Business context and reporting period
DXC Technology Company provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS). This unaudited Form 10-Q covers the quarter and nine months ended December 31, 2019 (fiscal 2020 third quarter), compared with the corresponding fiscal 2019 periods. DXC acquired digital-services provider Luxoft in June 2019 for approximately $2.0 billion.
Financial results and liquidity
Unless otherwise indicated, amounts are in U.S. dollars.
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $5.021 billion | $5.178 billion | $14.762 billion | $15.473 billion |
| Net income (loss) | $90 million | $466 million | $(1.857) billion | $991 million |
| Diluted EPS from continuing operations | $0.32 | $1.66 | $(7.20) | $3.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.062 billion | $1.035 billion |
| Adjusted EBIT, non-GAAP | $528 million | $840 million | $1.709 billion | $2.442 billion |
- Quarterly revenue declined 3.0%; nine-month revenue declined 4.6%. Nine-month constant-currency revenue fell 2.4%.
- Quarterly GAAP income from continuing operations was $90 million; nine-month results include a $2.940 billion non-cash goodwill impairment charge and a $632 million arbitration-award gain. The impairment drove the reported nine-month loss.
- Quarterly adjusted EBIT margin was approximately 10.5%, versus 16.2% in the prior-year quarter. Costs of services were 76.1% of quarterly revenue, up from 71.8%.
- Cash and equivalents were $2.560 billion at December 31, 2019, versus $2.899 billion at March 31, 2019. Nine-month operating cash flow included $668 million received on the arbitration award.
- Total debt was $8.896 billion, including current debt; net debt was $6.336 billion. Debt-to-total capitalization was 49.4%, up from 38.7% at March 31, 2019. Total liquidity, including $4.0 billion of available revolving credit, was $6.560 billion. Current liabilities exceeded current assets by approximately $601 million.
- DXC repurchased $736 million of shares and declared approximately $165 million in dividends during the nine months.
Material changes versus the prior comparable period
- GBS revenue increased 8.8% in the quarter and 4.8% for the nine months, supported by Luxoft and other acquisitions. GIS revenue fell 11.5% and 11.4%, respectively, reflecting continuing declines in traditional infrastructure services.
- Quarterly segment profit decreased to $585 million from $923 million; nine-month segment profit fell to $1.893 billion from $2.673 billion.
- Nine-month operating cash flow increased by $1.027 billion year over year, aided by the arbitration proceeds and lower working-capital outflows. Investing cash use rose to $2.122 billion, largely due to acquisition spending, including Luxoft.
- Gross debt increased $1.484 billion from March 31, 2019, principally to finance Luxoft; DXC also repaid $500 million notes due 2020 and $500 million notes due 2021 during the period.
- Adoption of lease accounting added $1.7 billion of assets and $1.8 billion of liabilities at April 1, 2019. The company also extended the estimated useful lives of certain computer equipment, reducing depreciation expense by $179 million for the nine-month period.
Outlook, commentary, risks and unusual items
- Management expects existing cash and operating cash generation to meet normal operating requirements for the next 12 months. The filing provides no specific earnings or revenue guidance. Approximately $25.6 billion of remaining performance obligations were reported; about 15% was expected to be recognized in fiscal 2020.
- Management cited ongoing declines in legacy application maintenance and infrastructure services, as well as a 2.2% unfavorable foreign-exchange impact on fiscal 2020 revenue. GBS contract awards improved, while GIS contract awards declined year over year.
- DXC recorded a $2.940 billion goodwill impairment after a substantial, sustained decline in its share price and market capitalization. Further share-price declines or other impairment indicators could lead to additional charges.
- DXC disclosed a material weakness in internal control over financial reporting, related to reassessing controls for complex transactions and processes. Disclosure controls were deemed ineffective as of December 31, 2019; remediation was underway, and completion could extend beyond fiscal year-end.
- Perspecta increased its arbitration claim against DXC to $500 million, alleging breaches of separation-agreement obligations; DXC disputes the claim. Other notable contingencies include a labor case with an $18.75 million damages award under appeal, and the Kemper arbitration judgment, for which DXC estimated a potential $25–$60 million balance if rehearing is denied and insurance does not cover it.
- Fitch and S&P maintained DXC’s ratings but revised outlooks to negative after DXC announced it was exploring strategic alternatives for certain businesses. DXC also cited risks involving acquisition integration, competition, contract execution, cybersecurity, refinancing and litigation.
Important facts for investors to verify
- Whether GBS growth can offset the continued contraction in GIS and legacy services, and how contract awards translate into revenue.
- The sustainability of operating cash flow after excluding the $668 million arbitration proceeds, alongside acquisition, debt-service and restructuring needs.
- Progress in remediating the material weakness and whether further accounting adjustments or restatements arise.
- The outcome and potential financial exposure from the Perspecta arbitration, Kemper judgment, tax examinations and securities litigation.
- Whether DXC can realize Luxoft’s expected benefits and avoid additional goodwill impairment amid share-price and market pressures.