DXC Technology Company — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020. The filing is an annual report, not a report for calendar 2019 Q4; fiscal Q4 ended March 31, 2020. DXC provides IT outsourcing, applications, cloud, security, analytics and engineering services through Global Business Services (GBS) and Global Infrastructure Services (GIS.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $19.577 billion | $20.753 billion |
| GAAP continuing-operations income (loss) | $(5.358) billion | $1.227 billion |
| GAAP diluted EPS from continuing operations | $(20.76) | $4.35 |
| Adjusted EBIT, non-GAAP | $2.061 billion | $3.269 billion |
| Adjusted diluted EPS, non-GAAP | $5.58 | $8.34 |
| Cash from operations | $2.350 billion | $1.783 billion |
- Revenue declined 5.7% year over year, or 3.5% in constant currency. GBS revenue rose 4.9% to $9.111 billion (7.0% constant currency), including Luxoft; GIS revenue fell 13.3% to $10.466 billion (11.1% constant currency), reflecting pricing pressure, contract run-off and account terminations.
- Costs of services were 76.0% of revenue, versus 72.1% in FY2019. The resulting revenue less costs of services was $4.676 billion, or approximately 23.9% of revenue, compared with $5.807 billion, or approximately 28.0%, in FY2019; this calculation excludes depreciation, amortization and restructuring costs.
- The GAAP loss was principally driven by $6.794 billion in non-cash goodwill impairment charges—$3.789 billion in GBS and $3.005 billion in GIS. DXC also recorded a $632 million gain on an arbitration award and $720 million of other income, including pension-related income.
- FY2020 Q4 revenue was $4.815 billion; continuing-operations loss was $3.501 billion after tax, and diluted loss per share was $13.79. Q4 included a $3.562 billion pretax loss.
Cash, debt and liquidity
- Cash and cash equivalents were $3.679 billion at March 31, 2020, including $1.2 billion held outside the United States. Total debt was $9.948 billion, up from $7.412 billion; net debt was $6.269 billion. Net debt-to-total capitalization increased to 41.6% from 23.6%.
- Reported liquidity at year-end was $6.179 billion, comprising cash and $2.5 billion available under the revolving credit facility. DXC drew $1.5 billion of the facility in March and suspended its commercial-paper program amid market disruption. It drew the remaining $2.5 billion on April 6, 2020, after year-end.
- Of $9.9 billion in debt including finance leases, $5.2 billion was floating-rate. DXC reported compliance with financial covenants at year-end; credit-rating outlooks from Fitch, Moody’s and S&P were negative.
- Operating cash flow included $668 million received on the arbitration award. Investing activities used $2.137 billion, including $1.997 billion of net acquisition payments. Financing activities provided $657 million.
Material changes, outlook and risks
- DXC completed its approximately $2.0 billion Luxoft acquisition in June 2019. Luxoft contributed $695 million of revenue from acquisition through year-end and a reported $25 million net loss for that period.
- DXC agreed to sell its U.S. State and Local Health and Human Services business to Veritas Capital for $5.0 billion in cash. The sale was pending at filing and subject to closing conditions, including customer-contract transfer requirements. DXC expected to use after-tax proceeds to repay debt. No assurance was provided that the transaction would close.
- Remaining performance obligations were approximately $24.0 billion; about 42% was expected to be recognized in FY2021. This is a contract measure, not a revenue forecast, and may change.
- The filing provides no clear numeric company-wide revenue or earnings guidance. Management cited COVID-19 uncertainty and potential effects on client demand, service delivery, collections, costs, cash flow and asset values. DXC suspended quarterly dividends beginning in FY2021 to preserve cash; future payments depend on the Board’s reassessment.
- Subsequent to year-end, DXC issued $1.0 billion of senior notes and used the net proceeds to prepay term loans. On May 15, 2020, it amended bank-facility leverage terms to measure leverage net of cash and agreed to extend portions of euro term loans by one year.
- The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. DXC identified an unremediated material weakness involving controls for reassessing policies and procedures in complex transactions, including goodwill impairment and deferred-revenue classification; reported financial statements were stated to be fairly presented.
- Other notable exposures include pending securities and derivative litigation, a Perspecta arbitration claim that had increased to more than $800 million (DXC disputed the claim), and an ongoing voluntary disclosure/investigation concerning possible sanctions-law violations. The filing does not provide a clear estimate of possible loss for the disclosed contingencies overall.
Most important facts for investors to verify
- Whether the $5.0 billion HHS sale closed, the final after-tax proceeds, and actual debt reduction.
- Post-year-end cash, debt, commercial-paper access, covenant headroom and credit-rating developments after the additional revolver draw and amendments.
- Whether GIS revenue declines and cost pressures continued, and whether GBS growth from Luxoft translated into improved profitability and cash generation.
- Progress in remediating the material weakness and any subsequent control findings or financial-statement adjustments.
- Developments in the Perspecta arbitration, securities litigation, tax examinations and OFAC matter, including any estimable financial impact.
- Actual performance against the $24.0 billion remaining-performance-obligation balance and the expected FY2021 recognition timetable.