UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2023
OR
| ☐ | 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
| DXC TECHNOLOGY COMPANY | ||
| (Exact name of registrant as specified in its charter) | ||
Nevada | 61-1800317 | |||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
20408 Bashan Drive, Suite 231 | ||||||||||||||||||||
Ashburn, Virginia 20147 | ||||||||||||||||||||
| (Address of principal executive offices and zip code) | ||||||||||||||||||||
Registrant’s telephone number, including area code: (703) 972-7000
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
Common Stock, $0.01 par value per share | DXC | The New York Stock Exchange | ||||||||||||||||||
1.750% Senior Notes Due 2026 | DXC 26 | The New York Stock Exchange | ||||||||||||||||||
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.
| Large Accelerated Filer | x | Accelerated Filer | o | |||||||||||||||||||||||
| Non-accelerated Filer | o | Smaller reporting company | ☐ | |||||||||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||||||||
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).
☐ Yes x No
205,174,357 shares of common stock, par value $0.01 per share, were outstanding on July 24, 2023.
TABLE OF CONTENTS
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PART I
ITEM 1. FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements
1
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| Three Months Ended | ||||||||||||||
| (in millions, except per-share amounts) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Revenues | $ | 3,446 | $ | 3,707 | ||||||||||
| Costs of services (excludes depreciation and amortization and restructuring costs) | 2,719 | 2,930 | ||||||||||||
| Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | 327 | 349 | ||||||||||||
| Depreciation and amortization | 344 | 389 | ||||||||||||
| Restructuring costs | 20 | 33 | ||||||||||||
| Interest expense | 66 | 37 | ||||||||||||
| Interest income | (49) | (20) | ||||||||||||
| Loss (gain) on disposition of businesses | 5 | (29) | ||||||||||||
| Other income, net | (64) | (104) | ||||||||||||
| Total costs and expenses | 3,368 | 3,585 | ||||||||||||
| Income before income taxes | 78 | 122 | ||||||||||||
| Income tax expense | 36 | 19 | ||||||||||||
| Net income | 42 | 103 | ||||||||||||
| Less: net income attributable to non-controlling interest, net of tax | 6 | 1 | ||||||||||||
| Net income attributable to DXC common stockholders | $ | 36 | $ | 102 | ||||||||||
| Income per common share: | ||||||||||||||
| Basic | $ | 0.17 | $ | 0.44 | ||||||||||
| Diluted | $ | 0.17 | $ | 0.43 | ||||||||||
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)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended | ||||||||||||||||||||
(in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||||||||
| Net income | $ | 42 | $ | 103 | ||||||||||||||||
| Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||
Foreign currency translation adjustments, net of tax expense (benefit) of $0 and $5 | 34 | (176) | ||||||||||||||||||
Cash flow hedges adjustments, net of tax expense (benefit) of $1 and $(1) | 3 | — | ||||||||||||||||||
| Pension and other post-retirement benefit plans, net of tax: | ||||||||||||||||||||
Amortization of prior service cost, net of tax benefit of $0 and $4 | (2) | (2) | ||||||||||||||||||
| Pension and other post-retirement benefit plans, net of tax | (2) | (2) | ||||||||||||||||||
| Other comprehensive income (loss), net of taxes | 35 | (178) | ||||||||||||||||||
| Comprehensive income (loss) | 77 | (75) | ||||||||||||||||||
| Less: comprehensive income attributable to non-controlling interest | 6 | 1 | ||||||||||||||||||
| Comprehensive income (loss) attributable to DXC common stockholders | $ | 71 | $ | (76) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| As of | ||||||||||||||
| (in millions, except per-share and share amounts) | June 30, 2023 | March 31, 2023 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 1,576 | $ | 1,858 | ||||||||||
Receivables and contract assets, net of allowance of $43 and $47 | 3,285 | 3,441 | ||||||||||||
| Prepaid expenses | 652 | 565 | ||||||||||||
| Other current assets | 231 | 255 | ||||||||||||
| Assets held for sale | — | 5 | ||||||||||||
| Total current assets | 5,744 | 6,124 | ||||||||||||
Intangible assets, net of accumulated amortization of $5,849 and $5,670 | 2,441 | 2,569 | ||||||||||||
| Operating right-of-use assets, net | 849 | 909 | ||||||||||||
| Goodwill | 539 | 539 | ||||||||||||
| Deferred income taxes, net | 512 | 460 | ||||||||||||
Property and equipment, net of accumulated depreciation of $4,166 and $4,111 | 1,922 | 1,979 | ||||||||||||
| Other assets | 3,281 | 3,247 | ||||||||||||
| Assets held for sale - non-current | 5 | 18 | ||||||||||||
| Total Assets | $ | 15,293 | $ | 15,845 | ||||||||||
| LIABILITIES and EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Short-term debt and current maturities of long-term debt | 694 | 500 | ||||||||||||
| Accounts payable | 701 | 782 | ||||||||||||
| Accrued payroll and related costs | 613 | 569 | ||||||||||||
| Current operating lease liabilities | 303 | 317 | ||||||||||||
| Accrued expenses and other current liabilities | 1,587 | 1,836 | ||||||||||||
| Deferred revenue and advance contract payments | 1,008 | 1,054 | ||||||||||||
| Income taxes payable | 151 | 120 | ||||||||||||
| Liabilities related to assets held for sale | — | 9 | ||||||||||||
| Total current liabilities | 5,057 | 5,187 | ||||||||||||
| Long-term debt, net of current maturities | 3,891 | 3,900 | ||||||||||||
| Non-current deferred revenue | 749 | 788 | ||||||||||||
| Non-current operating lease liabilities | 598 | 648 | ||||||||||||
| Non-current income tax liabilities and deferred tax liabilities | 579 | 587 | ||||||||||||
| Other long-term liabilities | 816 | 912 | ||||||||||||
| Liabilities related to assets held for sale - non-current | — | 3 | ||||||||||||
| Total Liabilities | 11,690 | 12,025 | ||||||||||||
| Commitments and contingencies | ||||||||||||||
| DXC stockholders’ equity: | ||||||||||||||
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued as of June 30, 2023 and March 31, 2023 | — | — | ||||||||||||
Common stock, par value $0.01 per share; authorized 750,000,000 shares; issued 210,584,214 as of June 30, 2023 and 218,058,482 as of March 31, 2023 | 2 | 2 | ||||||||||||
| Additional paid-in capital | 8,677 | 9,121 | ||||||||||||
| Accumulated deficit | (4,445) | (4,665) | ||||||||||||
| Accumulated other comprehensive loss | (739) | (774) | ||||||||||||
Treasury stock, at cost, 4,507,506 and 3,333,592 shares as of June 30, 2023 and March 31, 2023 | (217) | (187) | ||||||||||||
| Total DXC stockholders’ equity | 3,278 | 3,497 | ||||||||||||
| Non-controlling interest in subsidiaries | 325 | 323 | ||||||||||||
| Total Equity | 3,603 | 3,820 | ||||||||||||
| Total Liabilities and Equity | $ | 15,293 | $ | 15,845 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Three Months Ended | ||||||||||||||
(in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | 42 | $ | 103 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 351 | 398 | ||||||||||||
| Operating right-of-use expense | 90 | 106 | ||||||||||||
| Share-based compensation | 23 | 28 | ||||||||||||
| Deferred taxes | (50) | (38) | ||||||||||||
| Gain on dispositions | (9) | (62) | ||||||||||||
| Provision for losses on accounts receivable | 2 | 2 | ||||||||||||
| Unrealized foreign currency exchange loss | 23 | 46 | ||||||||||||
| Impairment losses and contract write-offs | 7 | — | ||||||||||||
| Other non-cash charges, net | (2) | 3 | ||||||||||||
| Changes in assets and liabilities, net of effects of acquisitions and dispositions: | ||||||||||||||
| Decrease (Increase) in assets | 63 | (69) | ||||||||||||
| Decrease in operating lease liability | (90) | (106) | ||||||||||||
| Decrease in other liabilities | (323) | (248) | ||||||||||||
| Net cash provided by operating activities | 127 | 163 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchases of property and equipment | (55) | (68) | ||||||||||||
| Payments for transition and transformation contract costs | (62) | (57) | ||||||||||||
| Software purchased and developed | (85) | (50) | ||||||||||||
| Business dispositions, net of cash sold | (7) | (36) | ||||||||||||
| Proceeds from sale of assets | 11 | 14 | ||||||||||||
| Short-term investing | (3) | — | ||||||||||||
| Other investing activities, net | 2 | 5 | ||||||||||||
| Net cash used in investing activities | (199) | (192) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Borrowings of commercial paper | 546 | 292 | ||||||||||||
| Repayments of commercial paper | (305) | (239) | ||||||||||||
| Payments on finance leases and borrowings for asset financing | (131) | (159) | ||||||||||||
| Proceeds from stock options and other common stock transactions | — | 1 | ||||||||||||
| Taxes paid related to net share settlements of share-based compensation awards | (33) | (12) | ||||||||||||
| Repurchase of common stock and advance payment for accelerated share repurchase | (285) | (272) | ||||||||||||
| Other financing activities, net | (2) | (5) | ||||||||||||
| Net cash used in financing activities | (210) | (394) | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | (50) | ||||||||||||
| Net decrease in cash and cash equivalents including cash classified within current assets held for sale | (282) | (473) | ||||||||||||
| Cash classified within current assets held for sale | — | 10 | ||||||||||||
| Net decrease in cash and cash equivalents | (282) | (463) | ||||||||||||
| Cash and cash equivalents at beginning of year | 1,858 | 2,672 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 1,576 | $ | 2,209 | ||||||||||
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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| (in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock(1) | Total DXC Equity | Non- Controlling Interest | Total Equity | ||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 218,058 | $ | 2 | $ | 9,121 | $ | (4,665) | $ | (774) | $ | (187) | $ | 3,497 | $ | 323 | $ | 3,820 | |||||||||||||||
| Net income | 36 | 36 | 6 | 42 | ||||||||||||||||||||||||||||
| Other comprehensive income | 35 | 35 | 35 | |||||||||||||||||||||||||||||
| Share-based compensation expense | 22 | 22 | 22 | |||||||||||||||||||||||||||||
| Acquisition of treasury stock | (30) | (30) | (30) | |||||||||||||||||||||||||||||
Share repurchase program(2) | (10,976) | (466) | 184 | (282) | (282) | |||||||||||||||||||||||||||
| Stock option exercises and other common stock transactions | 3,502 | — | — | |||||||||||||||||||||||||||||
| Non-controlling interest distributions and other | — | (4) | (4) | |||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 210,584 | $ | 2 | $ | 8,677 | $ | (4,445) | $ | (739) | $ | (217) | $ | 3,278 | $ | 325 | $ | 3,603 | |||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| (in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total DXC Equity | Non- Controlling Interest | Total Equity | ||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 240,508 | $ | 3 | $ | 10,057 | $ | (4,450) | $ | (385) | $ | (173) | $ | 5,052 | $ | 323 | $ | 5,375 | |||||||||||||||
| Net income | 102 | 102 | 1 | 103 | ||||||||||||||||||||||||||||
| Other comprehensive loss | (178) | (178) | (178) | |||||||||||||||||||||||||||||
| Share-based compensation expense | 24 | 24 | 24 | |||||||||||||||||||||||||||||
| Acquisition of treasury stock | (10) | (10) | (10) | |||||||||||||||||||||||||||||
| Share repurchase program | (8,851) | (1) | (374) | 109 | (266) | (266) | ||||||||||||||||||||||||||
| Stock option exercises and other common stock transactions | 1,338 | 1 | 1 | 1 | ||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 232,995 | $ | 2 | $ | 9,708 | $ | (4,239) | $ | (563) | $ | (183) | $ | 4,725 | $ | 324 | $ | 5,049 | |||||||||||||||
(1) 4,507,506 treasury shares as of June 30, 2023.
