DXC Technology Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended December 31, 2022. Unless otherwise stated, amounts are in U.S. dollars. DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS).
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $3.566B | $4.089B | $10.839B | $12.257B |
| Income before taxes | $102M | $166M | $278M | $342M |
| Net income | $61M | $102M | $192M | $197M |
| Diluted EPS | $0.25 | $0.38 | $0.80 | $0.73 |
| Operating cash flow | Not separately reported for the quarter | $1.000B | $1.230B | |
| Adjusted EBIT (non-GAAP) | $309M | $355M | $837M | $1.033B |
- Q3 revenue fell 12.8% reported and 6.2% at constant currency; organic revenue declined 3.8%. Nine-month revenue fell 11.6% reported and 5.0% at constant currency; organic revenue declined 2.6%.
- Q3 segment revenue: GBS $1.738B, down 10.7% reported (0.2% organic growth); GIS $1.828B, down 14.7% reported (7.4% organic decline). Nine-month contract awards were $5.5B in each segment, below the prior-year levels of $6.6B for GBS and $6.7B for GIS.
- Calculated adjusted EBIT margin was approximately 8.7% in Q3 FY2023 and 8.7% in Q3 FY2022; for the nine-month periods it was approximately 7.7% and 8.4%, respectively. These margins use the company’s non-GAAP adjusted EBIT.
- Q3 net income attributable to DXC common stockholders was $59M, versus $98M a year earlier. Nine-month attributable income was $188M in both periods; lower weighted-average shares contributed to higher nine-month diluted EPS.
- Nine-month operating cash flow was $1.0B, down $230M, primarily reflecting lower net income after adjustments; working-capital changes partly offset the decline. Cash and cash equivalents were $2.091B at December 31, versus $2.672B at March 31, 2022. A further $509M of FDB cash was classified within assets held for sale.
- Total debt was $4.723B, compared with $4.965B at March 31, 2022. Cash less reported total debt was a net debt position of approximately $2.632B. The company reported $5.6B of total liquidity: $2.1B cash, $3.0B available under its revolving facility and $500M available under an undrawn term loan agreement. DXC reported compliance with its financial covenants.
Material changes and unusual items
- Revenue declines reflected foreign exchange headwinds, divestitures and organic contraction. The stronger U.S. dollar reduced reported revenue by 6.6 percentage points in both the Q3 and nine-month comparisons. GIS was the main source of organic weakness.
- Q3 adjusted EBIT declined 13.0% to $309M; nine-month adjusted EBIT declined 19.0% to $837M. The company cited lower revenue and revenue declining faster than related payroll costs, alongside cost optimization efforts.
- Prior-year nine-month comparisons included a $337M pretax gain on the HPS business sale and $311M of debt-extinguishment costs; neither item recurred in the current nine-month period. Current-period restructuring costs were $135M for nine months, versus $248M a year earlier.
- DXC completed the sale of its German financial services subsidiary (FDB) on January 3, 2023, after quarter-end, for approximately $323M. It estimated a pretax gain of approximately $180M for recognition in Q4 FY2023.
- DXC repurchased 10.9M shares for $323M in the first nine months. It suspended quarterly dividends for fiscal 2023 to preserve financial flexibility.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected cash and cash generated from operations to cover normal operating requirements for the next 12 months, while noting that future borrowing availability on acceptable terms is not assured.
- Remaining performance obligations were approximately $19.6B at December 31, 2022; DXC expected to recognize about 13% in fiscal 2023 and the balance thereafter.
- Key risks cited include weaker customer spending and economic conditions, inflation, foreign exchange movements, competition, contract execution and cost estimation, cybersecurity and data protection, talent retention, indebtedness and refinancing, and execution of restructuring and strategic objectives.
- Tax examinations remain a material contingency: DXC disputed IRS positions for earlier tax years and estimated approximately $472M of federal and state tax expense, including estimated interest and penalties, and related cash cost if it does not prevail on the unreserved items. The company said it expects no resolution of specified tax disputes before fiscal 2024 or 2025.
- The SEC’s informal investigation concerns historical disclosure of certain non-GAAP transaction-related costs. DXC accrued $8M as its current estimated settlement cost, but stated that final resolution, timing and terms are uncertain. A remaining California securities class action continued after the court denied DXC’s motion to dismiss in January 2023.
- DXC recorded $11M of merger-related indemnification expense and a $9M arbitration loss in Q3. The Oracle litigation was settled in November 2022 and dismissed with prejudice in January 2023.
Important facts for investors to verify
- Whether organic revenue and GIS performance stabilize, and whether new contract awards convert into recognized revenue.
- Whether cost reductions and restructuring can support margins despite falling revenue; compare GAAP results with the company’s adjusted, non-GAAP measures.
- Cash generation, working-capital trends, the treatment of FDB sale proceeds and gain, and continued access to revolving and term-loan financing.
- Progress and potential financial exposure from the IRS disputes, SEC matter and remaining securities litigation.
- Whether management’s 12-month liquidity expectation remains supported by operating cash flow and available borrowing capacity.