DXC Technology Company — Form 10-Q Summary
Reporting period: Fiscal 2021 second quarter and first six months, ended September 30, 2020. The filing was signed November 5, 2020. DXC provides IT and digital services through Global Business Services (GBS) and Global Infrastructure Services (GIS).
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $4.554 billion | $4.851 billion | $9.056 billion | $9.741 billion |
| Net loss | $246 million | $2.115 billion | $445 million | $1.947 billion |
| Diluted loss per share | $0.96 | $8.19 | $1.77 | $7.44 |
| Adjusted EBIT, non-GAAP | $283 million | $529 million | $473 million | $1.181 billion |
| Operating cash flow | Not separately provided for the quarter | $591 million | $1.585 billion |
Q2 revenue declined 6.1% year over year; constant-currency revenue declined 7.7%. GBS revenue was $2.242 billion, down 1.9%; GIS revenue was $2.312 billion, down 9.9%. For the first six months, revenue fell 7.0%, with GBS down 0.6% and GIS down 12.4%.
Q2 segment profit was $317 million for GBS and $36 million for GIS, versus $359 million and $243 million, respectively, a year earlier. Costs of services were 78.3% of Q2 revenue, compared with 75.8% in the prior-year quarter. Adjusted EBIT was lower year over year in both the quarter and six-month period. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $3.079 billion at September 30, down from $3.679 billion at March 31, 2020. Six-month cash from operations was $591 million; investing used $234 million and financing used $963 million. The company attributed the operating cash-flow decline largely to the prior-year arbitration proceeds and lower net income, partly offset by lower working-capital outflows.
- Total debt was $9.668 billion, versus $9.948 billion at March 31. Management-reported net debt was $6.589 billion; net debt-to-total capitalization was 45.7%, up from 41.6%. Total debt-to-capitalization was 67.1%.
- At quarter-end, reported liquidity was $5.829 billion: $3.079 billion cash and $2.750 billion available under the revolving facility. Current liabilities exceeded current assets by approximately $319 million.
- After quarter-end, DXC completed the HHS sale on October 1 for $5.0 billion enterprise value, subject to working-capital adjustments and assumed liabilities. It then repaid approximately $3.5 billion of debt. The proceeds and repayments occurred after the balance-sheet date.
- DXC stated that cash, operating cash generation and other resources were expected to cover normal operating requirements for the next 12 months. It suspended quarterly dividends to enhance financial flexibility; no share repurchases occurred in the six-month period.
Material changes and unusual items
- Revenue pressure reflected prior contract terminations, price reductions and customer settlements. Cost optimization reduced costs of services, but revenue declines increased that expense as a share of sales.
- The prior-year comparison included a $2.887 billion goodwill impairment and a $632 million arbitration gain, neither recorded in the current quarter. These items largely explain why the current-period GAAP net loss was substantially smaller despite lower adjusted EBIT.
- Current-period restructuring expense was $265 million in Q2 and $337 million for six months, primarily related to a new global cost-savings plan. Transaction, separation and integration costs were $101 million and $211 million, respectively.
- Remaining performance obligations were approximately $23 billion at September 30; DXC expected to recognize about 25% in fiscal 2021 and the balance thereafter. This is an estimate, not a guarantee of revenue.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cited continuing uncertainty from COVID-19 and its potential effects on clients, operations, cash flow and liquidity.
- The proposed sale of healthcare provider software (HPS) to Dedalus for approximately €459 million, or about $525 million, was expected to close by March 2021, subject to conditions including regulatory and customer consents. Completion was not assured.
- A material weakness in internal control over financial reporting remained unresolved at quarter-end; management concluded disclosure controls were not effective. Remediation was ongoing, and management said there had not been sufficient time to conclude the weakness was resolved.
- Perspecta arbitration claims totaled approximately $990 million, including interest; DXC disputes the claims. Perspecta also challenged invoices, while DXC asserted amounts were owed. The hearing had occurred, with closing arguments expected in November 2020. The filing did not provide a clear estimate of possible loss.
- Other legal matters include securities and employment litigation, an Oracle-related matter remanded for further proceedings, and tax audits. DXC said resolution of pending matters could materially adversely affect results in a particular period, while stating it did not believe currently pending matters would materially affect its financial position or ability to meet obligations.
- Additional risks include substantial indebtedness, reliance on third-party software licenses, contract and customer-retention risks, restructuring execution, cybersecurity and business interruption. The filing specifically disclosed a ransomware attack at subsidiary Xchanging.
Important facts for investors to verify
- Net cash proceeds from the HHS sale after adjustments and liabilities, and the resulting debt, interest expense and liquidity levels.
- Whether the HPS sale closes on the expected terms and timetable, and its effect on remaining revenue and operations.
- Whether revenue declines—particularly in GIS—stabilize, and whether contract awards and the $23 billion performance-obligation balance convert to revenue and cash.
- Operating cash-flow trends, receivables and working-capital requirements, and the use and availability of revolving credit and receivables facilities.
- Progress in remediating the material weakness and the outcome of significant legal, arbitration and tax matters.