognizing virtually all lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 will be effective for DXC in fiscal 2020 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition and provides for certain practical expedients. DXC is currently evaluating the effect the adoption of ASU 2016-02 will have on its existing accounting policies and the consolidated financial statements in future reporting periods, but expects there will be an increase in assets and liabilities on its balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be significant. Refer to Note 18 - " Commitments and Contingencies " for information about its operating lease obligations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which, along with amendments issued in 2015 and 2016, will replace most existing revenue recognition guidance under U.S. GAAP and eliminate industry specific guidance. The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which DXC expects to be entitled in exchange for those goods or services. The guidance also addresses the timing of recognition of certain costs incurred to obtain or fulfill a customer contract. Further, it requires the disclosure of sufficient information to enable readers of DXC’s financial statements to understand the nature, amount, timing and uncertainty of revenues, and cash flows arising from customer contracts, and information regarding significant judgments and changes in judgments made.

ASU 2014-09 provides two methods of adoption: full retrospective and modified retrospective. Under the full retrospective method, the standard would be applied to all periods presented with previously disclosed periods restated under the new guidance. Under the modified retrospective method, prior periods would not be restated but rather a cumulative catch-up adjustment would be recorded on the adoption date. The Company will adopt this standard in the first quarter of Fiscal 2019 and expects to adopt using the modified retrospective method.

DXC has performed an initial assessment of the impact of the standard and continues to assess the impact that the guidance will have on accounting policies, processes, systems and internal controls. The Company is currently in the process of implementing the new standard. Based on the implementation efforts to-date, including the assessment of contracts acquired through the combination with HPES, the Company expects the primary accounting impacts to include the following:
•
The Company’s IT and business process outsourcing arrangements comprise a series of distinct services, for which revenue is expected to be recognized as the services are provided in a manner that is generally consistent with current practices.
•
The Company has certain arrangements involving the sale of proprietary software and related services for which vendor-specific objective evidence of fair value may not exist, resulting in the deferral of revenues. Under the new standard, estimates of standalone selling price will be necessary for all software performance obligations, which may result in the acceleration of revenues.

8
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


•
The Company currently does not capitalize commission costs, which will be required in certain cases under the new standard and amortized over the period that services or goods are transferred to the customer. However, the Company is currently assessing the impact of the standard on commission plans of the combined company.
 
As the quantitative impact of adopting the standard may be significantly impacted by arrangements contracted before the adoption date, the Company has not yet reached a conclusion about whether the accounting impact of the new standard will be material to its consolidated financial statements. However, the Company expects continuing significant implementation efforts to accumulate and report additional disclosures required by the standard.

Other recently issued ASUs effective after September 30, 2017 are not expected to have a material effect on DXC's consolidated financial statements.

Note 3 - Acquisitions

Fiscal 2018 Acquisitions

HPES Merger

On April 1, 2017, CSC, Hewlett Packard Enterprise Company (“HPE”), Everett SpinCo, Inc.(“Everett”), and New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett (“Merger Sub”), completed the strategic combination of CSC with the Enterprise Services business of HPE to form DXC. The combination was accomplished through a series of transactions that included the transfer by HPE of its Enterprise Services business, HPES, to Everett, and spin-off by HPE of Everett on March 31, 2017, and the merger of Merger Sub with and into CSC on April 1, 2017 (the “Merger”). At the time of the Merger, Everett was renamed DXC, and as a result of the Merger, CSC became a direct wholly owned subsidiary of DXC. DXC common stock began regular-way trading on the New York Stock Exchange on April 3, 2017. The strategic combination of the two complementary businesses was to create a versatile global technology services business, well positioned to innovate, compete and serve clients in a rapidly changing marketplace.

Effective as of the closing of the Merger, the DXC board of directors consisted of 10 directors comprised of five former CSC board members and five directors designated by HPE, including CSC’s CEO J. Michael Lawrie, who became chairman, president and CEO of DXC and HPE’s president and CEO Margaret C. Whitman, who joined the DXC board of directors. Each director was re-elected at DXC’s 2017 annual meeting of stockholders on August 10, 2017 .

The transaction involving HPES and CSC is a reverse merger acquisition, in which DXC is considered the legal acquirer of the business and CSC is considered the accounting acquirer. While purchase consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer, CSC did not issue any consideration in the Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the Merger. DXC issued a total of 141,298,797 shares of DXC common stock to CSC stockholders, representing approximately 49.9% of the outstanding shares of DXC common stock immediately following the Merger.

All share and per share information has been restated to reflect the effects of the Merger. The reverse merger is deemed a capital transaction and the net assets of CSC (the accounting acquirer) are carried forward to DXC (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of CSC which are recorded at historical cost. The equity of the Company is the historical equity of CSC, retroactively restated to reflect the number of shares issued by DXC in the transaction.

In connection with the Merger, the Company entered into a number of agreements with HPE including the following:

•
Information Technology Services Agreement - The Company and HPE have entered into an Agreement pursuant to which the Company will provide information technology services to HPE. This agreement terminates on the fifth anniversary of its’ effective date, unless earlier terminated by the parties in accordance with its terms.


9
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


•
Preferred Vendor Agreements - The Company and HPE have entered into Preferred Vendor Agreements, pursuant to which HPE and Micro Focus International, the acquirer of HPE's software business, will: (1) make available to DXC for purchase hardware products sold by HPE and technology services provided by HPE and (2) make available to DXC for purchase and license software products sold or licensed by HPE and Micro Focus, and technology (including SaaS), support, professional and other services provided by HPE and Micro Focus.

•
Certain other additional agreements were entered into, including an employee matters agreement, a tax matters agreement, a transition services agreement, an intellectual property matters agreement, and certain real estate related agreements.

On September 25, 2017, HPE settled certain obligations as required under the Separation and Distribution Agreement, as amended. In accordance with the provisions of the agreement, a calculation was performed to make certain adjustments required to complete the separation and standup of legacy HPES and achieve accurate cut off for intercompany transactions with its former parent. The adjustment to settle the obligation was $175 million .

In May 2016, CSC, HPE and DXC (f/k/a Everett Spinco, Inc.) entered into an agreement and plan of merger, as amended (the “Merger Agreement”), and HPE and DXC entered into a separation agreement, as amended (the “Separation Agreement”), in each case relating to the combination of HPES and CSC. At the time the Merger Agreement and the Separation Agreement were executed, HPES was a party to several thousand leases with Hewlett-Packard Financial Services that were classified as capital leases. Under the terms of the Separation Agreement, the balance of long-term capital leases for which HPES would be liable at the time of the spin-off was not to exceed $250 million . The Separation Agreement provided HPE an opportunity to modify the terms of the long-term leases to reduce the balance classified as capital leases. Between late May 2016 and the end of March 2017, Hewlett-Packard Financial Services entered into lease amendments that purported to modify most of the leases between HPES and Hewlett-Packard Financial Services in a manner that would cause those leases to be classified as operating leases.

After the closing of the Merger, the Company began assessing the terms of the leases (including the amendments described above). During the Company’s second fiscal quarter, the Company concluded that the long-term capital leases that were amended by Hewlett-Packard Financial Services did not satisfy the requirements for classification as operating leases and as a result should be classified as capital leases as of the closing of the spin-off. Accordingly, during the quarter ended September 30, 2017, as part of the process of determining fair value of these leases as of April 1, 2017, the Company recorded a lease liability of $977 million , fixed assets under capital leases of $594 million and a $383 million increase to goodwill.

The Company reflected the impact of this change in lease classification to its statement of operations during the quarter ended September 30, 2017 by decreasing cost of sales by $209 million , increasing depreciation expense by $88 million and increasing interest expense by $13 million to reflect the leases as capital leases. The net impact of the change in lease classification on pre-tax income in the Company’s first fiscal quarter, which was recorded in the Company’s second fiscal quarter, was an increase of $54 million .

The Company will address this matter with HPE in a manner consistent with the terms of the Separation Agreement and any disagreement that may arise between the parties will be treated in a confidential manner under the Separation Agreement, including dispute resolution through executive escalation, mediation and binding arbitration.



10
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Under the acquisition method of accounting, total consideration exchanged was:
(in millions)
 
Amount
Preliminary fair value of purchase consideration received by HPE stockholders (1)  
 
$
9,782

Preliminary fair value of HPES options assumed by CSC (2)
 
68

Total estimated consideration transferred
 
$
9,850

        

(1)  
Represents the fair value of consideration received by HPE stockholders to give them 50.1% ownership in the combined company. The fair value of the purchase consideration transferred was based on a total of 141,865,656 shares of DXC common stock distributed to HPE stockholders as of the close of business on the record date ( 141,741,712 after effect of 123,944 cancelled shares) at CSC's closing price of $69.01 per share on March 31, 2017.
(2)  
Represents the fair value of certain stock-based awards of HPES employees that were unexercised on March 31, 2017, which HPE, HPES and CSC agreed would be converted to DXC stock-based awards.

Due to the complexity of the Merger, the Company recorded the assets acquired and liabilities assumed at their preliminary fair values. The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed, as well as the fair value of non-controlling interest, are based on the information that was available as of the Merger date, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger date. The cumulative impact of any subsequent changes resulting from the facts and circumstances that existed as of the Merger date will be adjusted in the reporting period in which the adjustment amount is determined. The preliminary estimated purchase price is allocated as follows:

(in millions)
 
Estimated Fair Value
Cash and cash equivalents
 
$
974

Accounts receivable (1)
 
4,059

Other current assets
 
538

Total current assets
 
5,571

Property and equipment
 
2,918

Intangible assets
 
6,194

Other assets
 
1,574

Total assets acquired
 
16,257

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(4,572
)
Deferred revenue
 
(1,105
)
Long-term debt, net of current maturities
 
(4,783
)
Long-term deferred tax liabilities and income tax payable
 
(1,659
)
Other liabilities
 
(1,304
)
Total liabilities assumed
 
(13,423
)
Net identifiable assets acquired
 
2,834

Add: Fair value of non-controlling interests
 
(61
)
Goodwill
 
7,077

Total estimated consideration transferred
 
$
9,850

        

(1)  
Includes adjustment received from HPE on September 25, 2017, in accordance with the provisions of the Separation and Distribution Agreement, as amended, of $175 million .

As of September 30, 2017, DXC has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to: receivables; property and equipment; deferred income taxes, net; deferred revenue and advanced contract payments; deferred costs; intangible assets; accounts payable and accrued liabilities; lease obligations; loss contracts; non-controlling interest; and goodwill.


11
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


During the three months ended September 30, 2017, the Company made a number of refinements to the April 1, 2017 preliminary purchase price allocation . These refinements were primarily driven by the Company recording valuation adjustments to certain preliminary estimates of fair values which resulted in a decrease in net assets of $312 million . Total assets increased by $1.3 billion driven by a $94 million increase in accounts receivable primarily due from the recognition of $85 million of indemnification assets related to tax obligations and deferred compensation; a  $436 million  increase in property and equipment primarily arising from recognition of $594 million of fixed assets under capital lease, offset by a $152 million reduction in the preliminary fair value of assets primarily related to data centers and land; and a  $1.1 billion  increase in intangible assets primarily driven by a $1.3 billion increase in the preliminary fair value assessment for customer relationships. Liabilities increased by $1.6 billion primarily driven by an increase in capital lease obligations of $977 million , a $226 million adjustment to deferred revenue primarily related to a valuation adjustment for outsourcing and other customer contracts taking into account continuing performance obligation, and an increase in long-term deferred income taxes of $106 million .

In accordance with ASU 2015-16, "Business Combinations (Topic 805)," Simplifying the Accounting for Measurement-period Adjustments, during the three months ended September 30, 2017, the Company continued to refine its fair value assessment of assets acquired and liabilities assumed. As a result, a $48 million increase in income before income taxes related to the three months ended June 30, 2017 was recognized in the condensed consolidated statement of operations for the three months ended September 30, 2017. The change in income before income taxes was primarily attributed to an increase of $54 million as a result of change in lease classification and related fair value adjustment, a net increase of $8 million related to the fair value of deferred revenue and deferred cost, and an increase of $10 million resulting from a decrease in depreciation expense arising from a lower fair value assessment for fixed assets, offset by a decrease of $18 million resulting from an increase in amortization expense arising from a higher fair value assessment of certain intangible assets and a decrease of $10 million related to a refinement in the treatment of the fair value assessment of a vendor contract obligation.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the Merger date. The goodwill recognized with the Merger was attributable to the synergies expected to be achieved by combining the businesses of CSC and HPES, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The goodwill arising from the Merger was preliminarily allocated to the Company's reportable segments as  $2.9 billion  to the Global Business Services ("GBS") segment,  $3.5 billion  to the Global Infrastructure Services ("GIS") segment and $0.7 billion to the United States Public Sector ("USPS") segment. A portion of the total goodwill is expected to be deductible for tax purposes. See Note 9 - " Goodwill ."

Current Assets and Liabilities

For the preliminary fair value estimates reported in the three months ended September 30, 2017, the Company valued current assets and liabilities using existing carrying values as an estimate for the fair value of those items as of the Merger date.

Property and Equipment

The acquired property and equipment are summarized in the following table:
(in millions)
 
Amount
Land, buildings, and leasehold improvements
 
$
1,617

Computers and related equipment
 
1,123

Furniture and other equipment
 
45

Construction in progress
 
133

Total
 
$
2,918


The Company estimated the value of acquired property and equipment using predominately the market method and in certain specific cases, the cost method.

Identified Intangible Assets


12
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The acquired identifiable intangible assets are summarized in the following table:
(in millions)
 
Amount
 
Estimated Useful Lives (Years)
Customer relationships
 
$
5,200

 
10-13
Developed technology
 
141

 
10
Third-party purchased software
 
499

 
2-7
Deferred contract costs
 
354

 
n/a
Total
 
$
6,194

 
 

The Company estimated the value of customer relationships, and developed technology using the multi-period excess earnings and relief from royalty methods, respectively. Deferred contract costs were fair valued taking into account continuing performance obligation.

Restructuring Liabilities

The Company acquired approximately $333 million of restructuring liabilities incurred under HPES' restructuring plans, expected to be paid out through 2029. Approximately $256 million relates to workforce reductions and $77 million relates mainly to facilities costs.

Long-Term Debt

Assumed indebtedness included senior notes in the principal amount of $1.5 billion issued in 2017 and $0.3 billion issued in 1999 for total principal amount of $1.8 billion ; a term loan with three tranches all borrowed on March 31, 2017 in an aggregate principal equivalent of $2.0 billion ; as well as capitalized lease liabilities and other debt. During this reporting period, there was a fair value assessment of the senior notes and term loans as of the Merger date, which resulted in a purchase accounting adjustment that increased debt by $94 million , including $12 million to eliminate historical deferred debt issuance costs, premium and discounts. Converted capital leases were recorded on the balance sheet at preliminary fair value as of April 1, 2017 resulting in a total capital lease obligation of $1.6 billion . The Company will continue to assess the fair value of assumed debt, including capital leases, during the measurement period.

Deferred Tax Liabilities

The Company preliminarily valued deferred tax assets and liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.

Defined Benefit Pension Plans

Certain eligible employees, retirees and other former employees of HPES participated in certain U.S. and international defined benefit pension plans offered by HPE. The plans whose participants were exclusively HPES employees were acquired, while the plans whose participants included both HPES employees and HPE employees were replicated to allow separation of HPES and HPE employees. The resulting separate plans containing only HPES were acquired.

HPES' pension obligations depend on various assumptions. The Company's actuaries remeasured all of the acquired HPES plan obligations as of March 31, 2017. The following table summarizes the balance sheet impact of the pension plans assumed from HPES as a result of the Merger.
(in millions)
 
Amount
Other assets
 
$
558

Accrued expenses and other current liabilities
 
(13
)
Other long-term liabilities
 
(547
)
Net amount recorded
 
$
(2
)


13
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following table summarizes the projected benefit obligation, fair value of the plan assets and the funded status assumed from HPES as a result of the Merger.
(in millions)
 
Amount
Projected benefit obligation
 
$
(7,413
)
Fair value of plan assets
 
7,411

Funded status
 
$
(2
)

The following table summarizes the plan asset allocations by asset category for HPES pension plans assumed by the Company as a result of the Merger.
Equity securities
 
22
%
Debt securities (1)
 
72
%
Alternatives
 
5
%
Cash and other
 
1
%
Total
 
100
%
        

(1) Includes liability-driven investments

14
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The following table summarizes the estimated future benefit payments due to the pension and benefit plans assumed from HPES as a result of the Merger.
(in millions)
 
Amount
Employer contributions:
 
 
2018
 
$
39

 
 
 
Benefit payments:
 
 
2018
 
$
225

2019
 
$
151

2020
 
$
163

2021
 
$
224

2022
 
$
180

2023 through 2027
 
$
1,132


Unaudited and Pro Forma Results of Operations

The Company's condensed consolidated statements of operations includes the following revenues and net income attributable to HPES since the Merger date:
(in millions)
 
Three Months Ended September 30, 2017
 
Six Months Ended September 30, 2017
Revenues
 
$
4,380

 
$
8,708

Net income
 
$
455

 
$
645


The following table provides unaudited pro forma results of operations for the Company for the three and six months ended September 30, 2016, as if the Merger had been consummated on April 2, 2016, the first day of DXC's fiscal year ended March 31, 2017. These unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. In addition, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed during the measurement period. Accordingly, the Company presents these unaudited pro forma results for informational purposes only, and they are not necessarily indicative of what the actual results of operations of DXC would have been if the Merger had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and six months ended September 30, 2016 and of HPES for the three and six months ended July 31, 2016.

15
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


(in millions, except per-share amounts)
 
Three Months Ended September 30, 2016 (1)
 
Six Months Ended September 30, 2016 (1)
Revenues
 
$
6,355

 
$
12,773

Net loss
 
(123
)
 
(404
)
Loss attributable to the Company
 
(130
)
 
(413
)
 
 
 
 
 
Loss per common share:
 
 
 
 
Basic
 
$
(0.46
)
 
$
(1.46
)
Diluted
 
$
(0.46
)
 
$
(1.46
)
        

(1)  
The unaudited pro forma information is based on legacy CSC results for the three and six months ended September 30, 2016 and legacy HPES results for the three and six months ended July 31, 2016.

The unaudited pro forma information above is based on events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma statement of operations, expected to have a continuing impact on the consolidated results of operations of the combined company. The unaudited pro forma financial information for the three and six months ended September 30, 2016 does not include $1 million and $26 million , respectively, of nonrecurring transaction costs associated with the Merger, which were incurred during the three and six months ended September 30, 2017.

Tribridge Acquisition

On July 1, 2017, DXC acquired all of the outstanding capital stock of Tribridge Holdings LLC, an independent integrator of Microsoft Dynamics 365, for total consideration of $152 million . The acquisition includes the Tribridge affiliate company, Concerto Cloud Services LLC. The combination of Tribridge with DXC expands DXC’s Microsoft Dynamics 365 global systems integration business.

The Company’s purchase price allocation for the Tribridge acquisition is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The preliminary purchase price was allocated to assets acquired and liabilities assumed based upon current determination of fair values at the date of acquisition as follows: $32 million to current assets, $4 million to property and equipment, $62 million to intangible assets other than goodwill, $24 million to current liabilities and $78 million to goodwill. The goodwill is primarily associated with the Company's GBS segment and is tax deductible. The amortizable lives associated with the intangible assets acquired includes customer relationships which have a 12 -year estimated useful life.

Fiscal 2017 Acquisitions

Xchanging Acquisition

On May 5, 2016, DXC acquired Xchanging plc ("Xchanging"), a provider of technology-enabled business solutions to organizations in global insurance and financial services, healthcare, manufacturing, real estate, and the public sector in a step acquisition. Xchanging was listed on the London Stock Exchange under the symbol “XCH.” Total cash consideration paid to and on behalf of the Xchanging shareholders of  $693 million  (or  $492 million  net of cash acquired) was funded from existing cash balances and borrowings under DXC's credit facility. Transaction costs associated with the acquisition of  $17 million  were included within Selling, general, and administrative expenses. The acquisition expanded CSC's market coverage in the global insurance industry and enabled the Company to offer access to a broader, partner-enriched portfolio of services including property and casualty insurance and wealth management business processing services.

The Xchanging purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair value at date of acquisition as follows:  $396 million  to current assets,  $99 million  to non-current assets,  $582 million  to intangible assets other than goodwill,  $267 million  to current liabilities,  $516 million  to long-term liabilities,  $680 million  to goodwill, and $281 million to non-controlling interest. The amortizable lives associated with the intangible assets acquired includes developed technology, customer relationships and trade names, which have

16
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


estimated useful lives of 7 to 8 years, 15 years and 3 to 5 years, respectively. The goodwill arising from the acquisition was allocated to the GBS and GIS segments and is no t deductible for tax purposes.

Note 4 - Earnings per Share

Basic EPS are computed using the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflect the incremental shares issuable upon the assumed exercise of stock options and equity awards. The following table reflects the calculation of basic and diluted EPS:


Three Months Ended
 
Six Months Ended
(in millions, except per-share amounts)

September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to DXC common shareholders:
 
$
256

 
$
15

 
$
415

 
$
(6
)
 
 
 
 
 
 
 
 
 
Common share information:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
284.87

 
140.53

 
284.35

 
139.76

Dilutive effect of stock options and equity awards
 
4.42

 
3.25

 
5.03

 
—

Weighted average common shares outstanding for diluted EPS
 
289.29

 
143.78

 
289.38

 
139.76

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
     Basic
 
$
0.90

 
$
0.11

 
$
1.46

 
$
(0.04
)
     Diluted
 
$
0.88

 
$
0.10

 
$
1.43

 
$
(0.04
)

Certain stock options and RSUs were excluded from the computation of dilutive EPS because inclusion of these amounts would have had an anti-dilutive effect. Due to the Company's net loss during the six months ended September 30, 2016 , PSUs were also excluded from the calculation because they would have had an anti-dilutive effect. The number of options and shares excluded were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Stock Options
 
32,060

 
2,038,486

 
41,327

 
2,858,277

RSUs
 
20,718

 
13,690

 
36,387

 
979,647

PSUs
 
2,844

 
—

 
1,430

 
1,165,411


Note 5 - Sale of Receivables

Receivables Securitization Facility

On December 21, 2016, CSC established a  $250 million  accounts receivable securitization facility (the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers") for the sale of commercial account receivables in the United States. Under the Receivables Facility, CSC and certain of its subsidiaries (collectively, the "Sellers") sell billed and unbilled accounts receivable to CSC Receivables, LLC ("CSC Receivables"), a wholly owned bankruptcy-remote entity. CSC Receivables in turn sells such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. Sales of receivables by CSC Receivables occur continuously and are settled on a monthly basis. The proceeds from the sale of these receivables comprise a combination of cash and a deferred purchase price receivable ("DPP"). The DPP is realized by the Company upon the ultimate collection of the underlying receivables sold to the Purchasers. The amount available under the Receivables Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after deducting excess concentrations. As of  September 30, 2017 , the total availability under the Receivables Facility was approximately  $199 million . On September 15, 2017, the Receivables Facility was amended to extend the termination date to September 14, 2018. The Receivables Facility provides for one or more optional extensions, if agreed to by the Purchasers, for an additional one-year duration. The Company uses the proceeds from receivables sales under the Receivables Facility for general corporate purposes.


17
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The Company has no retained interests in the transferred receivables, other than collection and administrative services and its right to the DPP. The DPP is included in receivables at fair value on the condensed consolidated balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature, and as a result  no  gain or loss on sale of receivables was recorded. In exchange for the sale of accounts receivable during the six months ended  September 30, 2017 , the Company received cash of  $207 million  and recorded a DPP. The DPP, which fluctuates over time based on the total amount of eligible receivables generated during the normal course of business, was  $272 million  as of  September 30, 2017 . Additionally, as of  September 30, 2017 , the Company recorded an  $8 million  liability within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility exceeded the maximum funding limit.

The Company's risk of loss following the transfer of accounts receivable under the Receivables Facility is limited to the DPP outstanding and any short-falls in collections for specified non-credit related reasons after sale. Payment of the DPP is not subject to significant risks other than delinquencies and credit losses on accounts receivable sold under the Receivables Facility.

Certain obligations of Sellers under the Receivables Facility and CSC, as initial servicer, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the Purchasers. However, the performance guaranty does not cover CSC Receivables’ obligations to pay yield, fees or invested amounts to the administrative agent or any of the Purchasers.

The following table is a reconciliation of the beginning and ending balances of the DPP:
 
 
As of and for the
(in millions)
 
Three Months Ended September 30, 2017
 
Six Months Ended
September 30, 2017
Beginning balance
 
$
242

 
$
252

    Transfers of receivables
 
606

 
1,154

Collections
 
(579
)
 
(1,124
)
Fair value adjustment
 
3

 
(10
)
Ending balance
 
$
272

 
$
272


Receivables Sales Facility

On July 14, 2017, Enterprise Services LLC, a wholly-owned subsidiary of the Company ("Enterprise"), entered into a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with certain financial institutions (the "Financial Institutions"). The Purchase Agreement established a federal government obligor receivables purchase facility (the “Facility”) that provides for up to $200 million (the “Facility Limit”) in outstanding funding based on the availability of eligible receivables and the satisfaction of certain conditions. The Facility Limit may be increased from time to time pursuant to the terms of the Purchase Agreement. Concurrently, the Company entered into a guaranty made in favor of the Financial Institutions, that guarantees the obligations of the sellers and servicers of receivables under the Purchase Agreement. However, the guaranty does not cover any credit losses under the receivables .

Under the Facility, the Company sells eligible federal government obligor receivables, including both billed and certain unbilled receivables. The Company has no retained interests in the transferred receivables other than collection and administrative functions for the Financial Institutions for a servicing fee. The Facility has a one-year term but may be extended. The Company uses the proceeds from receivables sales under the Facility for general corporate purposes.

The Company accounts for these receivable transfers as sales and derecognizes the sold receivables from its condensed consolidated balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature. The Company estimated that its servicing fee was at fair value and therefore, no servicing asset or liability related to these services was recognized as of  September 30, 2017 .

During the three and six months ended September 30, 2017 , the Company sold  $486 million of billed and unbilled receivables. Collections corresponding to these receivables sales were $371 million . As of September 30, 2017, there

18
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


was  $26 million  of cash collected by the Company, but not remitted to the Financial Institutions, which represents restricted cash and is included within other current assets on the condensed consolidated balance sheets. The operating cash flow effect, net of collections and fees from sales was $114 million .


Note 6 - Fair Value

Fair Value Measurements on a Recurring Basis

The following table presents the Company’s assets and liabilities, excluding pension assets, see Note 12 - " Pension and Other Benefit Plans " and derivative assets and liabilities, see Note 7 - " Derivative Instruments ", that are measured at fair value on a recurring basis. There were no transfers between any of the levels during the periods presented.
 
 
 
 
Fair Value Hierarchy
(in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
September 30, 2017
Money market funds and money market deposit accounts (1)
 
$
232

 
$
232

 
$
—

 
$
—

Time deposits (1)
 
292

 
292

 
—

 
—

Foreign bonds
 
51

 
—

 
51

 
—

Other debt securities
 
6

 
—

 
—

 
6

Deferred purchase price receivable
 
272

 
—

 
—

 
272

Total assets
 
$
853

 
$
524

 
$
51

 
$
278

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
7

 
$
—

 
$
—

 
$
7

Total liabilities
 
$
7

 
$
—

 
$
—

 
$
7

        

(1) Cost basis approximated fair value due to the short period of time to maturity.