(2) On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (the "IRA") into law. The IRA imposes a 1% excise tax on share repurchases completed after December 31, 2022. We reflect the excise tax within equity as part of the repurchase of the common stock.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Note 1 – Summary of Significant Accounting Policies
Business
DXC Technology Company (“DXC,” the “Company,” “we,” “us,” or “our”) helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. The world’s largest companies and public sector organizations trust DXC to deploy services to drive new levels of performance, competitiveness, and customer experience across their IT estates.
Basis of Presentation
In order to make this report easier to read, DXC refers throughout to (i) the interim unaudited Condensed Consolidated Financial Statements as the “financial statements,” (ii) the Condensed Consolidated Statements of Operations as the “statements of operations,” (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) as the “statements of comprehensive income,” (iv) the Condensed Consolidated Balance Sheets as the “balance sheets,” and (v) the Condensed Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references are made throughout to the numbered Notes to the Condensed Consolidated Financial Statements (“Notes”) in this Quarterly Report on Form 10-Q.
The accompanying 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 balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the statements of operations and comprehensive income attributable to non-controlling interests are presented separately in the statements of comprehensive income. All intercompany transactions and balances have been eliminated. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation.
The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) 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 the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (“fiscal 2023”).
Use of Estimates
The preparation of the financial statements, in accordance with GAAP, requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on assumptions regarding historical experience, currently available information, and anticipated developments that it believes are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. Estimates are used for, but are not limited to, contracts accounted for using the percentage-of-completion method, cash flows used in the evaluation of impairment of goodwill and other long-lived assets, reserves for uncertain tax positions, valuation allowances on deferred tax assets, loss accruals for litigation, and obligations related to our pension plans. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary, including those of a normal recurring nature, to fairly present the 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.
Recent Accounting Pronouncements
Recently issued Accounting Standards Updates (ASUs) effective after June 30, 2023 are not expected to have a material effect on DXC’s condensed consolidated financial statements.
7
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 2 – Divestitures
During the first quarters of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses that resulted in a loss of $5 million and a gain of $38 million, respectively. During the first quarter of fiscal 2023, the Company also classified certain insignificant businesses as held for sale and recognized a loss of $9 million.
Note 3 – Earnings per Share
Basic earnings per share (“EPS”) is computed using the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects 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 | ||||||||||||||
(in millions, except per-share amounts) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Net income attributable to DXC common shareholders: | $ | 36 | $ | 102 | ||||||||||
| Common share information: | ||||||||||||||
| Weighted average common shares outstanding for basic EPS | 210.11 | 232.48 | ||||||||||||
| Dilutive effect of stock options and equity awards | 3.64 | 4.90 | ||||||||||||
| Weighted average common shares outstanding for diluted EPS | 213.75 | 237.38 | ||||||||||||
| Earnings per share: | ||||||||||||||
| Basic | $ | 0.17 | $ | 0.44 | ||||||||||
| Diluted | $ | 0.17 | $ | 0.43 | ||||||||||
Certain share-based equity awards were excluded from the computation of dilutive EPS because inclusion of these awards would have had an anti-dilutive effect. The number of awards excluded were as follows:
| Three Months Ended | ||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||
| Stock Options | 918,608 | 480,727 | ||||||||||||
| Restricted Stock Units | 1,505,292 | 1,542,055 | ||||||||||||
| Performance Stock Units | 1,287,186 | 234,731 | ||||||||||||
8
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 4 – Receivables
Allowance for Doubtful Accounts
The following table presents the change in balance for the allowance for doubtful accounts:
| As of | ||||||||||||||
| (in millions) | June 30, 2023 | March 31, 2023 | ||||||||||||
| Beginning balance | $ | 47 | $ | 55 | ||||||||||
| Provisions for losses on accounts receivable | 2 | (1) | ||||||||||||
| Other adjustments to allowance and write-offs | (6) | (7) | ||||||||||||
| Ending balance | $ | 43 | $ | 47 | ||||||||||
Receivables Facility
The Company has an accounts receivable sales facility (as amended, restated, supplemented or otherwise modified as of June 30, 2023, the “Receivables Facility”) with certain unaffiliated financial institutions (the “Purchasers”) for the sale of commercial accounts receivable in the United States up to a maximum amount of $400 million. The Receivables Facility was amended on July 28, 2023, extending the termination date to July 26, 2024.
As of June 30, 2023, the total availability under the Receivables Facility and the amount sold to the Purchasers was $380 million, which was derecognized from the Company’s balance sheet. As of June 30, 2023, the Company recorded a liability of $20 million within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility was more than the total availability.
The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
Note 5 – Leases
The Company has operating and finance leases for data centers, corporate offices, and certain equipment. Its leases have remaining lease terms of to years, some of which include options to extend the leases for up to years, and some of which include options to terminate the leases within to three years.
Operating Leases
The components of operating lease expense were as follows:
| (in millions) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||
| Operating lease cost | $ | 90 | $ | 106 | ||||||||||
| Short-term lease cost | 7 | 8 | ||||||||||||
| Variable lease cost | 15 | 22 | ||||||||||||
| Sublease income | (4) | (4) | ||||||||||||
| Total operating costs | $ | 108 | $ | 132 | ||||||||||
9
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Cash payments made for variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and as such, are excluded from the supplemental cash flow information stated below.
| (in millions) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities – operating cash flows | $ | 90 | $ | 106 | ||||||||||
ROU assets obtained in exchange for operating lease liabilities(1) | $ | 23 | $ | 55 | ||||||||||
(1) Net of $230 million and $338 million in lease modifications and terminations for the three months ended June 30, 2023 and June 30, 2022, respectively. See Note 17 – “Cash Flows” for further information on non-cash activities affecting cash flows.
The following table presents operating lease balances:
| As of | ||||||||||||||||||||
| (in millions) | Balance Sheet Line Item | June 30, 2023 | March 31, 2023 | |||||||||||||||||
| ROU operating lease assets | Operating right-of-use assets, net | $ | 849 | $ | 909 | |||||||||||||||
| Operating lease liabilities | Current operating lease liabilities | $ | 303 | $ | 317 | |||||||||||||||
| Operating lease liabilities | Non-current operating lease liabilities | 598 | 648 | |||||||||||||||||
| Total operating lease liabilities | $ | 901 | $ | 965 | ||||||||||||||||
The weighted-average operating lease term was 3.9 years and 3.9 years as of June 30, 2023 and March 31, 2023, respectively. The weighted-average operating lease discount rate was 4.1% and 3.9% as of June 30, 2023 and March 31, 2023, respectively.
The following maturity analysis presents expected undiscounted cash payments for operating leases as of June 30, 2023:
Fiscal Year | ||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Remainder of 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
Operating lease payments | $ | 255 | $ | 276 | $ | 185 | $ | 100 | $ | 76 | $ | 93 | $ | 985 | ||||||||||||||||||||||||||||||
Less: imputed interest | (84) | |||||||||||||||||||||||||||||||||||||||||||
Total operating lease liabilities | $ | 901 | ||||||||||||||||||||||||||||||||||||||||||
10
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Finance Leases
The components of finance lease expense were as follows:
| (in millions) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||
| Amortization of right-of-use assets | $ | 42 | $ | 61 | ||||||||||
| Interest on lease liabilities | 4 | 5 | ||||||||||||
| Total finance lease cost | $ | 46 | $ | 66 | ||||||||||
The following table provides supplemental cash flow information related to the Company’s finance leases:
| (in millions) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||
Interest paid for finance lease liabilities – Operating cash flows | $ | 4 | $ | 5 | ||||||||||
Cash paid for amounts included in the measurement of finance lease obligations – financing cash flows | 61 | 96 | ||||||||||||
| Total cash paid in the measurement of finance lease obligations | $ | 65 | $ | 101 | ||||||||||
Capital expenditures through finance lease obligations(1) | $ | 17 | $ | 26 | ||||||||||
(1) See Note 17 – ”Cash Flows” for further information on non-cash activities affecting cash flows.
The following table presents finance lease balances:
| As of | ||||||||||||||||||||
| (in millions) | Balance Sheet Line Item | June 30, 2023 | March 31, 2023 | |||||||||||||||||
| ROU finance lease assets | $ | 370 | $ | 424 | ||||||||||||||||
| Finance lease | $ | 208 | $ | 215 | ||||||||||||||||
| Finance lease | 267 | 287 | ||||||||||||||||||
Total finance lease liabilities(1) | $ | 475 | $ | 502 | ||||||||||||||||
(1) See Note 10 – “Debt” for further information on finance lease liabilities.
The weighted-average finance lease term was 2.8 years and 2.9 years as of June 30, 2023 and March 31, 2023, respectively. The weighted-average finance lease discount rate was 3.5% and 3.4% as of June 30, 2023 and March 31, 2023, respectively.
The following maturity analysis presents expected undiscounted cash payments for finance leases as of June 30, 2023:
Fiscal Year | ||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Remainder of 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
Finance lease payments | $ | 164 | $ | 161 | $ | 99 | $ | 53 | $ | 14 | $ | — | $ | 491 | ||||||||||||||||||||||||||||||
Less: imputed interest | (16) | |||||||||||||||||||||||||||||||||||||||||||
Total finance lease liabilities | $ | 475 | ||||||||||||||||||||||||||||||||||||||||||
11
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 6 – Fair Value
Fair Value Measurements on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding pension assets and derivative assets and liabilities. See Note 7 – “Derivative Instruments” for information about derivative assets and liabilities. Note 10 – “Debt” includes information about the estimated fair value of the Company’s long-term debt. There were no transfers between any of the levels during the periods presented.
| Fair Value Hierarchy | ||||||||||||||||||||||||||
| (in millions) | As of June 30, 2023 | |||||||||||||||||||||||||
| Assets: | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Money market funds and money market deposit accounts | $ | 45 | $ | 45 | $ | — | $ | — | ||||||||||||||||||
Time deposits(1) | 82 | 82 | — | — | ||||||||||||||||||||||
Other securities(2) | 48 | — | 46 | 2 | ||||||||||||||||||||||
| Total assets | $ | 175 | $ | 127 | $ | 46 | $ | 2 | ||||||||||||||||||
| As of March 31, 2023 | ||||||||||||||||||||||||||
| Assets: | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Money market funds and money market deposit accounts | $ | 75 | $ | 75 | $ | — | $ | — | ||||||||||||||||||
Time deposits(1) | 37 | 37 | — | — | ||||||||||||||||||||||
Other securities(2) | 48 | — | 46 | 2 | ||||||||||||||||||||||
| Total assets | $ | 160 | $ | 112 | $ | 46 | $ | 2 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
Contingent consideration(3) | $ | 2 | $ | — | $ | — | $ | 2 | ||||||||||||||||||
| Total liabilities | $ | 2 | $ | — | $ | — | $ | 2 | ||||||||||||||||||
(1) Cost basis approximated fair value due to the short period of time to maturity.
