DXC Technology Company — Q1 fiscal 2021 Form 10-Q
Reporting period: Three months ended June 30, 2020; filed August 7, 2020. DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS). Results reflect the COVID-19 period.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $4.502 billion | $4.890 billion |
| Net income (loss) | $(199) million | $168 million |
| Net income (loss) attributable to DXC common shareholders | $(205) million | $163 million |
| Diluted EPS | $(0.81) | $0.61 |
| Operating cash flow | $119 million | $(66) million |
| Cash and cash equivalents at quarter-end | $5.509 billion | $1.868 billion |
- Revenue fell 7.9% year over year; the filing attributes the decline to contract terminations, price reductions, weaker demand related to COVID-19, and a 2.0% unfavorable foreign-exchange impact. Constant-currency revenue declined 5.9%.
- GBS revenue rose 0.7% reported and 2.5% in constant currency to $2.174 billion, supported by Luxoft; GBS contract awards were $3.5 billion versus $2.4 billion. GIS revenue declined 14.8% reported and 12.4% in constant currency to $2.328 billion; awards were $1.8 billion in both periods.
- GAAP net margin was approximately (4.4)%, compared with 3.4% a year earlier. Costs and expenses were 105.0% of revenue versus 95.8%, reflecting lower revenue against broadly similar total costs. Costs of services were 80.6% of revenue versus 74.0%.
- Adjusted EBIT, a non-GAAP measure, was $190 million versus $652 million; adjusted EBIT margin was approximately 4.2% versus 13.3%. Non-GAAP net income attributable to common shareholders was $53 million and non-GAAP diluted EPS was $0.21, versus $467 million and $1.74.
- Operating cash flow improved by $185 million, primarily as working-capital cash outflows decreased by $488 million, partly offset by lower earnings. Investing used $61 million; financing provided $1.786 billion, including net borrowing on the revolving credit facility.
- Total debt was $12.016 billion, up from $9.948 billion at March 31, 2020; cash-adjusted net debt was $6.507 billion versus $6.269 billion. Debt-to-total capitalization rose to 70.9% from 66.0%; net debt-to-total capitalization fell to 38.4% from 41.6%. Total liquidity was $6.259 billion, including $750 million available under the revolver.
Material changes, outlook, and risks
- DXC drew the remaining $2.5 billion under its $4.0 billion revolving credit agreement as a precaution amid COVID-19 uncertainty, then repaid $750 million. It also issued $1.0 billion of senior notes and used the proceeds to prepay term loans. The company reported compliance with its debt covenants.
- Management expects cash on hand and operating cash flow to meet normal operating requirements for the next 12 months, while noting that future financing may not be available on acceptable terms. No specific earnings or revenue guidance is provided in the supplied filing text.
- Quarter-end remaining performance obligations were approximately $23 billion; DXC expects to recognize about 35% in fiscal 2021. The filing cautions that estimates and results remain uncertain due to COVID-19 and its potential effects on customer demand, collections, operations, credit losses, asset values, and liquidity.
- DXC suspended quarterly dividends to preserve financial flexibility; the Board will revisit the decision as conditions stabilize. No share repurchases occurred in the quarter. Management approved new global cost-reduction initiatives; restructuring costs were $72 million versus $142 million.
- Material unusual costs included $110 million of transaction, separation and integration costs, $148 million of acquired-intangible amortization, and $72 million of restructuring costs. Management’s reconciliation identifies $258 million of specified adjustments before tax, including pension and OPEB losses.
- The proposed $5.0 billion cash sale of the U.S. State and Local Health and Human Services business remained pending, with closing expected by September 2020 but no later than December, subject to conditions. A separate healthcare-provider software business sale to Dedalus was announced July 17 for approximately $525 million, subject to adjustments and closing conditions.
- A material weakness in internal control over financial reporting remained unresolved at June 30; disclosure controls were therefore deemed ineffective. Management said remediation was ongoing, and that it believed the financial statements fairly presented the periods shown.
- Perspecta claims at least $990 million in arbitration, including interest; DXC disputes the claim. Other notable matters include an appeal of an FLSA judgment and pending securities-related litigation. The filing says it cannot reasonably estimate possible losses for certain disclosed contingencies.
- After quarter-end, DXC disclosed a ransomware attack at subsidiary Xchanging. The company reported containment, restored operations, minimal customer impact, and no loss of customer data; cybersecurity remains a stated risk.
Important facts for investors to verify
- Whether revenue declines, particularly in GIS, stabilize and whether contract awards convert into recognized revenue.
- Cash generation, working-capital trends, and debt levels after precautionary borrowing; also confirm revolver availability and refinancing needs.
- Timing, proceeds, and closing conditions for the HHS and Dedalus divestitures, and how proceeds will be used.
- Progress and independent testing of remediation for the material weakness in financial reporting controls.
- Potential exposure from the Perspecta arbitration and other legal matters, plus any further developments from the Xchanging cyber incident.
- Whether the dividend suspension continues and how COVID-19 affects customer demand, receivables, and the company’s liquidity assumptions.