 
 
March 31, 2017
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
406

 
$
406

 
$
—

 
$
—

Deferred purchase price receivable
 
252

 
—

 
—

 
252

Total assets
 
$
658

 
$
406

 
$
—

 
$
252

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
7

 
$
—

 
$
—

 
$
7

Total liabilities
 
$
7

 
$
—

 
$
—

 
$
7


The fair value of money market funds, money market deposit accounts, and time deposits, reported as cash and cash equivalents, are based on quoted market prices. The fair value of foreign government bonds is based on actual market prices and included in Other long-term assets. Fair value of the DPP, included in Receivables, net, is determined by calculating the expected amount of cash to be received and is principally based on unobservable inputs consisting primarily of the face amount of the receivables adjusted for anticipated credit losses. The fair value of contingent consideration, presented in Other liabilities, is based on contractually defined targets of financial performance and other considerations.


19
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Other Fair Value Disclosures

The carrying amounts of the Company’s other financial instruments with short-term maturities, primarily accounts receivable, accounts payable, short-term debt, and financial liabilities included in Other accrued liabilities, are deemed to approximate their market values. If measured at fair value, these financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.

The Company estimates the fair value of its long-term debt primarily using an expected present value technique, which is based on observable market inputs, using interest rates currently available to the Company for instruments with similar terms and remaining maturities. The estimated fair value of the Company's long-term debt, excluding capital leases, was $6.0 billion as of September 30, 2017 , as compared with carrying value of $5.8 billion . If measured at fair value, long-term debt, excluding capital lease would be classified in Level 2 of the fair value hierarchy.

Non-financial assets such as goodwill, tangible assets, intangible assets and other contract related long-lived assets are recorded at fair value in the period an impairment charge is recognized. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the three and six months ended September 30, 2017 and September 30, 2016 .

The Company is subject to counterparty risk in connection with its derivative instruments, see Note  7  - "Derivative Instruments". With respect to its foreign currency derivatives, as of  September 30, 2017  there were  eight  counterparties with concentration of credit risk. Based on gross fair value of these foreign currency derivative instruments, the maximum amount of loss that the Company could incur is approximately  $30 million .

Note 7 - Derivative Instruments

In the normal course of business, the Company is exposed to interest rate and foreign exchange rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not use derivative instruments for trading or any speculative purpose.

Derivatives Designated for Hedge Accounting

Cash flow hedges

The Company uses interest rate swap agreements designated as cash flow hedges to mitigate its exposure to interest rate risk associated with the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted the debt into fixed interest rate debt. As of  September 30, 2017 , the Company had interest rate swap agreements with a total notional amount of  $623 million .

As of  September 30, 2017 , the Company performed both retrospective and prospective hedge effectiveness analyses for the interest rate swaps designated as cash flow hedges. The Company applied the long-haul method outlined in ASC 815 “Derivatives and Hedging", to assess retrospective and prospective effectiveness of the interest rate swaps. A quantitative effectiveness analysis assessment of the hedging relationship was performed using regression analysis. As of  September 30, 2017 , the Company has determined that the hedging relationship was highly effective.

The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee denominated intercompany obligations and forecasted transactions. T he notional amount of foreign currency forward contracts designated as cash flow hedges as of September 30, 2017 was $467 million , and the related forecasted transactions extend through March 2020 .

For the three and six months ended September 30, 2017 and September 30, 2016 , the Company performed an assessment at the inception of the cash flow hedge transactions and determined all critical terms of the hedging instruments and hedged items matched; therefore, there is no ineffectiveness to be recorded and all changes in the hedging instruments’ fair value are recorded in accumulated other comprehensive income (loss) ("AOCI") and

20
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three and six months ended September 30, 2017 and September 30, 2016 , the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of September 30, 2017 , $19 million of the existing amount of gain related to the cash flow hedge reported in AOCI is expected to be reclassified into earnings within the next 12 months.

For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in AOCI in the condensed consolidated balance sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in the condensed statements of operations. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.

The pre-tax impact of gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive income and net income was not material for three and six months ended September 30, 2017 and September 30, 2016 .

Derivatives not Designated for Hedge Accounting

The derivative instruments not designated as hedges for purposes of hedge accounting include total return swaps and certain short-term foreign currency forward and option contracts. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

Total return swaps

The Company manages the exposure to market volatility of the notional investments underlying its deferred compensation obligations by using total return swaps derivative contracts ("TRS"). The TRS are reset monthly and are marked-to-market on the last day of each fiscal month. Gain (loss) on TRS was not material for the three and six months ended September 30, 2017 and September 30, 2016 .

Foreign currency forward contracts

The Company manages the exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. The notional amount of the foreign currency forward contracts outstanding as of September 30, 2017 was $2.3 billion . Losses on foreign currency forward contracts not designated for hedge accounting, recognized within other (income) expense, net, were $77 million and $114 million during the three and six months ended September 30, 2017 , respectively, and $3 million and $5 million during the three and six months ended September 30, 2016 , respectively.

21
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Fair Value of Derivative Instruments

All derivatives are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value:
 
 
Derivative Assets
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2017
 
March 31, 2017
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
Interest rate swaps
 
Other assets
 
$
4

 
$
5

Foreign currency forward contracts
 
Other current assets
 
21

 
27

Total fair value of derivatives designated for hedge accounting
 
$
25

 
$
32

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
21

 
$
15

Total fair value of derivatives not designated for hedge accounting
 
$
21

 
$
15


 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2017
 
March 31, 2017
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
Interest rate swaps
 
Other long-term liabilities
 
$
—

 
$
1

Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
1

 
—

Total fair value of derivatives designated for hedge accounting:
 
$
1

 
$
1

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
12

 
$
12

Total fair value of derivatives not designated for hedge accounting
 
$
12

 
$
12


Derivative instruments include foreign currency forward contracts and interest rate swap contracts. The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates and is based on the period-end foreign currency exchange rates and forward points as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs.

Other risks

The Company is exposed to the risk of losses in the event of non-performance by counterparties to its derivative contracts. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of counterparties. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is Company policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counterparties.


22
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Note 8 - Intangible Assets
 
 
As of September 30, 2017
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,180

 
$
1,707

 
$
1,473

Outsourcing contract costs
 
1,323

 
559

 
764

Customer related intangible assets
 
6,127

 
447

 
5,680

Other intangible assets
 
105

 
18

 
87

Total intangible assets
 
$
10,735

 
$
2,731

 
$
8,004

 
 
As of March 31, 2017
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
2,347

 
$
1,554

 
$
793

Outsourcing contract costs
 
793

 
475

 
318

Customer related intangible assets
 
851

 
248

 
603

Other intangible assets
 
96

 
16

 
80

Total intangible assets
 
$
4,087

 
$
2,293

 
$
1,794


Total intangible assets amortization was $310 million and $82 million for the three months ended September 30, 2017 and September 30, 2016 , respectively, and included reductions of revenue for amortization of outsourcing contract cost premiums of $3 million and $3 million , respectively.

Total intangible assets amortization was $514 million and $162 million for the six months ended September 30, 2017 and September 30, 2016 , respectively, and included reductions of revenue for amortization of outsourcing contract cost premiums of $6 million and $6 million , respectively.

The increase in net and gross carrying value for the six months ended September 30, 2017 were primarily due to the Merger (see Note 3 - " Acquisitions ").

Estimated future amortization related to intangible assets as of  September 30, 2017  is as follows:
Fiscal Year
 
(in millions)

Remainder of 2018
 
$
559

2019
 
$
1,079

2020
 
$
1,008

2021
 
$
918

2022
 
$
778


23
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 9 - Goodwill

The following table summarizes the changes in the carrying amount of Goodwill, by segment, as of September 30, 2017 .
(in millions)
 
GBS
 
GIS
 
USPS
 
Total
Balance as of March 31, 2017, net
 
$
1,470

 
$
385

 
$
—

 
$
1,855

Additions
 
2,996

 
3,423

 
736

 
7,155

Foreign currency translation
 
93

 
55

 
—

 
148

Balance as of September 30, 2017, net
 
$
4,559

 
$
3,863

 
$
736

 
$
9,158


The additions to goodwill during the six months ended  September 30, 2017 were primarily due to the Merger described in Note 3 - " Acquisitions ." As a result of the Merger, the Company began to report the United States Public Sector ("USPS") segment, formerly a component of the HPES business, see Note 17 - " Segment Information " for additional information. The foreign currency translation amounts reflect the impact of currency movements on non-U.S. dollar-denominated goodwill balances.

Goodwill Impairment Analyses

The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s annual goodwill impairment analysis, which was performed qualitatively during the three months ended September 30, 2017, did not result in an impairment charge. This qualitative analysis, which is commonly referred to as step zero under ASC Topic 350, Goodwill and Other Intangible Assets, considered all relevant factors specific to the reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.

24
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Note 10 - Debt

The following is a summary of the Company's debt:
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
September 30, 2017
 
March 31, 2017
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Euro-denominated commercial paper
 
(0.1) - 0.02% (1)
 
2018
 
$
828

 
$
646

EUR term loan
 
2.04% (2)
 
2019
 
473

 
—

Current maturities of long-term debt
 
Various
 
2019
 
207

 
55

Current maturities of capitalized lease liabilities
 
1.1% - 6.7%
 
2019
 
692

 
37

Short-term debt and current maturities of long-term debt
 
 
 
 
 
$
2,200

 
$
738

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
 
 
 
 
GBP term loan
 
1.0 - 1.2% (3)
 
2019
 
$
248

 
$
233

USD term loan
 
1.2% - 2.3% (4)
 
2021
 
—

 
571

AUD term loan
 
2.9% - 3.0% (5)
 
2022
 
216

 
76

EUR term loan
 
0.9% (6)
 
2022
 
338

 
—

USD term loan
 
2.2% - 2.3% (7)
 
2022
 
1,165

 
—

$500 million Senior notes
 
2.875%
 
2020
 
504

 
—

$650 million Senior notes
 
2.2% - 2.3% (8)
 
2021
 
647

 
—

$274 million Senior notes
 
4.45%
 
2023
 
274

 
—

$170 million Senior notes
 
4.45%
 
2023
 
178

 
453

$500 million Senior notes
 
4.25%
 
2025
 
508

 
—

$500 million Senior notes
 
4.75%
 
2028
 
509

 
—

$300 million Senior notes
 
7.45%
 
2030
 
358

 
—

Revolving credit facility
 
1.3% - 1.4%
 
2021 - 2023
 
385

 
678

Lease credit facility
 
2.0% - 2.2%
 
2020 - 2022
 
50

 
60

Capitalized lease liabilities
 
1.1% - 6.7%
 
2018 - 2022
 
1,379

 
104

Borrowings for assets acquired under long-term financing
 
1.7% -4.8%
 
2018 - 2023
 
310

 
77

Mandatorily redeemable preferred stock outstanding
 
3.5%
 
2023
 
61

 
61

Other borrowings
 
0.5% - 14.0%
 
2018 - 2036
 
94

 
4

Long-term debt
 
 
 
 
 
7,224

 
2,317

Less: current maturities
 
 
 
 
 
899

 
92

Long-term debt, net of current maturities
 
 
 
 
 
$
6,325

 
$
2,225

        

(1)  
Approximate weighted average interest rate
(2) Three-month EURIBOR rate plus 1.75%
(3) Three-month LIBOR rate plus 0.65 %
(4) At DXC's option, the USD term loan bears interest at a variable rate equal to the adjusted LIBOR for a one-, two-, three-, or six-month interest period, plus a margin between  0.75%  and  1.50%  based on a pricing grid consistent with the Company's outstanding revolving credit facility or the greater of the prime rate, the federal funds rate plus  0.50% , or the adjusted LIBOR for a one-month interest period plus  1.00% , in each case plus a margin of up to  0.50% , based on a pricing grid consistent with the revolving credit facility.
(5) Variable interest rate equal to the bank bill swap bid rate for a one-, two-, three- or six-month interest period plus 0.95% to 1.45% based on the published credit ratings of DXC.
(6)  At DXC’s option, the EUR term loan bears interest at the Eurocurrency Rate for a one-, two-, three-, or six-month interest period, plus a margin of between 0.75% and 1.35% , based on published credit ratings of DXC.
(7)  At DXC’s option, the USD term loan bears interest at the Eurocurrency Rate for a one-, two-, three-, or six-month interest period, plus a margin of between 1.00% and 1.75% , based on published credit ratings of DXC or the Base Rate plus a margin of between 0% and 0.75% , based on published credit ratings of DXC.
 (8) Three-month LIBOR plus 0.95%


25
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Senior Notes and Terms Loans

On April 3, 2017, as a result of the Merger, financial covenants were amended and CSC was replaced with DXC as the borrower and guarantor to certain outstanding debt including short-term Euro-denominated commercial paper, senior notes and term loans.

In connection with the Merger, DXC entered into an unsecured term loan agreement consisting of a $375 million U.S. dollar term loan maturing in 2020 , a $1.3 billion U.S. dollar term loan maturing in 2022 and a Euro-equivalent of $315 million EUR term loan maturing in 2022 . Interest on the Company's term loans is payable monthly or quarterly in arrears. DXC also completed an offering of senior notes in an aggregate principal amount of $1.5 billion consisting of 2.875% senior notes due 2020 , 4.25% senior notes due 2025 and 4.75% senior notes due 2027 . DXC assumed pre-existing indebtedness incurred by HPES including 7.45% senior notes due 2030 which were issued at a principal amount of $300 million . Interest on the Company's senior notes is payable semi-annually in arrears. Generally, the Company's notes are redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest. The Company fully and unconditionally guaranteed term loans issued by its 100% owned subsidiaries.

Revolving Credit Facility

In connection with the Merger, the Company entered into several amendments to its revolving credit facility agreement pursuant to which DXC replaced CSC as the principal borrower and as the guarantor of borrowings by subsidiary borrowers. During the six months ended September 30, 2017 , DXC exercised its option to extend the maturity date and also increased commitments to $3.81 billion , $70 million of which matures in January 2021 and $3.74 billion matures in January 2023.


Note 11 - Restructuring Costs

The Company recorded restructuring costs of $192 million and $25 million , net of reversals, for the three months ended September 30, 2017 and September 30, 2016 , respectively. For the six months ended September 30, 2017 and September 30, 2016 , the Company recorded $382 million and $82 million , respectively. The costs recorded during the three and six months ended September 30, 2017 were largely a result of the Fiscal 2018 Plan (defined below).

The composition of restructuring liabilities by financial statement line items is as follows:
 
 
As of
(in millions)
 
September 30, 2017
Accrued expenses and other current liabilities
 
$
338

Other long-term liabilities
 
160

Total
 
$
498


Summary of Restructuring Plans

Fiscal 2018 Plan

On June 30, 2017, management approved a post-Merger restructuring plan to optimize the Company's operations in response to a continuing business contraction (the "Fiscal 2018 Plan"). The additional restructuring initiatives are intended to reduce the company's core structure and related operating costs, improve its competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and re-balancing the pyramid structure. Additionally, this plan included global facility restructuring, including a global datacenter restructuring program.


26
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Fiscal 2017 Plan

In May 2016, the Company initiated a restructuring plan to realign the Company's cost structure and resources to take advantage of operational efficiencies following recent acquisitions. During the fourth quarter of Fiscal 2017, the Company expanded the plan to strengthen the Company's competitiveness and to optimize the workforce by increasing work performed in low-cost locations (the "Fiscal 2017 Plan"). Total costs incurred to date under the Fiscal 2017 Plan total $229 million , comprising $222 million in employee severance and $7 million of facilities costs.

Fiscal 2016 Plan

In September 2015, the Company initiated a restructuring plan to optimize utilization of facilities and right-size overhead organizations as a result of CSC's separation of its former NPS segment (the "Fiscal 2016 Plan"). N o additional costs are expected to be expensed under this plan. Total costs incurred to date as of September 30, 2017 under the Fiscal 2016 Plan total $58 million , comprising $25 million in employee severance and $33 million of facilities costs.

Fiscal 2015 Plan

In June 2014, the Company initiated a restructuring plan to optimize the workforce in high cost markets, particularly in Europe, address the Company's labor pyramid and right shore its labor mix (the "Fiscal 2015 Plan"). No additional costs are expected to be expensed under this plan. Total costs incurred to date under the Fiscal 2015 Plan total $228 million , comprising $220 million in employee severance and $8 million of facilities costs.

Acquired Restructuring Liabilities

As a result of the Merger, DXC acquired restructuring liabilities under restructuring plans that were initiated for HPES under plans approved by the HPE Board of Directors.


27
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Restructuring Liability Reconciliations by Plan
 
 
Restructuring Liability as of March 31, 2017
 
Acquired Balance as of April 1, 2017
 
Costs Expensed, net of reversals (1)
 
Costs Not Affecting Restructuring Liability (2)
 
Cash Paid
 
Other (3)
 
Restructuring Liability as of September 30, 2017
Fiscal 2018 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
—

 
n/a

 
$
282

 
$
—

 
$
(153
)
 
$
1

 
$
130

Facilities Costs
 
—

 
n/a

 
124

 
(11
)
 
(42
)
 
3

 
74

Total
 
$
—

 
n/a

 
$
406

 
$
(11
)
 
$
(195
)
 
$
4

 
$
204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2017 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
155

 
n/a

 
$
(17
)
 
$
—

 
$
(74
)
 
$
—

 
$
64

Facilities Costs
 
6

 
n/a

 
(2
)
 
—

 
(3
)
 
1

 
2

Total
 
$
161

 
n/a

 
$
(19
)
 
$
—

 
$
(77
)
 
$
1

 
$
66

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2016 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
8

 
n/a

 
$
(1
)
 
$
—

 
$
(2
)
 
$
—

 
$
5

Facilities Costs
 
5

 
n/a

 
—

 
—

 
(3
)
 
—

 
2

Total
 
$
13

 
n/a

 
$
(1
)
 
$
—

 
$
(5
)
 
$
—

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
3

 
n/a

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
2

Facilities Costs
 
—

 
n/a

 
—

 
—

 
—

 
—

 
—

Total
 
$
3

 
n/a

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
n/a

 
$
256

 
$
—

 
$
(2
)
 
$
(93
)
 
$
6

 
$
167

Facilities Costs
 
n/a

 
77

 
(4
)
 
—

 
(22
)
 
1

 
52

Total
 
n/a

 
$
333

 
$
(4
)
 
$
(2
)
 
$
(115
)
 
$
7

 
$
219

        

(1)  Costs expensed, net of reversals include $19 million , $1 million and $4 million of costs reversed from the Fiscal 2017 Plan, Fiscal 2016 Plan and Acquired liabilities, respectively.
(2) Pension benefit augmentations recorded as a pension liability and asset impairment.
(3) Foreign currency translation adjustments.

Note 12 - Pension and Other Benefit Plans

The Company offers a number of pension and other post-retirement benefit ("OPEB") plans, life insurance benefits, deferred compensation and defined contribution plans. Most of the Company's pension plans are not admitting new participants; therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates.

Defined Benefit Plans

The Company sponsors a number of defined benefit and post-retirement medical benefit plans for the benefit of eligible employees. The benefit obligations of the Company's U.S. pension, U.S. OPEB, and non-U.S. OPEB represent an insignificant portion of the Company's pension and other post-retirement benefits. As a result, the disclosures below include the Company's U.S. and non-U.S. pension plans on a global consolidated basis.

28
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The Company contributed $17 million and $32 million to the defined benefit pension and other post-retirement benefit plans during the three and six months ended September 30, 2017 . The Company expects to contribute an additional $38 million during the remainder of fiscal 2018, which does not include certain salary deferral programs and future potential termination benefits related to the Company's potential restructuring activities.

The components of net periodic pension expense were:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Service cost
 
$
34

 
$
5

 
$
66

 
$
11

Interest cost
 
61

 
21

 
121

 
42

Expected return on assets
 
(132
)
 
(40
)
 
(260
)
 
(83
)
Amortization of prior service costs
 
(4
)
 
(4
)
 
(8
)
 
(9
)
Contractual termination benefit
 
2

 
—

 
11

 
—

Net periodic pension expense (income)
 
$
(39
)
 
$
(18
)
 
$
(70
)
 
$
(39
)

The weighted-average rates used to determine net periodic pension cost for the three and six months ended September 30, 2017 and September 30, 2016 were:
 
 
September 30, 2017
 
September 30, 2016
Discount or settlement rates
 
2.5
%
 
3.1
%
Expected long-term rates of return on assets
 
4.9
%
 
6.3
%
Rates of increase in compensation levels
 
2.7
%
 
2.6
%

Deferred Compensation Plans

Effective as of the Merger, DXC assumed sponsorship of the Computer Sciences Corporation Deferred Compensation Plan, which was renamed the “DXC Technology Company Deferred Compensation Plan” (the “DXC DCP”) and adopted the Enterprise Services Executive Deferred Compensation Plan (the “ES DCP”). Both plans are non-qualified deferred compensation plans maintained for a select group of management, highly compensated employees and non-employee directors.

The DXC DCP covers eligible employees who participated in CSC’s Deferred Compensation Plan prior to the Merger. The ES DCP covers eligible employees who participated in the HPE Executive Deferred Compensation Plan prior to the Merger. Both plans allow participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under DXC’s tax-qualified 401(k) plan, the DXC Technology Matched Asset Plan. Neither plan provides for employer contributions. As of April 3, 2017, the ES DCP does not admit new participants.

Certain management and highly compensated employees are eligible to defer all, or a portion of, their regular salary that exceeds the limitation set forth in Internal Revenue Section 401(a)(17) and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. The liability, which is included in Other long-term liabilities in the Company's condensed consolidated balance sheets, amounted to $76 million as of September 30, 2017 and $67 million as of March 31, 2017 .

29
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 13 - Income Taxes

The Company's income tax expense (benefit) was $122 million and $(22) million for the three months ended September 30, 2017 and September 30, 2016 , respectively, and $134 million and $(38) million for the six months ended September 30, 2017 and September 30, 2016 , respectively. For the three and six months ended September 30, 2017 , the primary drivers of the effective tax rate ("ETR") were the global mix of income, the reduction of a deferred tax liability recorded on the outside basis difference of an HPES foreign subsidiary due to current year earnings and taxes, excess tax benefits related to employee share-based payment awards and releases of valuation allowances for deferred tax assets of CSC. The primary drivers of the ETR for the three and six months ended September 30, 2016 were the global mix of income, excess tax benefits related to employee share-based payment awards and the release of valuation allowances for deferred tax assets of CSC in a non-U.S. jurisdiction.

As a result of the Merger and changes in U.S. cash requirements, a deferred tax liability of $570 million was recorded for U.S. income taxes based on the estimated historical taxable earnings of non-U.S. HPES subsidiaries. In addition, we recorded an estimated liability of $67 million for India dividend distribution tax based on estimated historical taxable earnings of the HPES India subsidiary. These liabilities were recorded as part of acquisition accounting. Other than these amounts, the Company considers the current and accumulated earnings for substantially all non-U.S. subsidiaries to be indefinitely reinvested outside of the U.S. Generally, such amounts would become subject to U.S. taxation upon the remittance of dividends to the U.S. and under certain other circumstances. The Company cannot practically estimate the amount of additional taxes that might be payable on such unremitted earnings.

In connection with the Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-Merger tax liabilities including adjustments made by tax authorities to HPES U.S. and non-U.S. income tax returns. Likewise, DXC is liable to HPE for income tax receivables and refunds which it receives related to pre-Merger periods. Pursuant to the tax matters agreement, the Company recorded a net payable of $14 million due to $111 million of tax indemnification receivable related to uncertain tax positions net of related deferred tax benefits, $69 million of tax indemnification receivable related to other tax payables and $194 million of tax indemnification payable related to other tax receivables.

As part of the acquisition of HPES, DXC acquired uncertain tax liabilities including interest and penalties of $114 million for prior year income taxes, whic h are ind emnified by HPE. There were no other material changes to uncertain tax positions during the three and six months ended September 30, 2017 .

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2016. With respect to CSC's fiscal 2008 through 2010 federal tax returns, the Company previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to some but not all of these adjustments. The Company has agreed to extend the statute of limitations associated with this audit through April 30, 2018. In addition, during the first quarter of fiscal 2018, we received a Revenue Agent’s Report with proposed adjustments to CSC's fiscal 2011 through 2013 federal returns. The Company has filed a protest of certain of these adjustments to the IRS Office of Appeals. The IRS is also examining CSC's fiscal 2014 through 2016 federal income tax returns. The Company has not received any adjustments for this cycle. We continue to believe that our tax positions are more-likely-than-not sustainable and that the Company will ultimately prevail.

In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more-likely-than-not standard if such positions are not upheld. Conversely, the Company could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes that are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of $14 million to $19 million , excluding interest, penalties, and tax carry-forwards.

30
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 14 - Stockholders' Equity

Description of Capital Stock

The Company has authorized share capital consisting of 750,000,000 shares of common stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.

Each share of common stock is equal in all respects to every other share of common stock of the Company. Each share of common stock is entitled to one vote per share at each annual or special meeting of stockholders for the election of directors and upon any other matter coming before such meeting. Subject to all the rights of the preferred stock, dividends may be paid to holders of common stock as and when declared by the Board of Directors.

The Company's charter requires that preferred stock must be all of one class but may be issued from time to time in one or more series, each of such series to have such full or limited voting powers, if any, and such designations, preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions as provided in a resolution adopted by the Board of Directors. Each share of preferred stock will rank on a parity with each other share of preferred stock, regardless of series, with respect to the payment of dividends at the respectively designated rates and with respect to the distribution of capital assets according to the amounts to which the shares of the respective series are entitled.

Share repurchases

On April 3, 2017, DXC announced the establishment of a share repurchase program approved by the Board of Directors with an initial authorization of $2.0 billion for future repurchases of outstanding shares of DXC common stock. An expiration date has not been established for this repurchase plan.

The shares repurchased are retired immediately and included in the category of authorized but unissued shares. The excess of purchase price over par value of the common shares is allocated between additional paid-in capital and retained earnings. The details of shares repurchased are shown below:

Fiscal Period
 
Number of Shares Repurchased
 
Average Price per Share
 
Amount (in millions)
1st Quarter 2018
 
250,000

 
$
77.39

 
$
19

2nd Quarter 2018
 
591,505

 
78.20

 
47

Total
 
841,505

 
$
77.96

 
$
66



31
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Accumulated other comprehensive income (loss)

The following table shows the changes in accumulated other comprehensive income (loss), net of taxes:
(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2017
 
$
(458
)
 
$
20

 
$
276

 
$
(162
)
Current-period other comprehensive income (loss)
 
109

 
(5
)
 
—

 
104

Amounts reclassified from accumulated other comprehensive income
 
(5
)
 
—

 
(7
)
 
(12
)
Balance at September 30, 2017
 
$
(354
)
 
$
15

 
$
269

 
$
(70
)

(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Loss
Balance at April 1, 2016
 
$
(399
)
 
$
(1
)
 
$
289

 
$
(111
)
Current-period other comprehensive loss
 
(6
)
 
9

 
—

 
3

Amounts reclassified from accumulated other comprehensive loss
 
—

 
—

 
(7
)
 
(7
)
Balance at September 30, 2016
 
$
(405
)
 
$
8

 
$
282

 
$
(115
)

Note 15 - Stock Incentive Plans

Equity Plans

As a result of the Merger, all outstanding CSC awards of stock options, stock appreciation rights, restricted stock units ("CSC RSUs"), including performance-based restricted stock units, relating to CSC common stock granted under the 2011 Omnibus Incentive Plan, the 2007 Employee Incentive Plan and the 2010 Non-Employee Director Incentive Plan (the “CSC Equity Incentive Plans”) held by CSC employees and non-employee directors were converted into an adjusted award relating to DXC common shares subject to the same terms and conditions after the Merger as the terms and conditions applicable to such awards prior to the Merger.