(2) Other securities include available-for-sale equity security investments with Level 2 inputs that have a cost basis of $52 million as of both June 30, 2023 and March 31, 2023. For the periods presented, gains and losses are insignificant and are included in other income, net in the Company’s statements of operations.
(3) As of June 30, 2023, the Company completed the payment for its contingent consideration obligation.
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 foreign currency forward contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. The Company does not use derivative instruments for trading or any speculative purposes.
12
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Derivatives Designated for Hedge Accounting
Cash flow hedges
The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Euro and Indian Rupee-denominated obligations and forecasted transactions. The notional amounts of foreign currency forward contracts designated as cash flow hedges as of June 30, 2023 and March 31, 2023 were $893 million and $842 million, respectively. As of June 30, 2023, the related forecasted transactions extend through June 2025.
During the three months ended June 30, 2023 and June 30, 2022, respectively, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur.
See Note 15 - Stockholders’ Equity for changes in accumulated other comprehensive loss, net of taxes, related to the Company’s derivatives designated for hedge accounting. As of June 30, 2023, $7 million of loss related to cash flow hedges reported in accumulated other comprehensive loss is expected to be reclassified into earnings within the next 12 months.
Derivatives Not Designated for Hedge Accounting
The derivative instruments not designated as hedges for purposes of hedge accounting include certain short-term foreign currency forward 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.
Foreign currency forward contracts
The Company manages the exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and forecasted transactions. The net notional amounts of the foreign currency forward contracts outstanding as of June 30, 2023 and March 31, 2023 were $2.4 billion and $2.5 billion, respectively.
The following table presents the pretax foreign currency (gain) loss to Other income, net:
| For the Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
Foreign currency remeasurement(1) | $ | (4) | $ | 36 | ||||||||||
Undesignated foreign currency forward contracts(2) | (4) | (38) | ||||||||||||
| Total - Foreign currency gain | $ | (8) | $ | (2) | ||||||||||
(1) Movements from exchange rates on the Company’s foreign currency-denominated assets and liabilities.
(2) Movements from hedges used to manage the Company’s foreign currency remeasurement exposure, and the associated costs of the hedging program.
13
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Fair Value of Derivative Instruments
All derivative instruments are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables present the fair values of derivative instruments included in the balance sheets:
| As of | ||||||||||||||||||||
| (in millions) | Balance Sheet Line Item | June 30, 2023 | March 31, 2023 | |||||||||||||||||
| Derivatives designated for hedge accounting: | ||||||||||||||||||||
| Foreign currency forward contracts | Other current assets | $ | 8 | $ | 6 | |||||||||||||||
| Accrued expenses and other current liabilities | $ | 11 | $ | 13 | ||||||||||||||||
| Derivatives not designated for hedge accounting: | ||||||||||||||||||||
| Foreign currency forward contracts | Other current assets | $ | 20 | $ | 15 | |||||||||||||||
| Accrued expenses and other current liabilities | $ | 21 | $ | 16 | ||||||||||||||||
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 that are classified as Level 2 inputs.
Other Risks for Derivative Instruments
The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty’s obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. With respect to its foreign currency derivatives, as of June 30, 2023, there were six counterparties with concentration of credit risk, and based on gross fair value, the maximum amount of loss that the Company could incur is $7 million.
The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company’s policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements. The potential effect of such netting arrangements on the Company’s balance sheets is not material for the periods presented.
Non-Derivative Financial Instruments Designated for Hedge Accounting
The Company applies hedge accounting for foreign currency-denominated debt used to manage foreign currency exposures on its net investments in certain non-U.S. operations. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged.
Net Investment Hedges
DXC seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations with foreign currency-denominated debt. For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation. Gains or losses on individual net investments in non-U.S. operations are reclassified to earnings from accumulated other comprehensive loss when such net investments are sold or substantially liquidated.
14
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of June 30, 2023 and March 31, 2023, DXC had $273 million and $272 million, respectively, of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries. For the three months ended June 30, 2023, the pre-tax impact of loss on foreign currency-denominated debt designated for hedge accounting recognized in other comprehensive income was $1 million.
Note 8 – Intangible Assets
Intangible assets consisted of the following:
| As of June 30, 2023 | As of March 31, 2023 | |||||||||||||||||||||||||||||||||||||
| (in millions) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||||||
| Software | $ | 4,046 | $ | 3,366 | $ | 680 | $ | 4,009 | $ | 3,290 | $ | 719 | ||||||||||||||||||||||||||
| Customer related intangible assets | 3,940 | 2,353 | 1,587 | 3,927 | 2,260 | 1,667 | ||||||||||||||||||||||||||||||||
| Other intangible assets | 304 | 130 | 174 | 303 | 120 | 183 | ||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 8,290 | $ | 5,849 | $ | 2,441 | $ | 8,239 | $ | 5,670 | $ | 2,569 | ||||||||||||||||||||||||||
The components of amortization expense were as follows:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Intangible assets amortization | $ | 183 | $ | 199 | ||||||||||
Transition and transformation contract cost amortization(1) | 48 | 52 | ||||||||||||
| Total amortization expense | $ | 231 | $ | 251 | ||||||||||
(1)Transaction and transformation contract costs are included within other assets on the balance sheets.
Estimated future amortization related to intangible assets as of June 30, 2023 is as follows:
| Fiscal Year | (in millions) | |||||||
| Remainder of 2024 | $ | 538 | ||||||
| 2025 | 593 | |||||||
| 2026 | 530 | |||||||
| 2027 | 397 | |||||||
| 2028 | 173 | |||||||
| Thereafter | 210 | |||||||
| Total | $ | 2,441 | ||||||
15
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 9 – Goodwill
The following table summarizes the changes in the carrying amount of goodwill, by segment, as of June 30, 2023.
| (in millions) | GBS | GIS | Total | |||||||||||||||||
| Balance as of March 31, 2023, net | $ | 539 | $ | — | $ | 539 | ||||||||||||||
| Balance as of June 30, 2023, net | $ | 539 | $ | — | $ | 539 | ||||||||||||||
| Goodwill, gross | 5,029 | 5,066 | 10,095 | |||||||||||||||||
| Accumulated impairment losses | (4,490) | (5,066) | (9,556) | |||||||||||||||||
| Balance as of June 30, 2023, net | $ | 539 | $ | — | $ | 539 | ||||||||||||||
16
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 10 – Debt
The following is a summary of the Company’s debt:
| (in millions) | Interest Rates | Fiscal Year Maturities | June 30, 2023(1) | March 31, 2023(1) | ||||||||||||||||||||||
| Short-term debt and current maturities of long-term debt | ||||||||||||||||||||||||||
Commercial paper(2) | 3.56% - 4.03% | 2024 | $ | 349 | $ | 109 | ||||||||||||||||||||
| Current maturities of long-term debt | Various | 2024 - 2025 | 137 | 176 | ||||||||||||||||||||||
| Current maturities of finance lease liabilities | 0.00% - 14.59% | 2024 - 2025 | 208 | 215 | ||||||||||||||||||||||
| Short-term debt and current maturities of long-term debt | $ | 694 | $ | 500 | ||||||||||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||||||||||||||
€650 million Senior notes | 1.75% | 2026 | 707 | 704 | ||||||||||||||||||||||
$700 million Senior notes | 1.80% | 2027 | 696 | 696 | ||||||||||||||||||||||
€750 million Senior notes | 0.45% | 2028 | 814 | 810 | ||||||||||||||||||||||
$650 million Senior notes | 2.375% | 2029 | 645 | 645 | ||||||||||||||||||||||
€600 million Senior notes | 0.95% | 2032 | 649 | 646 | ||||||||||||||||||||||
| Finance lease liabilities | 0.00% - 14.59% | 2024 - 2029 | 475 | 502 | ||||||||||||||||||||||
| Borrowings for assets acquired under long-term financing | 0.00% - 9.78% | 2024 - 2029 | 248 | 285 | ||||||||||||||||||||||
| Other borrowings | Various | 2024 | 2 | 3 | ||||||||||||||||||||||
| Long-term debt | 4,236 | 4,291 | ||||||||||||||||||||||||
| Less: current maturities | 345 | 391 | ||||||||||||||||||||||||
| Long-term debt, net of current maturities | $ | 3,891 | $ | 3,900 | ||||||||||||||||||||||
(1)The carrying amounts of the senior notes as of June 30, 2023 and March 31, 2023, include the remaining principal outstanding of $3,532 million and $3,523 million, respectively, net of total unamortized debt (discounts) and premiums, and deferred debt issuance costs of $21 million and $22 million, respectively.
(2)At DXC’s option, DXC can borrow up to a maximum of €1 billion or its equivalent in €, £, and $.
Term Loan
During the second quarter of fiscal 2023, the Company entered into a $500 million term loan credit agreement (as amended, the “USD Term Loan”) with certain unaffiliated financial institutions. The USD Term Loan is required to be drawn down by September 1, 2023 or the facility will terminate. The Company did not draw on the USD Term Loan as of June 30, 2023.
Fair Value of Debt
The estimated fair value of the Company’s long-term debt, excluding finance lease liabilities, was $3.2 billion and $3.3 billion as of June 30, 2023 and March 31, 2023, respectively, compared with carrying value of $3.8 billion and $3.8 billion as of June 30, 2023 and March 31, 2023, respectively.
17
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 11 – Revenue
Revenue Recognition
The following table presents DXC’s revenues disaggregated by geography, based on the location of incorporation of the DXC entity providing the related goods or services:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| United States | $ | 1,002 | $ | 1,131 | ||||||||||
| United Kingdom | 465 | 473 | ||||||||||||
| Other Europe | 1,064 | 1,138 | ||||||||||||
| Australia | 342 | 391 | ||||||||||||
| Other International | 573 | 574 | ||||||||||||
| Total Revenues | $ | 3,446 | $ | 3,707 | ||||||||||
The revenue by geography pertains to both of the Company’s reportable segments. Refer to Note 18 – “Segment Information” for the Company’s segment disclosures.
Remaining Performance Obligations
As of June 30, 2023, approximately $19.4 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 32% of these remaining performance obligations in fiscal 2024, with the remainder of the balance recognized thereafter.
