DXC Technology Company (DXC) — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended September 30, 2022. DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS). Financial statements are unaudited.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $3.566B | $4.027B | $7.273B | $8.168B |
| Income (loss) before tax | $54M | $(248)M | $176M | $176M |
| Net income attributable to DXC | $27M | $(188)M | $129M | $90M |
| Diluted EPS | $0.12 | $(0.74) | $0.55 | $0.35 |
| Adjusted EBIT (non-GAAP) | $269M | $346M | $528M | $678M |
| Operating cash flow | Six-month period: $375M, versus $534M | — |
Revenue fell 11.4% year over year in Q2 and 11.0% for the six-month period. At constant currency, declines were 4.0% and 4.3%, respectively; the reported declines also reflected unfavorable foreign exchange and divestitures. Q2 organic revenue declined 1.5% overall: GBS organic revenue grew 3.4%, while GIS declined 5.8%. GIS contract awards were $1.3B in Q2 versus $2.0B a year earlier; GBS awards were $1.7B in both periods.
Adjusted EBIT margin was approximately 7.5% in Q2 versus 8.6% a year earlier, and 7.3% for the six months versus 8.3%. The Q2 GAAP return to profit partly reflects the prior-year quarter’s $281M debt-extinguishment charge; adjusted EBIT nevertheless declined. The prior-year six-month comparison also included a $341M gain on the HPS sale and $309M of debt-extinguishment costs.
Q2 costs included $53M of restructuring, $101M of acquired-intangible amortization, an $8M SEC matter accrual, and a $32M loss on dispositions. For the six months, restructuring was $86M and acquired-intangible amortization was $205M. GAAP effective tax rates were 48.1% for Q2 and 25.6% for the six months.
Cash, debt and liquidity
- Cash and cash equivalents were $2.260B at September 30, 2022, down from $2.672B at March 31, 2022. Six-month operating cash flow was $375M, investing cash flow was $(193)M, and financing cash flow was $(513)M.
- Management attributed the $159M year-over-year decline in operating cash flow primarily to a $167M unfavorable working-capital change. Cash conversion cycle was 15 days versus 30 days a year earlier.
- Total debt was $4.529B, down from $4.965B at fiscal year-end; management said the decrease was primarily due to favorable euro translation and payments exceeding additions to lease and asset-financing obligations, partly offset by higher commercial paper borrowings.
- Reported total liquidity was $5.8B: $2.3B cash, $3.0B available under the revolving credit facility, and $500M available under a new term-loan agreement. No term-loan borrowing had been drawn by quarter-end. DXC said it expected cash and operating cash generation to meet normal operating needs for the next 12 months and reported compliance with financial covenants.
- DXC repurchased $266M of shares in the first quarter; there were no repurchases in Q2. Quarterly dividends remained suspended for fiscal 2023.
Outlook, commentary and key risks
- No specific revenue or earnings guidance was provided in the supplied filing text. DXC reported approximately $19B of remaining performance obligations, with about 24% expected to be recognized in fiscal 2023.
- Management cited cost-saving initiatives and restructuring to align workforce and facilities. It identified macroeconomic conditions, inflation, foreign exchange, customer spending, deal execution, hiring and retention, cyber incidents, and the ability to deliver cost reductions as risks.
- The planned sale of German financial-services subsidiary FDB for approximately €300M remained subject to regulatory consents. FDB’s reported cash included approximately $473M primarily related to customer deposit liabilities. DXC also revised its estimate of proceeds from the sale of its primary Russian entity amid evolving regional conditions.
- Tax authorities’ disputed positions could result in an estimated $466M of federal and state tax expense, including estimated interest and penalties, if DXC does not prevail; the company said resolution is not expected in the next 12 months. DXC accrued $8M for its ongoing SEC matter discussions.
- In Oracle v. HPE, a jury awarded Oracle $30M; final judgment remained pending post-trial motions, and Oracle sought $27M in attorneys’ fees and prejudgment interest. DXC may owe HPE an indemnification share. A separate DXC securities lawsuit remained pending; DXC said it considered the case without merit.
- Other unusual items include the $1.294B of minimum purchase commitments disclosed for the remainder of fiscal 2023 through fiscal 2027. The filing reported no material changes to risk factors since the prior annual report and no material change in market-risk exposure.
Important facts for investors to verify
- Whether revenue and GIS contract-award declines stabilize, and whether GBS organic growth can offset pressure in GIS.
- How much of the reported revenue decline reflects currency and divestitures versus underlying demand, and whether adjusted EBIT margins recover.
- Cash conversion and working-capital trends, alongside the availability and terms of revolving and term-loan funding.
- Outcomes and potential financial exposure from the IRS dispute, Oracle-related indemnification, the SEC matter, and the remaining securities litigation.
- Timing, regulatory approval, and proceeds for the FDB sale, and any further changes to Russian divestiture estimates.