Under the terms of the CSC Equity Incentive Plans and the individual award agreements, all unvested equity incentive awards, including all stock options and CSC RSUs held by all participants under the plans, including its named executive officers and directors, are subject to accelerated vesting in whole or in part upon the occurrence of a change in control or upon the participant’s termination of employment on or after the occurrence of a change in control under certain circumstances ("CIC events"). As a result of CIC events triggered by the Merger, approximately $3.6 million unvested awards became vested on April 1, 2017 and $26 million of incremental stock compensation expense was recognized. CSC options granted in fiscal 2017 vested 33% upon the Merger; the remaining 67% were converted into DXC RSUs based on the accounting value of the options. These RSUs will vest on the second and third anniversaries of the original option grant date. For equity incentive awards granted by HPE under HPE equity incentive plans to HPES prior to the Merger, outstanding options (vested and unvested) and unvested RSU awards were converted upon the Merger into

32
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


economically equivalent DXC option and RSU awards, with terms and conditions substantially the same as the terms of such awards prior to the Merger.

In March 2017, prior to the Merger, the board of directors and shareholders of HPES approved DXC’s 2017 Omnibus Incentive Plan (the “DXC Employee Equity Plan”), DXC’s 2017 Non-Employee Director Incentive Plan (the “DXC Director Equity Plan”) and DXC’s 2017 Share Purchase Plan (“DXC Share Purchase Plan”). The terms of the DXC Employee Equity Plan and DXC Director Equity Plans are substantially similar to the terms of the CSC Equity Incentive Plans. The former allows DXC to grant stock options (including incentive stock options), stock appreciation rights (“SARs”), restricted stock, RSUs (including PSUs), and cash awards intended to qualify for the performance-based compensation exemption to the $1 million deduction limit under Section 162(m) of the Internal Revenue Code (collectively the "Awards"). Awards are typically subject to vesting over the 3 -year period following the grant date. Vested stock options are generally exercisable for a term of 10 years from the grant date. All of DXC’s employees are eligible for awards under the plan. The Company issues authorized but previously unissued shares upon the granting of stock options and the settlement of RSUs and PSUs.

The Compensation Committee of the Board of Directors (the "Board") has broad authority to grant awards and otherwise administer the DXC Employee Equity Plan. The plan became effective March 30, 2017 and will continue in effect for a period of 10 years thereafter, unless earlier terminated by the Board. The Board has the authority to amend the plan in such respects as it deems desirable, subject to approval of DXC’s stockholders for material modifications.

RSUs represent the right to receive one share of DXC common stock upon a future settlement date, subject to vesting and other terms and conditions of the award, plus any dividend equivalents accrued during the award period. In general, if the employee’s status as a full-time employee is terminated prior to the vesting of the RSU grant in full, then the RSU grant is automatically canceled on the termination date and any unvested shares and dividend equivalents are forfeited. Certain executives were awarded service-based "career share" RSUs for which the shares are settled over the 10 anniversaries following the executive's separation from service as a full-time employee, provided the executive complies with certain non-competition covenants during that period.

The Company also grants PSUs, which generally vest over a period of 3 years. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified financial performance criteria over a three -year period. If the specified performance criteria are met, awards are settled for shares of DXC common stock and dividend equivalents upon the filing with the SEC of the Annual Report on Form 10-K for the last fiscal year of the performance period. PSU awards include the potential for up to 25% of the shares granted to be earned after the first and second fiscal years if certain of the Company's performance targets are met early, subject to vesting based on the participant's continued employment through the end of the three -year performance period.

The terms of the DXC Director Equity Plan allow DXC to grant RSU awards to non-employee directors of DXC. Such RSU awards vest in full at the earlier of (i) the first anniversary of the grant date or (ii) the next annual meeting date, and are automatically redeemed for DXC common stock and dividend equivalents either at that time or, if an RSU deferral election form is submitted, upon the date or event elected by the director. Distributions made upon a director’s separation from the Board may occur in either a lump sum or in annual installments over periods of 5 , 10 , or 15 years, per the director’s election. In addition, RSUs vest in full upon a change in control of DXC.

The DXC Share Purchase Plan allows DXC’s employees located in the United Kingdom to purchase shares of DXC’s common stock at the fair market value of such shares on the applicable purchase date. There were no shares purchased under this plan during the three and six months ended September 30, 2017 .


33
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The Board has reserved for issuance shares of DXC common stock, par value $0.01 per share, under each of the plans as detailed below:
 
As of September 30, 2017
 
Reserved for issuance
 
Available for future grants
DXC Employee Equity Plan
34,200,000

 
22,460,616

DXC Director Equity Plan
230,000

 
121,334

DXC Share Purchase Plan
250,000

 
250,000

Total
34,680,000

 
22,831,950


Stock Options
 
 
Number
of Option Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding as of March 31, 2017
 
4,767,396

 
$
38.70

 
8.01
 
$
145

HPE options converted to DXC options at Merger
 
2,654,872

 
$
46.56

 
 
 
 
CSC Options converted to RSUs due to Merger
 
(1,521,519
)
 
$
51.00

 
 
 
 
Exercised
 
(1,818,441
)
 
$
39.10

 
 
 
$
74

Canceled/Forfeited
 
(1,214
)
 
$
68.20

 
 
 
 
Expired
 
(35,987
)
 
$
43.23

 
 
 
 
Outstanding as of September 30, 2017
 
4,045,107

 
$
39.01

 
5.83
 
$
190

Vested and expected to vest in the future as of September 30, 2017
 
4,037,125

 
$
38.96

 
5.83
 
$
189

Exercisable as of September 30, 2017
 
3,992,228

 
$
38.70

 
5.81
 
$
188


Restricted Stock Units

 
Employee Equity Plan
 
Director Equity Plan
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of March 31, 2017
3,710,985

 
$
34.86

 
85,766

 
$
34.19

Granted
1,439,433

 
$
77.90

 
22,900

 
$
84.40

HPE RSUs converted to DXC RSUs due to Merger
95,568

 
$
69.32

 
—

 
$
—

Options converted to RSUs due to Merger
609,416

 
$
32.58

 
—

 
$
—

Settled
(1,890,233
)
 
$
35.58

 
(38,800
)
 
$
46.14

Canceled/Forfeited
(104,174
)
 
$
45.79

 
—

 
$
—

Outstanding as of September 30, 2017
3,860,995

 
$
50.75

 
69,866

 
$
44.02



34
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Share-Based Compensation
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Total share-based compensation cost
 
$
17

 
$
21

 
$
57

 
$
35

Related income tax benefit
 
$
6

 
$
6

 
$
19

 
$
11

Total intrinsic value of options exercised
 
$
45

 
$
10

 
$
74

 
$
54

Tax benefits from exercised stock options and awards
 
$
18

 
$
7

 
$
53

 
$
26


As of September 30, 2017 , total unrecognized compensation expense related to unvested DXC stock options and unvested DXC RSUs, net of expected forfeitures was $ 1 million and $ 146 million , respectively. The unrecognized compensation expense for unvested RSUs is expected to be recognized over a weighted-average period of 2.28 years.

Note 16 - Cash Flows

Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
 
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
Cash paid for:
 
 
 
 
Interest
 
$
91

 
$
52

Taxes on income, net of refunds
 
$
72

 
$
25

 
 
 
 
 
Non-cash activities:
 
 
 
 
Investing:
 
 
 
 
Capital expenditures in accounts payable and accrued expenses
 
$
3

 
$
28

Capital expenditures through capital lease obligations
 
$
109

 
$
22

Assets acquired under long-term financing
 
$
236

 
$
67

Financing:
 
 
 
 
Dividends declared but not yet paid
 
$
52

 
$
19

Stock issued for the acquisition of HPES
 
$
9,850

 
$
—


35
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 17 - Segment Information

DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industry and geographic region. As a result and in accordance with accounting standards, operating segments are organized by the type of services provided. DXC's chief operating decision maker ("CODM"), the chief executive officer, obtains, reviews, and manages the Company’s financial performance based on these segments. The CODM uses these results, in part, to evaluate the performance of, and allocate resources to, each of the segments.

As a result of the Merger, the HPES legacy reportable segments were combined with GBS and GIS, and the HPES public sector business, USPS, is now a separate operating segment. DXC's operating segments are the same as its reportable segments: GBS, GIS, and USPS. In addition, DXC management changed its primary segment performance measure to segment profit from the previously used consolidated segment operating income. Prior periods presented have been restated to reflect this change. The accounting policies of the reportable segments are the same as those described in Note 1 - “ Summary of Significant Accounting Policies .”

Global Business Services

GBS provides innovative technology solutions including Enterprise and Cloud Applications, Consulting Application Services, and Analytics. GBS also includes our Industry-aligned IP and Business Process Services. These offerings address key business challenges and accelerate digital transformations tailored to each customer’s industry and specific objectives. GBS strives to help clients understand and take advantage of IT modernization and virtualization across the IT portfolio (hardware, software, networking, storage, and computing assets).

Enterprise and Cloud Applications provide industry, business process, systems integration, technical delivery experience, and innovation to deliver value across our clients' enterprise application portfolios. The Company's Consulting professionals act as a trusted source for clients in creating bold digital strategies, designing innovative digital experiences, managing complex digital integration, and delivering safe and secure digital operations that help the Company's clients disrupt their industry, without disrupting their business operations. DXC's Application Services offerings utilize the Company's IP and world-class partner ecosystem to modernize and transform its clients' applications landscape, develop and manage their portfolio and roadmap, and execute with precision. In Analytics, DXC offers a complete portfolio of services to rapidly provide insights and drive impactful business outcomes. DXC's Partner Network allows clients to leverage investment while building the analytic solutions of tomorrow. DXC’s industry-aligned IP is centered on the insurance, banking, healthcare, and travel and transportation industries.

Activities are primarily related to vertical alignment of software solutions and process-based IP that power mission-critical transaction engines. DXC's Business Process Services combine business process expertise and intellectual property with the resources of a global Tier I IT services company, leveraging intelligent automation and innovative solutions to reduce manual effort and the associated cost.

Key competitive differentiators for GBS include global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Evolving business demands such as globalization, fast-developing economies, government regulation and growing concerns around risk, security, and compliance drive demand for these offerings.

Global Infrastructure Services

GIS provides Cloud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions to commercial clients globally. This includes DXC’s next-generation cloud offerings, including Infrastructure as a Service ("IaaS"), private cloud solutions, and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. Further, DXC's industry-leading security solutions help clients predict attacks, proactively respond to threats, ensure compliance, and protect data, applications, infrastructure and endpoints. To provide clients with differentiated offerings, GIS maintains a Partner Network to make investments in developing unique offerings and go-to-market strategies. This collaboration helps the Company independently determine the best technology, develop road maps, and enhance opportunities to

36
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions that best address client needs.

United States Public Sector

USPS delivers technology services and business solutions to all levels of government in the United States. USPS helps clients to address their key objectives of: (1) transforming and modernizing through innovation, (2) enhancing security and privacy, (3) improving efficiency and effectiveness, (4) reducing and optimizing costs, and (5) becoming more agile, flexible, and resilient. USPS aims to be a transformation partner that can maximize technology’s potential to create the solutions that matter most to its government clients. USPS supports hundreds of accounts at the federal, state, and local government levels. Commensurate with DXC's strategy of leading the next generation of IT services, USPS is leveraging the Company’s commercial best practices and next-generation offerings to help civilian government agencies address their business issues and provide better and more secure access to citizen services while reducing costs for community & social service, environmental management, education, transportation, and general government & revenue collection.

Segment Measures

The following table summarizes operating results regularly provided to the CODM by reportable segment and a reconciliation to the financial statements:
(in millions)
 
GBS
 
GIS
 
USPS
 
Total Reportable Segments
 
All Other
 
Totals
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,311

 
$
3,142

 
$
710

 
$
6,163

 
$
—

 
$
6,163

Segment profit
 
$
380

 
$
469

 
$
109

 
$
958

 
$
(82
)
 
$
876

Depreciation and amortization (1)
 
$
15

 
$
298

 
$
29

 
$
342

 
$
26

 
$
368

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,035

 
$
836

 
$
—

 
$
1,871

 
$
—

 
$
1,871

Segment profit
 
$
105

 
$
66

 
$
—

 
$
171

 
$
(51
)
 
$
120

Depreciation and amortization (1)
 
$
27

 
$
102

 
$
—

 
$
129

 
$
16

 
$
145


(in millions)
 
GBS
 
GIS
 
USPS
 
Total Reportable Segments
 
All Other
 
Totals
Six Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,578

 
$
6,111

 
$
1,387

 
$
12,076

 
$
—

 
$
12,076

Segment profit
 
$
662

 
$
759

 
$
186

 
$
1,607

 
$
(52
)
 
$
1,555

Depreciation and amortization (1)
 
$
51

 
$
474

 
$
35

 
$
560

 
$
49

 
$
609

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,084

 
$
1,717

 
$
—

 
$
3,801

 
$
—

 
$
3,801

Segment profit
 
$
215

 
$
117

 
$
—

 
$
332

 
$
(106
)
 
$
226

Depreciation and amortization (1)
 
$
56

 
$
209

 
$
—

 
$
265

 
$
32

 
$
297

        
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $169 million and $22 million for the three months ended September 30, 2017 and 2016, respectively, and $289 million and $36 million for the six months ended September 30, 2017 and 2016, respectively.

37
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Reconciliation of Reportable Segment Profit to Consolidated Total

The Company's management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenues less cost of services, segment selling, general and administrative, and depreciation and amortization (excluding amortization of acquired intangible assets). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, pension and OPEB actuarial and settlement gains and losses, restructuring costs, transaction and integration-related costs and amortization of acquired intangible assets.


 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Profit
 
 
 
 
 
 
 
 
Total profit for reportable segments
 
$
958

 
$
171

 
$
1,607

 
$
332

All other profit/loss
 
(82
)
 
(51
)
 
(52
)
 
(106
)
Interest Income
 
16

 
8

 
32

 
18

Interest expense
 
(78
)
 
(29
)
 
(154
)
 
(54
)
Restructuring costs
 
(192
)
 
(25
)
 
(382
)
 
(82
)
Amortization of acquired intangible assets
 
(169
)
 
(22
)
 
(289
)
 
(36
)
Transaction and integration-related costs
 
(66
)
 
(53
)
 
(190
)
 
(109
)
Income (loss) before income taxes
 
$
387

 
$
(1
)
 
$
572

 
$
(37
)
 
Management does not use total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment and therefore, total assets by segment is not disclosed.

Note 18 - Commitments and Contingencies

Commitments

The Company has operating leases for the use of certain real estate and equipment. Substantially all operating leases are non-cancelable or cancelable only through payment of penalties. Lease payments are typically based upon the period of the lease but may include payments for insurance, maintenance, and property taxes. There are no purchase options on operating leases at favorable terms. Most real estate leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in utilities and property taxes.


38
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Minimum fixed rentals required for the next five years and thereafter under operating leases in effect at September 30, 2017 , were as follows:
Fiscal year
 
 
 
 
(in millions)
 
Real Estate
 
Equipment
Remainder of 2018
 
$
191

 
$
180

2019
 
317

 
315

2020
 
249

 
177

2021
 
191

 
52

2022
 
151

 
7

Thereafter
 
697

 
1

     Minimum fixed rentals
 
1,796

 
732

Less: Sublease rental income
 
(143
)
 
—

     Totals
 
$
1,653

 
$
732


The Company signed long-term purchase agreements with certain software, hardware, telecommunication, and other service providers to obtain favorable pricing and terms for services, and products that are necessary for the operations of business activities. Under the terms of these agreements, the Company is contractually committed to purchase specified minimums over periods ranging from 1 to 6 years. If the Company does not meet the specified minimums, the
Company would have an obligation to pay the service provider all, or a portion, of the shortfall. Minimum purchase commitments as of  September 30, 2017  were as follows:
Fiscal year
 
Minimum Purchase Commitment
(in millions)
 
Remainder of 2018  
 
$
1,454

2019
 
2,173

2020
 
2,102

Thereafter
 
1,252

     Total
 
$
6,981

        

(1) A significant portion of the minimum purchase commitments in fiscal 2018, 2019 and 2020 relate to the amounts committed under the HPE preferred vendor agreements.

In the normal course of business, the Company may provide certain clients with financial performance guarantees and at times performance letters of credit or surety bonds. In general, the Company would only be liable for the amounts of these guarantees in the event that non-performance by the Company permits termination of the related contract by the Company’s client. The Company believes it is in compliance with its performance obligations under all service contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on its condensed consolidated results of operations or financial position.

The Company also uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations on these policies. The following table summarizes the expiration of the Company’s financial guarantees and stand-by letters of credit outstanding as of September 30, 2017 :

39
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


(in millions)
 
 Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020 and Thereafter
 
Totals
Surety bonds
 
$
47

 
$
186

 
$
35

 
$
268

Performance letters of credit
 
161

 
57

 
317

 
535

Stand-by letters of credit
 
12

 
6

 
34

 
52

Totals
 
$
220

 
$
249

 
$
386

 
$
855


The Company generally indemnifies licensees of its proprietary software products against claims brought by third parties alleging infringement of their intellectual property rights, including rights in patents (with or without geographic limitations), copyrights, trademarks, and trade secrets. DXC’s indemnification of its licensees relates to costs arising from court awards, negotiated settlements, and the related legal and internal costs of those licensees. The Company maintains the right, at its own cost, to modify or replace software in order to eliminate any infringement. The Company has not incurred any significant costs related to licensee software indemnification.


Contingencies

Vincent Forcier v. Computer Sciences Corporation and The City of New York : On October 27, 2014, the United States Attorney’s Office for the Southern District of New York and the Attorney General for the State of New York filed complaints-in-intervention on behalf of the United States and the State of New York, respectively, against CSC and The City of New York. This action arose out of a qui tam complaint originally filed under seal in 2012 by Vincent Forcier, a former employee of CSC. The complaints allege that from 2008 to 2012 New York City and CSC, in its role as fiscal agent for New York City’s Early Intervention Program ("EIP"), a federal program that provides services for infants and toddlers with manifest or potential developmental delays, violated the federal and state False Claims Acts and various common law standards by allegedly orchestrating a billing fraud against Medicaid through the misapplication of default billing codes and the failure to exhaust private insurance coverage before submitting claims to Medicaid. The New York Attorney General’s complaint also alleges that New York City and CSC failed to reimburse Medicaid in certain instances where insurance had paid a portion of the claim. The lawsuits seek treble statutory damages, other civil penalties and attorneys’ fees and costs.

On January 26, 2015, CSC and the City of New York moved to dismiss Forcier’s amended qui tam complaint as well as the federal and state complaints-in-intervention. In June 2016, the Court dismissed Forcier’s amended complaint in its entirety. With regard to the complaints-in-intervention, the Court dismissed the federal claims alleging misuse of default diagnosis codes when the provider had entered an invalid code, and the state claims alleging failure to reimburse Medicaid when claims were subsequently paid by private insurance. The Court denied the motions to dismiss with respect to the federal and state claims relating to (i) submission of insurance claims with a code signifying that the patient’s policy ID was unknown, and (ii) submission of claims to Medicaid after the statutory deadline for payment by private insurance had passed, and state common law claims. In accordance with the ruling, the United States and the State of New York each filed amended complaints-in-intervention on September 6, 2016. In addition to reasserting the claims upheld by the Court, the amended complaints assert new claims alleging that the compensation provisions of CSC’s contract with New York City rendered it ineligible to serve as a billing agent under state law.
 
On November 9, 2016, CSC filed motions to dismiss the amended complaints in their entirety. On August 10, 2017, the Court granted in part and denied in part the motions to dismiss , allowing the remaining causes of action to proceed.  The Parties have agreed to a non-binding mediation to take place on November 29, 2017. Commencement of discovery will be stayed pending settlement negotiations. The Company believes that these claims are without merit and intends to continue to defend itself vigorously.

Washington, DC Navy Yard Litigation : In December 2013, a wrongful death action was filed in U.S. District Court for the Middle District of Florida against HP Enterprise Services, LLC, now known as Enterprise Services, LLC (“ES”) and others in connection with the September 2013 Washington, DC Navy Yard shooting that resulted in the deaths of 12 individuals. The perpetrator was an employee of The Experts, ES’s now terminated subcontractor on ES’s IT services contract with the U.S. Navy (a contract served by USPS). A total of 15 lawsuits arising out of the shooting have been filed. All have been consolidated in the U.S. District Court for the District of Columbia. ES filed motions to dismiss, which the Court has granted in part and denied in part. Discovery is proceeding.

40
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Strauch Fair Labor Standards Act Collective Action : On July 1, 2014, plaintiffs Joseph Strauch, Timothy Colby, Charles Turner, and Vernon Carre filed an action in the U.S. District Court for the District of Connecticut on behalf of themselves and a putative nationwide collective of CSC system administrators, alleging CSC’s failure to properly classify these employees as non-exempt under the federal Fair Labor Standards Act ("FLSA"). Plaintiffs allege similar state-law Rule 23 class claims pursuant to Connecticut and California statutes, including the Connecticut Minimum Wage Act, the California Unfair Competition Law, California Labor Code, California Wage Order No. 4-2001 and the California Private Attorneys General Act. Plaintiffs claim double overtime damages, liquidated damages, pre- and post-judgment interest, civil penalties, and other state-specific remedies.

In 2015 the Court entered an order granting conditional certification under the FLSA of the collective of over 4,000 system administrators, and notice of the right to participate in the FLSA collective action was mailed to the system administrators. Approximately 1,000 system administrators, prior to the announced deadline, filed consents with the Court to participate in the FLSA collective.

On June 30, 2017, the Court granted Rule 23 certification of a Connecticut state-law class and a California state-law class consisting of professional system administrators and associate professional system administrators. Senior professional system administrators were found not to qualify for Rule 23 certification under the state-law claims. On July 14, 2017, the Company petitioned the Second Circuit Court of Appeals for permission to file an appeal of the Rule 23 decision. A ruling on that petition is pending.

As a result of the Court's findings in its Rule 23 certification order, the parties entered into a stipulation to decertify the senior professional system administrators from the FLSA collective. On August 2, 2017, the Court approved the stipulation, and the FLSA collective action is currently made up of approximately 700 individuals who held the title of associate professional or professional system administrator.

Discovery is completed, and a trial is scheduled to begin on December 5, 2017. The Parties have agreed to a non-binding mediation to take place on November 21, 2017.

Computer Sciences Corporation v. Eric Pulier, et al. : On May 12, 2015, CSC and its wholly owned subsidiary, ServiceMesh Inc. ("SMI"), filed a civil complaint in the Court of Chancery of the State of Delaware against Eric Pulier, the former CEO of SMI, which had been acquired by CSC on November 15, 2013. Following the acquisition, Mr. Pulier signed a retention agreement with SMI pursuant to which he received a grant of restricted stock units of CSC and agreed to be bound by CSC’s rules and policies, including CSC’s Code of Business Conduct. Mr. Pulier resigned from SMI on April 22, 2015 amid allegations that he had engaged in fraudulent transactions with two employees of the Commonwealth Bank of Australia Ltd. (“CBA”). The original complaint against Mr. Pulier asserted claims for fraud, breach of contract and breach of fiduciary duty. In an amended complaint, CSC named TechAdvisors, LLC and Shareholder Representative Services LLC ("SRS") as additional defendants. In ruling on a motion to dismiss filed by Mr. Pulier, the Court dismissed CSC’s claim for breach of the implied covenant of good faith, but allowed substantially all of the remaining claims to proceed. Mr. Pulier asserted counter-claims for breach of contract, fraud, negligent representation, rescission, and violations of the California Blue Sky securities law. With the exception of the claim for breach of his retention agreement, the Court dismissed in whole or in part each of Mr. Pulier’s counterclaims.

On December 17, 2015, CSC entered into a settlement agreement with the majority of the former equityholders of SMI, as well as with SRS acting in its capacity as the agent and attorney-in-fact for the settling equityholders. Pursuant to the settlement agreement, CSC received  $16.5 million , which amount was equal to the settling equityholders’ pro rata share of the funds remaining in escrow from the transaction, which was recorded as an offset to selling, general and administrative costs in CSC’s Consolidated Statements of Operations for the fiscal year ended March 31, 2016. On February 20, 2017, CSC, SRS and the former equityholders of SMI who remain named defendants entered into a partial settlement agreement by which CSC received payment of some of the funds remaining in escrow.

Discovery was proceeding when on July 20, 2017, the Court granted a motion by the United States for a 90-day stay of discovery pending the completion of a criminal investigation. On September 27, 2017, a grand jury empaneled by the United States District Court for the Central District of California returned an indictment against Pulier, charging him with conspiracy, securities and wire fraud, obstruction of justice, and other violations of federal law ( United States v. Eric Pulier ,

41
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


CR 17-599-AB). The Government sought an extension of the stay which the Delaware Court granted on November 3, 2017. The civil action is now stayed pending resolution of the criminal case.

Law enforcement officials in Australia have brought bribery-related charges against the two former CBA employees.  One of these has since pled guilty, and in 2016 received a sentence of imprisonment. In 2016, the United States Attorney’s Office for the Central District of California announced similar criminal charges against this same CBA employee for securities fraud and wire fraud. CSC is cooperating with and assisting the Australian and U.S. authorities in their investigations.

On February 17, 2016, Mr. Pulier filed a complaint in Delaware Chancery Court against CSC and its subsidiary - CSC Agility Platform, Inc., formerly known as SMI - seeking advancement of his legal fees and costs. On May 12, 2016, the Court ruled that CSC Agility Platform - as the successor to SMI - is liable for advancing  80%  of Mr. Pulier’s fees and costs in the underlying civil action. Mr. Pulier has also filed a complaint for advancement of the legal fees and costs incurred in connection with his defense of criminal investigations by the U.S. Government and other entities. On March 30, 2017, Mr. Pulier filed a motion for judgment on the pleadings in this fee advancement matter. Mr. Pulier's motion for judgment on the pleadings and other advancement-related issues were argued before the Court on August 2, 2017, and, on August 7, 2017, the Court ruled substantially in Mr. Pulier's favor. In undertakings previously provided to SMI, Mr. Pulier agreed to repay all amounts advanced to him if it should ultimately be determined that he is not entitled to indemnification.