Contract Balances
The following table provides information about the balances of the Company’s trade receivables, contract assets and contract liabilities:
| As of | ||||||||||||||||||||
| (in millions) | Balance Sheet Line Item | June 30, 2023 | March 31, 2023 | |||||||||||||||||
| Trade receivables, net | Receivables and contract assets, net of allowance for doubtful accounts | $ | 2,210 | $ | 2,269 | |||||||||||||||
| Contract assets | Receivables and contract assets, net of allowance for doubtful accounts | $ | 363 | $ | 366 | |||||||||||||||
| Contract liabilities | Deferred revenue and advance contract payments and Non-current deferred revenue | $ | 1,757 | $ | 1,842 | |||||||||||||||
Change in contract liabilities were as follows:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Balance, beginning of period | $ | 1,842 | $ | 1,915 | ||||||||||
| Deferred revenue | 464 | 612 | ||||||||||||
| Recognition of deferred revenue | (548) | (684) | ||||||||||||
| Currency translation adjustment | 13 | (87) | ||||||||||||
| Other | (14) | (12) | ||||||||||||
| Balance, end of period | $ | 1,757 | $ | 1,744 | ||||||||||
18
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 12 – Restructuring Costs
The composition of restructuring liabilities by financial statement line items is as follows:
| As of | ||||||||||||||
| (in millions) | June 30, 2023 | March 31, 2023 | ||||||||||||
| Accrued expenses and other current liabilities | $ | 77 | $ | 105 | ||||||||||
| Other long-term liabilities | 18 | 22 | ||||||||||||
| Total | $ | 95 | $ | 127 | ||||||||||
Summary of Restructuring Plans
Fiscal 2024 Plan
During fiscal 2024, management approved global cost savings initiatives designed to better align the Company’s facilities and data centers (the “Fiscal 2024 Plan”).
Restructuring Liability Reconciliations by Plan
| Restructuring Liability as of March 31, 2023 | Costs Expensed, Net of Reversals | Costs Not Affecting Restructuring Liability(1) | Cash Paid | Other(2) | Restructuring Liability as of June 30, 2023 | |||||||||||||||||||||||||||||||||
| Fiscal 2024 Plan | ||||||||||||||||||||||||||||||||||||||
| Facilities Costs | — | 7 | (6) | — | — | 1 | ||||||||||||||||||||||||||||||||
| — | 7 | (6) | — | — | 1 | |||||||||||||||||||||||||||||||||
| Fiscal 2023 Plan | ||||||||||||||||||||||||||||||||||||||
| Workforce Reductions | $ | 79 | $ | 3 | $ | — | $ | (28) | $ | — | $ | 54 | ||||||||||||||||||||||||||
| Facilities Costs | 1 | 7 | (1) | (5) | (1) | 1 | ||||||||||||||||||||||||||||||||
| 80 | 10 | (1) | (33) | (1) | 55 | |||||||||||||||||||||||||||||||||
| Other Prior Year and Acquired Plans | ||||||||||||||||||||||||||||||||||||||
| Workforce Reductions | $ | 45 | $ | (1) | $ | — | $ | (6) | $ | — | $ | 38 | ||||||||||||||||||||||||||
| Facilities Costs | 2 | 4 | (1) | (4) | — | 1 | ||||||||||||||||||||||||||||||||
| 47 | 3 | (1) | (10) | — | 39 | |||||||||||||||||||||||||||||||||
| Total | $ | 127 | $ | 20 | $ | (8) | $ | (43) | $ | (1) | $ | 95 | ||||||||||||||||||||||||||
(1) Pension benefit augmentations recorded as pension liabilities, asset impairments and restructuring costs associated with right-of-use assets.
(2) Foreign currency translation adjustments.
Included in restructuring costs for the three months ended June 30, 2023 is $6 million related to amortization of the right-of-use asset and interest expense for leased facilities that have been vacated but are being actively marketed for sublease or we are in negotiations with the landlord to potentially terminate or modify those leases.
19
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 13 – Pension and Other Benefit Plans
Defined Benefit Plans
The components of net periodic pension income were:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Service cost | $ | 15 | $ | 19 | ||||||||||
| Interest cost | 79 | 67 | ||||||||||||
| Expected return on assets | (114) | (132) | ||||||||||||
| Amortization of prior service credit | (2) | (2) | ||||||||||||
| Net periodic pension income | $ | (22) | $ | (48) | ||||||||||
The service cost component of net periodic pension income is presented in costs of services, and selling, general and administrative and the other components of net periodic pension income are presented in other income, net.
Note 14 – Income Taxes
The Company’s effective tax rate (“ETR”) was 46.2% and 15.6% for the three months ended June 30, 2023, and June 30, 2022, respectively. For the three months ended June 30, 2023, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, and a decrease in uncertain tax positions due to an income tax audit settlement. For the three months ended June 30, 2022, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income and base erosion payments, and a decrease in uncertain tax positions due to statute of limitation expirations.
The majority of our global unremitted foreign earnings have been taxed or would be exempt from U.S. tax upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The following earnings are considered indefinitely reinvested: approximately $485 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and approximately $200 million of our accumulated earnings in India. A portion of these indefinitely reinvested earnings may be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position in the future based on its future strategy and cash needs.
In connection with the merger of Computer Sciences Corporation (“CSC”) and the Enterprise Services business of Hewlett Packard Enterprise Company (the “HPES Merger”), the Company entered into a tax matters agreement with Hewlett Packard Enterprise Company (“HPE”). HPE generally will be responsible for tax liabilities arising prior to the HPES Merger, and DXC is liable to HPE for income tax receivables it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a $16 million tax indemnification receivable related to uncertain tax positions, a $53 million tax indemnification receivable related to other tax payables, and an $89 million tax indemnification payable related to other tax receivables.
In connection with the spin-off of the Company’s former U.S. public sector business (the “USPS Separation”), the Company entered into a tax matters agreement with Perspecta Inc. (including its successors and permitted assigns, “Perspecta”). The Company generally will be responsible for tax liabilities arising prior to the USPS Separation, and Perspecta is liable to the Company for income tax receivables related to pre-spin-off periods. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE pursuant to the tax matters agreement between the Company and HPE. The Company remains liable to HPE for tax receivables transferred to Perspecta related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded an $18 million tax indemnification receivable from Perspecta related to other tax payables and a $6 million tax indemnification payable to Perspecta related to income tax and other tax receivables.
20
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In connection with the sale of its healthcare provider software business (“HPS”), the Company entered into a tax matters agreement with Dedalus. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the sale of the HPS business.
The Internal Revenue Service (the “IRS”) has examined, or is examining, the Company’s federal income tax returns for fiscal 2009 through the tax year ended October 31, 2018. With respect to CSC’s fiscal 2009 through 2017 federal tax returns, the Company participated in settlement negotiations with the IRS Office of Appeals. The IRS examined several issues for these tax years that resulted in various audit adjustments. The Company and the IRS Office of Appeals have settled various audit adjustments, and we disagree with the IRS’ disallowance of certain losses and deductions resulting from restructuring costs and tax planning strategies in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and are challenging them in the U.S. Tax Court, these matters are not fully reserved and would result in incremental federal and state tax expense and cash tax payments of approximately $483 million (including estimated interest and penalties) for the unreserved portion of these items if we do not prevail. We have received notices of deficiency with respect to fiscal 2009, 2010, 2011 and 2013 and have timely filed petitions with the U.S. Tax Court. During the first quarter of fiscal 2024, some of these cases were dismissed, but the dismissals were procedural in nature only and do not impact the Company’s potential liability for the aforementioned fiscal years. We do not expect the U.S. Tax Court matters to be resolved in the next 12 months.
The Company’s fiscal years 2009, 2010 and 2013 are in the U.S. Tax Court, and consequently these years will remain open until such proceedings have concluded. The statute of limitations on assessments related to a refund claim for fiscal year 2012 is open through February 28, 2025. The Company has agreed to extend the statute of limitations for fiscal and tax return years 2014 through 2020 to September 30, 2024. The Company expects to reach resolution for fiscal and tax return years 2009 through 2020 no earlier than fiscal 2025.
The Company may settle certain other tax examinations for different amounts than the Company has accrued as uncertain tax positions. Consequently, the Company may need to accrue and ultimately pay additional amounts or pay lower amounts than previously estimated and accrued when positions are settled in the future. For the three months ended June 30, 2023, the Company’s liability for uncertain tax positions decreased by $3 million (excluding interest and penalties and related tax attributes) primarily due to statute of limitation expirations. The Company believes the outcomes that are reasonably possible within the next 12 months to result in a reduction in its liability for uncertain tax positions, excluding interest, penalties, and tax carryforwards, would be approximately $12 million.
Note 15 – Stockholders’ Equity
Share Repurchases
The details of shares repurchased during the three months ended June 30, 2023 and June 30, 2022 are shown below:
| Fiscal 2024 | Fiscal 2023 | |||||||||||||||||||||||||||||||||||||
| Fiscal Period | Number of Shares Repurchased | Average Price Per Share | Amount (in millions) | Number of Shares Repurchased | Average Price Per Share | Amount (in millions) | ||||||||||||||||||||||||||||||||
| 1st Quarter | ||||||||||||||||||||||||||||||||||||||
| Open market purchases | 10,975,643 | $ | 25.53 | $ | 280 | 8,850,912 | $ | 30.09 | $ | 266 | ||||||||||||||||||||||||||||
| Total | 10,975,643 | $ | 25.53 | $ | 280 | 8,850,912 | $ | 30.09 | $ | 266 | ||||||||||||||||||||||||||||
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DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Accumulated Other Comprehensive Loss
The following table shows the changes in accumulated other comprehensive loss, net of taxes:
| (in millions) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Pension and Other Post-retirement Benefit Plans | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||
| Balance at March 31, 2023 | $ | (985) | $ | (7) | $ | 218 | $ | (774) | ||||||||||||||||||
| Other comprehensive income before reclassifications | 34 | 3 | — | 37 | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | (2) | (2) | ||||||||||||||||||||||
| Balance at June 30, 2023 | $ | (951) | $ | (4) | $ | 216 | $ | (739) | ||||||||||||||||||
| (in millions) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Pension and Other Post-retirement Benefit Plans | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||
| Balance at March 31, 2022 | $ | (651) | $ | 10 | $ | 256 | $ | (385) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | (176) | 4 | — | (172) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (4) | (2) | (6) | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | (827) | $ | 10 | $ | 254 | $ | (563) | ||||||||||||||||||
Note 16 – Stock Incentive Plans
Restricted Stock Units and Performance-Based Restricted Stock Units
Restricted stock units ("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. The Company also grants performance-based restricted stock units (“PSUs”), which generally vest over a three year period. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified market- and performance-based criteria over the three-year vesting period. The fair value of RSUs and PSUs is based on the Company’s common stock closing price on the grant date. For PSUs with a market-based condition, DXC uses a Monte Carlo simulation model to value the grants.
| 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, 2023 | 7,449,379 | $ | 37.11 | 147,487 | $ | 35.80 | ||||||||||||||||||||
| Granted | 4,789,997 | $ | 25.09 | — | $ | — | ||||||||||||||||||||
| Settled | (3,816,958) | $ | 23.47 | — | $ | — | ||||||||||||||||||||
| Canceled/Forfeited | (268,023) | $ | 46.32 | — | $ | — | ||||||||||||||||||||
| Outstanding as of June 30, 2023 | 8,154,395 | $ | 35.85 | 147,487 | $ | 35.80 | ||||||||||||||||||||
Share-Based Compensation
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Total share-based compensation cost | $ | 23 | $ | 28 | ||||||||||
| Related income tax benefit | $ | 3 | $ | 3 | ||||||||||
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DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 17 – Cash Flows
Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Cash paid for: | ||||||||||||||
| Interest | $ | 51 | $ | 22 | ||||||||||
Taxes on income, net of refunds (1) | $ | 52 | $ | 53 | ||||||||||
| Non-cash activities: | ||||||||||||||
| Operating: | ||||||||||||||
ROU assets obtained in exchange for lease, net (2) | $ | 23 | $ | 55 | ||||||||||
| Prepaid assets acquired under long-term financing | $ | 4 | $ | 34 | ||||||||||
| Investing: | ||||||||||||||
| Capital expenditures in accounts payable and accrued expenses | $ | 3 | $ | 8 | ||||||||||
| Capital expenditures through finance lease obligations | $ | 17 | $ | 26 | ||||||||||
| Assets acquired under long-term financing | $ | 27 | $ | 2 | ||||||||||
| Financing: | ||||||||||||||
Shares repurchased but not settled in cash (3) | $ | 13 | $ | — | ||||||||||
(1) Income tax refunds were $6 million and $13 million for the three months ended June 30, 2023 and June 30, 2022, respectively.
