DXC Technology Company — FY2021 Form 10-K
Reporting period: Fiscal year ended March 31, 2021; comparisons are primarily with the year ended March 31, 2020. This is an annual report, not a standalone 2020 fourth-quarter filing. DXC provides global IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS).
Financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $17.729 billion | $19.577 billion |
| Income (loss) from continuing operations before taxes | $654 million | $(5.228) billion |
| Net loss | $(146) million | $(5.358) billion |
| Diluted loss per share | $(0.59) | $(20.76) |
| Cash from operating activities | $124 million | $2.350 billion |
| Cash and cash equivalents at year-end | $2.968 billion | $3.679 billion |
| Total debt | $5.512 billion | $9.948 billion |
- Revenue declined 9.4% year over year, or 11.1% in constant currency. GBS revenue fell 8.5% to $8.336 billion; GIS fell 10.3% to $9.393 billion.
- Segment profit was $1.365 billion, versus $2.308 billion. GBS segment profit was $1.120 billion and GIS was $245 million, down from $1.301 billion and $1.007 billion, respectively.
- GAAP net loss included a $2.014 billion pretax gain on the HHS divestiture, $551 million of restructuring costs, $190 million of impairment losses and $519 million of pension/OPEB actuarial and settlement losses. Income tax expense was $800 million, producing a 122.3% effective tax rate.
- Management-reported adjusted EBIT was $1.102 billion, down from $2.061 billion; non-GAAP net income attributable to DXC common stockholders was $624 million, or $2.43 diluted EPS. These non-GAAP measures exclude specified items and are not directly comparable to GAAP results.
- Operating cash flow fell by $2.226 billion, primarily reflecting lower earnings before noncash adjustments; a $697 million favorable working-capital comparison partly offset the decline. Days sales outstanding rose to 67 from 65.
- Net debt was $2.544 billion, compared with $6.269 billion; net debt-to-total capitalization declined to 23.5% from 41.6%. Reported total liquidity was $6.968 billion, including $2.968 billion cash and $4.0 billion available under the revolver.
Material changes and unusual items
- Revenue weakness reflected project terminations and completions, lower run-rate volumes, and the October 2020 HHS sale; Luxoft and additional customer services partly offset declines. Contract awards were $11.0 billion in GBS and $8.8 billion in GIS, versus $9.0 billion and $8.7 billion.
- The HHS business was sold for $5.0 billion enterprise value, subject to adjustments, generating a $2.014 billion pretax gain. Approximately $3.5 billion of proceeds was used to repay debt.
- DXC completed the sale of its healthcare provider software business (HPS) on April 1, 2021, after year-end, for €462 million (approximately $543 million), subject to adjustments. Proceeds were used in part to retire remaining 4.45% notes due 2023.
- Cash provided by investing activities was $4.665 billion, largely due to divestiture proceeds; financing activities used $5.476 billion, including debt repayments. DXC made no share repurchases in FY2021.
- Quarterly cash dividends were suspended beginning in FY2021; management said the suspension would continue through FY2022.
Outlook, risks and contingencies
- Management said existing cash and expected operating cash flows should cover normal operating requirements for the next 12 months. It identified revenue stabilization, cost optimization, winning in the market and portfolio shaping as priorities; the filing provides no specific revenue or earnings guidance.
- Approximately $23 billion of remaining performance obligations was expected to be recognized as revenue; about 39% was expected in FY2022. Estimates may change with terminations, scope changes, and other factors.
- COVID-19 remained a risk to customer demand, service delivery, employees and suppliers, particularly given DXC’s significant delivery operations in India. The filing also highlights competition and pricing pressure, execution and contract-estimation risks, cybersecurity and data privacy, foreign exchange, debt and refinancing, and restructuring execution.
- DXC disclosed a material weakness in internal control over financial reporting relating to controls for complex transactions and processes. Management and the auditor concluded controls were ineffective as of March 31, 2021; Deloitte issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation was ongoing.
- The IRS disputes certain historical tax positions; DXC estimated a potential $405 million federal and state tax expense and cash cost if it does not prevail on unreserved issues. A $3.9 billion valuation allowance was recorded against deferred tax assets.
- Other matters include securities and employment litigation, an OFAC sanctions-law voluntary disclosure, and customer/vendor disputes. The Perspecta arbitration was resolved in DXC’s favor, with $69 million awarded and the matter closed. DXC said it could not reasonably estimate possible losses for certain disclosed contingencies.
Important facts for investors to verify
- Whether revenue declines and operating cash flow weakness persist, and how performance develops by GBS and GIS.
- Progress in remediating the material weakness, including whether subsequent testing supports a conclusion that controls are effective.
- Actual cash proceeds and final working-capital adjustments for HHS and HPS, and the resulting debt and liquidity position after post-year-end transactions.
- Cash conversion and collection trends, including receivables, contract assets, and the rising days-sales-outstanding measure.
- Developments in the IRS examination, valuation allowances, and other litigation or regulatory contingencies.
- Whether restructuring costs produce durable savings and whether the FY2022 dividend suspension or any capital-return plans change.