Cisco Systems Inc. and Cisco Systems Capital Corporation v. Hewlett-Packard Co. : On August 24, 2015, Cisco Systems, Inc. (“Cisco”) and Cisco Systems Capital Corporation (“Cisco Capital”) filed an action against Hewlett Packard Co., now known as HP Inc. ("HP") in California Superior Court, Santa Clara County, for declaratory judgment and breach of contract in connection with a contract to utilize Cisco products and services, and to finance the services through Cisco Capital. HP terminated the contract, and the parties dispute the calculation of the proper cancellation credit. On December 18, 2015, Cisco filed an amended complaint that abandoned the claim for breach of contract set forth in the original complaint, and asserted a single cause of action for declaratory relief concerning the proper calculation of the cancellation credit. On January 19, 2016, HP answered the complaint and filed a counterclaim for breach of contract and declaratory judgment. Discovery is completed, and the trial, originally scheduled for this year, is now scheduled to begin on March 12, 2018. A court-ordered mediation took place on August 30, 2017, but the parties have been unable to reach a settlement. DXC is the party in interest in this matter pursuant to the Separation and Distribution Agreement between the then Hewlett-Packard Co. and HPE and the subsequent Separation and Distribution Agreement between HPE and DXC.

Kemper Corporate Services, Inc. v. Computer Sciences Corporation : In October 2015, Kemper Corporate Services, Inc. (“Kemper”) filed a demand for arbitration against CSC with the American Arbitration Association (“AAA”), alleging that CSC breached the terms of a 2009 Master Software License and Services Agreement and related Work Orders (the “Agreement”) by failing to complete a software translation and implementation plan by certain contractual deadlines. Kemper claimed breach of contract, seeking approximately $100 million in damages measured in part by the amount of the fees paid under the contract, as well as pre-judgment interest, and in the alternative claimed rescission of the Agreement. CSC answered the demand for arbitration denying Kemper’s claims and asserting a counterclaim for unpaid invoices for services rendered by CSC.

A single arbitrator conducted an evidentiary hearing on the merits of the claims and counterclaims in April 2017. Oral argument took place on August 28, 2017. On October 2, 2017, the arbitrator issued a partial final award, finding for Kemper on its breach of contract theory, awarding Kemper $84.2 million in compensatory damages plus prejudgment interest, denying Kemper’s claim for rescission as moot, and denying CSC’s counterclaim. In a subsequent ruling, the arbitrator will consider a supplemental award of Kemper's costs of the arbitration including reasonable attorneys’ fees and expenses , and will set out the total amount awarded including prejudgment interest.

The Company disagrees with the decision of the arbitrator, intends to continue to defend itself vigorously, and is reviewing its legal and procedural options going forward.  The Company is also pursuing coverage for the full scope of the award, interest, and legal fees and expenses, under the Company's applicable insurance policies.  

Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise :  This purported class and collective action was filed on August 18, 2016 in the U.S. District Court for the Northern District of California, against HP and HPE alleging violations of the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California

42
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


public policy and the California Business and Professions Code. Former business units of HPE now owned by the Company will be proportionately liable for any recovery by plaintiffs in this matter. Plaintiffs filed an amended complaint on December 19, 2016. Plaintiffs seek to certify a nationwide class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a work force reduction (“WFR”) plan on or after December 9, 2014 (deferral states) and April 8, 2015 (non-deferral states), and who were 40 years of age or older at the time of termination. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On January 30, 2017, defendants filed a partial motion to dismiss and a motion to compel arbitration of claims by opt-in plaintiffs who signed releases as part of their WFR packages. On September 20, 2017, the Court denied the partial motion to dismiss without prejudice, but granted defendants’ motions to compel arbitration. Accordingly, the Court has stayed the entire action pending arbitration, and administratively closed the case. Plaintiffs have filed a motion for reconsideration as well as a notice of appeal to the Ninth Circuit (which has been denied as premature).

Voluntary Disclosure of Certain Possible Sanctions Law Violations : On February 2, 2017, CSC submitted an initial notification of voluntary disclosure to the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC") regarding certain possible violations of U.S. sanctions laws pertaining to insurance premium data and claims data processed by two partially-owned joint ventures of Xchanging, which CSC acquired during the first quarter of fiscal 2017. A copy of the disclosure was also provided to Her Majesty’s Treasury Office of Financial Sanctions Implementation in the U.K. The Company’s related internal investigation is continuing, and the Company has undertaken to cooperate with and provide a full report of its findings to OFAC when completed.

In addition to the matters noted above, the Company is currently subject in the normal course of business to various claims and contingencies arising from, among other things, disputes with customers, vendors, employees, contract counterparties and other parties, as well as securities matters, environmental matters, matters concerning the licensing and use of intellectual property, and inquiries and investigations by regulatory authorities and government agencies. Some of these disputes involve or may involve litigation. The consolidated financial statements reflect the treatment of claims and contingencies based on management's view of the expected outcome. DXC consults with outside legal counsel on issues related to litigation and regulatory compliance and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Although the outcome of these and other matters cannot be predicted with certainty, and the impact of the final resolution of these and other matters on the Company’s results of operations in a particular subsequent reporting period could be material and adverse, management does not believe based on information currently available to the Company, that the resolution of any of the matters currently pending against the Company will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due. Unless otherwise noted, the Company is unable to determine at this time a reasonable estimate of a possible loss or range of losses associated with the foregoing disclosed contingent matters.

Note 19 - Subsequent Events

On October 11, 2017, the Company announced that it had entered into an Agreement and Plan of Merger with Ultra SC Inc., Ultra First VMS Inc., Ultra Second VMS LLC, Ultra KMS Inc., Vencore Holding Corp. (“Vencore”), KGS Holding Corp (“KeyPoint”), The SI Organization Holdings LLC and KGS Holding LLC (the “Merger Agreement”). The Merger Agreement provides that the Company will spin off its United States Public Sector business and combine it with Vencore and KeyPoint to form a separate, independent publicly traded company to serve U.S. public sector clients. The formation of the new company is targeted to be completed by the end of March 2018, subject to regulatory and other approvals.


43

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements and assumptions contained in this Quarterly Report on Form 10-Q and in the documents incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements.” Forward-looking statements often include words such as “anticipates,” “believes,” “estimates,” “expects,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target,” and “will” and words and terms of similar substance in discussions of future operating or financial performance. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking statements include, among other things, statements with respect to our financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to:

•
the integration of CSC's and HPES's businesses, operations, and culture and the ability to operate as effectively and efficiently as expected, and the combined company's ability to successfully manage and integrate acquisitions generally;
•
the ability to realize the synergies and benefits expected to result from the Merger within the anticipated time frame or in the anticipated amounts;
•
other risks related to the Merger including anticipated tax treatment, unforeseen liabilities, and future capital expenditures;
•
changes in governmental regulations or the adoption of new laws or regulations that may make it more difficult or expensive to operate our business;
•
changes in senior management, the loss of key employees or the ability to retain and hire key personnel and maintain relationships with key business partners;
•
business interruptions in connection with our technology systems;
•
the competitive pressures faced by our business;
•
the effects of macroeconomic and geopolitical trends and events;
•
the need to manage third-party suppliers and the effective distribution and delivery of our products and services;
•
the protection of our intellectual property assets, including intellectual property licensed from third parties;
•
the risks associated with international operations;
•
the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends;
•
the execution and performance of contracts by us and our suppliers, customers, clients and partners;
•
the resolution of pending investigations, claims and disputes;
•
risks relating to the respective abilities of the parties to the USPS Separation and Mergers (defined below) to satisfy the conditions to, and to otherwise consummate, the USPS Separation and Mergers and to achieve the expected results therefrom; and
•
the other factors described in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.


44

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The purpose of the MD&A is to present information that management believes is relevant to an assessment and understanding of DXC's results of operations and cash flows for the three and six months ended September 30, 2017 . The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes. The use of "we," "our" and "us" refers to DXC and its consolidated subsidiaries.

The MD&A is organized into the following sections:
•
Background
•
Segments and Services
•
Results of Operations
•
Liquidity and Capital Resources
•
Off-Balance Sheet Arrangements
•
Contractual Obligations
•
Critical Accounting Policies and Estimates

Background

DXC is the world's leading independent, end-to-end IT services company, helping clients harness the power of innovation to thrive on change. DXC was formed by the spin-off of HPES on March 31, 2017 and merger of CSC with a wholly owned subsidiary of DXC on April 1, 2017. As a result of the Merger, CSC became a wholly owned subsidiary of DXC. DXC's common stock began trading under the ticker symbol “DXC” on the New York Stock Exchange on April 3, 2017 and is part of Standard & Poor's (S&P) 500 Index.

Segments and Services

Our reportable segments are GBS, GIS, and USPS. Segment information is included in Note 17 - " Segment Information " to the financial statements. For a discussion of risks associated with our foreign operations, see Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.

Global Business Services

GBS provides innovative technology solutions including Enterprise and Cloud Applications, Consulting Application Services, and Analytics. GBS also includes our Industry-aligned IP and Business Process Services. These offerings address key business challenges and accelerate digital transformations tailored to each customer’s industry and specific objectives. GBS strives to help clients understand and take advantage of IT modernization and virtualization across the IT portfolio (hardware, software, networking, storage, and computing assets).

Enterprise and Cloud Applications provide industry, business process, systems integration, technical delivery experience, and innovation to deliver value across our clients' enterprise application portfolios. Our Consulting professionals act as a trusted source for our clients in creating bold digital strategies, designing innovative digital experiences, managing complex digital integration, and delivering safe and secure digital operations that help our clients disrupt their industry, without disrupting their business operations. DXC’s Application Services offerings utilize our IP and world-class partner ecosystem to modernize and transform our clients applications landscape, develop and manage their portfolio and roadmap, and execute with precision. In Analytics, DXC Technology offers a complete portfolio of services to rapidly provide insights and drive impactful business outcomes. Our Partner Network allows you to leverage investment while building the analytic solutions of tomorrow. DXC’s industry-aligned IP is centered on the insurance, banking, healthcare, and travel and transportation industries.

Activities are primarily related to vertical alignment of software solutions and process-based IP that power mission-critical transaction engines. And, our Business Process Services combine business process expertise and intellectual property with the resources of a global Tier I IT services company, leveraging intelligent automation and innovative solutions to

45

reduce manual effort and the associated cost. Key competitive differentiators for GBS include global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Evolving business demands such as globalization, fast-developing economies, government regulation and growing concerns around risk, security, and compliance drive demand for these offerings.

Global Infrastructure Services

GIS provides Cloud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions to commercial clients globally. This includes DXC’s next-generation cloud offerings, including Infrastructure as a Service ("IaaS"), private cloud solutions, and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. Further, our industry-leading security solutions help clients predict attacks, proactively respond to threats, ensure compliance, and protect data, applications, infrastructure and endpoints. To provide clients with differentiated offerings, GIS maintains a Partner Network to make investments in developing unique offerings and go-to-market strategies. This collaboration helps us independently determine the best technology, develop road maps, and enhance opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions that best address client needs.

United States Public Sector

USPS delivers IT services and business solutions to all levels of government in the United States. USPS helps clients to address their key objectives of: (1) transforming and modernizing through innovation, (2) enhancing security and privacy, (3) improving efficiency and effectiveness, (4) reducing and optimizing costs, and (5) becoming more agile, flexible and resilient. USPS aims to be a transformation partner that can maximize technology’s potential to create the solutions that matter most to its government clients. USPS supports hundreds of accounts at the federal, state, and local government levels. Commensurate with DXC's strategy of leading the next generation of IT services, USPS is leveraging our commercial best practices and next-generation offerings to help civilian government agencies address their business issues and provide better and more secure access to citizen services while reducing costs for community & social service, environmental management, education, transportation, and general government & revenue collection.


46

Results of Operations

On April 1, 2017, we completed the strategic combination of CSC with HPES to form DXC. See Note 1 - " Summary of Significant Accounting Policies " and Note 3 " Acquisitions ". Because it was deemed the accounting acquirer, CSC is considered DXC's predecessor and the historical financial statements of CSC prior to the Merger are reflected in this Quarterly Report on Form 10-Q as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017, included elsewhere in this Quarterly Report on Form 10-Q do not include the financial results of HPES, and therefore, are not directly comparable.

The following table calculates the period over period changes in the unaudited condensed consolidated statements of operations:
 
 
Three Months Ended
(In millions, except per-share amounts)
 
September 30, 2017
 
September 30, 2016
 
Change
 
Percentage Change (NC)
 
 
 
 
 
 
 
 
 
Revenues
 
$
6,163

 
$
1,871

 
$
4,292

 
—
Total costs and expenses
 
5,776

 
1,872

 
3,904

 
—
Income (loss) before income taxes
 
387

 
(1
)
 
388

 
—
Income tax expense (benefit)
 
122

 
(22
)
 
144

 
—
Net income
 
$
265

 
$
21

 
$
244

 
—
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.88

 
$
0.10

 
$
0.78

 
—
        
(NC) - Not comparable
 
 
Six Months Ended
(In millions, except per-share amounts)
 
September 30, 2017
 
September 30, 2016
 
Change
 
Percentage Change (NC)
 
 
 
 
 
 
 
 
 
Revenues
 
$
12,076

 
$
3,801

 
$
8,275

 
—
Total costs and expenses
 
11,504

 
3,838

 
7,666

 
—
Income (loss) before income taxes
 
572

 
(37
)
 
609

 
—
Income tax expense (benefit)
 
134

 
(38
)
 
172

 
—
Net income
 
$
438

 
$
1

 
$
437

 
—
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
$
1.43

 
$
(0.04
)
 
$
1.47

 
—
        
(NC) - Not comparable




47

Revenues

The following discussion includes comparisons of our results of operations for the three and six months ended September 30, 2017 to our pro forma results of operations for the three and six months ended September 30, 2016 . Our pro forma results of operations for the three and six months ended September 30, 2016 are based upon the historical statements of operations of each of CSC and HPES, giving effect to the Merger as if it had been consummated on April 2, 2016. CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and six months ended September 30, 2016 and of HPES for the three and six months ended July 31, 2016.

See "Unaudited Pro Forma Condensed Combined Statement of Operations" below for additional information.
 
 
Three Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
September 30, 2016
 
Change
 
Percentage Change (NC)
GBS
 
$
2,311

 
$
1,035

 
$
1,276

 
—
GIS
 
3,142

 
836

 
2,306

 
—
USPS
 
710

 
—

 
710

 
—
Total Revenues
 
$
6,163

 
$
1,871

 
$
4,292

 
—
        
(NC) - Not comparable

 
 
Three Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
Pro Forma September 30, 2016
 
Change
 
Percentage Change
GBS
 
$
2,311

 
$
2,392

 
$
(81
)
 
(3.4
)%
GIS
 
3,142

 
3,289

 
(147
)
 
(4.5
)%
USPS
 
710

 
674

 
36

 
5.3
 %
Total Revenues
 
$
6,163

 
$
6,355

 
$
(192
)
 
(3.0
)%

 
 
Six Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
September 30, 2016
 
Change
 
Percentage Change (NC)
GBS
 
$
4,578

 
$
2,084

 
$
2,494

 
—
GIS
 
6,111

 
1,717

 
4,394

 
—
USPS
 
1,387

 
—

 
1,387

 
—
Total Revenues
 
$
12,076

 
$
3,801

 
$
8,275

 
—
        
(NC) - Not comparable



48

 
 
Six Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
Pro Forma September 30, 2016
 
Change
 
Percentage Change
GBS
 
$
4,578

 
$
4,813

 
$
(235
)
 
(4.9
)%
GIS
 
6,111

 
6,579

 
(468
)
 
(7.1
)%
USPS
 
1,387

 
1,381

 
6

 
0.4
 %
Total Revenues
 
$
12,076

 
$
12,773

 
$
(697
)
 
(5.5
)%

As a global company over 56% of our revenues have been earned internationally. As a result, the changes in revenues denominated in currencies other than the U.S. dollar from period to period are impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. The table below summarizes our constant currency revenues for the three and six months ended September 30, 2017 compared to the pro forma three and six months ended September 30, 2016 :
 
 
Three Months Ended
(in millions)
 
September 30, 2017 at Constant Currency
 
September 30, 2016 Pro Forma
 
Increase (Decrease) at Constant Currency
 
Percentage Change
GBS
 
$
2,285

 
$
2,392

 
$
(107
)
 
(4.5
)%
GIS
 
3,117

 
3,289

 
(172
)
 
(5.2
)%
USPS
 
710

 
674

 
36

 
5.3
 %
Total
 
$
6,112

 
$
6,355

 
$
(243
)
 
(3.8
)%

 
 
Six Months Ended
(in millions)
 
September 30, 2017 at Constant Currency
 
September 30, 2016 Pro Forma
 
Increase (Decrease) at Constant Currency
 
Percentage Change
GBS
 
$
4,593

 
$
4,813

 
$
(220
)
 
(4.6
)%
GIS
 
6,160

 
6,579

 
(419
)
 
(6.4
)%
USPS
 
1,387

 
1,381

 
6

 
0.4
 %
Total
 
$
12,140

 
$
12,773

 
$
(633
)
 
(5.0
)%


The revenue discussions below include references to revenues on a constant currency basis. Constant currency revenues are a non-GAAP measure calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This non-GAAP measure allows management to evaluate operating performance separately from movements in foreign exchange rates.

On a GAAP basis, total revenues were $6.2 billion and $12.1 billion during the three and six months ended September 30, 2017 , respectively, an increase of $4.3 billion and $8.3 billion as compared to the comparable period of the prior fiscal year. The revenue growth is attributed to the Merger involving CSC and HPES.

On a GAAP basis, our GIS segment revenues during the three and six months ended September 30, 2017 were $3.1 billion and $6.1 billion , or 51.0% and 50.6% of total revenues, respectively. Our GIS segment includes our C loud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions businesses. Our GBS segment revenues were $2.3 billion and $4.6 billion , or 37.5% and 37.9% of total revenues, during the three and six months ended September 30, 2017 , respectively. Our GBS segment includes Enterprise and Cloud Applications, Consulting Application Services, Analytics, Industry-aligned IP and Business Process Services businesses. Our USPS

49

segment, which was created upon the consummation of the Merger contributed $0.7 billion and $1.4 billion of revenues, or 11.5% of total revenues during the three and six months ended September 30, 2017, respectively. The USPS segment provides both infrastructure and other services similar to our GIS and GBS segments to all levels of government in the United States. 

On a pro forma basis, constant currency revenues decreased $243 million , or 3.8% , during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 . The constant currency revenues decrease for both our GIS and GBS segments was driven by contracts that concluded or were renewed at a lower rate. These decreases were partially offset by an increase in revenues from new business as well as the contributions from our recent acquisition of Tribridge, primarily within our GBS segment. The $36 million increase in constant currency USPS segment revenues for the three months ended September 30, 2017 , as compared to the same period of the prior fiscal year, was due to an increase in pass-through revenues and revenues from new business, partially offset by contracts that concluded or were renewed at a lower rate.

On a pro forma basis, constant currency revenues decreased $633 million , or 5.0% , during the six months ended September 30, 2017 as compared to the six months ended September 30, 2016 . The constant currency revenues decrease for both our GIS and GBS segments was driven by contracts that concluded or were renewed at a lower rate, which were more than offset by an increase in revenues from new business as well as the contributions from our recent acquisition of Tribridge, primarily within our GBS segment. The $6 million increase in constant currency USPS segment revenues for the six months ended September 30, 2017 , as compared to the same period of the prior fiscal year, was due to an increase in revenues from new business and pass-through revenues, partially offset by contracts that concluded or were renewed at a lower rate.

For the three months ended  September 30, 2017 , GIS, GBS and USPS contract awards were $2.8 billion , $2.5 billion and $0.6 billion , respectively. For the six months ended  September 30, 2017 , GIS, GBS and USPS contract awards were $6.5 billion , $4.9 billion and $0.8 billion , respectively.


50

Costs and Expenses

Our total costs and expenses are shown in the tables below:
 
 
Three Months Ended
 
 
 
 
Amount
Percentage of Revenues
 
Percentage of Revenue Change
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
4,312

 
$
1,363

 
70.0
 %
 
72.9
 %
 
(2.9
)%
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
672

 
293

 
10.9

 
15.7

 
(4.8
)
Depreciation and amortization
 
537

 
167

 
8.7

 
8.9

 
(0.2
)
Restructuring costs
 
192

 
25

 
3.1

 
1.3

 
1.8

Interest expense
 
78

 
29

 
1.3

 
1.5

 
(0.2
)
Interest income
 
(16
)
 
(8
)
 
(0.3
)
 
(0.4
)
 
0.1

Other (income) expense, net
 
1

 
3

 
—

 
0.2

 
(0.2
)
Total costs and expenses
 
$
5,776

 
$
1,872

 
93.7
 %
 
100.1
 %
 
(6.4
)%

 
 
Six Months Ended
 
 
 
 
Amount
Percentage of Revenues
 
Percentage of Revenue Change
(in millions)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
9,100

 
$
2,784

 
75.4
 %
 
73.3
 %
 
2.1
 %
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,082

 
598

 
9.0

 
15.7

 
(6.7
)
Depreciation and amortization
 
898

 
333

 
7.4

 
8.8

 
(1.4
)
Restructuring costs
 
382

 
82

 
3.2

 
2.2

 
1.0

Interest expense
 
154

 
54

 
1.3

 
1.4

 
(0.1
)
Interest income
 
(32
)
 
(18
)
 
(0.3
)
 
(0.5
)
 
0.2

Other (income) expense, net
 
(80
)
 
5

 
(0.7
)
 
0.1

 
(0.8
)
Total costs and expenses
 
$
11,504

 
$
3,838

 
95.3
 %
 
101.0
 %
 
(5.7
)%


Costs of Services

Cost of services excluding depreciation and amortization and restructuring costs ("COS") was $4.3 billion and $9.1 billion for the three and six months ended September 30, 2017 , respectively. The $2.9 billion and $6.3 billion increase in COS, as compared to the same periods of the prior fiscal year, was driven by the Merger offset by reduction in costs associated with workforce and facilities optimization. COS for the three months ended September 30, 2017 included certain adjustments related to the prior interim period, including a cumulative purchase price accounting adjustment of $(92) million as a result of change in lease classification and related fair value adjustment (see Note 3 - " Acquisitions "), and a classification correction of $(126) million (see Note 1 - " Summary of Significant Accounting Policies ").

51

Selling, General, and Administrative

Selling, general, and administrative expense excluding depreciation and amortization and restructuring costs ("SG&A") was $672 million and $1,082 million for the three and six months ended September 30, 2017 , respectively. The $379 million and $484 million increase in SG&A, as compared to the same periods of the prior fiscal year, was driven by the Merger. Integration and transaction-related costs of $66 million and $190 million were included in SG&A for the three and six months ended September 30, 2017, respectively, as compared to $53 million and $109 million for the comparable periods of the prior fiscal year. SG&A for the three months ended September 30, 2017 included a $126 million classification adjustment related to the prior interim period (see Note 1 - " Summary of Significant Accounting Policies ").

Depreciation and Amortization

Depreciation expense increased $142 million and amortization expense increased $228 million for the three months ended September 30, 2017 , compared to the three months ended September 30, 2016 . For the six months ended September 30, 2017 , depreciation expense increased $213 million and amortization expense increased $352 million , compared to the six months ended September 30, 2016 . The increase in depreciation and amortization expense ("D&A") was attributed to acquired property and equipment and intangible assets associated with the Merger. D&A for the three months ended September 30, 2017 included a cumulative purchase price accounting adjustment attributed to the prior interim period of $75 million which was primarily the result of change in lease classification and related fair value adjustment (see Note 3 - " Acquisitions ").

Restructuring Costs

During the six months ended September 30, 2017, management approved the Fiscal 2018 Plan to optimize operations in response to a continuing business contraction. The additional restructuring initiatives are intended to reduce our core structure and related operating costs, improve our competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and rebalancing the pyramid structure. Additionally, this plan includes global facility restructuring, including a global datacenter restructuring program.

During the three and six months ended September 30, 2017 , restructuring costs, net of reversals, were $192 million and $382 million , respectively, as compared with $25 million and $82 million during the comparable periods of the prior fiscal year. The year-over-year increase in restructuring costs was due to the implementation of the Fiscal 2018 Plan. Restructuring costs included pension benefit augmentations owed to certain employees under legal or contractual obligations. These augmentations will be paid as part of normal pension distributions over several years.

For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 11 - "Restructuring Costs" to the financial statements.

Interest Expense and Interest Income

Interest expense for the three and six months ended  September 30, 2017  increased  $49 million and $100 million over the same periods of the prior fiscal year, respectively. Interest income for the three and six months ended  September 30, 2017  increased $8 million and $14 million over the same periods of the prior fiscal year, respectively. The year-over-year increase in interest expense and interest income was due to the Merger. The increase in interest expense for the six months ended September 30, 2017 includes interest expense associated with $5.5 billion of acquired debt; see Note 3 - " Acquisitions "
 
Other Expense (Income), Net

Other expense (income), net comprises movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses. The $85 million increase in other income for the six months ended September 30, 2017 over the six months ended September 30, 2016 was due to foreign currency gain related to a change in the functional currency of a European holding company.


52

Taxes

The Company's income tax expense (benefit) was $122 million and $(22) million for the three months ended September 30, 2017 and September 30, 2016 , respectively, and $134 million and $(38) million for the six months ended September 30, 2017 and September 30, 2016 , respectively. For the three and six months ended September 30, 2017 , the primary drivers of the ETR were the global mix of income, the reduction of a deferred tax liability recorded on the outside basis difference of an HPES foreign subsidiary due to current year earnings and taxes, excess tax benefits related to employee share-based payment awards and releases of valuation allowances for deferred tax assets of CSC. The primary drivers of the ETR for the three and six months ended September 30, 2016 were the global mix of income, excess tax benefits related to employee share-based payment awards and the release of a valuation allowance on deferred tax assets of CSC in a non-U.S. jurisdiction.

Except for the uncertain tax liabilities acquired as a result of the Merger, there were no material changes to uncertain tax positions during fiscal 2018 . For further discussion of these uncertain tax positions, please refer to Note 13 - " Income Taxes ."

Earnings (Loss) per Share

Diluted EPS for the three and six months ended September 30, 2017 increased $0.78 and $1.47 , respectively, from the same periods a year ago. The increase for the three and six months ended September 30, 2017 was due to increases of $241 million and $421 million , respectively, in net income attributable to DXC common stockholders, partially offset by an increase in weighted average common shares outstanding for diluted EPS attributable to capital restructuring associated with the Merger. The increase in Diluted EPS for the three months ended September 30, 2017, included an increase of $0.13 due to cumulative adjustments attributed to the prior interim period resulting from change in lease classification and related fair value adjustment (see Note 3 - " Acquisitions ").

Unaudited Pro Forma Condensed Combined Statement of Operations

In an effort to provide investors with additional information, we are disclosing certain unaudited pro forma financial information of DXC for the three and six months ended September 30, 2016 as supplemental information herein. The following unaudited pro forma condensed combined statement of operations of DXC (the “unaudited pro forma statement of operations”) is for the three and six months ended September 30, 2016 after giving effect to the Merger. See Note 1 - " Summary of Significant Accounting Policies " and Note 3 - " Acquisitions " to the financial statements for additional information.

CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. Every fifth year included an additional week in the first quarter to prevent the fiscal year moving from an approximate end of March date. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and six months ended September 30, 2016 and of HPES for the three and six months ended July 31, 2016.