(2) Net of $230 million and $338 million in lease modifications and terminations for the three months ended June 30, 2023 and June 30, 2022, respectively.
(3) On August 16, 2022, the U.S. government enacted the IRA into law. The IRA imposes a 1% excise tax on share repurchases completed after December 31, 2022. In our cash flow statement, we reflect the excise tax as a financing activity relating to the repurchase of common stock.
23
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 18 – Segment Information
DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industries and geographic regions. 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.
Global Business Services (“GBS”)
GBS provides innovative technology solutions that help our customers address key business challenges and accelerate transformations tailored to each customer’s industry and specific objectives. GBS offerings include:
•Analytics and Engineering. Our portfolio of analytics services and extensive partner ecosystem help customers gain rapid insights, automate operations, and accelerate their transformation journeys. We provide software engineering, consulting, and data analytics solutions that enable businesses to run and manage their mission-critical functions, transform their operations, and develop new ways of doing business.
•Applications. We help simplify, modernize, and accelerate mission-critical applications that support business agility and growth through our Applications services. We are the engineers that enable our customers to take advantage of the latest digital platforms with both customized and pre-packaged applications, ensure resiliency, launch new products and enter new markets with minimal disruption. We help customers define, execute and manage their enterprise applications strategy.
•Insurance Software and Business Process Services. We partner with insurance clients, to modernize and run IT systems, provide proprietary modular insurance software and platforms, and operate the full spectrum of insurance business process services. We also help operate and continuously improve bank cards, payment and lending processes and operations, and customer experience operations.
Global Infrastructure Services (“GIS”)
GIS provides a portfolio of technology offerings that deliver predictable outcomes and measurable results while reducing business risk and operational costs for customers. GIS offerings include:
•Security. Our Security services help customers assess risk and proactively address all facets of the security environment, from threat intelligence to compliance. We leverage proven methodologies, intelligent automation and industry-leading partners to tailor security solutions to customers’ unique business needs. Our experts weave cyber resilience into IT security, operations and culture. Whether migrating to the cloud, protecting data with a Zero Trust strategy or managing a security operations center, our Security services enable our customers to focus on their business.
•Cloud Infrastructure and IT Outsourcing (“ITO”). We enable customers to do Cloud Right™, making the right investments at the right time and on the right platforms. We orchestrate hybrid cloud and multicloud environments, ensuring private and public clouds, servers and mainframes operate effectively together. We provide companies with tailored plans for cloud migration and optimization to enable successful transformation. We leverage our deep expertise in legacy IT and drive innovation with reliable, secure, mission-critical IT Outsourcing services – from compute and data center, to storage and backup, to network, to mainframe and to business continuity – providing a clear path to modernization.
•Modern Workplace. Our Modern Workplace services put the employee experience first, helping them achieve new levels of productivity, engagement and collaboration while working seamlessly and securely on any device. Organizations are empowered to deliver a consumer-like experience, centralize IT management and support services, and improve the total cost of ownership.
24
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 | Total Reportable Segments | All Other | Totals | |||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 1,703 | $ | 1,743 | $ | 3,446 | $ | — | $ | 3,446 | ||||||||||||||||||||||
| Segment profit | $ | 192 | $ | 91 | $ | 283 | $ | (59) | $ | 224 | ||||||||||||||||||||||
Depreciation and amortization(1) | $ | 45 | $ | 184 | $ | 229 | $ | 26 | $ | 255 | ||||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 1,758 | $ | 1,949 | $ | 3,707 | $ | — | $ | 3,707 | ||||||||||||||||||||||
| Segment profit | $ | 210 | $ | 127 | $ | 337 | $ | (78) | $ | 259 | ||||||||||||||||||||||
Depreciation and amortization(1) | $ | 41 | $ | 218 | $ | 259 | $ | 26 | $ | 285 | ||||||||||||||||||||||
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $89 million and $104 million for the
three months ended June 30, 2023 and June 30, 2022, respectively.
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, depreciation and amortization, and other income (excluding the movement in foreign currency exchange rates on DXC's foreign currency denominated assets and liabilities and the related economic hedges). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs generally include certain corporate function costs, stock-based compensation expense, pension and other post-retirement benefit (“OPEB”) actuarial and settlement gains and losses, restructuring costs, transaction, separation, and integration-related costs and amortization of acquired intangible assets.
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Profit | ||||||||||||||
| Total profit for reportable segments | $ | 283 | $ | 337 | ||||||||||
| All other loss | (59) | (78) | ||||||||||||
| Subtotal | $ | 224 | $ | 259 | ||||||||||
| Interest income | 49 | 20 | ||||||||||||
| Interest expense | (66) | (37) | ||||||||||||
| Restructuring costs | (20) | (33) | ||||||||||||
| Transaction, separation and integration-relation costs | (1) | (2) | ||||||||||||
| Amortization of acquired intangible assets | (89) | (104) | ||||||||||||
| Merger related indemnification | (11) | (10) | ||||||||||||
| (Loss) gain on disposition of businesses | (5) | 29 | ||||||||||||
| Impairment losses | (3) | — | ||||||||||||
| Income before income taxes | $ | 78 | $ | 122 | ||||||||||
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 are not disclosed.
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DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 19 – Commitments and Contingencies
Commitments
Minimum purchase commitments as of June 30, 2023 were as follows:
| Fiscal year | Minimum Purchase Commitment(1) | |||||||
| (in millions) | ||||||||
| Remainder of 2024 | $ | 342 | ||||||
| 2025 | 388 | |||||||
| 2026 | 327 | |||||||
| 2027 | 9 | |||||||
| Total | $ | 1,066 | ||||||
(1) Subsequent to June 30, 2023, the Company entered into minimum purchase commitments totaling approximately $250 million for additional purchased goods and services. These minimum purchase commitments are not reflected in the table above.
Contingencies
Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise: On August 18, 2016, this purported class and collective action was filed 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”) and California state law, in connection with workforce reductions that occurred in or after August 2012 in California, and in or after as early as December 2014 in other U.S. locations. Former business units of HPE now owned by the Company and former business units of the Company now owned by Peraton (formerly Perspecta), may be proportionately liable for any recovery by plaintiffs in this matter.
In December 2020, Plaintiffs filed a motion for preliminary certification of the collective action, which Defendants opposed. In April 2021, the court granted Plaintiffs’ motion for preliminary certification and lifted the previously imposed stay of the action. In November 2021, notice was sent to putative members of the ADEA collectives regarding participation in the case. In February 2022, the notice period closed. The case is currently stayed.
Securities Litigation: Previously disclosed securities litigation matters have been dismissed, with one case remaining, in the Superior Court of the State of California.
On August 20, 2019, a purported class action lawsuit was filed in the Superior Court of the State of California, County of Santa Clara, against the Company, directors of the Company, and a former officer of the Company, among other defendants. The action asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s prospects and expected performance. The putative class of plaintiffs includes all persons who acquired shares of the Company’s common stock pursuant to the offering documents filed with the Securities and Exchange Commission in connection with the April 2017 transaction that formed DXC.
The State of California action had been stayed pending the outcome of the substantially similar federal action filed in the United States District Court for the Northern District of California. The federal action was dismissed with prejudice in December 2021. Thereafter, the state court lifted the stay and entered an order permitting additional briefing by the parties. In March 2022, Plaintiffs filed an amended complaint, which the Company moved to dismiss. In August 2022, the Court granted the Company’s motion to dismiss, but permitted Plaintiffs to amend and refile their complaint. In September 2022, Plaintiffs filed a second amended complaint, which the Company moved to dismiss. In January 2023, the Court issued an order denying the Company’s motion to dismiss the second amended complaint. In March 2023, the Court entered a scheduling order setting a trial date for September 2025. The case is now in discovery.
The Company believes that the final remaining lawsuit described above is also without merit, and intends to vigorously defend it.
26
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Tax Examinations: The Company is under IRS examination in the U.S. on its federal income tax returns for certain fiscal years and is in disagreement with the IRS on certain tax positions, which are currently being contested in the U.S. Tax Court. For more detail, see Note 14 – “Income Taxes” for further information.
SEC Matter: In December 2019, the Company received a request for voluntary production of information in connection with an informal investigation by the U.S. Securities and Exchange Commission. The primary focus of the investigation was the Company’s historical reporting related to its non-GAAP adjustment for “transaction, separation, and integration-related costs,” including whether the disclosure the Company previously used to describe the non-GAAP adjustment was sufficiently broad to cover certain expenses the Company included as transaction, separation, and integration-related costs. The non-GAAP costs at issue primarily consisted of expenses associated with the business combination that formed DXC in 2017. The Company cooperated fully with the SEC’s informal investigation, and the new management team appointed beginning in September of 2019 proactively clarified and expanded the disclosure of the Company’s non-GAAP transaction, separation, and integration-related costs. In addition, the new management team significantly reduced the transaction, separation, and integration-related costs.
In September 2022, the Company accrued $8 million, representing its estimate of the settlement costs based on its discussions with the SEC at that time. In March 2023, the Company entered into an Offer of Settlement with the SEC and a Cease-and-Desist Order was entered. The Company agreed to pay a civil penalty of $8 million and to implement certain remedial measures related to the Company’s non-GAAP policies and procedures within 120 days. The Company has paid the civil penalty and has implemented the requisite remedial measures within the time provided. This matter is now closed.
OFAC Matter: In August 2022, the Company submitted an initial notification of voluntary self-disclosure to the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) regarding potential violations of U.S. sanctions on Russia. The self-disclosure pertains to the Company’s sale of Luxoft’s Russia business to IBS Holding LLC in April 2022, as part of the Company’s exit from the Russian market following Russia’s invasion of Ukraine. The Company has also submitted an initial notification of voluntary self-disclosure to the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) regarding potential export control violations in connection with its exit from the Russian market. The Company’s review of potential sanctions violations is ongoing, and the Company may make further disclosures to relevant agencies as its review continues.
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 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.
