DXC Technology Company — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2017 (DXC fiscal Q1 2018). The quarter is the first after the April 1 merger of CSC and HPE’s Enterprise Services business (HPES). CSC is the accounting predecessor, so the reported prior-year quarter excludes HPES and is not directly comparable.
Key financial results
| Metric | Quarter ended June 30, 2017 | Comparable reported quarter |
|---|---|---|
| Revenue | $5.913 billion | $1.930 billion |
| Income (loss) before tax | $185 million | $(36) million |
| Net income (loss) | $173 million | $(20) million |
| Net income (loss) attributable to DXC common stockholders | $159 million | $(21) million |
| Diluted EPS | $0.55 | $(0.15) |
| Operating cash flow | $534 million | $50 million |
- On a pro forma basis including HPES in both periods, revenue was $5.913 billion versus $6.418 billion, down 7.9%; constant-currency revenue declined 6.1%. Management cited contract completions or renewals at lower rates, partly offset by new business. USPS revenue declined mainly due to lower pass-through revenue.
- GAAP net margin was approximately 2.9%. Segment profit was $649 million across reportable segments, plus $30 million in “All Other.” Reportable-segment revenue/profit: GBS $2.267 billion/$282 million; GIS $2.969 billion/$290 million; USPS $677 million/$77 million.
- Adjusted EBIT, a company-defined non-GAAP measure, was $679 million; adjusted EBIT margin was approximately 11.5%. The filing reconciles this measure by excluding restructuring, merger transaction/integration costs, and acquired-intangible amortization.
- Restructuring expense was $190 million, versus $57 million a year earlier. Transaction and integration costs were $124 million. Other income included a $77 million foreign-currency gain related to a change in a European holding company’s functional currency.
- Effective tax rate was 6.5%, compared with 44.4% in the reported prior-year period. Management attributed the current rate to income mix, share-based payment tax benefits and valuation-allowance releases, partly offset by foreign inclusions and non-deductible compensation.
Cash, debt and liquidity
- Cash and cash equivalents were $2.517 billion at June 30, including $1.6 billion held outside the United States. Net cash from the merger materially contributed to the increase from $1.263 billion at March 31.
- Operating cash flow was $534 million. Investing cash flow was positive $859 million, including $974 million of cash acquired in the merger; financing cash flow was negative $168 million.
- Total debt was $7.452 billion, including $1.203 billion of short-term debt and current maturities. Net debt was $4.935 billion. Debt-to-total capitalization was 37.6%; net debt-to-total capitalization was 24.9%.
- Reported total liquidity was $5.571 billion: cash of $2.517 billion plus available revolving-credit and lease-facility borrowings. The revolving credit facility had approximately $2.992 billion available. Management said cash and operating cash flows should cover normal operating requirements for the next 12 months.
- Current assets were $9.575 billion and current liabilities $8.091 billion. The company reported compliance with its financial covenants. Credit ratings were investment grade, with S&P’s outlook negative and Fitch and Moody’s outlooks stable.
Merger, changes and outlook
- HPES contributed $4.328 billion of revenue and $190 million of net income from the April 1 acquisition date through June 30. The preliminary purchase accounting included $6.765 billion of merger goodwill; total goodwill was $8.774 billion at quarter-end. The purchase price allocation remained subject to change.
- Management’s stated merger target was approximately $1.0 billion of first-year synergies and a $1.5 billion run rate by the end of year one. These are targets, not guaranteed results; the pro forma comparison excludes expected synergies and integration costs.
- Management approved a new fiscal 2018 restructuring plan to reduce costs through workforce optimization, increased offshore work and facility/datacenter actions. Quarter-end restructuring liabilities totaled $464 million.
- The company announced a dividend policy targeting $0.18 per share quarterly, or $0.72 for fiscal 2018, subject to board approval. It authorized a $2.0 billion share-repurchase program and repurchased 250,000 shares for $19 million in the quarter.
- Contract awards for the quarter were $3.7 billion in GIS, $2.4 billion in GBS and $0.2 billion in USPS. On July 1, DXC acquired Tribridge Holdings and Concerto Cloud Services; integration was expected to complete by April 1, 2018.
Risks, contingencies and unusual items
- Key risks include integrating CSC and HPES, realizing synergies, retaining customers and employees, continuing HPES’s turnaround, pricing pressure, contract execution, cybersecurity, foreign-exchange exposure and substantial indebtedness. The filing also notes that long-term contracts can require significant upfront investment.
- Operating and purchase commitments are substantial: contractual obligations totaled $17.750 billion, including $6.522 billion of purchase obligations, much of which relates to supplier agreements and HPE preferred-vendor arrangements.
- Disclosed legal and regulatory matters include a False Claims Act case related to New York City’s Early Intervention Program, Navy Yard litigation, wage-and-hour class and collective actions, a Kemper arbitration seeking approximately $100 million, and an ongoing voluntary disclosure/investigation concerning possible sanctions-law violations at Xchanging joint ventures. The filing does not provide a clear estimate of potential losses for these matters.
- The company said disclosure controls were effective. It was implementing a new consolidation and reporting system and continuing merger-related control integration; monitoring and adjustments were expected to continue through fiscal Q2 2018.
- Foreign-exchange hedging losses and gains affected results. Approximately 57% of revenue was generated outside the United States; management estimated an adverse 10% dollar move would reduce revenue by about $334 million, with most of the effect expected to be offset by local-currency expenses.
Important facts for investors to verify
- Track pro forma and constant-currency revenue trends, particularly contract renewals, new business and segment performance.
- Monitor whether the announced synergy targets are achieved, alongside restructuring and integration costs and any impact on customer retention.
- Review the final merger purchase-price allocation, acquired liabilities, goodwill and intangible-asset amortization.
- Assess debt repayment, floating-rate exposure, cash generation and the availability and conditions of reported liquidity facilities.
- Follow developments in the disclosed litigation and sanctions inquiry, and any changes to loss estimates or tax indemnities.
- Evaluate progress integrating financial systems and controls, and execution of the dividend and repurchase plans.