The historical condensed combined statement of operations of HPES was “carved-out” from the combined statement of operations of HPE and reflects assumptions and allocations made by HPE. The condensed combined statement of operations of HPES included all revenues and costs directly attributable to HPES and an allocation of expenses related to certain HPE corporate functions. The results of operations in the HPES historical condensed combined statement of operations does not necessarily include all expenses that would have been incurred by HPES had it been a separate, stand-alone entity. Actual costs that may have been incurred if HPES had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, functions outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. Consequently, HPES’ historical condensed combined statement of operations does not necessarily reflect what HPES’ results of operations would have been had HPES operated as a stand-alone company during the period presented.
 
The unaudited pro forma statement of operations has been prepared using the acquisition method of accounting with CSC considered the accounting acquirer of HPES. This unaudited pro forma statement includes combining historical results, reflecting preliminary purchase accounting adjustments and aligning accounting policies for our consolidated results and reportable segments. The historical statements of operations have been adjusted in the unaudited pro forma statement of

53
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2016


operations to give effect to pro forma events that were (i) directly attributable to the Merger, (ii) factually supportable, and (iii) which are expected to have a continuing impact on the consolidated results of operations of DXC. The pro forma results do not reflect the costs of integration activities or benefits that may result from realization of previously announced anticipated first-year synergies of approximately $1.0 billion. No assurances of the timing or the amount of cost synergies, or the costs necessary to achieve those cost synergies, can be provided.

The adjustments included in the unaudited pro forma statement of operations were based upon currently available information and assumptions that management of DXC believes to be reasonable. The unaudited pro forma statement of operations is for informational purposes only and is not intended to represent or to be indicative of the actual results of operations that the combined company would have reported had the Merger been completed on April 2, 2016, and should not be taken as being indicative of DXC’s future consolidated financial results. The unaudited pro forma statement of operations should be read in conjunction with Exhibit 99.2 of the previously filed Form 8-K/A that DXC filed with the SEC on June 14, 2017, including the accompanying notes.

54
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2016



 
 
Historical
 
 
 
 
 
 
(in millions, except per-share amounts)
 
CSC for the Three Months Ended September 30, 2016
 
HPES for the Three Months Ended July 31, 2016
 
Reclassifications
 
Merger Adjustments
 
Pro Forma combined
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,871

 
$
4,484

 
$
—

 
$
—

 
$
6,355

 
 
 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
1,363

 
3,833

 
(272
)
 
84

 
5,008

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
293

 
530

 
(82
)
 
(81
)
 
660

Depreciation and amortization
 
167

 
99

 
357

371

(83
)
 
540

Restructuring costs
 
25

 
276

 
—

 
—

 
301

Transaction costs
 
—

 
3

 
(3
)
 
—

 
—

Interest expense
 
29

 
—

 
50

 
10

 
89

Interest income
 
(8
)
 
—

 
(12
)
 
—

 
(20
)
Other expense, net
 
3

 
—

 
5

 
—

 
8

Total costs and expenses
 
1,872

 
4,741

 
43

 
(70
)
 
6,586

 
 
 
 
 
 
 
 
 
 
 
Interest and other, net
 
—

 
(44
)
 
44

 
—

 
—

Loss before income taxes
 
(1
)
 
(301
)
 
1

 
70

 
(231
)
Income tax benefit
 
(22
)
 
(110
)
 
—

 
24

 
(108
)
Net income (loss)
 
21

 
(191
)
 
1

 
46

 
(123
)
Less: net income attributable to non-controlling interest, net of tax
 
6

 
—

 
1

 
—

 
7

Net loss attributable to DXC common stockholders
 
$
15

 
$
(191
)
 
$
—

 
$
46

 
$
(130
)
 
 
 
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.11

 
 
 
 
 
 
 
$
(0.46
)
Diluted
 
$
0.10

 
 
 
 
 
 
 
$
(0.46
)
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
140.53

 
 
 
 
 
 
 
283.16

Diluted
 
143.78

 
 
 
 
 
 
 
283.16




55
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2016


 
 
Historical
 
 
 
 
 
 
(in millions, except per-share amounts)
 
CSC for the Six Months Ended September 30, 2016
 
HPES for the Six Months Ended July 31, 2016
 
Reclassifications
 
Merger Adjustments
 
Pro Forma combined
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,801

 
$
8,972

 
$
—

 
$
—

 
$
12,773

 
 
 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
2,784

 
7,722

 
(551
)
 
323

 
10,278

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
598

 
1,005

 
(164
)
 
(69
)
 
1,370

Depreciation and amortization
 
333

 
199

 
728

371

(164
)
 
1,096

Restructuring costs
 
82

 
350

 
—

 
—

 
432

Transaction costs
 
—

 
13

 
(13
)
 
—

 
—

Interest expense
 
54

 
—

 
99

 
24

 
177

Interest income
 
(18
)
 
—

 
(23
)
 
—

 
(41
)
Other expense, net
 
5

 
—

 
9

 
—

 
14

Total costs and expenses
 
3,838

 
9,289

 
85

 
114

 
13,326

 
 
 
 
 
 
 
 
 
 
 
Interest and other, net
 
—

 
(87
)
 
87

 
—

 
—

Loss before income taxes
 
(37
)
 
(404
)
 
2

 
(114
)
 
(553
)
Income tax benefit
 
(38
)
 
(93
)
 
—

 
(18
)
 
(149
)
Net income (loss)
 
1

 
(311
)
 
2

 
(96
)
 
(404
)
Less: net income attributable to non-controlling interest, net of tax
 
7

 
—

 
2

 
—

 
9

Net loss attributable to DXC common stockholders
 
$
(6
)
 
$
(311
)
 
$
—

 
$
(96
)
 
$
(413
)
 
 
 
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.04
)
 
 
 
 
 
 
 
$
(1.46
)
Diluted
 
$
(0.04
)
 
 
 
 
 
 
 
$
(1.46
)
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
139.76

 
 
 
 
 
 
 
283.16

Diluted
 
139.76

 
 
 
 
 
 
 
283.16



56

Non-GAAP Financial Measures

We present non-GAAP financial measures of performance which are derived from the unaudited condensed consolidated statements of operations and unaudited pro forma statement of operations of DXC. These non-GAAP financial measures include earnings before interest and taxes ("EBIT"), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income and non-GAAP EPS.

We present these non-GAAP financial measures to provide investors with meaningful supplemental financial information, in addition to the financial information presented on a GAAP or pro forma basis. These non-GAAP financial measures exclude certain items from GAAP results that DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures provide investors supplemental information about the financial performance of DXC exclusive of the impacts of corporate wide strategic decisions. DXC management believes that adjusting for these items provides investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period. DXC management believes the non-GAAP measures provided are also considered important measures by financial analysts covering DXC as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS.

There are limitations to the use of the non-GAAP financial measures presented in this report. One of the limitations is that they do not reflect complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP or on a pro forma basis. Additionally, other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes between companies.

Non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:
 
 
Three Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
Pro Forma September 30, 2016
 
Change
 
Percentage Change
Income (loss) before income taxes
 
$
387

 
$
(231
)
 
$
618

 
(267.5
)%
Non-GAAP income before income taxes
 
$
814

 
$
311

 
$
503

 
161.7
 %
Net income (loss)

 
$
265

 
$
(123
)
 
$
388

 
(315.4
)%
Adjusted EBIT
 
$
876

 
$
380

 
$
496

 
130.5
 %

 
 
Six Months Ended
 
 
 
 
(in millions)
 
September 30, 2017
 
Pro Forma September 30, 2016
 
Change
 
Percentage Change
Income (loss) before income taxes
 
$
572

 
$
(553
)
 
$
1,125

 
(203.4
)%
Non-GAAP income before income taxes
 
$
1,433

 
$
554

 
$
879

 
158.7
 %
Net income (loss)

 
$
438

 
$
(404
)
 
$
842

 
(208.4
)%
Adjusted EBIT
 
$
1,555

 
$
690

 
$
865

 
125.4
 %


57


Reconciliation of Non-GAAP Financial Measures

Our non-GAAP adjustments include:
•
Restructuring - reflects costs, net of reversals, related to workforce optimization and real estate charges
•
Transaction and integration-related costs - reflects costs related to integration planning, financing, and advisory fees associated with the Merger and other acquisitions.
•
Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business combinations.
•
Pension and OPEB actuarial and settlement losses - reflects pension and OPEB actuarial and settlement gains and losses from mark-to-market accounting.
•
Certain overhead costs - reflects certain fiscal 2017 HPE costs allocated to HPES that are expected to be largely eliminated on a prospective basis.
•
Tax adjustment - reflects the application of an approximate 27.5% pro forma tax rate for fiscal 2017 periods, which is the midpoint of prospective targeted effective tax rate range of 25% to 30% and effectively excludes the impact of discrete tax adjustments for those periods.

A reconciliation of reported results to non-GAAP results is as follows:
 
 
Three Months Ended September 30, 2017
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction and Integration-related Costs
 
Amortization of Acquired Intangible Assets
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
4,312

 
$
—

 
$
—

 
$
—

 
$
4,312

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
672

 
—

 
(66
)
 
—

 
606

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
387

 
192

 
66

 
169

 
814

Income tax expense
 
122

 
46

 
23

 
57

 
248

Net income
 
265

 
146

 
43

 
112

 
566

Less: net income attributable to non-controlling interest, net of tax
 
9

 
—

 
—

 
—

 
9

Net income (loss) attributable to DXC common stockholders
 
$
256

 
$
146

 
$
43

 
$
112

 
$
557

 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
31.5
%
 
 
 
 
 
 
 
30.5
%
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
$
0.90

 
$
0.51

 
$
0.15

 
$
0.39

 
$
1.96

Diluted EPS
 
$
0.88

 
$
0.50

 
$
0.15

 
$
0.39

 
$
1.93

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.87

 
284.87

 
284.87

 
284.87

 
284.87

Diluted EPS
 
289.29

 
289.29

 
289.29

 
289.29

 
289.29



58

 
 
Six Months Ended September 30, 2017
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction and Integration-related Costs
 
Amortization of Acquired Intangible Assets
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
9,100

 
$
—

 
$
—

 
$
—

 
$
9,100

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,082

 
—

 
(190
)
 
—

 
892

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
572

 
382

 
190

 
289

 
1,433

Income tax expense
 
134

 
91

 
64

 
103

 
392

Net income
 
438

 
291

 
126

 
186

 
1,041

Less: net income attributable to non-controlling interest, net of tax
 
23

 
—

 
—

 
—

 
23

Net income (loss) attributable to DXC common stockholders
 
$
415

 
$
291

 
$
126

 
$
186

 
$
1,018

 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
23.4
%
 
 
 
 
 
 
 
27.4
%
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
$
1.46

 
$
1.02

 
$
0.44

 
$
0.65

 
$
3.58

Diluted EPS
 
$
1.43

 
$
1.01

 
$
0.44

 
$
0.64

 
$
3.52

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.35

 
284.35

 
284.35

 
284.35

 
284.35

Diluted EPS
 
289.38

 
289.38

 
289.38

 
289.38

 
289.38



59

A reconciliation of pro forma combined results to pro forma non-GAAP results for the three and six months ended September 30, 2016 is as follows:
 
 
Three Months Ended September 30, 2016
(in millions, except per-share amounts)
 
Pro Forma Combined
 
Restructuring Costs
 
Transaction and Integration-related Costs
 
Amortization of Acquired Intangibles
 
Certain Overhead Costs
 
Tax Adjustment
 
Pro Forma Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
5,008

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
5,008

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
660

 
—

 
(70
)
 
—

 
(51
)
 
—

 
$
539

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income, before income taxes
 
(231
)
 
301

 
70

 
120

 
51

 
—

 
311

Income tax (benefit) expense
 
(108
)
 
—

 
—

 
—

 
—

 
194

 
86

Net (loss) income
 
(123
)
 
301

 
70

 
120

 
51

 
(194
)
 
225

Less: net income attributable to non-controlling interest, net of tax
 
7

 
—

 
—

 
 
 
—

 
—

 
7

Net (loss) income attributable to DXC common stockholders
 
$
(130
)
 
$
301

 
$
70

 
$
120

 
$
51

 
$
(194
)
 
$
218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
46.8
%
 
 
 
 
 
 
 
 
 
 
 
27.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
$
(0.46
)
 
$
1.06

 
$
0.25

 
$
0.42

 
$
0.18

 
$
(0.69
)
 
$
0.77

Diluted EPS
 
$
(0.46
)
 
$
1.05

 
$
0.24

 
$
0.42

 
$
0.18

 
$
(0.68
)
 
$
0.76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

Diluted EPS
 
283.16

 
286.41

 
286.41

 
286.41

 
286.41

 
286.41

 
286.41



60

 
 
Six Months Ended September 30, 2016
(in millions, except per-share amounts)
 
Pro Forma Combined
 
Restructuring Costs
 
Transaction and Integration-related Costs
 
Amortization of Acquired Intangibles
 
Pension and OPEB Actuarial and Settlement Losses
 
Certain Overhead Costs
 
Tax Adjustment
 
Pro Forma Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
10,278

 
$
—

 
$
—

 
$
—

 
$
(150
)
 
$
—

 
$
—

 
$
10,128

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,370

 
—

 
(156
)
 
—

 
(48
)
 
(88
)
 
—

 
$
1,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income, before income taxes
 
(553
)
 
432

 
156

 
233

 
198

 
88

 
—

 
554

Income tax (benefit) expense
 
(149
)
 
—

 
—

 
—

 
—

 
—

 
302

 
153

Net (loss) income
 
(404
)
 
432

 
156

 
233

 
198

 
88

 
(302
)
 
401

Less: net income attributable to non-controlling interest, net of tax
 
9

 
—

 
—

 
 
 
—

 
—

 
—

 
9

Net (loss) income attributable to DXC common stockholders
 
$
(413
)
 
$
432

 
$
156

 
$
233

 
$
198

 
$
88

 
$
(302
)
 
$
392

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
26.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
27.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
$
(1.46
)
 
$
1.53

 
$
0.55

 
$
0.82

 
$
0.70

 
$
0.31

 
$
(1.07
)
 
$
1.38

Diluted EPS
 
$
(1.46
)
 
$
1.51

 
$
0.54

 
$
0.81

 
$
0.69

 
$
0.31

 
$
(1.05
)
 
$
1.37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

 
283.16

Diluted EPS
 
283.16

 
286.54

 
286.54

 
286.54

 
286.54

 
286.54

 
286.54

 
286.54



Reconciliation of adjusted EBIT and pro forma adjusted EBIT to net income (loss) and pro forma net income (loss):
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
Pro Forma September 30, 2016
 
September 30, 2017
 
Pro Forma September 30, 2016
Net income (loss)
 
$
265

 
$
(123
)
 
$
438

 
$
(404
)
Income tax expense (benefit)
 
122

 
(108
)
 
134

 
(149
)
Interest income
 
(16
)
 
(20
)
 
(32
)
 
(41
)
Interest expense
 
78

 
89

 
154

 
177

EBIT
 
449

 
(162
)
 
694

 
(417
)
Restructuring
 
192

 
301

 
382

 
432

Transaction and integration-related costs
 
66

 
70

 
190

 
156

Amortization of intangible assets
 
169

 
120

 
289

 
233

Pension and OPEB actuarial and settlement losses
 
—

 
—

 
—

 
198

Certain overhead costs
 
—

 
51

 
—

 
88

Adjusted EBIT
 
$
876

 
$
380

 
$
1,555

 
$
690



61

Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of September 30, 2017 , our cash and cash equivalents were $2.7 billion , of which $1.4 billion was held outside of the U.S. A substantial portion of funds can be returned to the U.S. from funds advanced previously to finance our foreign acquisition initiatives. If additional funds held outside the U.S. are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, for certain subsidiaries, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these funds for our U.S. operations.

Cash and cash equivalents ("cash") increased $1.4 billion during the first six months of fiscal 2018 to $2.7 billion , primarily due to the Merger. The following table summarizes our cash flow activity:
 
 
Six Months Ended
 
 
(in millions)
 
September 30, 2017
 
September 30, 2016
 
Change
Net cash provided by operating activities
 
$
1,543

 
$
242

 
$
1,301

Net cash (used in) provided by investing activities
 
437

 
(721
)
 
1,158

Net cash (used in) provided by financing activities
 
(621
)
 
376

 
(997
)
Effect of exchange rate changes on cash and cash equivalents
 
49

 
(21
)
 
70

Net increase (decrease) in cash and cash equivalents
 
$
1,408

 
$
(124
)
 
$
1,532

Cash and cash equivalents at beginning-of-year
 
1,263

 
1,178

 
 
Cash and cash equivalents at the end-of-period
 
$
2,671

 
$
1,054

 
 

Net cash provided by operating activities during the six months ended September 30, 2017 was $1,543 million as compared to $242 million during the comparable period of the prior fiscal year. The increase of $1,301 million was predominately due to an increase in net income of $437 million , additional depreciation expense of $565 million and an increase in working capital movements of $347 million . The cash provided by operating activities during the first six months of fiscal 2018 included a reduction in unrealized foreign currency exchange loss of $86 million , comprised of a $4 million loss in fiscal 2018 compared to a $90 million loss in fiscal 2017.

Net cash provided by investing activities during the six months ended September 30, 2017 was $437 million as compared to net cash used by investing activities of $721 million during the comparable period of the prior fiscal year. The increase of $1,158 million was predominately due to cash provided by acquisitions of $822 million , compared to net cash paid for acquisitions of $434 million in the comparable period of the prior fiscal year. The increase in cash provided by acquisitions is offset by additional cash payments for outsourcing contract costs of $127 million .

Net cash used in financing activities during the six months ended September 30, 2017 was $621 million as compared to net cash provided by financing activities of $376 million during the comparable period of the prior fiscal year. The decrease in cash from financing activities of $997 million was primarily due to a decrease in credit facility draws, net of repayments of $726 million , additional payments on capitalized lease obligations of $348 million and additional payments on long-term debt obligations of $1,016 million . These cash outflows were offset by draws on long-term debt of $508 million and cash proceeds from bond issuance of $647 million .

62


Capital Resources

See Note 18 - " Commitments and Contingencies " to the financial statements for discussion of general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."
 
 
As of
(in millions)
 
September 30, 2017
 
March 31, 2017
Short-term debt and current maturities of long-term debt
 
$
2,200

 
$
738

Long-term debt, net of current maturities
 
6,325

 
2,225

Total debt
 
$
8,525

 
$
2,963


The $5.6 billion increase in total debt during the six months ended September 30, 2017 was attributed primarily to debt assumed in the Merger.

During the six months ended September 30, 2017 we increased commitments under our revolving credit facility to approximately $3.8 billion from $3.0 billion pre-Merger and completed a senior bond offering in an aggregate principal amount of $650 million due 2021 , the proceeds of which were used to retire the outstanding USD term loan due 2021. During the six months ended September 30, 2017, DXC entered into an unsecured €400 million term loan agreement maturing in 2018 and entered into amendments to its existing AUD term loan to increase total borrowings to AUD $275 million . The proceeds from these borrowings were used to pay down term loans maturing in 2022 and to repay drawn revolving credit facilities.

We were in compliance with all financial covenants associated with our borrowings as of September 30, 2017 and September 30, 2016 . For more information on our debt, see Note 10 - " Debt " to the financial statements.

The following table summarizes our capitalization ratios:
 
 
As of
(in millions)
 
September 30, 2017
 
March 31, 2017
Total debt
 
$
8,525

 
$
2,963

Cash and cash equivalents
 
2,671

 
1,263

Net debt (1)
 
$
5,854

 
$
1,700

 
 
 
 
 
Total debt
 
$
8,525

 
$
2,963

Equity
 
12,507

 
2,166

Total capitalization
 
$
21,032

 
$
5,129

 
 
 
 
 
Debt-to-total capitalization
 
41
%
 
58
%
Net debt-to-total capitalization (1)
 
28
%
 
33
%
        

(1) Net debt and Net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone.

The decrease in net debt-to-total capitalization was primarily due to a $4.2 billion  increase in net debt and a $10.3 billion increase in equity, which were primarily a result of the Merger.


63

As of September 30, 2017, our credit ratings were as follows:
Rating Agency
 
Rating
 
Outlook
 
Short Term Ratings
Fitch
 
BBB+
 
Stable
 
F-2
Moody's
 
Baa2
 
Stable
 
P-2
S&P
 
BBB
 
Negative
 
A-2

Liquidity

We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet normal operating requirements for the next 12 months. We expect to continue to use cash generated by operations as a primary source of liquidity; however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to draw on our multi-currency revolving credit facility or raise capital through the issuance of capital market debt instruments such as commercial paper, term loans, and bonds. However, there can be no guarantee that we will be able to obtain debt financing on acceptable terms in the future.

Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.

The following table summarizes our total liquidity:
 
 
As of
(in millions)
 
September 30, 2017
Cash and cash equivalents
 
$
2,671

Available borrowings under our revolving credit facility
 
3,425

Available borrowings under our lease credit facility
 
62

Total liquidity  
 
$
6,158


Share Repurchases

During the first three months of fiscal 2018, our Board of Directors authorized the repurchase of up to  $2.0 billion  of our common stock. This program became effective on April 3, 2017 and no end date was established.  During the six months ended September 30, 2017, we repurchased 841,505 shares of our common stock, at an aggregate cost of  $66 million .

Dividends

During the first three months of fiscal 2018, we announced a dividend policy targeting $0.18 per share beginning with our declaration date in June 2017 for the first quarter of fiscal 2018, and $0.72 per share for full year fiscal 2018, subject to customary board review and approval prior to declaration. During the six months ended September 30, 2017, we declared cash dividends to our stockholders of  $0.36  per share, or approximately $105 million  in the aggregate. 

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to arrangements that include guarantees, the receivables securitization facility, receivables sales arrangements and financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheets. There have been no material changes to our off-balance sheet arrangements reported under Part II, Item 7 of CSC's Annual Report on Form 10-K other than as disclosed below and in our guarantees detail which has been updated in Note 5 - " Sale of Receivables ," and Note 18 - " Commitments and Contingencies " to the financial statements in this Quarterly Report on Form 10-Q.

64


Supply Chain Finance

We are occasionally asked by our clients to participate in Supply Chain Finance ("SCF") or "reverse-factoring" programs where the client encourages us to assign and sell our receivables due from the client to a bank or banks of the client's choice. Such receivables sales are conducted under a true-sale arrangement where in exchange for assignment of the client receivables claim, we receive cash on an expedited basis. We may participate in such SCF programs based upon our assessment of financial terms, credit risk, liquidity risk, and other policy parameters. These SCF programs are an additional component of our working capital management strategy that can help us maintain diversity of liquidity sources among a variety of receivables securitization and monetization strategies. Our participation in SCF programs may increase as these forms of supply chain finance become more prevalent. During the six months ended September 30, 2017, the Company sold and collected $178 million of receivables under SCF programs.

Contractual Obligations

DXC's contractual obligations have materially changed since April 1, 2017, as a result of the Merger. Significant increases in debt included $1.8 billion in senior notes and $2.0 billion in term loans, see Note 10 - " Debt " for further information.

The increases in capital lease obligations, future minimum operating lease liabilities and purchase obligations primarily increased from March 31, 2017 to September 30, 2017 as a result of the Merger. The following table summarizes our contractual obligations as of September 30, 2017 :
(in millions)
 
Less than
1 year
 
2-3 years
 
4-5 years
 
More than
5 years
 
Total
Debt (1)
 
$
104

 
$
1,204

 
$
2,208

 
$
2,238

 
$
5,754

Capitalized lease liabilities
 
384

 
900

 
91

 
4

 
1,379

Operating leases
 
371

 
1,058

 
401

 
698

 
2,528

Purchase obligations (2)
 
1,454

 
4,275

 
804

 
448

 
6,981

Interest and preferred dividend payments (3)
 
197

 
361

 
276

 
402

 
1,236

Totals (4)
 
$
2,510

 
$
7,798

 
$
3,780

 
$
3,790

 
$
17,878

        

(1) Amounts represent scheduled principal cash payments of long-term debt and mandatory redemption of preferred stock of a consolidated subsidiary.
(2) Includes long-term purchase agreements with certain software, hardware, telecommunication and other service providers and exclude agreements that are cancelable without penalty. If we do not meet the specified service minimums, we may have an obligation to pay the service provider a portion of or the entire shortfall. Purchase obligations assumed from HPES will reflect a significant increase as a result of newly executed contracts.
(3) Amounts represent scheduled interest payments on long-term debt and scheduled dividend payments associated with the mandatorily redeemable preferred stock outstanding excluding contingent dividends associated with the participation and variable appreciation premium features.
(4) We have excluded the estimated future benefit payments under our Pension and OPEB plans and the estimated liability related to unrecognized tax benefits from this table because they have not materially changed since March 31, 2017 other than as a result of the Merger. For changes due to the Merger, see Note 3 - " Acquisitions ".

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider the following policies to be critical because of their complexity and the high degree of judgment involved in implementing them: revenue recognition, income taxes, business combinations, defined benefit plans and valuation of assets. We have discussed the selection of our critical accounting policies and the effect of estimates with the audit committee of our board of directors.


65

Revenue Recognition

Most of our revenues are recognized based on objective criteria and do not require significant estimates that may change over time. However, some arrangements are subject to specific accounting guidance that may require significant estimates, including contracts subject to percentage-of-completion accounting or include multiple-element deliverables.

Percentage-of-completion method

Certain software development projects and all long-term construction-type contracts require the use of estimates of completion in the application of the percentage-of-completion accounting method, whereby the determination of revenues and costs on a contract through its completion can require significant judgment and estimation. Under this method, and subject to the effects of changes in estimates, we recognize revenues using an estimated margin at completion as contract milestones or other input or output-based measures are achieved. This can result in costs being deferred as work in process until contractual billing milestones are achieved. Alternatively, this can result in revenues recognized in advance of billing milestones if output-based or input-based measures are achieved. Contracts that require estimates at completion using the percentage-of-completion method accounted for approximately 2% of our revenues.

The percentage-of-completion method requires estimates of revenues, costs and profits over the entire term of the contract, including estimates of resources and costs necessary to complete performance. The cost estimation process is based upon the professional knowledge and experience of our software and systems engineers, program managers, and financial professionals. We follow this method because reasonably dependable estimates of the revenues and costs applicable to various elements of a contract can be made; however, some estimates are particularly difficult for activities involving state-of-the-art technologies such as system development projects. Key factors that are considered in estimating the work to be completed and ultimate contract profitability include the availability and productivity of labor, the nature and complexity of the work to be performed, results of testing procedures and progress toward completion. Management regularly reviews project profitability and the underlying estimates. A significant change in an estimate on one or more contracts could have a material effect on our results of operations. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become evident.

We periodically negotiate modifications to the scope, schedule, and price of contracts accounted for on a percentage-of-completion basis. Accounting for such changes prior to formal contract modification requires evaluation of the characteristics and circumstances of the effort completed and assessment of probability of recovery. If recovery is deemed probable, we may, as appropriate, either defer the costs until the parties have agreed on the contract change or recognize the costs and related revenues as current period contract performance.