27
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 future financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, divestitures, competitive position, growth opportunities, share repurchases, dividend payments, 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:
•our inability to succeed in our strategic objectives;
•the risk of liability or damage to our reputation resulting from security incidents, including breaches, and cyber-attacks to our systems and networks and those of our business partners, insider threats, disclosure of sensitive data or failure to comply with data protection laws and regulations in a rapidly evolving regulatory environment; in each case, whether deliberate or accidental;
•our inability to develop and expand our service offerings to address emerging business demands and technological trends, including our inability to sell differentiated services amongst our offerings;
•our inability to compete in certain markets and expand our capacity in certain offshore locations and risks associated with such offshore locations, such as the on-going conflict between Russia and Ukraine;
•failure to maintain our credit rating and ability to manage working capital, refinance and raise additional capital for future needs;
•public health crises such as the COVID-19 pandemic;
•our indebtedness;
•the competitive pressures faced by our business;
•our inability to accurately estimate the cost of services, and the completion timeline of contracts;
•execution risks by us and our suppliers, customers, and partners;
•the risks associated with climate change and natural disasters;
•increased scrutiny of, and evolving expectations for, sustainability and environmental, social and governance (“ESG”) initiatives;
•our inability to retain and hire key personnel and maintain relationships with key partners;
•the risks associated with prolonged periods of inflation or current macroeconomic conditions, including the current decline in economic growth rates in the United States and in other countries, the possibility of reduced spending by customers in the areas we serve, the success of our cost-takeout efforts, continuing unfavorable foreign exchange rate movements, and our ability to close new deals in the event of an economic slowdown;
•the risks associated with our international operations, such as risks related to currency exchange rates;
•our inability to comply with existing and new laws and regulations, including social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands;
•our inability to achieve the expected benefits of our restructuring plans;
•inadvertent infringement of third-party intellectual property rights or our inability to protect our own intellectual property assets;
•our inability to procure third-party licenses required for the operation of our products and service offerings;
•risks associated with disruption of our supply chain;
•our inability to maintain effective disclosure controls and internal control over financial reporting;
•potential losses due to asset impairment charges;
•our inability to pay dividends or repurchase shares of our common stock;
•pending investigations, claims and disputes and any adverse impact on our profitability and liquidity;
28
•disruptions in the credit markets, including disruptions that reduce our customers’ access to credit and increase the costs to our customers of obtaining credit;
•counterparty default risk in our hedging program;
•our failure to bid on projects effectively;
•financial difficulties of our customers and our inability to collect receivables;
•our inability to maintain and grow our customer relationships over time and to comply with customer contracts or government contracting regulations or requirements;
•our inability to succeed in our strategic transactions;
•changes in tax rates, tax laws, and the timing and outcome of tax examinations;
•risks following the merger of Computer Sciences Corporation (“CSC”) and Enterprise Services business of Hewlett Packard Enterprise Company’s (“HPES”) businesses, including anticipated tax treatment, unforeseen liabilities, and future capital expenditures;
•risks following the spin-off of our former U.S. Public Sector business (the “USPS”) and its related mergers with Vencore Holding Corp. and KeyPoint Government Solutions in June 2018 to form Perspecta Inc. (including its successors and permitted assigns, “Perspecta”), which was acquired by Peraton in May 2021; and
•the other factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 and subsequent SEC filings, including 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. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. 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 report or to reflect the occurrence of unanticipated events, except as required by law.
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The purpose of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the first quarter of fiscal 2024 and our financial condition as of June 30, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes.
The MD&A is organized in the following sections:
•Background
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
The following discussion includes a comparison of our results of operations and liquidity and capital resources for the first quarters of fiscal 2024 and fiscal 2023. References are made throughout to the numbered Notes to the Condensed Consolidated Financial Statements (“Notes”) in this Quarterly Report on Form 10-Q.
Background
DXC helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. The world’s largest companies and public sector organizations trust DXC to deploy services to drive new levels of performance, competitiveness, and customer experience across their IT estates.
We generate revenue by offering a wide range of information technology services and solutions primarily in North America, Europe, Asia, and Australia. We operate through two segments: Global Business Services ("GBS") and Global Infrastructure Services ("GIS"). We market and sell our services directly to customers through our direct sales offices around the world. Our customers include commercial businesses of many sizes and in many industries and public sector clients.
Key Metrics
Key metrics for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 are included below. We have presented organic revenue and diluted earnings per share on a non-GAAP basis. For more information, see “Non-GAAP Financial Measures”.
•Revenues of $3.4 billion, down 7.0% compared to prior year period, and down 3.6% on an organic basis;
•Diluted earnings per share of $0.17, compared to $0.43 in the first quarter of fiscal 2023; adjusted diluted earnings per share of $0.63, compared to $0.75 in the first quarter of fiscal 2023, a decrease of 16.0%;
•Q1 FY24 operating cash flow of $127 million, less capital expenditures of $202 million, resulted in free cash flow of $(75) million;
•Returned $280 million to shareholders through share repurchases.
30
Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Revenues
Revenues across operating segments and geographies are provided below:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | Percentage Change | Constant Currency June 30, 2023(1) | Percentage Change in Constant Currency(1) | |||||||||||||||||||||||||||
| Geographic Market | ||||||||||||||||||||||||||||||||
| United States | $ | 1,002 | $ | 1,131 | (11.4) | % | $ | 1,002 | (11.4) | % | ||||||||||||||||||||||
| U.K. | 465 | 473 | (1.7) | % | 466 | (1.5) | % | |||||||||||||||||||||||||
| Other Europe | 1,064 | 1,138 | (6.5) | % | 1,045 | (8.2) | % | |||||||||||||||||||||||||
| Australia | 342 | 391 | (12.5) | % | 365 | (6.6) | % | |||||||||||||||||||||||||
| Other International | 573 | 574 | (0.2) | % | 596 | 3.8 | % | |||||||||||||||||||||||||
| Total Revenues | $ | 3,446 | $ | 3,707 | (7.0) | % | $ | 3,474 | (6.3) | % | ||||||||||||||||||||||
| Reportable Segments | ||||||||||||||||||||||||||||||||
| GBS | $ | 1,703 | $ | 1,758 | (3.1) | % | $ | 1,718 | (2.3) | % | ||||||||||||||||||||||
| GIS | 1,743 | 1,949 | (10.6) | % | 1,756 | (9.9) | % | |||||||||||||||||||||||||
| Total Revenues | $ | 3,446 | $ | 3,707 | (7.0) | % | $ | 3,474 | (6.3) | % | ||||||||||||||||||||||
(1) 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 information is consistent with how management views our revenues and evaluates our operating performance and trends. For more information, see "Non-GAAP Financial Measures."
For the first quarter of fiscal 2024, our total revenue was $3.4 billion, a decrease of $0.3 billion or 7.0%, compared to the same period a year ago. The 7.0% decrease against the comparative period includes a 0.7% unfavorable foreign currency exchange rate impact, a 2.7% decline in revenue from the disposition of certain businesses, and a 3.6% decline in organic revenue. Organic revenue growth is a non-GAAP measure. For more information, see "Non-GAAP Financial Measures".
The unfavorable foreign currency exchange rate impact is primarily driven by the strengthening of the U.S. dollar against the Australian Dollar.
For the discussion of risks associated with our foreign operations, see Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Global Business Services
For the first quarter of fiscal 2024, GBS revenue was $1.7 billion, a decrease of $55 million or 3.1% compared to the same period a year ago.The 3.1% decrease against the comparative period includes a 0.8% unfavorable foreign currency exchange rate impact and a 5.6% decline in revenue from the disposition of certain businesses, partially offset by 3.3% organic revenue growth from additional services provided to new and existing customers. GBS accounts for 49.4% of total revenue, an increase of 2.0% against the comparative period.
Global Infrastructure Services
For the first quarter of fiscal 2024, GIS revenue was $1.7 billion, a decrease of $206 million or 10.6% compared to the same period a year ago. The 10.6% decrease against the comparative period includes a 0.7% unfavorable foreign currency exchange rate impact, and a 9.9% decline in organic revenue from project completions, early terminations, and lower resale revenue. GIS accounts for 50.6% of total revenue, a decrease of 2.0% against the comparative period.
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Costs and Expenses
Our total costs and expenses are provided below:
| Dollar Amount | ||||||||||||||||||||||||||
| Three Months Ended June 30, | Change | |||||||||||||||||||||||||
(in millions) | 2023 | 2022 | Dollar | Percent | ||||||||||||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 2,719 | $ | 2,930 | $ | (211) | (7.2) | % | ||||||||||||||||||
| Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | 327 | 349 | (22) | (6.3) | % | |||||||||||||||||||||
| Depreciation and amortization | 344 | 389 | (45) | (11.6) | % | |||||||||||||||||||||
| Restructuring costs | 20 | 33 | (13) | (39.4) | % | |||||||||||||||||||||
| Interest expense | 66 | 37 | 29 | 78.4 | % | |||||||||||||||||||||
| Interest income | (49) | (20) | (29) | 145.0 | % | |||||||||||||||||||||
| Loss (gain) on disposition of businesses | 5 | (29) | 34 | (117.2) | % | |||||||||||||||||||||
| Other income, net | (64) | (104) | 40 | (38.5) | % | |||||||||||||||||||||
| Total costs and expenses | $ | 3,368 | $ | 3,585 | $ | (217) | (6.1) | % | ||||||||||||||||||
Costs of Services
Costs of services, excluding depreciation and amortization and restructuring costs (“COS”), were $2.7 billion for the first quarter of fiscal 2024, a decrease of $211 million compared to a year ago. The $211 million decrease was primarily due to a favorable foreign currency exchange rate impact of $23 million, a decrease in costs from lower revenue levels, and a reduction in professional services and contractor-related expenses from our cost optimization efforts.
Gross margin (Revenues less COS as a percentage of revenue) was 21.1% and 21.0% for the first quarter of fiscal 2024 and 2023, respectively.
Selling, General and Administrative
Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs (“SG&A”), was $327 million for the first quarter of fiscal 2024, a decrease of $22 million compared to a year ago. During the first quarter of fiscal 2024, SG&A as a percentage of revenues was 9.5%, an increase of 10 basis points against the comparative period. The $22 million decrease in SG&A expenses was primarily driven by reductions in professional services and vendor-related expenses, partially offset by increases in payroll and related expenses.
In the first quarter of fiscal 2024 and fiscal 2023, there was a merger-related indemnification expense of $11 million and $10 million, respectively.
Depreciation and Amortization
Depreciation expense was $113 million for the first quarter of fiscal 2024, a decrease of $25 million compared to a year ago. The decrease in depreciation expense was primarily due to lower average net property and equipment balances.
Amortization expense was $231 million for the first quarter of fiscal 2024, a decrease of $20 million compared to a year ago. The decrease in amortization expense was primarily due to a decrease in software amortization and a reduction in transition and transformation contract cost amortization due to contract completions.
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Restructuring Costs
During fiscal 2024, management approved global cost savings initiatives designed to better align our facilities and data centers. Total restructuring costs recorded, net of reversals, was $20 million for the first quarter of fiscal 2024, a decrease of $13 million compared to a year ago.
See Note 12 – “Restructuring Costs” for additional information about our restructuring actions.
