DXC Technology Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended December 31, 2021. Comparisons are with the corresponding periods of fiscal 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $4,089 | $4,288 | $12,257 | $13,344 |
| Income before tax | $166 | $1,978 | $342 | $1,447 |
| Net income | $102 | $1,103 | $197 | $658 |
| Diluted EPS | $0.38 | $4.29 | $0.73 | $2.54 |
| Adjusted EBIT (non-GAAP) | $355 | $300 | $1,033 | $773 |
| Operating cash flow | Not separately stated | Not separately stated | $1,230 | $404 |
Q3 revenue declined 4.6% year over year; constant-currency revenue declined 3.6%. GBS revenue rose 1.3% reported (2.6% constant currency), while GIS revenue fell 9.5% (8.6% constant currency). For the nine-month period, revenue declined 8.1% reported and 10.2% constant currency. Segment profit in Q3 was $315 million for GBS and $102 million for GIS, versus $273 million and $88 million, respectively, a year earlier.
Q3 costs of services were 77.8% of revenue, unchanged year over year; SG&A was 8.3% of revenue versus 12.1%. The filing does not present a directly comparable GAAP operating-margin measure in the cited tables. The non-GAAP adjusted EBIT increase should be considered alongside the company’s stated exclusions and reconciliations.
Cash, debt and liquidity
- Cash and cash equivalents were $2.919 billion at December 31, 2021, down from $2.968 billion at March 31, 2021. The company reported total liquidity of $5.919 billion, including $3.0 billion available under its revolving credit facility.
- Nine-month operating cash flow was $1.230 billion, up from $404 million; management attributed the improvement chiefly to higher net income, partly offset by a $677 million unfavorable working-capital change. Investing activities provided $93 million, compared with $4.500 billion, largely reflecting lower disposition proceeds. Financing activities used $1.460 billion.
- Total debt was $4.942 billion, down from $5.512 billion at March 31, 2021. DXC issued new euro- and dollar-denominated notes and used proceeds principally to refinance or repay higher-coupon debt. The company reported compliance with financial covenants and stable outlooks from Fitch, Moody’s and S&P.
- DXC repurchased 10.6 million shares for $363 million in the first nine months. Quarterly dividends remained suspended for fiscal 2022.
Changes, outlook and management commentary
- Comparisons are materially affected by divestitures: the prior-year period included a $2.046 billion gain on the HHS sale; the current nine-month period included a $337 million HPS-sale gain, partly offset by $311 million of debt-extinguishment costs. These items help explain why GAAP net income fell despite higher adjusted EBIT.
- Management cited project completions and terminations, lower run-rate volumes in GIS, and prior divestitures as revenue headwinds. New and existing customer work, software licensing and pass-through hardware and software revenue partially offset them. Cost optimization and lower transaction, restructuring, depreciation and amortization expenses supported profitability.
- Remaining performance obligations were approximately $22 billion; DXC expected to recognize about 14% in fiscal 2022 and the rest thereafter. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- DXC expected cash and operating cash generation to cover normal operating needs for the next 12 months, while cautioning that future borrowing may not be available on acceptable terms. Long-term customer contracts can require significant upfront cash investment.
- During the quarter, DXC agreed to sell its German financial-services subsidiary FDB for approximately €300 million, subject to adjustments and regulatory consents. At quarter-end FDB held about $670 million, primarily related to customer deposit liabilities.
Risks, contingencies and unusual matters
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2021 because of an ongoing material weakness involving controls for complex transactions and processes. Remediation was underway but had not been fully tested for effectiveness.
- Tax exposure: DXC disputed IRS adjustments relating to prior tax years. The unreserved portion could result in $456 million of federal and state tax expense, including estimated interest and penalties, and related cash cost if the company does not prevail. The company said resolution of certain years was not expected before fiscal 2025.
- Legal matters: The Oracle litigation involving HPE and former business units remained active, with trial continued to May 2022. A purported employment discrimination collective action and California securities litigation also remained matters to monitor. DXC said it could not reasonably estimate potential losses for certain disclosed contingencies.
- Commitments: Minimum purchase commitments totaled $2.262 billion. Surety bonds, letters of credit and standby letters of credit totaled $866 million. Management stated that performance-guarantee liabilities were not expected to have a material adverse effect.
- Other stated risks include COVID-19 and macroeconomic uncertainty, cyber and data-security incidents, contract execution and customer collections, foreign-exchange exposure, tax changes, and achieving restructuring benefits. The filing identified no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether revenue trends, especially GIS declines and GBS contract awards, improve in subsequent quarters.
- How much of the $22 billion remaining performance obligations converts to revenue, and on what timetable.
- Whether cash generation remains strong as working capital, restructuring spending and debt repayments fluctuate.
- Progress in testing and remediating the material weakness in internal controls.
- Developments in the $456 million tax dispute exposure and the Oracle and employment-related proceedings.
- Completion terms and regulatory status of the proposed FDB sale, including treatment of customer deposits.