DXC Technology Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2020 (fiscal 2021). Amounts are U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and financial performance
DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS). It completed the sale of its U.S. State and Local Health and Human Services business (HHS) on October 1, 2020. The filing reports results including HHS through its sale date; the sale was not treated as discontinued operations.
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $4,288 | $5,021 | $13,344 | $14,762 |
| Net income (loss) | $1,103 | $90 | $658 | $(1,857) |
| Net income (loss) attributable to DXC common stockholders | $1,098 | $82 | $649 | $(1,874) |
| Diluted EPS | $4.29 | $0.32 | $2.54 | $(7.20) |
| Adjusted EBIT (non-GAAP) | $300 | $528 | $773 | $1,709 |
| Operating cash flow | Not presented here for the quarter | $404 | $2,062 |
Quarterly revenue fell 14.6% (16.9% in constant currency); nine-month revenue fell 9.6% (10.2% in constant currency). Management attributed the declines principally to the HHS divestiture, project terminations and changes in run volumes; GIS also faced price reductions. Quarterly GBS revenue declined 18.6% and GIS 11.1%; nine-month declines were 6.8% and 12.0%, respectively.
Reported profit was materially affected by the HHS sale gain: the quarter included a $2,046 pre-tax gain on business dispositions, primarily the $2,041 HHS gain. Quarterly reported diluted EPS was $4.29 versus non-GAAP diluted EPS of $0.84; adjusted EBIT was $300 versus $528 a year earlier. For the nine months, non-GAAP diluted EPS was $1.69 versus $4.38. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Quarterly segment profit was $273 for GBS and $88 for GIS, compared with $353 and $232, respectively, in the prior-year quarter. Nine-month segment profit was $805 for GBS and $147 for GIS, versus $1,078 and $815. Cost of services declined in dollars, but increased as a share of revenue: by 1.6 percentage points for the quarter and 3.6 points for the nine months, reflecting lower revenue. Restructuring costs were $104 for the quarter and $441 for the nine months.
Cash, debt and liquidity
At December 31, 2020, cash and cash equivalents were $3,919, total debt was $6,239 and net debt (non-GAAP) was $2,320. Compared with March 31, 2020, total debt fell from $9,948 and net debt from $6,269. Debt-to-total capitalization declined to 51.0% from 66.0%; net debt-to-total capitalization declined to 19.0% from 41.6%.
Cash was $3,919, up from $3,679 at fiscal year-end. Available revolver borrowings were $4,000, giving reported total liquidity of $7,919. The company said cash and operating cash generation should meet normal operating needs for the next 12 months. Some cash is subject to country, regulatory or minority-interest restrictions, including $0.5 billion in a German financial-services subsidiary and $0.5 billion held by foreign subsidiaries subject to local limitations.
Nine-month investing cash flow was $4,500, largely reflecting $4,942 in business-disposition proceeds. Financing cash outflow was $4,671, including debt repayments; approximately $3.5 billion of HHS proceeds was used to repay debt. Operating cash flow fell by $1,658 year over year. Management cited lower net income after adjustments, the prior-year arbitration proceeds, HHS-related cash payments and receivables, partly offset by lower working-capital cash outflows. No share repurchases occurred in the nine-month period, and quarterly dividends remained suspended.
Transactions, outlook and risks
- HHS was sold for total enterprise value of $5.0 billion, including $85 million associated with future services. The gain is subject to final working-capital adjustments. DXC retained its healthcare provider software business pending a separate sale to Dedalus for approximately €459 million (about $525 million), expected to close by March 2021 subject to conditions.
- Remaining performance obligations were approximately $24 billion at December 31, 2020; DXC expected to recognize about 14% in fiscal 2021 and the balance thereafter. GBS contract awards were $2.7 billion for the quarter and $8.6 billion for nine months; GIS awards were $2.2 billion and $6.5 billion. The filing provides no clear formal revenue or earnings guidance.
- Management cited COVID-19 uncertainty, client demand and economic disruption among factors that could affect results, cash flows and liquidity. Other identified risks include competition, contract performance, cybersecurity and data protection, international operations, execution of restructuring and strategic plans, and substantial indebtedness. The filing specifically references a ransomware attack at subsidiary Xchanging.
- Disclosure controls and procedures were deemed ineffective at December 31, 2020 because of an existing material weakness in internal control over financial reporting. Management reported remediation progress but said the work would extend beyond fiscal year-end and requires subsequent testing.
- Contingencies include a pending Perspecta arbitration claim of $990 million, which DXC disputes; an IRS audit matter with potential federal and state tax cost of $410 million excluding interest and penalties; and other litigation and regulatory matters. Management said it could not reasonably estimate possible losses for the disclosed matters in general.
- DXC reported $3,476 of minimum purchase commitments through fiscal 2024. Financial guarantees, letters of credit and surety bonds totaled $1,013. Moody’s rating was Baa2 with a negative outlook; Fitch and S&P outlooks were stable.
Important facts for investors to verify
- How much of the revenue decline reflects the HHS sale versus continuing project losses, run-volume changes and GIS price reductions.
- The sustainability of earnings and cash generation excluding the HHS disposal gain and other adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
- Final HHS working-capital adjustments, use of sale proceeds, and whether the pending HPS divestiture closes on expected terms and timing.
- Progress in remediating the material weakness and the outcome of the Perspecta arbitration, IRS audit and other significant legal matters.
- Availability and quality of liquidity, including restrictions on some cash, reliance on receivables facilities, debt maturities and the negative Moody’s outlook.