Interest Expense and Interest Income
For the first quarter of fiscal 2024 and fiscal 2023, net interest expense (interest expense less interest income) was $17 million, respectively. Net interest expense was flat against the comparative period primarily due to increases in interest expense from securitization and commercial paper expense offset by higher income from cash deposits, both of which are driven by higher interest rates globally.
Loss (Gain) on Disposition of Businesses
During the first quarter of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses that resulted in a loss of $5 million and a gain of $38 million, respectively. During the first quarter of fiscal 2023, the Company also classified certain insignificant businesses as held for sale and recognized a loss of $9 million.
Other Income, Net
Other income, net comprises non-service cost components of net periodic pension income, 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 components of other income, net for the first quarter of fiscal 2024 and 2023 were as follows:
| Three Months Ended | ||||||||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | Dollar Change | |||||||||||||||||
| Non-service cost components of net periodic pension income | $ | (37) | $ | (67) | $ | 30 | ||||||||||||||
| Foreign currency gain | (8) | (2) | (6) | |||||||||||||||||
| Gain on sale of assets | (21) | (38) | 17 | |||||||||||||||||
| Other loss | 2 | 3 | (1) | |||||||||||||||||
| Total | $ | (64) | $ | (104) | $ | 40 | ||||||||||||||
Other income, net, was $64 million and $104 million during the first quarter of fiscal 2024 and fiscal 2023, respectively, a change of $40 million compared to a year ago that was primarily due to:
•net periodic pension income decreased by $30 million primarily due to changes in expected returns on assets and other actuarial assumptions.
•foreign currency gains increased by $6 million primarily due to movements of exchange rates on our foreign currency-denominated assets and liabilities, related hedges including forward contracts to manage our exposure to economic risk, and the cost of our hedging program.
•a $17 million decrease in gains from sales of assets.
33
Taxes
Our effective tax rate (“ETR”) was 46.2% and 15.6% for the first quarter of fiscal 2024 and the first quarter of fiscal 2023, respectively. For the first quarter of fiscal 2024, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, and a decrease in uncertain tax positions due to an income tax audit settlement. For the first quarter of fiscal 2023, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income and base erosion payments, and a decrease in uncertain tax positions due to statute of limitation expirations.
Earnings Per Share
Diluted EPS for the first quarter of fiscal 2024 was $0.17, compared to $0.43 in the first quarter of fiscal 2023. The decrease in earnings per share was primarily due to a decrease of $66 million in net income attributable to DXC common stockholders, partially offset by a lower weighted average common shares outstanding.
Diluted EPS for the first quarter of fiscal 2024 includes $0.07 per share of restructuring costs, $0.32 per share of amortization of acquired intangible assets, $0.02 per share of net losses on dispositions, $0.03 per share of impairment losses, and $0.01 per share of tax adjustments.
Diluted EPS for the first quarter of fiscal 2023 includes $0.11 per share of restructuring costs, $0.01 per share of transaction, separation and integration-related costs, $0.34 per share of amortization of acquired intangible assets, $0.16 per share of net gains on dispositions, and $0.03 per share of merger related indemnification costs.
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Non-GAAP Financial Measures
We present non-GAAP financial measures of performance which are derived from the statements 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, non-GAAP net income attributable to DXC common stockholders, non-GAAP EPS, organic revenue growth, constant currency revenues, and free cash flow.
We believe EBIT, adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS provide investors with useful supplemental information about our operating performance after excluding certain categories of expenses.
We believe constant currency revenues provides investors with useful supplemental information about our revenues after excluding the effect of currency exchange rate fluctuations for currencies other than U.S. dollars in the periods presented. See below for a description of the methodology we use to present constant currency revenues.
One category of expenses excluded from adjusted EBIT, non-GAAP income before income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS, incremental amortization of intangible assets acquired through business combinations, if included, may result in a significant difference in period over period amortization expense on a GAAP basis. We exclude amortization of certain acquired intangible assets as these non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Although DXC management excludes amortization of acquired intangible assets, primarily customer-related intangible assets, from its non-GAAP expenses, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and support revenue generation. Any future transactions may result in a change to the acquired intangible asset balances and associated amortization expense.
Another category of expenses excluded from adjusted EBIT, non-GAAP income before income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS is impairment losses, which, if included, may result in a significant difference in period-over-period expense on a GAAP basis. We exclude impairment losses as these non-cash amounts reflect generally an acceleration of what would be multiple periods of expense and are not expected to occur frequently. Further, assets such as goodwill may be significantly impacted by market conditions outside of management’s control.
Selected references are made to revenue growth on an “organic basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates and without the impacts of acquisitions and divestitures, thereby providing comparisons of operating performance from period to period of the business that we have owned during both periods presented. Organic revenue growth is calculated by dividing the year-over-year change in GAAP revenues attributed to organic growth by the GAAP revenues reported in the prior comparable period. Organic revenue is calculated as constant currency revenue excluding the impact of mergers, acquisitions or similar transactions until the one-year anniversary of the transaction and excluding revenues of divestitures during the reporting period. This approach is used for all results where the functional currency is not the U.S. dollar. We believe organic revenue growth provides investors with useful supplemental information about our revenues after excluding the effect of currency exchange rate fluctuations for currencies other than U.S. dollars and the effects of acquisitions and divestitures in both periods presented.
Free cash flow represents cash flow from operations, less capital expenditures. Free cash flow is utilized by our management, investors, and analysts to evaluate cash available to pay debt, repurchase shares, and provide further investment in the business.
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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. 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. Selected references are made on a “constant currency basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a “constant currency basis” are non-GAAP measures calculated by translating current period activity into U.S. Dollars using the comparable prior period’s currency conversion rates. This approach is used for all results where the functional currency is not the U.S. Dollar. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Revenues.”
Certain non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:
| Dollar Amount | ||||||||||||||||||||||||||
| Three Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | Dollar | Percent | ||||||||||||||||||||||
| Income before income taxes | $ | 78 | $ | 122 | $ | (44) | (36.1) | % | ||||||||||||||||||
| Non-GAAP income before income taxes | $ | 207 | $ | 242 | $ | (35) | (14.5) | % | ||||||||||||||||||
| Net income | $ | 42 | $ | 103 | $ | (61) | (59.2) | % | ||||||||||||||||||
| Adjusted EBIT | $ | 224 | $ | 259 | $ | (35) | (13.5) | % | ||||||||||||||||||
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include:
•Restructuring costs – includes costs, net of reversals, related to workforce and real estate optimization and other similar charges.
•Transaction, separation and integration-related (“TSI”) costs – includes costs related to integration, separation, planning, financing and advisory fees and other similar charges associated with mergers, acquisitions, strategic investments, joint ventures, and dispositions and other similar transactions incurred within one year of such transactions closing, except for costs associated with related disputes, which may arise more than one year after closing.
•Amortization of acquired intangible assets – includes amortization of intangible assets acquired through business combinations.
•Merger related indemnification - in fiscal 2024, represents the Company’s current estimate of potential liability to HPE for a tax related indemnification; and in fiscal 2023, represents the Company’s estimate of potential liability to HPE for indemnification following the outcome of the Oracle v. HPE litigation in June 2022. These obligations are related to the HPES merger.
•Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities.(1)
•Impairment losses – non-cash charges associated with the permanent reduction in the value of the Company’s assets (e.g., impairment of goodwill and other long-term assets including fixed assets and impairments to deferred tax assets for discrete changes in valuation allowances). Future discrete reversals of valuation allowances are likewise excluded.(2)
•Tax adjustments – discrete tax adjustments to impair or recognize certain deferred tax assets, adjustments for changes in tax legislation and the impact of merger and divestitures. Income tax expense of all other (non-discrete) non-GAAP adjustments is based on the difference in the GAAP annual effective tax rate (AETR) and overall non-GAAP provision (consistent with the GAAP methodology).
(1) During the first quarter of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses that resulted in a loss of $5 million and a gain of $38 million, respectively. During the first quarter of fiscal 2023, the Company also classified certain insignificant businesses as held for sale and recognized a loss of $9 million.
(2) Impairment losses for the first quarter of fiscal 2024 include a $3 million and $4 million impairment charge associated with two strategic investments accounted for within Other income, net and Net income attributable to non-controlling interest, net of tax, respectively.