Multiple-element arrangements

Many of our contracts require us to provide a range of services or elements to our customers, which may include a combination of services, products or both. As a result, significant judgment may be required to determine the appropriate accounting, including whether the elements specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, when considered appropriate, how the total revenues should be allocated among the elements and the timing of revenue recognition for each element. If vendor specific objective evidence is not available, allocation of total contract consideration to each element requires estimating the fair value or selling price of each element based on third party evidence or management's best estimate of selling price for the deliverables when third party evidence ("TPE") is not available. TPE is established by considering our competitors' prices for comparable product and service offerings in the market in which we operate. When we conclude that comparable products or services are sold by competitors to similarly situated customers, we consult available information sources such as published list prices, quoted market prices, and industry reports to estimate TPE. We establish a best estimate of selling price consistent with our existing pricing practices involving a cost-plus-reasonable-margin methodology as well as comparison of the margins to those realized on recent contracts for similar products or services in that market. Once the total revenues have been allocated to the various contract elements, revenues for each element are recognized based on the relevant revenue recognition method for the services performed or elements delivered if the revenue recognition criteria have been met. Estimates of total revenues at contract inception often differ materially from actual revenues due to volume differences, changes in technology or other factors which may not be foreseen at inception.


66

Income Taxes

We are subject to income taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, analyzing our income tax reserves, the determination of the likelihood of recoverability of deferred tax assets and adjustment of valuation allowances accordingly. In addition, our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. For example, we are currently undergoing an IRS audit for fiscal 2011 through 2013 U.S. Federal tax returns.

As a global enterprise, our ETR is affected by many factors, including our global mix of earnings among countries with differing statutory tax rates, the extent to which our non-U.S. earnings are indefinitely reinvested outside the U.S, changes in the valuation allowance for deferred tax assets, changes in tax regulations, acquisitions, dispositions, and the tax characteristics of our income. We cannot predict what our ETR will be in the future because there is uncertainty regarding these factors.

As part of HPES acquisition accounting, we have recorded an estimated liability of $570 million for U.S. income taxes or additional non-U.S. taxes on the cumulative historical taxable earnings of non-U.S. HPES subsidiaries and an estimated liability of $67 million for India dividend distribution tax. With regard to non-U.S. earnings indefinitely reinvested outside the United States, we use the lower undistributed tax rate to measure deferred taxes on inside basis differences, including undistributed earnings, of our historical India operations as these earnings are permanently reinvested. If we change our intent and distribute such earnings either in the form of a dividend or a share buyback, higher dividend distribution tax or share buyback tax will be incurred as a result of additional legislation effective in May 2015 related to the India Finance Act of 2013 that increased the share buyback tax rate to 23.07% and increased the dividend distribution tax rate to 20.36%, among other changes.

Considerations impacting the recoverability of deferred tax assets include the period of expiration of the deferred tax asset and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the deferred tax asset relates. In determining whether the deferred tax assets are realizable, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies, and recent financial operations. We recorded a valuation allowance against deferred tax assets of approximately $1.1 billion as of March 31, 2017 due to uncertainties related to the ability to utilize these assets. However, valuation allowances are subject to change in future reporting periods due to changes in various factors.

Changes in tax laws, such as tax reform in the United States or changes in tax laws resulting from the Organization for Economic Co-operation and Development’s multi-jurisdictional plan of action to address “base erosion and profit shifting” could impact our effective tax rate. The calculation of our tax liabilities involves uncertainties in the application of complex tax regulations. For example, we have favorable positions related to the research & development tax credit, bonus depreciation, and the look-through rules related to Subpart F income that has historically been subject to annual extension, resulting in uncertainty in estimating future income tax results. In 2015, Congress enacted the Protecting Americans from Tax Hikes Act, which made several of these provisions permanent, or extended them for multiple years, which improved our ability to forecast income tax in future years.

The Finance Act of 2012 (the "2012 Finance Act") was signed into law in India on May 28, 2012. The 2012 Finance Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized and challenged in the Indian courts; however, there is no assurance that such a challenge will be successful. We have engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations involving Indian companies. The Indian tax authorities may seek to apply the provisions of the 2012 Finance Act to these prior transactions and seek to tax us directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. We believe that the 2012 Finance Act does not apply to these prior acquisitions and that we have strong defenses against any claims that might be raised by the Indian tax authorities.


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The UK Finance Bill 2017-19 ("U.K. Finance Act"), which is expected to be enacted by the end of 2017, brings back measures deferred from the UK Finance Act 2017. The legislation is expected to impose restrictions on the utilization of prior period losses against current period profits, limitations on interest deductions and changes to anti-hybrid rules. As the legislation has not yet been enacted, we have not yet at this stage determined the impact of the U.K. Finance Act on our future financial results in the United Kingdom. When fully enacted, the provisions of the U.K. Finance Act are expected to take effect from April 1, 2017.


Business Combinations

We account for the acquisition of a business using the acquisition method of accounting, which requires us to estimate the fair values of the assets acquired and liabilities assumed. This includes acquired intangible assets such as customer-related intangibles, the liabilities assumed, and contingent consideration, if any. Liabilities assumed may include litigation and other contingency reserves existing at the time of acquisition and require judgment in ascertaining the related fair values. Independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities. Such appraisals are based on significant estimates provided by us, such as forecasted revenues or profits utilized in determining the fair value of contract-related acquired intangible assets or liabilities. Significant changes in assumptions and estimates subsequent to completing the allocation of the purchase price to the assets and liabilities acquired, as well as differences in actual and estimated results, could result in material impacts to our financial results. Adjustments to the fair value of contingent consideration are recorded in earnings. Additional information related to the acquisition date fair value of acquired assets and liabilities obtained during the allocation period, not to exceed one year, may result in changes to the recorded values of acquired assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.

Defined Benefit Plans
 
The computation of our pension and other post-retirement benefit costs and obligations is dependent on various assumptions. Inherent in the application of the actuarial methods are key assumptions, including discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases, and medical cost trend rates. Our management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on observable inputs for similar assets or on significant unobservable inputs if not available.

Two of the most significant assumptions are the expected long-term rate of return on plan assets and the discount rate. The assumption for the expected long-term rate of return on plan assets is impacted by the expected asset mix of the plan, judgments regarding the correlation between historical excess returns and future excess returns, and expected investment expenses. The discount rate assumption is based on current market rates for high-quality, fixed income debt instruments with maturities similar to the expected duration of the benefit payment period.

Valuation of Assets

We review long-lived assets, intangible assets, and goodwill for impairment in accordance with our accounting policy disclosed in Note 1 of CSC's Annual Report on Form10-K for the period ending March 31, 2017. Assessing the fair value of assets involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows, and discount rates reflecting the risk inherent in projecting future cash flows. The valuation of long-lived and intangible assets involves management estimates about future values and remaining useful lives of assets, particularly purchased intangible assets. These estimates are subjective and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and forecasts.

Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities, and goodwill to reporting units and determination of the fair value of each reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions include a significant change in the business climate, established business plans, operating performance indicators or competition which could materially affect the determination of fair value for each reporting unit.

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We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. The discount rate used in an income approach is based on our weighted-average cost of capital and may be adjusted for the relevant risks associated with business-specific characteristics and any uncertainty related to a reporting unit's ability to execute on the projected future cash flows.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a multinational company, we are exposed to certain market risks such as changes in interest rates and foreign currency exchange rates. Changes in benchmark interest rates can impact Interest expense associated with our floating interest rate debt and the fair value of our fixed interest rate debt, whereas changes in foreign currency exchange rates can impact our foreign currency denominated monetary assets and liabilities and forecasted transactions in foreign currency. A variety of practices are employed to manage these risks, including operating and financing activities and the use of derivative instruments. We do not use derivatives tor trading or speculative purposes.

Presented below is a description of our risks together with a sensitivity analysis, performed annually, of each of these risks based on selected changes in market rates. In order to determine the impact of changes in interest rates on our future results of operations and cash flows, we calculated the increase or decrease in the index underlying these rates. We estimate the fair value of our long-term debt primarily using an expected present value technique using interest rates offered to us for instruments with similar terms and remaining maturities. The foreign currency model incorporates the impact of diversification from holding multiple currencies and the correlation of revenues, costs, and any related short-term contract financing in the same currency. These analyses reflect management's view of changes that are reasonably possible to occur over a one-year period. Our market risk exposures relative to interest rates and currency rates, as discussed below, have not changed materially as compared to prior fiscal year due to the Merger.

Interest Rate Risk

As of September 30, 2017 , we had outstanding debt with varying maturities for an aggregate carrying amount of $8.5 billion , of which $4.4 billion was floating rate debt. Most of our variable interest rate debt is based upon varying terms of adjusted LIBOR rates; consequently, changes in LIBOR result in the most volatility to our Interest expense. Pursuant to our interest rate and risk management strategy we had a series of interest rate swap agreements with a total notional amount of  $623 million . These instruments hedged the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted $623 million of our floating interest rate debt into fixed interest rate debt. As of September 30, 2017 , an assumed 10% unfavorable change in interest rates would not be material to our condensed consolidated results of operations or cash flows. A change in interest rates related to our long-term debt would not have had a material impact on our financial statements as we do not record our debt at fair value.

Foreign Currency Risk

We are exposed to both favorable and unfavorable movements in foreign currency exchange rates. In the ordinary course of business, we enter into certain contracts denominated in foreign currencies. Exposure to fluctuations in foreign currency exchange rates arising from these contracts is analyzed during the contract bidding process. We generally manage these contracts by incurring costs in the same currency in which revenues are received and any related short-term contract financing requirements are met by borrowing in the same currency. Thus, by generally matching revenues, costs, and borrowings to the same currency, we are able to mitigate a portion of the foreign currency risk to earnings. However, due to our increased use of offshore labor centers, we have become more exposed to fluctuations in foreign currency exchange rates. We experienced significant foreign currency fluctuations during the three and six months ended September 30, 2017 due primarily to the volatility of the Euro in relation to the U.S. dollar.
   
We have policies and procedures to manage exposure to fluctuations in foreign currency by using short-term foreign currency forward contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. For accounting purposes, these foreign currency forward contracts are not designated as hedges and changes in their fair value are reported in current period earnings within Other (income) expense, net in

69

the condensed consolidated statements of operations. We also use foreign currency forward contracts to reduce foreign currency exchange rate risk related to certain Indian rupee denominated intercompany obligations and forecasted transactions. For accounting purposes these foreign currency forward contracts are designated as cash flow hedges with critical terms that match the hedged items; therefore, the changes in fair value of these forward contracts are recorded in Accumulated other comprehensive income, net of taxes in the condensed consolidated statements of comprehensive income and subsequently classified into Net income in the period during which the hedged transactions are recognized in Net income. During fiscal 2018, approximately 56% of our revenues were generated outside of the United States. An unfavorable 10% change in the value of the U.S. dollar against all currencies would have changed revenues by approximately 6% , or $673 million . The majority of this fluctuation would be offset by expenses incurred in local currency and as a result, there would not be a material change to our Income before income taxes. As such, in the view of management, the resulting impact would not be material to our condensed consolidated results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this report to ensure that information required to be disclosed by us in the SEC reports (i) is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that DXC's disclosure controls and procedures were effective as of the end of the period covered by this report and that our condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

Changes in Internal Control Over Financial Reporting

As previously disclosed in Item 4 of our Quarterly Report on Form 10-Q for the three-month period ended June 30, 2017, and continuing during the three months ended September 30, 2017, we implemented a new consolidation and reporting system which consolidates the results of all our subsidiaries including the entities acquired in the Merger. We have modified, and will continue to monitor and evaluate, our internal controls relating to our consolidation and reporting processes throughout the system implementation, which is expected to progress through the end of the third quarter of fiscal 2018. While our management believes that this new system and the related changes to internal controls will ultimately strengthen our internal controls over financial reporting, there are inherent risks in implementing any new software system and we will continue to evaluate and test control changes in order to certify in Management's Annual Report on Internal Control over Financial Reporting as of our fiscal year ending March 31, 2018 on the effectiveness, in all material respects, of our internal controls over financial reporting.

As previously disclosed in Item 4 of our Quarterly Report on Form 10-Q for the three-month period ended June 30, 2017, on April 1, 2017, we completed the strategic combination of CSC with HPES to form DXC, see Note 3 - "Acquisitions" for further information. DXC common stock began regular-way trading under the symbol "DXC" on the New York Stock Exchange on April 3, 2017.  As part of our ongoing integration activities, we continue to evaluate our internal controls and procedures to the acquired business and to adjust and augment our company-wide controls and our integration controls to reflect the risks inherent in an acquisition of this magnitude. Otherwise, there were no changes in our internal control over financial reporting during the three and six months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II


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ITEM 1. LEGAL PROCEEDINGS

See Note 18 - " Commitments and Contingencies " to the financial statements under the caption “Contingencies” for information regarding legal proceedings in which we are involved.

Item 1A.
RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including the risks discussed in Part II, Item 1A-Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, which could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. Past performance may not be a reliable indicator of future financial performance and historical trends should not be used to anticipate results or trends in future periods. Future performance and historical trends may be adversely affected by the aforementioned risks, the additional risks listed below, as well as other variables and should not be relied upon to project future period results.

Risks Related to the Proposed USPS Separation and Mergers (defined below)

The proposed USPS Separation and Mergers are contingent upon the satisfaction of a number of conditions, and the USPS Separation and Mergers may not be consummated on the terms or timeline currently contemplated.

On October 11, 2017, our board of directors unanimously approved a plan to combine our USPS business with Vencore Holding Corporation (“Vencore”) and KGS Holding Corporation (“KeyPoint”) to form a separate, independent publicly traded company to serve U.S. public sector clients (the “USPS Separation and Mergers”). We currently expect that the USPS Separation and Mergers, if completed, will occur by the end of March 2018.

As previously announced, aspects of the proposed USPS Separation and Mergers are expected to include: (1) the transfer by DXC of certain subsidiary entities holding our USPS business to Ultra SC Inc. (“Ultra SpinCo”) (the “USPS Reorganization”); (2) the receipt by DXC of $1.05 billion in consideration from Ultra SpinCo via a cash distribution and/or issuance of Ultra SpinCo debt securities (the “Distribution Consideration”) as part of the USPS Reorganization; (3) the distribution by DXC to its stockholders of all of the issued and outstanding shares of common stock, par value $0.01 per share, of Ultra SpinCo by way of a pro rata dividend (the “Distribution,” and together with the USPS Reorganization, the “USPS Separation”); and (4) the acquisition of Vencore and KeyPoint by Ultra SpinCo in exchange for Ultra SpinCo common shares and approximately $400 million of cash merger consideration (the “Mergers”). Upon consummation of the USPS Separation and Mergers, DXC shareholders are expected to own approximately 86 percent of the combined company’s common shares, and funds managed by Veritas Capital and its affiliates are expected to own approximately 14% of the combined company’s common shares.

The terms and conditions of the USPS Separation and Mergers are as set forth in an Agreement and Plan of Merger dated as of October 11, 2017 by and among DXC, Ultra SpinCo, Ultra First VMS Inc., Ultra Second VMS LLC, Ultra KMS Inc., Vencore, KeyPoint, The SI Organization Holdings LLC and KGS Holding LLC (the “Merger Agreement”) and, further to the Merger Agreement, other separation agreements to be entered into by and between DXC and Ultra SpinCo prior to completion of the USPS Separation and Mergers (the “Separation Agreements”).

The consummation of the Mergers is subject to certain conditions, including (i) the completion of the USPS Reorganization, the payment of the Distribution Consideration, and the completion of the Distribution, (ii) the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the effectiveness of the registration statement to be filed with the Securities and Exchange Commission and the approval for listing on the New York Stock Exchange or the NASDAQ Global Market of the shares of Ultra SpinCo common stock to be issued in the Distribution, (iv) the accuracy of the parties’ representations and warranties and the performance of their respective covenants contained in the Merger Agreement, and (v) our receipt of an opinion of tax counsel to the effect that the USPS Separation should qualify as a tax-free transaction for U.S. federal income tax purposes. For these and other reasons, the USPS

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Separation and Mergers may not be completed by the end of March 2018 or otherwise on the terms or timeline contemplated, if at all.

T he proposed USPS Separation and Mergers may result in disruptions to relationships with customers and other business partners or may not achieve the intended results.

If we complete the proposed USPS Separation and Mergers, there can be no assurance that we will be able to realize the intended benefits of the transactions or that the combined company will perform as anticipated. Specifically, the proposed transactions could cause disruptions in our remaining businesses, the USPS business and the Vencore and KeyPoint businesses, including by disrupting operations or causing customers to delay or to defer decisions or to end their relationships, or otherwise limiting the ability to compete for or perform certain contracts or services or other potential effects relating to organizational conflict of interest (“OCI”) issues, including action to mitigate or avoid OCIs or lost business opportunity. If the USPS business and the Vencore and KeyPoint businesses face difficulties in integrating their businesses, or the Vencore and KeyPoint businesses face difficulties in their businesses generally, the USPS Separation and Mergers, if completed, may not achieve the intended results.

Further, it is possible that current or prospective employees of the USPS business or the Vencore and KeyPoint businesses could experience uncertainty about their future roles with the combined company, which could harm the ability of the USPS business or the Vencore and KeyPoint businesses to attract and retain key personnel. Any of the foregoing could adversely affect our remaining businesses, the USPS business or the Vencore and KeyPoint businesses, the financial condition of such businesses and their results of operations and prospects.

The actions required to implement the USPS Separation and Mergers will take significant management time and attention and may require us to incur significant costs.

The USPS Separation and Mergers will require significant amounts of management's time and resources, which will be in addition to and may divert management's time and attention from the operation of our remaining businesses and the execution of our other strategic initiatives. Additionally, we may incur significant costs in connection with the USPS Separation and Mergers. These costs must be paid regardless of whether the USPS Separation and Mergers are consummated. The Merger Agreement contains certain termination rights for DXC, Vencore and KeyPoint. The Merger Agreement further provides that, if the Distribution is not completed in accordance with the terms and conditions of the Separation Agreements on or before October 1, 2018, a termination fee of $50,000,000 may be payable by DXC to Vencore and KeyPoint upon termination of the Merger Agreement under specified circumstances.

The proposed USPS Separation and Mergers could result in substantial tax liability to DXC and our stockholders.

Among the conditions to completing the USPS Separation and Mergers will be our receipt of a legal opinion of tax counsel substantially to the effect that, for U.S. federal income tax purposes: (i) the USPS Separation should qualify as a “reorganization” within the meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) each of DXC and Ultra SpinCo should be a “party to a reorganization” within the meaning of Section 368(b) of the Code with respect to the USPS Separation; (iii) the Distribution should qualify as (1) a tax-free spin-off, resulting in nonrecognition under Sections 355(a), 361 and 368(a) of the Code, and (2) a transaction in which the stock distributed thereby should constitute “qualified property” for purposes of Sections 355(d), 355(e) and 361(c) of the Code; and (iv) none of the Mergers should cause Section 355(e) of the Code to apply to the Distribution.

The opinion of counsel we receive will be based on, among other things, various factual representations and assumptions, as well as certain undertakings made by DXC and Ultra SpinCo. If any of those representations or assumptions is untrue or incomplete in any material respect or any of those undertakings is not complied with, the conclusions reached in the opinion could be adversely affected and the USPS Separation may not qualify for tax-free treatment. Furthermore, an opinion of counsel is not binding on the Internal Revenue Service (“IRS”) or the courts. Accordingly, no assurance can be given that the IRS will not challenge the conclusions set forth in the

72

opinion or that a court would not sustain such a challenge. If, notwithstanding our receipt of the opinion, the USPS Separation is determined to be taxable, we would recognize taxable gain as if we had sold the shares of Ultra SpinCo in a taxable sale for its fair market value, which could result in a substantial tax liability. In addition, if the USPS Separation is determined to be taxable, each holder of our common stock who receives shares of Ultra SpinCo would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares received, which could materially increase such holder’s tax liability.

Even if the USPS Separation otherwise qualifies as a tax-free transaction, the Distribution could be taxable to us (but not to our shareholders) in certain circumstances if future significant acquisitions of our stock or the stock of Ultra SpinCo are deemed to be part of a plan or series of related transactions that includes the Distribution. In this event, the resulting tax liability could be substantial. In connection with the USPS Separation, we expect to enter into a tax matters agreement with Ultra SpinCo, under which it will agree not to undertake any transaction without our consent that could reasonably be expected to cause the USPS Separation to be taxable to us and to indemnify us for any tax liabilities resulting from such transactions. These obligations and potential tax liabilities could be substantial.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities
    
None during the period covered by this report.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

The following table provides information on a monthly basis for the quarter ended September 30, 2017 with respect to the Company’s purchase of equity securities:

Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs
 
Approximate
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or Programs
July 1, 2017 to July 31, 2017
 
441,505

 
$78.05
 
441,505
 
$1,946,193,961
August 1, 2017 to August 31, 2017
 
150,000

 
$78.65
 
150,000
 
$1,934,396,361
September 1, 2017 to September 30, 2017
 
—

 
$—
 
—
 
$1,934,396,361
    
On April 3, 2017, DXC announced the establishment of a share repurchase plan approved by the Board of Directors with an initial authorization of $2.0 billion for future repurchases of outstanding shares of DXC common stock. An expiration date has not been established for this repurchase plan. Share repurchases may be made from time to time through various means, including in open market purchases, 10b5-1 plans, privately-negotiated transactions, accelerated stock repurchases, block trades and other transactions, in compliance with Rule 10b-18 under the Exchange Act as well as, to the extent applicable, other federal and state securities laws and other legal requirements. The timing, volume, and nature of share repurchases pursuant to the share repurchase plan are at the discretion of management and may be suspended or discontinued at any time.


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ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
Number
Description of Exhibit
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14

3.1
3.2

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4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

4.9
10.1
10.2
10.3
10.4*
31.1
31.2
32.1**
32.2**
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
 
 
* Management contract or compensatory plan or agreement
** Furnished, not filed

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
DXC TECHNOLOGY COMPANY
 
 
 
 
Dated:
November 7, 2017
By:
/s/ Neil A. Manna
 
 
Name:
Neil A. Manna
 
 
Title:
Senior Vice President, Corporate Controller Principal Accounting Officer
 


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AMENDMENT
TO THE DXC TECHNOLOGY COMPANY
DEFERRED COMPENSATION PLAN

This AMENDMENT to the DXC Technology Company Deferred Compensation Plan, effective as of April 1, 2017 (the “Plan”), shall be effective as of January 1, 2018.

W I T N E S S E T H:

WHEREAS, DXC Technology Company (the “Company”) maintains the Plan and has the power to amend the Plan and now wishes to do so;

NOW, THEREFORE, the Plan is hereby amended as follows:

1.
A new paragraph is hereby added to the end of the preamble to the Plan to read as follows:

“Effective January 1, 2018, the frozen Enterprise Services Executive Deferred Compensation Plan (the “ES Plan”) was merged into and became a part of the Plan. The terms of the ES Plan are incorporated herein as Part D of the Plan, which applies solely to deferrals made prior to January 1, 2018 by former ES Plan participants. As of January 1, 2018, former ES Plan participants who otherwise meet the Plan’s eligibility requirements will be eligible to make deferrals under the Plan pursuant to the provisions of Part C.”

2.
The last sentence of Section 17.6 of the Plan is hereby amended in its entirety to read as follows:

“Notwithstanding any ES Plan provisions to the contrary, the term “Eligible Key Executive” shall include former ES Plan participants who meet the foregoing requirements, but only with respect to periods beginning after December 31, 2017.”

3.
A new Part D is hereby added to the Plan to read as follows:

“ PART D

Part D of the Plan is applicable and effective with respect to deferrals made prior to January 1, 2018 by individuals who are former participants in the ES Plan. References herein to the ES Plan shall refer to the Plan for periods after December 31, 2017. The Administrative Provisions (Article XV) and Miscellaneous Provisions (Article XVI) of Part B shall apply to Part D after substituting the term “Part D” for any references in such Articles to “Part B” and after making appropriate adjustments to any section references.

