DXC Technology Company — Form 10-Q Summary
Business context and reporting period. DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS). This filing covers the three months ended June 30, 2021, the first quarter of fiscal 2022; comparisons are with the three months ended June 30, 2020.
Financial performance and position
- Revenue: $4.141 billion, down 8.0% year over year; down 13.7% in constant currency. GBS revenue was $1.887 billion, down 13.2%; GIS was $2.254 billion, down 3.2%.
- Profit: GAAP net income attributable to DXC stockholders was $278 million, versus a $205 million loss. Diluted EPS was $1.07, versus a loss of $0.81 per share. Results included a $341 million estimated gain on the HPS sale and other disposition gains. Adjusted EBIT was $332 million versus $190 million; non-GAAP diluted EPS was $0.84 versus $0.21.
- Margins: Adjusted EBIT margin was approximately 8.0% of revenue, compared with 4.2%. GAAP profit was materially affected by disposition gains and should not be viewed as solely recurring operating performance.
- Cash flow: Operating cash use was $29 million, versus $119 million generated in the prior-year quarter. Investing activities provided $311 million, primarily reflecting disposition proceeds; financing activities used $866 million. Cash declined by $508 million to $2.460 billion.
- Debt and liquidity: Total debt was $4.933 billion, down from $5.512 billion at March 31, 2021. Cash plus available revolving-credit borrowings was $6.460 billion. The company reported compliance with financial covenants and said existing cash and expected operating cash flows should cover normal requirements for the next 12 months.
- Balance sheet: Current assets were $7.541 billion and current liabilities $7.406 billion. Total liabilities were $15.481 billion; total equity was $5.386 billion.
- Commercial indicators: Remaining performance obligations were approximately $24 billion, with about 33% expected to be recognized in fiscal 2022. First-quarter contract awards were $2.4 billion in GBS (versus $3.5 billion) and $2.2 billion in GIS (versus $1.8 billion).
Material changes versus the prior comparable period
- Revenue fell $361 million, reflecting the prior HHS divestiture, the current-quarter HPS divestiture, project completions and terminations, and lower run-rate volumes. Higher pass-through revenue and added customer services partly offset declines. Foreign exchange increased reported revenue by 5.7%; constant-currency revenue declined more sharply.
- Net income improved by $481 million. Management cited cost optimization, HPS sale gains, and lower transaction and integration costs, partly offset by lower revenue.
- Costs of services declined $374 million and SG&A declined $156 million. Transaction, separation and integration costs were $9 million, versus $110 million.
- Debt declined following repayment of the remaining $319 million of 4.45% notes due 2023, a $33 million repurchase of 4.125% notes due 2026, and repayments of finance leases and asset financing.
- Cash from operations weakened by $148 million year over year, primarily due to an $87 million unfavorable working-capital change.
Outlook, risks, contingencies and unusual items
- DXC gave no specific earnings or revenue forecast in the provided filing text. It expects cash and operating cash generation, together with financing capacity, to meet normal operating needs for the next 12 months, while cautioning that future debt financing is not assured on acceptable terms.
- The company suspended quarterly dividends for fiscal 2022. It repurchased 1.75 million shares for $67 million during the quarter.
- Management approved new global workforce and facility cost-saving initiatives; quarterly restructuring costs were $67 million. The filing does not quantify expected total savings or completion timing.
- The HPS sale closed April 1, 2021 for approximately $551 million, subject to working-capital adjustments. Proceeds helped repay debt. DXC also reported $28 million of debt-extinguishment costs.
- Controls: Management concluded disclosure controls were not effective and that a material weakness in internal control over financial reporting remained at June 30, 2021. Remediation work was underway but not complete; further testing is required.
- Tax contingency: Disputed IRS matters could result in $407 million of federal and state tax expense and related cash cost if DXC does not prevail on unreserved items. The company expects some matters to extend to Tax Court and does not expect those cases to be resolved within 12 months.
- Other disclosed matters include securities and employment litigation, an Oracle-related case scheduled for trial in November 2021, and an OFAC sanctions-law inquiry. DXC said outcomes cannot be predicted and generally could not estimate possible losses; it did not believe currently pending matters would materially impair its financial position or ability to meet obligations.
- Key stated risks include COVID-19 and macroeconomic uncertainty, execution of strategic transactions and restructuring, cybersecurity and data protection, contract performance and cost estimation, customer credit and collections, access to capital, regulatory and tax matters, and the unresolved control weakness.
Important facts for investors to verify
- How much of reported profit and EPS is attributable to the HPS and other disposition gains, and whether underlying margins and revenue stabilize.
- Whether cost reductions and new restructuring plans deliver sustainable savings without impairing service delivery or growth; monitor contract awards and constant-currency revenue.
- Whether operating cash flow and working capital improve, and how much of reported liquidity is practically available given foreign, regulatory, and subsidiary restrictions.
- Progress and independent testing of remediation of the material weakness in internal controls.
- Developments in the $407 million unreserved IRS exposure, other legal matters, and pending disposition working-capital adjustments.