DXC Technology Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended September 30, 2021; comparatives are the corresponding periods of fiscal 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context
DXC provides IT and business services through Global Business Services (GBS) and Global Infrastructure Services (GIS). The period includes the April 1, 2021 sale of its healthcare provider software business (HPS); the U.S. State and Local Health and Human Services business (HHS) was sold in October 2020.
Financial performance and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $4.027bn | $4.554bn | $8.168bn | $9.056bn |
| Net income (loss) | $(187)m | $(246)m | $95m | $(445)m |
| Diluted EPS | $(0.74) | $(0.96) | $0.35 | $(1.77) |
| Operating cash flow | Not separately shown for the quarter | $534m | $591m |
- Q2 revenue declined 11.6%; six-month revenue declined 9.8%. On a constant-currency basis, declines were 13.0% and 13.4%, respectively.
- Q2 GBS revenue fell 16.5% to $1.873bn and GIS revenue fell 6.8% to $2.154bn. Six-month GBS and GIS revenue declined 14.9% and 5.0%, respectively.
- Q2 cost of services was 76.7% of revenue, versus 78.3% a year earlier; SG&A was 9.2%, versus 11.8%. Total costs and expenses were 106.2% of revenue, versus 106.7%.
- Segment profit was $416m in Q2 (GBS $298m; GIS $118m) and $819m for six months (GBS $570m; GIS $249m). Adjusted EBIT, a non-GAAP measure, was $346m and $678m, respectively.
- Six-month operating cash flow was $534m, down $57m, primarily due to a $210m unfavorable working-capital change. Investing activities provided $199m, including $513m from business dispositions; financing activities used $1.063bn. Cash declined by $269m to $2.699bn.
- At September 30, cash was $2.699bn and total debt was $5.108bn, down from $5.512bn at March 31. Current liabilities were $6.819bn versus current assets of $7.384bn. Reported liquidity was $6.699bn, including $4.0bn of revolver availability; the revolver was amended in November 2021, after quarter-end, reducing availability to $3.0bn.
Material changes and unusual items
- Management attributed lower revenue mainly to HPS, HHS and other divestitures, project completions and terminations; increased pass-through sales and additional customer services partly offset declines. Contract awards decreased: Q2 GBS awards were $1.7bn versus $2.4bn, and GIS awards were $2.0bn versus $2.5bn.
- Six-month results included a $341m pretax gain on the HPS sale and gains on other dispositions, offset in part by prior-sale adjustments. The HPS sale generated approximately $551m of proceeds, subject to working-capital adjustment.
- Debt refinancing generated $281m of Q2 and $309m of six-month debt-extinguishment costs. The company issued euro- and dollar-denominated notes and used proceeds principally to repay older, higher-coupon debt. Interest expense fell to $61m in Q2 and $123m for six months.
- Restructuring costs were $145m in Q2 and $212m for six months, primarily associated with a new fiscal 2022 cost-savings plan. Management cited cost optimization and lower transaction and post-divestiture costs as contributors to improved year-over-year earnings.
Outlook, risks and contingencies
- No specific revenue or earnings forecast is provided in the supplied filing text. Management expects existing cash and operating cash generation to meet normal operating requirements for the next 12 months, while noting that future borrowing may not be available on acceptable terms.
- Remaining performance obligations were approximately $22bn; DXC expected to recognize about 25% in fiscal 2022 and the balance thereafter. This is not a revenue guarantee and is subject to contract changes and other factors.
- Disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2021 because a previously identified material weakness remained. Remediation was ongoing, with further testing required before management could conclude the weakness was resolved.
- An IRS dispute concerning historical tax years had an estimated $438m federal and state tax expense, including interest and penalties, for the unreserved items if DXC does not prevail. Management expected resolution of several years’ matters no earlier than fiscal 2025; certain other tax matters could affect liabilities.
- Other disclosed matters include the Oracle litigation, scheduled for trial in November 2021, securities and shareholder litigation, and customer and employment disputes. DXC said it intended to defend matters it considered without merit; for many contingencies, a reasonable loss estimate was unavailable.
- Risks highlighted include revenue and contract execution, competition, customer collections, cybersecurity and data protection, international operations and foreign exchange, restructuring execution, access to capital, litigation, taxes, and COVID-19-related uncertainty. The filing reported no material change to previously disclosed risk factors.
Investor facts to verify
- Whether revenue declines and lower contract-award levels persist after divestitures and project completions.
- Cash conversion and working-capital trends, alongside the effect of the reduced revolver availability.
- Progress and independent testing of the material-weakness remediation plan.
- Resolution, timing and potential cash exposure from IRS examinations and significant litigation.
- How much of the $22bn remaining performance obligation converts to revenue, and on what schedule.
- The sustainability of reported improvement given restructuring charges, sale gains and substantial debt-extinguishment costs.