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A reconciliation of reported results to non-GAAP results is as follows:
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per-share amounts) | As Reported | Restructuring Costs | Transaction, Separation and Integration-Related Costs | Amortization of Acquired Intangible Assets | Merger Related Indemnification | Gains and Losses on Dispositions | Impairment Losses | Tax Adjustments | Non-GAAP Results | |||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 78 | $ | 20 | $ | 1 | $ | 89 | $ | 11 | $ | 5 | $ | 3 | $ | — | $ | 207 | ||||||||||||||||||||||||||||||||||||||
| Income tax expense | 36 | 5 | — | 21 | 11 | — | 1 | (3) | 71 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 42 | 15 | 1 | 68 | — | 5 | 2 | 3 | 136 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interest, net of tax | 6 | — | — | — | — | — | (4) | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to DXC common stockholders | $ | 36 | $ | 15 | $ | 1 | $ | 68 | $ | — | $ | 5 | $ | 6 | $ | 3 | $ | 134 | ||||||||||||||||||||||||||||||||||||||
| Effective Tax Rate | 46.2 | % | 34.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic EPS | $ | 0.17 | $ | 0.07 | $ | — | $ | 0.32 | $ | — | $ | 0.02 | $ | 0.03 | $ | 0.01 | $ | 0.64 | ||||||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 0.17 | $ | 0.07 | $ | — | $ | 0.32 | $ | — | $ | 0.02 | $ | 0.03 | $ | 0.01 | $ | 0.63 | ||||||||||||||||||||||||||||||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic EPS | 210.11 | 210.11 | 210.11 | 210.11 | 210.11 | 210.11 | 210.11 | 210.11 | 210.11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS | 213.75 | 213.75 | 213.75 | 213.75 | 213.75 | 213.75 | 213.75 | 213.75 | 213.75 | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per-share amounts) | As Reported | Restructuring Costs | Transaction, Separation and Integration-Related Costs | Amortization of Acquired Intangible Assets | Merger Related Indemnification | Gains and Losses on Dispositions | Non-GAAP Results | |||||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 122 | $ | 33 | $ | 2 | $ | 104 | $ | 10 | $ | (29) | $ | 242 | ||||||||||||||||||||||||||||||
| Income tax expense | 19 | 8 | — | 24 | 2 | 9 | 62 | |||||||||||||||||||||||||||||||||||||
| Net income | 103 | 25 | 2 | 80 | 8 | (38) | 180 | |||||||||||||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interest, net of tax | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||
| Net income attributable to DXC common stockholders | $ | 102 | $ | 25 | $ | 2 | $ | 80 | $ | 8 | $ | (38) | $ | 179 | ||||||||||||||||||||||||||||||
| Effective Tax Rate | 15.6 | % | 25.6 | % | ||||||||||||||||||||||||||||||||||||||||
| Basic EPS | $ | 0.44 | $ | 0.11 | $ | 0.01 | $ | 0.34 | $ | 0.03 | $ | (0.16) | $ | 0.77 | ||||||||||||||||||||||||||||||
| Diluted EPS | $ | 0.43 | $ | 0.11 | $ | 0.01 | $ | 0.34 | $ | 0.03 | $ | (0.16) | $ | 0.75 | ||||||||||||||||||||||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||||||||||||||||||
| Basic EPS | 232.48 | 232.48 | 232.48 | 232.48 | 232.48 | 232.48 | 232.48 | |||||||||||||||||||||||||||||||||||||
| Diluted EPS | 237.38 | 237.38 | 237.38 | 237.38 | 237.38 | 237.38 | 237.38 | |||||||||||||||||||||||||||||||||||||
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Reconciliations of revenue growth to organic revenue growth are as follows:
| Three Months Ended | ||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||
| Total revenue growth | (7.0) | % | (10.5) | % | ||||||||||
| Foreign currency | 0.7 | % | 5.8 | % | ||||||||||
| Acquisition and divestitures | 2.7 | % | 2.1 | % | ||||||||||
| Organic revenue growth | (3.6) | % | (2.6) | % | ||||||||||
| GBS revenue growth | (3.1) | % | (6.8) | % | ||||||||||
| Foreign currency | 0.8 | % | 5.9 | % | ||||||||||
| Acquisition and divestitures | 5.6 | % | 3.7 | % | ||||||||||
| GBS organic revenue growth | 3.3 | % | 2.8 | % | ||||||||||
| GIS revenue growth | (10.6) | % | (13.5) | % | ||||||||||
| Foreign currency | 0.7 | % | 5.8 | % | ||||||||||
| Acquisition and divestitures | — | % | 0.5 | % | ||||||||||
| GIS organic revenue growth | (9.9) | % | (7.2) | % | ||||||||||
Reconciliations of net income to adjusted EBIT are as follows:
| Three Months Ended | ||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | ||||||||||||
| Net income | $ | 42 | $ | 103 | ||||||||||
| Income tax expense | 36 | 19 | ||||||||||||
| Interest income | (49) | (20) | ||||||||||||
| Interest expense | 66 | 37 | ||||||||||||
| EBIT | 95 | 139 | ||||||||||||
| Restructuring costs | 20 | 33 | ||||||||||||
| Transaction, separation and integration-related costs | 1 | 2 | ||||||||||||
| Amortization of acquired intangible assets | 89 | 104 | ||||||||||||
| Merger related indemnification | 11 | 10 | ||||||||||||
| Loss (gain) on disposition of businesses | 5 | (29) | ||||||||||||
| Impairment losses | 3 | — | ||||||||||||
| Adjusted EBIT | $ | 224 | $ | 259 | ||||||||||
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Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As of June 30, 2023, our cash and cash equivalents (“cash”) were $1.6 billion, of which $0.8 billion was held outside of the U.S. As of March 31, 2023, our cash was $1.9 billion, of which $0.7 billion was held outside of the U.S. We maintain various multi-currency, multi-entity, cross-border, physical and notional cash and pool arrangements with various counterparties to manage liquidity efficiently that enable participating subsidiaries to draw on the Company’s pooled resources to meet liquidity needs.
A significant portion of the cash held by our foreign subsidiaries is not expected to be impacted by U.S. federal income tax upon repatriation. However, a portion of this cash may still be subject to foreign and U.S. state income tax consequences upon future remittance. Therefore, if additional funds held outside the U.S. are needed for our operations in the U.S., we plan to repatriate these funds not designated as indefinitely reinvested.
We have $0.1 billion in cash held by foreign subsidiaries used for local operations that is subject to country-specific limitations which may restrict or result in increased costs in the repatriation of these funds. In addition, other practical considerations may limit our use of consolidated cash. This includes cash of $0.2 billion held by majority-owned consolidated subsidiaries where third-parties or public shareholders hold minority interests.
The following table summarizes our cash flow activity:
| Three Months Ended | ||||||||||||||||||||
| (in millions) | June 30, 2023 | June 30, 2022 | Change | |||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 127 | $ | 163 | $ | (36) | ||||||||||||||
| Investing activities | (199) | (192) | (7) | |||||||||||||||||
| Financing activities | (210) | (394) | 184 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | (50) | 50 | |||||||||||||||||
| Cash classified within current assets held for sale | — | 10 | (10) | |||||||||||||||||
| Net decrease in cash and cash equivalents | $ | (282) | $ | (463) | $ | 181 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 1,858 | 2,672 | ||||||||||||||||||
| Cash and cash equivalents at the end of period | $ | 1,576 | $ | 2,209 | ||||||||||||||||
Operating cash flow
Net cash provided by operating activities was $127 million and $163 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year decrease of $36 million. The decrease was primarily due to:
•a decrease in net income, net of adjustments of $109 million.
•a $73 million favorable change in working capital during the first quarter of fiscal 2024 compared to the first quarter fiscal 2023 primarily from improvements in our cash collection cycle.
The following table contains certain key working capital metrics:
| As of | ||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||
| Days of sales outstanding in accounts receivable | 68 | 70 | ||||||||||||
| Days of purchases outstanding in accounts payable | (48) | (48) | ||||||||||||
| Cash conversion cycle | 20 | 22 | ||||||||||||
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Investing cash flow
Net cash used in investing activities was $199 million and $192 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $7 million. The change was primarily due to:
•a $29 million year-over-year decrease in cash outflows from business dispositions.
•a $27 million year-over-year increase in capital expenditures primarily from software purchased and developed.
•a $9 million year-over-year decrease in cash flows from other net investing activities.
Financing cash flow
Net cash used in financing activities was $210 million and $394 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $184 million. The lower net cash used in financing activities was primarily due to:
•a $28 million decrease in payments on capital leases and borrowings for asset financings, as the Company continues reducing the volume of these financing arrangements.
•a $188 million increase in cash inflows from commercial paper borrowings, net of repayments.
•$35 million of higher cash outflows from increased share repurchase activity and related taxes paid on net share settlements.
Debt Financing
The following table summarizes our total debt:
| As of | ||||||||||||||||||||
| (in millions) | June 30, 2023 | March 31, 2023 | Change | |||||||||||||||||
| Short-term debt and current maturities of long-term debt | $ | 694 | $ | 500 | $ | 194 | ||||||||||||||
| Long-term debt, net of current maturities | 3,891 | 3,900 | (9) | |||||||||||||||||
| Total debt | $ | 4,585 | $ | 4,400 | $ | 185 | ||||||||||||||
The $185 million increase in total debt during the first quarter of fiscal 2024 was primarily attributable to the increase in borrowings of commercial paper and an unfavorable foreign currency exchange rate of U.S. dollar against the Euro, partially offset by decreases in finance leases and borrowings for asset financing attributable to payments exceeding additions.
We were in compliance with all financial covenants associated with our borrowings as of June 30, 2023 and June 30, 2022.
Our credit ratings are as follows:
| Rating Agency | Long Term Ratings | Short Term Ratings | Outlook | |||||||||||||||||
| Fitch | BBB | F-2 | Stable | |||||||||||||||||
| Moody’s | Baa2 | P-2 | Stable | |||||||||||||||||
| S&P | BBB- | - | Stable | |||||||||||||||||
For information on the risks of ratings downgrades, see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
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Liquidity
We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our normal operating requirements for the next 12 months. We expect to continue using 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 raise capital through debt financing, including the issuance of capital market debt instruments such as commercial paper, and bonds. In addition, we currently utilize, and will further utilize accounts receivables, sales facilities, and our cross currency cash pool for liquidity needs. However, there is no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future.
Our exposure to operational liquidity risk is primarily from long-term contracts that require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contracts and is dependent upon our performance as well as customer acceptance.
Our total liquidity of $5.1 billion as of June 30, 2023, includes $1.6 billion of cash and cash equivalents, $3.0 billion of available borrowings under our revolving credit facility, and $500 million of available borrowings under our USD Term Loan.
Share Repurchases
See Note 15 – “Stockholders’ Equity.”
Dividends
To maintain our financial flexibility we continue to suspend payment of quarterly dividends for fiscal 2024.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to arrangements that include guarantees, the receivables securitization facility and certain other 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 our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, other than as disclosed in Note 4 – “Receivables” and Note 19 – “Commitments and Contingencies”.
Cash Commitments
There have been no material changes, outside the ordinary course of business, to our cash commitments since March 31, 2023. For further information see “Cash Commitments” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023
For our minimum purchase cash commitments in connection with our long-term purchase agreements with certain software, hardware, telecommunication, and other service providers, see Note 19 – “Commitments and Contingencies.”
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Critical Accounting 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. During the three months ended June 30, 2023, there were no changes to our critical accounting policies and estimates from those described in our fiscal 2023 Annual Report on Form 10-K except as mentioned in Note 1 – “Summary of Significant Accounting Policies.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting DXC, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. Our exposure to market risk has not changed materially since March 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness 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 (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 19 – “Commitments and Contingencies” to the financial statements in this Quarterly Report on Form 10-Q 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, which may materially and adversely affect our business, financial condition, and results of operations, and the actual outcome of matters as to which forward-looking statements are made in this Quarterly Report on Form 10-Q. In such case, the trading price for DXC common stock could decline, and you could lose all or part of your investment. 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, and other variables and risks and uncertainties not currently known or that are currently expected to be immaterial may also materially and adversely affect our business, financial condition, and results of operations or the price of our common stock in the future. There have been no material changes in the three months ended June 30, 2023 to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
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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 June 30, 2023, 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 | ||||||||||||||||||||||
| April 1, 2023 to April 30, 2023 | 3,490,427 | $25.09 | 3,490,427 | $387,691,464 | ||||||||||||||||||||||
| May 1, 2023 to May 31, 2023 | 2,620,194 | $24.62 | 2,620,194 | $1,323,191,589 | ||||||||||||||||||||||
| June 1, 2023 to June 30, 2023 | 4,865,022 | $26.33 | 4,865,022 | $1,195,105,317 | ||||||||||||||||||||||
On April 3, 2017, we 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 our common stock. On November 8, 2018, our Board of Directors approved an incremental $2.0 billion share repurchase authorization. As of March 31, 2023, DXC had approximately $0.5 billion of remaining share repurchases authorized under these approved plans.
On May 18, 2023, DXC announced that its Board approved an incremental $1.0 billion share repurchase authorization. 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.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (the "IRA") into law. The IRA imposes a 1% excise tax on share repurchases completed after December 31, 2022. We reflect the excise tax within equity as part of the repurchase of the common stock.
See Note 15 - "Stockholders’ Equity" to the financial statements in this Quarterly Report on Form 10-Q for more information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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ITEM 6. EXHIBITS
Exhibit Number | Description of Exhibit | ||||
| 10.1* | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1** | |||||
| 32.2** | |||||
| 101.INS | Interactive Data Files | ||||
| 101.SCH | XBRL Taxonomy Extension Schema | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation | ||||
| 101.LAB | XBRL Taxonomy Extension Labels | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
* Filed herewith
** Furnished herewith
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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: | August 2, 2023 | By: | /s/ Christopher A. Voci | ||||||||
| Name: | Christopher A. Voci | ||||||||||
| Title: | Senior Vice President, Corporate Controller and Principal Accounting Officer | ||||||||||
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