ARTICLE XXIII




DEFINITIONS

Section 23.1      General
In addition to the terms defined in the preamble to the Plan, whenever the following terms are used in Part D of the Plan with the first letter capitalized, they shall have the meaning specified below unless the context clearly indicates to the contrary.
Section 23. 2      Account
“Account” means a bookkeeping account established by DXC for (i) each Participant electing to defer Eligible Income under the ES Plan, and (ii) each Rollover Participant.
Section 23. 3      Actual Pay
“Actual Pay” means “Eligible Compensation” as defined in the DXC Technology Matched Asset Plan, as amended from time to time, without giving effect to the Code section 401(a)(17) limitation set forth in such definition and the exclusion of pay deferred under this ES Plan.
Section 23. 4      Affiliate
“Affiliate” means any corporation or other entity that is treated as a single employer with DXC under Code section 414.
Section 23. 5      Annual Rate of Pay
“Annual Rate of Pay” means the annual rate of pay, which is the sum of an employee’s base pay and targeted incentive amount, as reflected in the compensation data in DXC’s global database for human resources information, and as adjusted for such employee’s employment status, including part-time status.
Section 23. 6      Beneficiary
“Beneficiary” means the person or persons or trust designated by a Participant to receive any amounts payable under the ES Plan in the event of the Participant’s death. DXC has established procedures governing the form and manner in which a Participant may designate a Beneficiary. Only a Beneficiary designation submitted in accordance with such procedures and that is received by DXC before the death of the Participant shall be a valid Beneficiary designation. If there is no valid Beneficiary designation in effect upon the death of a Participant, any remaining Account balance shall be paid in the following order: (i) to that person’s spouse; (ii) if no spouse is living at the time of such payment, then to that person’s living children, in equal shares; (iii) if neither a spouse nor children are living, then to that person’s living parents, in equal shares; (iv) if neither




spouse, nor children, nor parents are living, then to that person’s living brothers and sisters, in equal shares; and (v) if none of the individuals described in (i) through (iv) are living, to that person’s estate. A person’s domestic partner shall be considered a person’s spouse for purposes of this paragraph. DXC shall determine a person’s status as a domestic partner in a uniform and nondiscriminatory manner.
Section 23. 7      Bonus Eligible Employee
“Bonus Eligible Employee” means an individual who is an Employee on November 1 preceding the Plan Year with respect to which deferrals are to be made (1) who satisfies both of the following conditions: (i) whose job position has a title of Director (or whose job function is, in the sole and absolute discretion of DXC, equivalent to a ‘Director’ position) and (ii) whose Annual Rate of Pay is equal to or greater than the dollar limit for highly compensated employees as defined in Section 414(q)(1)(B)(i) of the Code plus $30,000, or (2) whose job position has a title of Executive Vice President or above, irrespective of such Employee’s Annual Rate of Pay.
Section 23. 8      Code
“Code” means the Internal Revenue Code of 1986, as amended.
Section 23. 9      Code Section 401(a)(17) Limit
“Code Section 401(a)(17) Limit” means the amount specified under Code section 401(a)(17) in effect on January 1 of the Plan Year.
Section 23. 10      Committee or Plan Committee
“Committee” or “Plan Committee” means the Compensation Committee of DXC’s Board of Directors or its delegate.
Section 23. 11      Deferral Form
“Deferral Form” means a written or electronic form provided by DXC pursuant to which an Eligible Employee may elect to defer amounts under the ES Plan.
Section 23. 12      Director
“Director” means the title for an employee who has a job grade of DIR1 and above.
Section 23. 13      DXC
“DXC” means DXC Technology Company (f/k/a Everett SpinCo, Inc.) or any successor corporation or other entity.
Section 23. 14      Eligible Employee




“Eligible Employee” means an individual who is (i) a Bonus Eligible Employee, (ii) a Match Eligible Employee, (iii) an Employee whose Annual Rate of Pay, as of the first day of November preceding the Plan Year with respect to which the deferral is to be made, exceeds the Code Section 401(a)(17) Limit for the Plan Year in which the deferral is to be made, or (iv) a combination or all of the foregoing. An individual’s status as an Eligible Employee shall be determined by DXC in its sole discretion.
An Eligible Employee shall also include a Newly Hired Employee and a Late Year Newly Hired Employee.
Eligible Employees shall also include all Everett Employees who are Employees as of April 1, 2017, and had deferral elections in effect with respect to 2017 compensation under the Predecessor Plan.
Any contrary terms of the ES Plan notwithstanding, no individual shall become an Eligible Employee after April 1, 2017.
Section 23. 15      Eligible Income
“Eligible Income” means Actual Pay, Annual Retainer and Incentive Awards.
Section 23. 16      EMA
“EMA” means the Employee Matters Agreement entered into at or prior to the date of the “Distribution” by and between Hewlett Packard Enterprise Company, a Delaware Corporation, Everett SpinCo, Inc. and Computer Sciences Corporation. The “Distribution” means the pro rata distribution by Hewlett Packard Enterprise Company of its shares of Everett SpinCo’s common stock to the holders of shares of Hewlett Packard Enterprise Company common stock.
Section 23. 17      Employee
“Employee” means an individual who is a regular employee on the U.S. payroll of a Participating Employer, other than a temporary or intermittent employee. The term “Employee” shall not include a person hired as an independent contractor, leased employee, consultant, or a person otherwise designated by a Participating Employer as not eligible to participate in the ES Plan, even if such person is determined to be an “employee” of a Participating Employer by any governmental or judicial authority.
Section 23. 18      Employer Matching Contributions
“Employer Matching Contributions” means the matching contributions as defined in Section 26.1.
Section 23. 19      EPfR Plan
 




“EPfR Plan” means the DXC Executive Pay-for-Results Plan, as amended from time to time.
Section 23. 20      ERISA
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
Section 23. 21      Everett Employee
“Everett Employee” has the meaning given such term under the EMA.
Section 23. 22      Former Everett Employee
“Former Everett Employee” has the meaning given such term under the EMA.
Section 23. 23      Grandfathered Plan
“Grandfathered Plan” shall mean the Hewlett Packard Enterprise Grandfathered Executive Deferred Compensation Plan, which is attached hereto as Attachment A.
Section 23. 24      Incentive Award
“Incentive Award” means an amount payable to an Eligible Employee under a cash bonus or incentive compensation plan of DXC or a Participating Employer that the Committee has deemed eligible for deferral.
Section 23. 25      Investment Options
“Investment Options” means the investment options, as determined from time to time by DXC, used to credit earnings, gains and losses on Account balances.
Section 23. 26      Key Employee
“Key Employee” means an Employee who at Termination of Employment is treated as a “specified employee” under Code section 409A(a)(2)(B)(i), i.e., a key employee (as defined in Code section 416(i) without regard to paragraph (5) thereof) of a corporation the stock of which is publicly traded on an established securities market or otherwise. DXC shall determine which Employees will be deemed a Key Employee for purposes of this ES Plan during a Plan Year based on the twelve-month period ending on the September 30 prior to the Plan Year. Notwithstanding the foregoing, to the extent required in connection with the Spin-Off, the determination of which individuals will be deemed a Key Employee shall be made in a manner that complies with Treas. Reg. § 1.409A-1(i)(6).
Section 23. 27      Late Year Newly Hired Employee




“Late Year Newly Hired Employee” means an Employee (i) who is hired in November or December and (ii) who would have qualified as an Eligible Employee as of the November 1 preceding his date of hire based on his initial position and Annual Rate of Pay.
Section 23. 28      Match Eligible Employee
“Match Eligible Employee” means an Employee (i) who is eligible for a matching contribution under the DXC Technology Matched Asset Plan, and (ii) whose Annual Rate of Pay, as of the first day of November preceding the Plan Year with respect to which the deferral is to be made, exceeds the Code Section 401(a)(17) Limit for such Plan Year.
Section 23. 29      Newly Hired Employee
“Newly Hired Employee” means an Employee (i) who would have qualified as an Eligible Employee as of the November 1 preceding his date of hire based on his initial position and Annual Rate of Pay, and (ii) whose base salary payable in the year of hire is projected to exceed the Code section 401(a)(17) limit for such year; provided, however, that an individual who has previously worked for DXC or an Affiliate will only qualify as a “Newly Hired Employee” if he meets the requirements of Treas. Reg. § 1.409A-2(a)(7) or any successor thereto. Generally, a re-hired individual will meet these requirements if (1) he has been paid any and all amounts due him under the ES Plan (and any plans required to be aggregated with the ES Plan under Code section 409A) prior to re-hire, or (2) he has not been eligible to participate, other than the accrual of earnings, in the ES Plan (or any other plan required to be aggregated with the ES Plan under Code section 409A) for at least 24 months.
Section 23. 30      Participant
“Participant” means an Eligible Employee who elects or has elected to defer amounts under the ES Plan or any individual who has a benefit that is part of the Transferred Benefits.
Section 23. 31      Participating Employer
“Participating Employer” means such Affiliate companies as may be designated by DXC from time to time.
Section 23. 32      PfR Plan
 
“PfR Plan” means the DXC Pay-for-Results Short-Term Bonus Plan, as amended from time to time.

Section 23. 33      Plan




“Plan” means this DXC Technology Company Deferred Compensation Plan, as set forth herein and as amended from time to time.

Section 23. 34      Plan Year
“Plan Year” means January 1 through December 31.
Section 23. 35      Predecessor Plan
“Predecessor Plan” means the Hewlett Packard Enterprise Executive Deferred Compensation Plan and, as applicable, the Grandfathered Plan.
Section 23. 36      Retirement Date
“Retirement Date” means the date on which a Participant has completed at least 15 years of service, as measured from such Participant’s last hire date, and has attained age 55.
Section 23. 37      Rollover Participant
“Rollover Participant” means an individual with an Account in the ES Plan transferred from a Rollover Plan in accordance with the provisions of Article XXVIII. The term Rollover Participant may also refer to an individual who has previously been a Participant in the ES Plan, or an existing Participant at the time of transfer.
Section 23. 38      Rollover Plan
“Rollover Plan” means either (1) a nonqualified deferred compensation plan of a business entity acquired by DXC or an Affiliate through acquisition of a majority of the voting interest in, or substantially all of the assets of, such entity, or (2) any plan or program of DXC or an Affiliate pursuant to the termination of which an Account is established for a Participant or Rollover Participant.
Section 23. 37      Spin-Off
“Spin-Off” means the spin-off and sale of the Enterprise Services business pursuant to the Agreement and Plan of Merger entered into an on May 24, 2016, as subsequently amended November 2, 2016, by and between Computer Sciences Corporation, Everett Merger Sub Inc., Hewlett Packard Enterprise Company and Everett SpinCo, Inc.
Section 23. 38      Termination Date
“Termination Date” means the date on which the Participant experiences a “separation from service” as defined under Code section 409A.
Section 23. 39      Termination of Employment or Terminates Employment




“Termination of Employment” or “Terminates Employment” means a “separation from service” with DXC and its Affiliates as defined under Code section 409A.
Section 23. 40      VPB Plan
“VPB Plan” means the DXC Company Variable Performance Bonus Plan, as amended from time to time.

ARTICLE XXIV
PARTICIPATION
Participation in the ES Plan shall be limited to Eligible Employees. DXC shall notify any Employee of his status as an Eligible Employee at such time and in such manner as DXC shall determine. An Eligible Employee shall become a Participant by making a deferral election under Article XXV.
To the extent required under the EMA, the ES Plan shall assume liability for all benefits accrued or earned (whether or not vested) by Everett Employees or Former Everett Employees under a Predecessor Plan (the “Transferred Benefits”). With respect to the Transferred Benefits, the ES Plan shall recognize and maintain all investment and payment form elections in effect with respect to such Transferred Benefits under the Predecessor Plan immediately prior to April 1, 2017; provided, that DXC shall be able to
change the Investment Options under the ES Plan at any time, in its sole discretion. The distribution of Transferred Benefits for benefits accrued or earned under the Grandfathered Plan shall be subject to the distribution terms regarding time and form or payment of the Grandfathered Plan.
All service and compensation that was taken into account for purposes of determining eligibility, the amount of a Participant’s 2017 Plan Year deferral or his vested right to a benefit under the Predecessor Plan as of immediately prior to April 1, 2017, shall be taken into account for the same purposes under the ES Plan, provided that such crediting shall not result in a duplication of benefits.

ARTICLE XXV
PARTICIPANT ACCOUNTS
Section 25. 1      Employee Deferral Elections
Deferrals may be made by an Eligible Employee with respect to the following types of Eligible Income, as permitted by DXC:
(a) Annual Rate of Pay .

(i)      An Eligible Employee whose Annual Rate of Pay, as of the first day of November preceding the Plan Year with respect to which the deferral is to be made, exceeds the Code Section 401(a)(17) Limit for the Plan Year in which the




deferral is to be made, may elect to defer a portion of his Actual Pay. In order to elect to defer Annual Rate of Pay earned during a Plan Year, an Eligible Employee shall submit an irrevocable Deferral Form with DXC before the beginning of such Plan Year.

(ii)      The portion of his Annual Rate of Pay that an Eligible Employee elects to defer for a Plan Year shall be stated as a whole dollar amount. The minimum amount of Annual Rate of Pay that an Eligible Employee may elect to defer in a Plan Year is $1,200. The maximum amount is equal to the greater of $1,200 or the Eligible Employee’s Annual Rate of Pay that exceeds the Code Section 401(a)(17) Limit. If the Internal Revenue Service does not publish the Code Section 401(a)(17) Limit for the Plan Year prior to enrollment, DXC has the discretion to determine eligibility to elect to defer Annual Rate of Pay; provided, however, if a Participant is determined to be ineligible to elect to defer Annual Rate of Pay under paragraph (i) above for a Plan Year, any Annual Rate of Pay deferrals the Participant elected for the Plan Year shall be void.

(i)      The deferral amount designated by an Eligible Employee will be deducted in equal installments over the pay periods falling within the Plan Year to which the election pertains.

(b)      Incentive Awards . A Bonus Eligible Employee may elect to defer any portion of an Incentive Award up to 95%, expressed as whole percentage points. In order to elect to defer an Incentive Award, a Bonus Eligible Employee shall submit an irrevocable Deferral Form with DXC before the beginning of the Plan Year in which the performance period to which Incentive Award pertains begins, in accordance with procedures that DXC determines in its discretion. Notwithstanding the foregoing, if DXC determines that a Bonus Eligible Employee may elect to defer a portion of the Incentive Award at a later time under Code section 409A, a Bonus Eligible Employee may elect to defer a portion of the Incentive Award by filing an irrevocable Deferral Form at such later time as determined by DXC in accordance with Code section 409A.
 
Section 25. 2      New Hires
 
A Newly Hired Employee may elect within 30 days of becoming an Employee to defer base salary earned subsequent to the deferral election becoming effective and in the year of hire. Such an election shall become irrevocable and effective at the end of this 30-day period.

Section 25. 3      Late Year New Hires





A Late Year Newly Hired Employee may elect within the later of 30 days of becoming an Employee or the end of the calendar year in which he is hired to defer base salary earned in the Plan Year following his year of hire. Such an election shall become irrevocable and effective at the end of this election period and shall apply to base salary earned subsequent to the deferral election’s becoming effective.

Section 25. 4      Predecessor Plan Deferrals

Notwithstanding Section 25.1, all deferral elections made by Everett Employees under the Predecessor Plan with respect to compensation earned during 2017 shall remain in effect under the ES Plan with respect to such compensation to the extent (i) such Everett Employee is an Employee on April 1, 2017, and (ii) permitted by Code Section 409A. To the extent required by Code Section 409A, for purposes of this Section 25. 4, “Actual Pay” shall mean “Eligible Compensation” as defined in the Hewlett Packard Enterprise 401(k) Plan, as in effect immediately prior to April 1, 2017, without giving effect to the Code section 401(a)(17) limitation set forth in such definition and the exclusion of pay deferred under this ES Plan.

Section 25. 5      Crediting of Deferrals

Eligible Income deferred by a Participant under the ES Plan shall be credited to the Participant’s Account as soon as administratively practicable after the amounts would have otherwise been paid to the Participant.

Section 25. 6      Vesting on Eligible Income

A Participant shall at all times be 100% vested in any Eligible Income deferred under the ES Plan and credited to his Account.

Section 25. 7      Administrative Charges

The administrative cost associated with this ES Plan may be debited to a Participant’s Account in a manner determined by the Plan Committee or its designee, in its sole discretion.

ARTICLE XXVI
MATCH ON DEFERRALS
Section 26. 1      Employer Matching Contributions

At the end of each Plan Year, DXC shall credit a Match Eligible Employee’s Account with Employer Matching Contributions. The Employer Matching Contributions shall be applied only to the extent that the Match Eligible Employee’s Actual Pay exceeds the Code Section 401(a)(17) Limit for the Plan Year, and the rate of Employer Matching Contributions shall be equal to the weighted average of the various rates that applied (or




would have applied) to such Employee under the DXC Technology Matched Asset Plan for the Plan Year, determined as if such Employee had participated in the DXC Technology Matched Asset Plan for the entire Plan Year. Notwithstanding the foregoing, the maximum amount of Employer Matching Contributions for a Plan Year for a Match Eligible Employee shall not exceed the maximum amount of match for which such Employee would be eligible under the DXC Technology Matched Asset Plan for the Plan Year.

Section 26. 2      Crediting of Employer Matching Contributions

Employer Matching Contributions for a Plan Year shall be credited to the Accounts of Match Eligible Employees as soon as administratively practicable after the end of the Plan Year. The Account of a Participant shall be credited with Employer Matching Contributions for a Plan Year only if such Participant has not terminated employment with DXC and its Participating Affiliates prior to the end of the Plan Year, unless such termination is due to death, disability or is after Participant’s Retirement Date.

Section 26. 3      Vesting of Employer Matching Contributions

(a) Vesting Schedule . A Participant’s interest in Employer Matching Contributions shall vest as follows:
(i)      Participants who participated in a Predecessor Plan shall be fully vested in Employer Matching Contributions credited to such Participant’s Account.
 
(ii)      For Participants not described in Section 26.3(a)(i) above, the Participant will be vested in Employer Matching Contributions credited to such Participant’s Account when such Participant would be vested in Employer Matching Contributions credited to his or her account under the DXC Technology Matched Asset Plan. Notwithstanding the foregoing, a Participant will be fully vested in Employer Matching Contributions credited to his or her Account if the Participant’s employment with DXC and its Affiliates is terminated (A) due to death or disability, (B) after the Participant has reached his or her Retirement Date, or (C) if the Participant terminates employment from DXC or an Affiliate in connection with a sale or other disposition by DXC or the Affiliate of the business unit in which the Participant had been employed.

(b) Forfeiture of Employer Matching Contributions . Except as otherwise provided above, upon termination of employment with DXC and its Affiliates, a Participant shall forfeit the nonvested portion of his or her Account and applicable earnings thereon.

Section 26.4      Elimination of HPE Matching Contributions
 




Notwithstanding any ES Plan provisions to the contrary, no HPE Matching Contributions shall be credited under the ES Plan with respect to periods of employment on or after April 3, 2017.
                
ARTICLE XXVII
INVESTMENT OPTIONS, EARNINGS CREDITED AND DISTRIBUTION OF ACCOUNT BALANCE

Section 27. 1      Investment Options and Earnings

(a) Investment Options and Procedures . DXC shall select the Investment Options to be available under the ES Plan, and shall specify procedures by which a Participant may make an election as to the deemed investment of amounts credited to his Accounts among the Investment Options, as well as the procedures by which a Participant may change his investment selection. Nothing in this ES Plan, however, will require DXC to invest any amounts in such Investment Options or otherwise.

(b) Earnings . DXC shall periodically credit gains, losses and earnings to a Participant’s Account, until the full balance of the Account has been distributed. Amounts shall be credited to a Participant’s Account under this Section based on the results that would have been achieved had amounts credited to the Account been invested as soon as practicable after crediting into the Investment Options selected by the Participant.

Any portion of an Incentive Award that qualifies as “performance-based compensation” under Code section 162(m) and is deferred under the ES Plan by a Participant who qualifies as a “covered employee” under Code section 162(m) shall be credited with earnings and otherwise administered in a manner so that the ultimate payment(s) of the deferred amount remains so qualified.    

Section 27. 2      Time and Form of Payment Elections

(a) Deferral Elections by Eligible Employees . Each Deferral Form submitted by an Eligible Employee shall specify the year in which payment of the aggregate of the deferred amount and any Employer Matching Contributions for the Plan Year (and earnings thereon) is to be made or commence. Such payment year shall be at least three (3) years after the Plan Year in which the deferrals are being made. Each Deferral Form shall also specify the form of payment of the deferred amount and any Employer Matching Contributions for the Plan Year (and earnings thereon). A Participant may elect payment in the form of a single lump sum payment or annual installment payments for a period of not less than two (2) but no more than fifteen (15) years. Annual installment payments will be paid once a year beginning in the year specified on the applicable Deferral Form or as otherwise provided herein.





(i)      Default Elections for Eligible Employees . If an Eligible Employee
Participant fails to specify the year in which payment of the deferred amount and any Employer Matching Contributions for the Plan Year (and earnings thereon) is to be made or commence, then Participant will be deemed to have elected distribution at Participant’s Termination Date, subject to Sections 27.3 or 27.4 below. If a Participant fails to make an effective payment form designation on a Deferral Form, the amount deferred and any Employer Matching Contributions for the Plan Year (and earnings thereon) under such Deferral Form will be distributed in a single lump sum in the year elected.

(ii)      Payment Timing for Eligible Employees . Payment shall be made or shall commence in January of the year that an Eligible Employee Participant elects to receive a distribution.

(iii)      Eligible Employees Terminating After Retirement Date . An Eligible Employee Participant may also elect on a Deferral Form that payments of that Plan Year’s deferrals and any Employer Matching Contributions (and earnings thereon) shall be paid in January of the year following the year in which the Participant’s Termination Date occurs (in the case of installment payments, the first installment shall be paid in the January following the Participant’s Termination Date, and subsequent installments shall be made each January thereafter), if the Participant’s Termination Date is after his Retirement Date.          
(iv)      Eligible Employees Terminating Prior to Retirement Date . If an Eligible Employee Participant’s Termination Date precedes his or her Retirement Date, such Participant shall be deemed to have elected on each Deferral Form that such Plan Year’s deferrals and any Employer Matching Contributions (and earnings thereon) shall be paid in a single lump sum in January of the year following the year in which the Participant Terminates Employment.

Section 27. 3      Automatic Distributions

Notwithstanding any payment elections made on Deferral Forms and Section 27.2:

(a) Distributions to Key Employees . Distributions may not commence to a Key Employee upon a Termination of Employment before the date which is six months after the date of the Key Employee’s Termination of Employment. If distributions are to be paid in a lump sum, such lump sum payment shall be distributed in the later of (A) the seventh month after the Termination of Employment or (B) January of the year following the year of the Termination of Employment. If distributions are to be paid in installments and the first installment is payable during this six-month period,




such installment shall be distributed in the later of (I) the seventh month after the Termination of Employment or (II) January of the year following the year of the Termination of Employment, with subsequent installments to be made each January thereafter.

(b) Distributions Upon Death . If a Participant dies before full distribution of his Account balance, any balance shall be distributed in a lump sum payment to the Participant’s Beneficiary in the month following the month in which the Participant’s death occurs.

Section 27. 4      Withdrawals for Unforeseeable Emergency

Upon approval by the Plan Committee, a Participant may withdraw all or any portion of his vested Account balance for an Unforeseeable Emergency. The amounts distributed with respect to an Unforeseeable Emergency may not exceed the amounts necessary to satisfy such Unforeseeable Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under this ES Plan. “Unforeseeable Emergency” means for this purpose a severe financial hardship to a Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code section 152(a)) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. For the avoidance of doubt, a circumstance does not constitute an “Unforeseeable Emergency” for purposes of the ES Plan unless such circumstance constitutes an “unforeseeable emergency” as defined in Treas. Reg. § 1.409A-3(i)(3). The amount withdrawn for an Unforeseeable Emergency is subject to a minimum of $10,000.

Notwithstanding Section 25.1, if the Plan Committee approves a distribution under this Section, the Participant’s deferrals under the ES Plan shall cease. The Participant will be allowed to enroll if eligible at the beginning of the next enrollment period following six (6) months after the date of distribution.

Section 27. 5      Effect of Taxation

If the Internal Revenue Service or a court of competent jurisdiction determines that ES Plan benefits are includible in the gross income of a Participant under Code section 409A prior to actual receipt of the benefits, DXC shall immediately distribute the benefits found to be so includible to the Participant.

ARTICLE XXVIII
ROLLOVERS FROM OTHER PLANS





Section 28. 1      Discretion to Accept

The Committee shall have complete authority and discretion, but no obligation, to establish an Account for a Rollover Participant and credit the Account with the amount transferred from the Rollover Participant’s account in a Rollover Plan. Amounts credited to such Accounts are fully subject to the provisions of this ES Plan. Reference in the ES Plan to such a crediting as a “rollover” or “transfer” from a Rollover Plan is nominal in nature, and confers no additional rights upon a Rollover Participant other than those specifically set forth in the ES Plan.

Section 28. 2      Status of Rollover Participants

A Rollover Participant and his Beneficiary are fully subject to the provisions of this ES Plan, except as otherwise expressly set forth herein. A Rollover Participant who is not already a Participant in the ES Plan and is not otherwise eligible to participate in the ES Plan at the time of rollover, shall not be entitled to make any additional deferrals under the ES Plan unless and until he has become eligible to do so under the terms of the ES Plan.    

Section 28. 3      Payments to Rollover Participants

Payments from a Rollover Participant’s Account shall be made in accordance with the form and timing of payment provisions of the Rollover Plan.

ARTICLE XXIX
ATTACHMENT A TO ES PLAN –
HEWLETT PACKARD ENTERPRISE GRANDFATHERED EXECUTIVE DEFERRED COMPENSATION PLAN
(Effective November 1, 2015)

Section 1. Establishment and Purpose of Plan.
The Hewlett Packard Enterprise Grandfathered Executive Deferred Compensation Plan is hereby adopted effective as of November 1, 2015 (the “Effective Date”). The Plan provides deferred compensation for a select group of management or highly compensated employees as established in Title I of ERISA. The Plan is established to receive liabilities transferred from the Hewlett-Packard Company Executive Deferred Compensation Plan.
No amounts shall be deferred under the Plan on and after the Effective Date.
The Plan is intended to be an unfunded and unsecured deferred compensation arrangement between the Participant and the Company, in which the Participant agrees to give up a portion of the Participant’s current compensation in exchange for the Company’s unfunded and unsecured promise to make a deferred payment at a future date, as specified in Sections 6 and 7. As such the Plan shall be exempt from the participation, vesting and funding requirements of Parts 2 and 3 of Title I of ERISA and shall be subject to the limited reporting and disclosure requirements (under Part 1 of Title I of ERISA) applicable to such




plans. The Company retains the right, as provided in Article XVI, to amend or terminate the Plan at any time. Certain capitalized words used in the text of the Plan are defined in Section 11 in alphabetical order.
See Appendix A for special rules related to the spin-off of the Company from HP Inc.
Section 2. Participation in the Plan.
2.1 General . All Eligible Employees are eligible to defer Bonuses under the Plan. Eligible Employees are eligible to defer Base Pay under the Plan so long as their Base Pay, as of the first day of October preceding the calendar year within which the deferral is to be made, is equal to or in excess of the sum of (1) the amount defined in Code section 401(a)(l7), which is in effect on January 1 of the calendar year to which the deferral election pertains, as adjusted by the Secretary of the Treasury under Code section 415(d), plus (2) $6,000.
2.2 Cessation of Status of Eligible Employee . If an Eligible Employee with a Base Pay Deferred Amount and/or Bonus Deferred Amount election in effect for a particular year ceases to be an Eligible Employee during such year, and does not reestablish eligibility prior to the first day in October prior to the next calendar year, his election with respect to a Base Pay Deferred Amount shall terminate effective as of the close of the calendar year during which he ceases to be an Eligible Employee. Such Employee’s election with respect to his Bonus Deferred Amount shall continue in effect for any Bonus attributable to the fiscal year during which the Participant ceases to be an Eligible Employee. The provisions in the preceding two sentences relate only to the discontinuance of the Deferred Amount elections after the end of the year in which the Employee terminates employment or otherwise ceases to be an Eligible Employee. Amounts credited to such person’s Deferral Account under any such election prior to its discontinuance shall be payable pursuant to the terms of such election, subject to the provisions of Section 2.
 
2.3 Suspension or Termination of Participation . Notwithstanding anything in this Plan to the contrary, in the event the Committee may determine, in its sole and absolute discretion, that an individual’s participation in the Plan may jeopardize the status of the Plan as an unfunded and unsecured nonqualified deferred compensation plan under the Code or ERISA or may cause other Participants in the Plan to have their Deferral Accounts includable in their taxable income, the Committee may suspend or terminate such individual’s status as an Eligible Employee.
Section 3. Timing and Amounts of Deferred Compensation.
All Base Pay and Bonus deferral elections, as provided under Sections 3.1 and 3.2, respectively, shall be made on such deferral election forms as are prescribed by the Committee. Each election form shall specify the nature of the Deferred Amount, the form of payment which is to be applicable with respect to such designated Deferred Amount, as provided in Section 6, the Beneficiary or Beneficiaries to receive any death benefit applicable to the subject amount, as provided in Section 9, and the Deferred Payment Date on which payment is to commence with respect to such Deferred Amount. Such Deferred Payment Date must be at least three (3) years after the date of the filing of the election form. Except as otherwise provided in this Section 3, all such Deferred Amount elections shall become irrevocable for the subject calendar year as of October 31 of the calendar year prior to the calendar year to which the election pertains. An Eligible Employee may change or revoke his Base Pay deferral election under Section 3.1.1 and may change or revoke his Bonus deferral election under Section 3.2.1 pursuant to such rules as are set by the Committee but in no event may any such election be amended or revoked after (1) the last business day of the Company’s calendar year preceding the calendar year for which the election is made, with respect to Base Pay deferral elections, and (2) the last business day preceding the beginning of the performance period to which the Bonus award pertains, with respect to Bonus deferral elections. Eligible Employees shall make elections to participate in the Plan, as follows:
3.1 Base Pay Deferrals .
3.1.1 Timing of Base Pay Deferral . To make an election of a Base Pay deferral for any calendar year, the Eligible Employee must file a deferral election form with the Committee in accordance with any




procedures established by the Committee, but in no event later than the last business day of the calendar year preceding the calendar year with respect to which the election to defer Base Pay is made.
3.1.2 Amount of Base Pay Deferral . Once an election is made by an Eligible Employee, an annual whole dollar amount will be deferred from Base Pay, taken equally over the twenty-four (24) pay periods falling within the calendar year to which the election pertains. The minimum amount of Base Pay which may be deferred is $6,000 per calendar year. The maximum amount of Base Pay which may be deferred each calendar year is equal to the amount of Base Pay exceeding the amount defined in Code section 40l(a)(17), as adjusted by the Secretary of the Treasury under Code section 415(d), in effect on January 1 of the calendar year to which the deferral election pertains.
3.2 Bonus Deferrals .
3.2.1 Timing of Bonus Deferral . Participants must make an election to defer an H1 Bonus and/or H2 Bonus in accordance with any procedures established by the Committee, but in no event later than October 31 of the calendar year ending before the fiscal year to which the H1 and H2 Bonuses pertain. Participants must make an election to defer any other Bonus that is neither an H1 Bonus nor an H2 Bonus in accordance with any procedures established by the Committee.
3.2.2 Amount of Bonus Deferral . An Eligible Employee may defer any portion, up to 95%, of any Bonus to which he or she may become entitled, so long as the Deferred Amount is expressed in terms of a whole percentage point. Once an election is made by an Eligible Employee to defer a portion of a Bonus, the appropriate amount will be withheld from the Bonus when the amount of the Bonus has been certified by the Committee (with respect to a Bonus under the EPfR Plan), but not before the Bonus would otherwise have been paid to the Participant in cash under the plan from which the Bonus is payable.
 
