DXC Technology Company — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. The request refers to 2018 Q4, but this filing is the FY2019 annual report; FY2019 fourth-quarter figures are also summarized below. All amounts are U.S. dollars.
Business context
DXC provides IT services and digital transformation solutions to commercial and public-sector clients. Following the May 31, 2018 separation of its U.S. Public Sector business into Perspecta, DXC reported Global Business Services (GBS) and Global Infrastructure Services (GIS). The company also completed the Molina Medicaid Solutions acquisition and other smaller acquisitions during FY2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | $20.753 billion | $21.733 billion | Down 4.5%; down 2.9% at constant currency |
| GBS revenue | $8.684 billion | $9.254 billion | Down 6.2%; down 4.7% at constant currency |
| GIS revenue | $12.069 billion | $12.479 billion | Down 3.3%; down 1.6% at constant currency |
| Income from continuing operations | $1.227 billion | $1.546 billion | Down $319 million |
| Net income attributable to DXC common stockholders | $1.257 billion | $1.751 billion | Down 28.2% |
| Diluted EPS, continuing operations | $4.35 | $5.23 | Down $0.88 |
| Adjusted EBIT (non-GAAP) | $3.269 billion | $2.989 billion | Up 9.4%; excludes specified items |
| Cash from operating activities | $1.783 billion | $2.567 billion | Down $784 million |
| Cash and cash equivalents | $2.899 billion | $2.593 billion | At March 31, 2019 |
| Total debt | $7.412 billion | $8.010 billion | Net debt was $4.513 billion |
Service costs, excluding depreciation, amortization and restructuring, declined to 72.1% of revenue from 75.0%, reflecting workforce and procurement efficiencies. The filing does not provide a single comparable GAAP operating-margin measure in the cited summary data. FY2019 segment profit was $1.645 billion for GBS and $1.911 billion for GIS.
FY2019 total costs and expenses were $19.238 billion, including $465 million of restructuring costs, $401 million of transaction, separation and integration costs, and $539 million of acquired-intangible amortization. Reported net income also reflects a $288 million income-tax expense; the effective tax rate was 19.0%, compared with a benefit and negative 18.6% rate in FY2018.
FY2019 fourth-quarter revenue was $5.280 billion, continuing-operations income after tax was $271 million, and diluted continuing-operations EPS was $1.01. In FY2018 Q4, those figures were $5.584 billion, $527 million and $1.80, respectively.
DXC returned $1.549 billion to shareholders through dividends and repurchases in FY2019, including $1.339 billion of share repurchases and $209 million of dividends declared. Management said existing cash and expected operating cash flow should cover normal operating needs for the next 12 months. Reported total liquidity was $9.084 billion, including cash, $4.0 billion of revolving-credit availability and $2.185 billion of delayed-draw term-loan availability.
Material changes and unusual items
- Revenue declines reflected continuing contraction in traditional application maintenance and legacy infrastructure services, including migration to cloud. Cloud infrastructure and digital workplace growth partially offset GIS declines.
- The USPS separation changed the business mix and comparability: USPS is presented as discontinued operations, and FY2019 includes only two months of USPS operating results. FY2018 includes a full year of discontinued-operations income.
- Operating cash flow fell year over year, primarily due to lower net income, receivables and other working-capital movements; deferred-tax adjustments partly offset the decline.
- FY2018 earnings were materially affected by U.S. tax reform. FY2019 tax results also included valuation-allowance changes and adjustments to the transition-tax liability.
- DXC adopted ASC 606 using the modified retrospective method. Adoption increased opening retained earnings by about $114 million; FY2019 reported net income attributable to common stockholders was $66 million higher than it would have been without adoption.
- DXC announced an approximately $2 billion cash acquisition of Luxoft at $59 per share. The filing stated an anticipated June 2019 closing, subject to conditions; it noted required antitrust approvals, including Russian approval on June 11, 2019.
Outlook, risks and contingencies
The filing provides no detailed FY2020 revenue or earnings guidance. Management intended to continue quarterly dividends in FY2020; the board declared a $0.21-per-share quarterly dividend in May 2019. Management emphasized cost synergies, workforce optimization, procurement efficiencies and facility rationalization, while noting that realization of restructuring and merger benefits is not assured.
Principal risks include continued erosion of legacy services, pricing pressure and competition, execution of digital offerings and cloud transition, integration and synergy delivery, cyber and data-security incidents, foreign-currency exposure, employee retention, contract-estimation and delivery risk, and substantial indebtedness. Debt was $7.4 billion, including $2.4 billion of floating-rate debt; the company reported compliance with its financial covenants and investment-grade ratings with stable outlooks.
Contingencies include a securities class action and shareholder derivative suits, a labor-classification verdict under appeal, the Kemper arbitration award under appeal, and other litigation. DXC said it could not reasonably estimate possible losses for disclosed matters generally and did not believe currently pending matters would prevent it from meeting financial obligations. It also continued an investigation into possible sanctions-law violations disclosed voluntarily to U.S. and U.K. authorities.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of March 31, 2019.
Key facts for investors to verify
- Whether core revenue trends stabilize, particularly in legacy application maintenance and infrastructure, and whether digital and cloud growth offsets those declines.
- Whether reported cost savings and adjusted EBIT improvement translate into sustainable GAAP earnings and operating cash flow.
- The drivers of receivables and working-capital movements, and the durability of cash conversion.
- Luxoft acquisition completion, financing, integration costs and realized benefits.
- Debt maturities, floating-rate exposure and continued availability of credit facilities and receivables financing.
- Developments and potential financial exposure in litigation, tax examinations and the sanctions-law investigation.
- Comparability caveats: USPS discontinued-operation treatment, ASC 606 adoption, and the non-GAAP adjustments used in adjusted EBIT and EPS.