3.3 Committee Discretion . Notwithstanding anything in this Section 3 to the contrary, the Committee shall have the discretion to modify the availability and timing of a valid deferral election under this Section 3, in any manner it deems appropriate; provided, however, that any alteration with respect to a Covered Officer must be consistent with the requirements for deductibility of compensation under Section 162(m) of the Code.
Section 4. Deferral Accounts.
4.1 In General . Amounts deferred pursuant to Section 3 shall be credited to a Deferral Account in the name of the Participant. Deferred Amounts arising from deferrals of Base Pay shall be credited to a Deferral Account at least quarterly. Deferrals resulting from amounts credited to a Participant’s Deferral Account from the deferral of Bonuses shall be credited to a Deferral Account as soon as practicable after the Committee – as appropriate under, and in accordance with, the terms of the plan from which the Bonus is payable – has approved the amount of a Bonus, but not before the Bonus would otherwise have been paid to the Participant in cash. The Participant’s rights in the Deferral Account shall be no greater than the rights of any other unsecured general creditor of the Company. Deferred Amounts and Earnings thereon invested hereunder shall for all purposes be part of the general funds of the Company. Any payouts to a Participant of amounts credited to a Participant’s Deferral Account are not due, nor are such amounts ascertainable, until the Payout Commencement Date.
4.2 Hewlett-Packard Company Officers Early Retirement Plan Deferrals . A Deferral Account may be created or credited pursuant to the termination of the Hewlett-Packard Company Officers Early Retirement (OER) Plan, as restated effective October 31, 1999. Except as otherwise provided in this Section 4.2, an OER Deferral shall be forfeited in full, if the Termination Date of a Rollover Participant for whom the OER Deferral was created or credited, occurs prior to April 1, 2001. Notwithstanding the foregoing, the OER Deferral of a Rollover Participant shall not be forfeited due to his or her Termination Date occurring prior to April 1, 2001, if the Rollover Participant has attained the age of 58 on or before March 31, 1999.
Section 5. Earnings on the Deferral Account.




5.1 Crediting in General . Amounts in a Participant’s Deferral Account will be credited at least quarterly with Earnings until such amounts are paid out to the Participant under this Plan as set forth in Section 6 or 7. All Earnings attributable to the Deferral Account shall be added to the liability of and retained therein by the Company. Any such addition to the liability shall be appropriately reflected on the books and records of the Company and identified as an addition to the total sum owing the Participant. The Deferral Account of a Rollover Participant shall be credited with Earnings at the same time and accounted for in the same manner as the Deferral Account of a Participant (regardless of the Rollover Participant’s eligibility to participate in the Plan), pro-rated to reflect the date on which the deferral account from a Rollover Plan is transferred into the Plan.
5.2 Hypothetical Investment Choice . Except as otherwise provided in this Section 5.2, and subject to provisions of Section 4.1, the Committee may, in its discretion, offer Participants a choice among various hypothetical investments on which their Deferral Accounts may be credited. Such a choice is nominal in nature, and grants Participants no real or beneficial interest in any specific fund or property. Provision of a choice among hypothetical investment options grants the Participant no ability to affect the actual aggregate investments the Company may or may not make to cover its obligations under the Plan. Any adjustments the Company may make in its actual investments for the Plan may only be instigated by the Company, and may or may not bear a resemblance to the Participants’ hypothetical investment choices on an account-by-account basis. The timing, allowance and frequency of hypothetical investment choices, and a Participant’s ability to change how his or her Deferral Account is credited, is within the sole discretion of the Committee. The Committee may, in order to comply with applicable law, further limit the hypothetical investment choices available to Covered Officers.
5.3 OER Deferral Fund . The Fund, referenced in Section 11.16.3, with respect to which OER Deferrals are credited, is a frozen fund. Participants will not have, among the hypothetical investment choices, the right to request that additional Deferral Account balances be credited in accordance with the deemed return on investment of this Fund. However, Participants may choose to have any or all of the balance of a Deferral Account being credited in accordance with the deemed return on investment of this Fund, credited instead using any of the hypothetical investment choices referenced in Section 5.2.
Section 6. Payout to the Participants.
6.1 Time of Payment of Deferred Amounts .
6.1.1 Deferrals Made in 2004 and Thereafter . On each deferral election form filed by a Participant, such Participant shall specify the Deferred Payment Date on which benefit payments under the Plan are to be made or commence with respect to the Deferred Amount covered by such deferral election. In making such designation, the Participant may designate any January of a specified year as a Deferred Payment Date, so long as the specified year is at least three (3) years after the year in which the deferrals are being made. Additionally, on such form the Participant may elect that in all events payments shall commence as soon as practicable following the date on which the Eligible Employee terminates employment with the Company (which, in the case of installment payments, shall be as of the January following the date of such Employee’s termination of employment). If for any reason the Eligible Employee fails to make an effective Deferred Payment Date designation, his Deferred Payment Date for the amount that is the subject of the deferral election shall be as soon as practicable following the date on which the Eligible Employee terminates employment with the Company and related entities, with such amount paid in a single lump sum. Except as otherwise provided in this Section 6, all benefit payments under the Plan with respect to Deferred Amounts shall be made to the Participant on the Deferred Payment Dates as specified in his applicable deferral election forms.
6.1.2 Special Election for Pre-2004 Deferrals . With respect to the portion of their Deferral Account attributable to Base Pay and Bonus deferrals that occurred prior to 2004, Participants shall be entitled to a special one-time election to specify a new Deferred Payment Date on which benefit payments under the Plan are to be made or commence. In general, such election shall follow the process described in Section 6.1.1 above and shall apply so long as the Participant’s Termination Date occurs on or after January 1, 2005, and in accordance with rules established by the Committee. Notwithstanding the




foregoing, however, in the event that a Participant’s Termination Date occurs prior to January 1, 2005, the portion of his Deferral Account attributable to contributions made prior to 2004 shall be distributed to him as described in Section 7.
6.2 Forms of Payment of Deferred Amounts . On each deferral election form filed by a Participant, such Participant shall specify the form of payment for the amounts attributable to the Deferred Amount covered by such deferral election. In making such designation, the Participant may designate payment in the form of a single lump-sum payment or payment in the form of annual installment payments payable for not less than two (2) but no more than fifteen (15) years. Annual installment payments will be paid once a year beginning on the date specified on the applicable deferral election form, as provided in Section 6.1. If for any reason the Participant fails to make an effective designation under this Section 6.2, payment of the amount that is the subject of the deferral election shall be made in the form of a single lump-sum payment on the date as specified in Section 6.1. Except as otherwise provided in this Section 6 or in Section 7, all benefit payments under the Plan with respect to a Participant’s Deferred Amounts shall be made to the Participant in the payment forms as specified on his applicable deferral election forms.
6.3 Death Benefits . If a Participant shall die with a balance credited to his Accounts, such balance shall be paid to his applicable designated Beneficiary or Beneficiaries as provided herein. With respect to all amounts that have not been paid as of the Participant’s death, the then-current balance of each such amount payable to a designated Beneficiary shall be paid to the designated Beneficiary in a single lump-sum payment as soon as practicable following the Participant’s death.
6.4 Minimum Distributions . If a Participant’s employment with the Company has terminated, and if such Participant has elected (or is entitled) to receive installment distributions from the Plan, and the Participant’s Account balance is equal or less than $15,000, the Committee in its sole and exclusive discretion may pay to such Participant, in lieu of such installment distribution, the total balance in such Participant’s Account immediately upon termination. If a Participant’s employment has terminated, and such Participant’s Account balance is greater than $15,000 and the Participant has elected (or is entitled) to receive installment distributions from the Plan, the Committee in its discretion may increase such Participant’s annual payments to $15,000 and reduce the total number of payments to be paid in proportion to such increased payment, but may not otherwise accelerate the time of the payments. Notwithstanding the foregoing, if a Participant’s Termination Date precedes his Retirement Date, then the Participant’s Account balance will be distributed in a single lump sum immediately upon termination.
6.5 Method of Calculation of Payments . For purposes of computing the amount of any distribution to a Participant or a Beneficiary, the balance in such Participant’s or Beneficiary’s Account (as of the date preceding the payment date) shall be multiplied by a fraction, the numerator of which equals one and the denominator of which equals the number of years that such Participant or Beneficiary has elected to defer payments under this Section 6 less the number of payments such Participant or Beneficiary has previously received pursuant to this Section 6.
6.6 Automatic Payment . Notwithstanding anything contained herein to the contrary, if it has been finally determined that funds held pursuant to this Plan and the relevant Earnings are includable in the taxable income of a Participant or his Beneficiary, such funds shall be immediately distributed to such Participant or Beneficiary. For purposes of this Section, a final determination shall occur when a decision is determined by the highest court which could otherwise render a decision (or the Participant and the Internal Revenue Service have reached a final agreement) in this regard.
Section 7. Special Transition Rules for Deferrals Before 2004.
7.1 Termination After Retirement Date . If a Participant’s Termination Date is prior to January 1, 2005 and on or after his or her Retirement Date and the portion of the Participant’s Deferral Account attributable to deferrals made before 2004 is no less than $15,000 on the Retirement Date, an election as to the form and commencement of benefit may be made in accordance with this Section 7.1. An election under this section is only valid if made before the date which is at least twelve (12) months prior to the Participant’s Termination Date, and on or before the last day of the calendar year preceding the Termination Year.
 




7.1.1 Form of Payout . A Participant making a valid election under this Section 7.1 may elect to receive either (1) a single lump sum payout by January 15 of the year following the Termination Year, or (2) a payout in annual installments over a five (5) to fifteen (15) year period beginning with the January 15 following the Termination Year.
7.1.2 Commencement of Payout . A Participant making a valid election under this Section 7.1 may elect to further defer the Payout Commencement Date, under either the single lump sum or the annual installment election addressed in Section 7.1.1, by an additional one (1), two (2) or three (3) years beginning after the January 15 following the Termination Year.
7.1.3 Earnings on Deferral Accounts . Whatever the form of payout under Section 7, and whatever the timing of the Payout Commencement Date, the Deferral Account of a Participant shall continue to be credited with Earnings until all amounts in such an account are paid out to the Participant.
7.2 Default Form and Commencement of Payout . If a Participant’s Termination Date is prior to January 1, 2005 and is on or after his or her Retirement Date, a valid election under Section 7.1 is not made, and the Participant’s Deferral Account balance is no less than $15,000 on the Retirement Date, then the Participant shall receive his or her payout in annual installments over the fifteen (15) year period beginning with the January 15 following the Termination Year. If, however, such Deferral Account balance is less than $15,000 on the Retirement Date, then the Participant shall receive a single lump sum payout as soon as practicable after the Retirement Date.
Section 8. Hardship Provision.
8.1 Unforeseeable Emergencies . Neither the Participant nor his or her Beneficiary is eligible to withdraw amounts credited to a Deferral Account prior to the time specified in Sections 6 and 7. However, such credited amounts may be subject to early withdrawal if an unforeseeable emergency occurs that is caused by an event beyond the Participant’s or Beneficiary’s control and would result in severe financial hardship to the individual if early withdrawal is not permitted. A severe financial hardship exists only when all other reasonably available financial resources have been exhausted. The Plan Committee (or its delegate) shall have sole discretion to determine whether to approve any hardship withdrawal, which amount will be limited to the amount necessary to meet the emergency and is subject to a minimum of $10,000. The decision of the Plan Committee (or its delegate) will be final and binding on all interested parties.
8.2 Waiting Period . If the Committee approves a hardship withdrawal, the Participant’s deferrals under the Plan shall cease, and such Participant will be allowed to enroll if eligible in the next enrollment period following six (6) months after the date of distribution.
Section 9. Designation of Beneficiary.
The Participant shall, by notice to the Company in the form and manner prescribed by the Company, (1) at the time of the first election to designate a Beneficiary hereunder, and (2) shall have the right thereafter to change any Beneficiary previously designated by the Participant. In the case of a Participant’s death, payment due under this Plan shall be made to the designated Beneficiary. To be valid, a Beneficiary designation must be received by the Company prior to the Participant’s death. If there is no valid Beneficiary designation in effect with respect to the Participant at the time of his or her death, the amount (if any) otherwise payable to the Beneficiary shall instead be paid to all members (in equal shares) of the first class in which there are living members on the date of the Participant’s death, in the following order of priority: (I) the Participant’s spouse; (II) the Participant’s children; (III) the Participant’s parents; (IV) the Participant’s brothers and sisters; (V) the Participant’s estate. Solely for purposes of the immediately preceding sentence, the term “spouse” shall include domestic partners. For such purposes, a “domestic partner” shall mean the person with whom the Participant has signed and filed a notarized declaration of domestic partnership form as prescribed by the Company.
 
The Company has adopted procedures governing the form and manner in which a Participant may designate a Beneficiary. Only a Beneficiary designation submitted in accordance with such procedures shall




be a valid Beneficiary designation. Accordingly, any Beneficiary designation submitted not in accordance with such procedures shall be invalid.
Notwithstanding the above, if any payment due a person remains unpaid at his or her death, the payment will be made to (i) that person’s spouse; (ii) if no spouse is living at the time of such payment, then his or her living children, in equal shares; (iii) if neither a spouse nor children are living, then his or her living parents, in equal shares; (iv) if neither spouse, nor children, nor parents are living, then his or her living brothers and sisters, in equal shares; (v) if none of the individuals described in (i) through (iv) are living, to his or her estate. A person’s domestic partner shall be considered a person’s spouse for purposes of this paragraph. The Committee shall determine a person’s status as a domestic partner in a uniform and nondiscriminatory manner. Such a determination shall be binding and conclusive on all parties.
Section 10. Rollovers from other Plans.
10.1 Discretion to Accept . The Committee shall have complete authority and discretion, but no obligation, to allow the Plan to create Deferral Accounts for Rollover Participants and credit such accounts with amounts to reflect the Rollover Participant’s deferral account in a Rollover Plan. The amounts credited to such Deferral Accounts are fully subject to the provisions of this Plan. Reference in the Plan to such a crediting as a “rollover” or “transfer” of assets from a Rollover Plan is nominal in nature, and confers no additional rights upon a Rollover Participant other than those specifically set forth in the Plan.
10.2 Status of Rollover Participants . A Rollover Participant and his or her Beneficiary are fully subject to the provisions of this Plan, except as otherwise expressly set forth herein. A Rollover Participant who is not already a Participant in the Plan and is not otherwise eligible to participate in the Plan at the time of rollover, shall not be entitled to make any additional deferrals under the Plan unless and until he or she has become an Eligible Employee under the terms of the Plan.
 
10.3 Payment to Rollover Participants . If at the time of rollover or transfer, payments from a Rollover Participant’s account in a Rollover Plan have already commenced from a Rollover Plan, he or she shall continue to receive such payments in accordance with the form and timing of payment provisions of such plan. If a Rollover Participant is not yet eligible to receive payments from the Rollover Plan at the time of the rollover or transfer, he or she is bound by the payout provisions of this Plan.
Section 11. Definitions and Construction.
11.1 Base Pay means the annual base cash compensation, determined on October 1 preceding the calendar years within which deferrals are to be made, for employees on the U.S. payroll of the Company, excluding commissions, overtime pay, bonuses or Bonuses, shift differential, payments under any disability program sponsored by the Company, or any other additional compensation.
11.2 Beneficiary means the person or persons or trust designated by a Participant under Section 9 to receive any amounts payable under the Plan in the event of the Participant’s death.
11.3 Bonus refers to an H1 Bonus, an H2 Bonus and any other bonus that the Committee may deem from time to time eligible to be deferred under this Plan.
11.4 Code means the Internal Revenue Code of 1986, as amended from time to time.
11.5 Committee means the HR and Compensation Committee of the Board of Directors of the Company, or its delegate. The Committee shall serve as plan administrator within the meaning of ERISA.
11.6 Company means Hewlett Packard Enterprise Company, a Delaware corporation, and any business entity within the Hewlett Packard Enterprise Company consolidated group.
11.7 Company Performance Bonus Plan or CPB Plan refer to the Hewlett-Packard Company Performance Bonus Plan, as amended from time to time.
11.8 Covered Officer shall have the same meaning as set forth in the PfR Plan.




11.9 Deferral Account means the account balance of a Participant in the Plan created from Deferred Amounts or from a credit to a Participant’s account from a Rollover Plan, and the Earnings thereon prior to payout to the Participant.
11.10 Deferred Amount means the amount the Participant elects to have deferred from Base Pay and/or a Bonus, pursuant to Section 3.
 
11.11 Deferred Payment Date means the payment date, as specified by a Participant on his Base Pay or Bonus deferred election form, on which he elects to have his applicable amount paid or commence being paid.
11.12 Earnings refers to the deemed return on investment (or charge on investment loss) allocated to the Participant’s Deferral Account, based on the return of the Fund.
11.13 Eligible Employee means an individual who is a regular employee on the U.S. payroll of the Company on the first day of October preceding the calendar years within which deferrals are to be made and whose job position with the Company has a title of Director (or whose job function is, in the sole and absolute discretion of the Committee, equivalent to a “Director” position) or above and who has been assigned a salary grade of E4 or S4 or above or its equivalent; notwithstanding the foregoing, individuals who are classified by the Company as (1) leased from or otherwise employed by a third party, (2) independent contractors, or (3) intermittent or temporary, even if such classification is changed retroactively as a result of an audit, litigation or otherwise shall be excluded.
11.14 EPfR Plan refers to the Hewlett-Packard Company Executive Pay-for-Results Plan.
11.15 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
11.16 Fund means –
11.16.1 With respect to Earnings credited to deferrals of Base Pay or Bonuses, those funds representing the investment returns of the hypothetical investment choices designated by the Committee from time to time, in accordance with the provisions of Section 5 ;
11.16.2 With respect to Earnings credited to the Deferral Account of a Covered Officer, the term Fund shall specifically refer to a fund permitted by the Treasury Regulations promulgated under Code Section 162(m) and in accordance with Section 5; and
11.16.3 With respect to an OER Deferral, the term Fund shall specifically refer to a fund the investments of which are comprised of a mix of debt and equity, as chosen in the sole discretion of the Committee, and as subject to the forfeiture provisions of Section 4.2.
11.17 Hl Bonus means a Bonus arising from the Performance Period described by the first half of the Company’s fiscal year (November 1 through April 30), as defined in the EPfR Plan, PfR Plan and the CPB Plan. The term “Hl Bonus” also relates to any other bonus payable to a Participant on the same cycle as the EPfR Plan, PfR Plan and CPB Plan – i.e., with a Performance Period defined by the first half of the Company’s fiscal year (November 1 through April 30).
11.18 H2 Bonus means a Bonus arising from the Performance Period described by the second half of the Company’s fiscal year (May 1 through October 31), as defined in the EPfR Plan, PfR Plan and CPB Plan. The term “H2 Bonus” also relates to any other bonus payable to a Participant on the same cycle as the EPfR Plan, PfR Plan and CPB Plan – i.e., with a Performance Period defined by the second half of the Company’s fiscal year (May 1 through October 31).
11.19 OER Deferral means that portion of a Participant’s Deferral Account comprised of amounts deferred and credited to the account arising from the termination of the Hewlett- Packard Company Officers Early Retirement Plan, as restated effective October 31, 1999, including any earnings thereon.
 




11.20 Participant means any individual who has benefits in a Deferral Account under the Plan or who is receiving or entitled to receive benefits under the Plan. The term Participant also refers to a Rollover Participant, except where expressly provided otherwise.
11.21 Pay-for-Results Short-Term Bonus Plan or “PfR” Plan refers to the Hewlett- Packard Company Pay-for-Results Short-Term Bonus Plan, as amended from time to time.
11.22 Payout Commencement Date means the date on which the payout to a Participant of amounts credited to his or her Deferral Account first commence.
11.23 Performance Measure shall have the same meaning as set forth in the PfR Plan.
11.24 Performance Period shall have the same meaning as set forth in the PfR Plan.
11.25 Plan means, unless preceded by (1) “EPfR” in which case the term refers to the EPfR Plan, (2) “PfR” in which case the term refers to the PfR Plan, (3) “CPB” or “Company Performance Bonus” in which case the term refers to the CPB Plan, or (4) “Rollover” in which case the term refers to a Rollover Plan, the Hewlett Packard Enterprise Grandfathered Executive Deferred Compensation Plan, as adopted effective November 1, 2015.
11.26 Retirement Date means (1) the date on which a Participant has completed at least 15 years of service, as defined in the Retirement Plan, and has attained age 55; or (2) the Termination Date of a Participant who participated in the Hewlett-Packard Company 2002 Enhanced Early Retirement Program and who terminated employment during the period June 14, 2002 through August 31, 2002. For purposes of Section 11.26(1) above, the Committee may, in its discretion, permit the years of service of a Rollover Participant to include the years of service with the employer for which a Rollover Participant worked immediately preceding employment with the Company.
11.27 Retirement Plan means the Hewlett-Packard Company Retirement Plan, as in effect on November 1, 2015.
11.28 Rollover Participant means an individual with a Deferral Account in the Plan transferred from a Rollover Plan in accordance with the provisions of Section 10. The term Rollover Participant may also refer to an individual who has previously been a Participant in the Plan, or an existing Participant at the time of transfer.
11.29 Rollover Plan means either –
11.29.1 The nonqualified deferred compensation plan of a business entity acquired by the Company through acquisition of a majority of the voting interest in, or substantially all of the assets of, such entity; or,
11.29.2 Any plan or program of the Company, or any employing business entity within the Hewlett-Packard Company consolidated group, including but not limited to the Hewlett-Packard Company Officers Early Retirement Plan, pursuant to the termination of which a Deferral Account is created or added to for a Participant or Rollover Participant.
 
11.30 Tax or Taxes means any federal, state, local, or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any Earnings thereon, and any payments made to Participants under the Plan.
11.31 Termination Date means the date on which the Participant ceases to be an employee of the Company.
11.32 Termination Year means the calendar year within which a Participant’s Termination Date falls.
11.33 Plan Committee means the committee to which the Committee delegates certain authority to act on various compensation and benefit matters.
 

APPENDIX A – HP INC. SPIN-OFF




A.1 Background
The Company was a subsidiary of HP Inc. (“HP”) prior to November 1, 2015 (the “Effective Date”). On the Effective Date, pursuant to an agreement between the Company and HP, the liabilities for certain participants’ benefits under the Hewlett-Packard Company Executive Deferred Compensation Plan (the “HP Plan”) were transferred to the Company and to this Plan. The Participants whose benefits were transferred to this Plan on the Effective Date are referred to below as “HP Participants.” The rules in this Appendix shall apply notwithstanding any Plan provisions to the contrary.
A.2 Plan Benefits
HP Participants who qualified as eligible employees under the HP Plan on the Effective Date shall be Eligible Employees under this Plan on such date. All service and compensation that was taken into account for purposes of determining the amount of an HP Participant’s benefit or his vested right to a benefit under the HP Plan as of the Effective Date shall be taken into account for the same purposes under this Plan.
A.3 Distributions
The terms of this Plan shall govern the distribution of all benefits payable to an HP Participant or any other person with a right to receive such benefits, including amounts accrued under the HP Plan and then transferred to this Plan.
A.4 Termination
For avoidance of doubt, no HP Participant shall be treated as incurring a separation from service, termination of employment, retirement, or similar event for purposes of determining the right to a distribution, vesting, benefits, or any other purpose under the Plan as a result of HP’s distribution of Company shares to HP shareholders.
A.5 Participant Elections
All elections made by HP Participants under the HP Plan, including any deferral elections, payment elections, and beneficiary designations, shall apply to the same effect under this Plan as if made under the terms of this Plan.
A.6 References to Plan
All references in this Plan to the “Plan” as in effect before the Effective Date shall be read as references to the HP Plan.
A.7 Right to Benefits
With respect to any recordkeeping account established to determine a benefit provided or due under the HP Plan at any time, no benefit will be due under the Plan except with respect to the portion of such recordkeeping account reflecting the liability transferred from the HP Plan to the Plan on the Effective Date. Additionally, on and after the Effective Date, HP and the HP Plan, and any successors thereto shall have no further obligation or liability to any HP Participant with respect to any benefit, amount, or right due under the HP Plan.”

4.
The first sentence of Appendix A of the Plan is hereby amended in its entirety to read as follows:





“Effective for periods on or after January 1, 2018, the following notional investment options shall be offered under the Plan with respect to Part A, Part B, Part C and Part D Account balances:

1.    State Street Money Market Fund,
2.    S & P 500 Index Fund (managed by Mellon Capital),
3.    Core Bond Fund (managed by BlackRock), and
4.
Target Date Retirement Funds 2010, 2015, 2020, 2025, 2030, 2035, 2040, 2045 and 2050 (managed by State Street).
5.
The last sentence of Appendix A of the Plan is hereby amended in its entirety to read as follows:

“Thus, if a Participant fails to make a timely effective investment election, the Participant’s balances for any Part A, Part B, Part C or Part D Accounts shall be notionally invested in the State Street Money Market Fund.”

6.
In all other respects not amended, the Plan is hereby ratified and confirmed.

*    *    *

IN WITNESS WHEREOF, the Company has caused this Amendment to be signed as of the 16th day of August, 2017.


DXC TECHNOLOGY COMPANY


By:     /s/ EDUARDO J. NÚÑEZ
Eduardo J. Núñez
Senior VP, Total Rewards







Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, J. Michael Lawrie, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of DXC Technology Company;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
 
 
 Date:  
November 7, 2017
 
 
/s/ J. Michael Lawrie
 
 
 
 
J. Michael Lawrie President and Chief Executive Officer




Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Paul N. Saleh, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of DXC Technology Company;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 
 
 
 
 
 
 Date:  
November 7, 2017
 
 
/s/ Paul N. Saleh
 
 
 
 
Paul N. Saleh
Executive Vice President and Chief Financial Officer




Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, J. Michael Lawrie, President and Chief Executive Officer of DXC Technology Company (the "Company"), hereby certify that, to my knowledge:
 
(1) The Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2017 , (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated:
November 7, 2017
 
/s/ J. Michael Lawrie
 
 
 
J. Michael Lawrie
President and Chief Executive Officer







Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Paul N. Saleh, Executive Vice President and Chief Financial Officer of DXC Technology Company (the "Company"), hereby certify that, to my knowledge:

(1) The Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2017 , (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
Dated:
November 7, 2017
 
/s/ Paul N. Saleh
 
 
 
Paul N. Saleh
Executive Vice President and Chief Financial Officer