DXC Technology Company — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018. Although the request identifies 2017 Q4, this filing is an annual report; it also includes unaudited FY2018 fourth-quarter data. DXC was formed on April 1, 2017, through the combination of CSC and HPE’s Enterprise Services business (HPES), so FY2018 results include HPES while prior-year reported results do not and are not directly comparable.
Business context and results
DXC provides IT and technology services to commercial and public-sector clients across approximately 70 countries. Its reportable segments are Global Business Services (GBS), Global Infrastructure Services (GIS), and U.S. Public Sector (USPS).
| Metric | FY2018 | Comparison / context |
|---|---|---|
| Revenue | $24.556 billion | Reported FY2017 revenue was $7.607 billion, but excludes HPES. On a pro forma, constant-currency basis, FY2018 revenue was $24.165 billion versus $25.394 billion, down 4.8%. |
| Net income | $1.782 billion | Net income attributable to DXC common stockholders was $1.751 billion; diluted EPS was $6.04. |
| Cash from operations | $3.243 billion | Up from $978 million in FY2017; FY2018 cash generation included significant noncash tax adjustments. |
| Cash and cash equivalents | $2.648 billion | Up from $1.263 billion; $1.0 billion was held outside the U.S. |
| Total debt | $8.379 billion | Up from $2.963 billion, primarily reflecting debt assumed in the HPES merger. Net debt was $5.731 billion. |
| Liquidity | $6.458 billion | Cash plus $3.810 billion available under the revolving credit facility. Management expected resources to cover normal operating requirements for the next 12 months. |
FY2018 segment revenue was $9.254 billion for GBS, $12.479 billion for GIS, and $2.823 billion for USPS. Compared with FY2017 pro forma constant-currency revenue, GBS declined 4.6%, GIS declined 5.9%, and USPS declined 0.8%. Management attributed GBS and GIS declines mainly to contracts that ended or renewed at lower rates, partly offset by new business; digital revenue grew year over year.
Reported income from continuing operations before taxes was $1.671 billion, including an income tax benefit of $111 million. Results were affected by the U.S. Tax Cuts and Jobs Act, including a provisional $338 million deferred-tax benefit and a $361 million transition-tax expense. The filing identifies $803 million of restructuring costs, $408 million of transaction, separation and integration costs, and $591 million of acquired-intangible amortization. Management reported adjusted EBIT of $3.499 billion, a non-GAAP measure.
Material changes and notable items
- The HPES merger substantially changed the scale and balance sheet: goodwill rose to $9.652 billion and intangible assets to $8.091 billion at year-end.
- Management said it exceeded first-year integration milestones, delivering more than $1 billion of year-one cost take-out. It reported a roughly 13% labor-base reduction and restructuring of over four million square feet of facilities.
- FY2018 operating cash flow increased by $2.265 billion year over year, primarily due to increased net income; higher deferred-tax adjustments partly offset the increase.
- DXC declared dividends of $0.72 per share ($209 million total) and repurchased 1.54 million shares for $137 million. Management intended to continue quarterly dividends in FY2019, subject to Board approval.
- The planned USPS separation and combination with Vencore and KeyPoint to form Perspecta remained subject to closing conditions as of the filing. DXC disclosed potential transaction costs, customer and employee disruption, and tax risks if the separation did not qualify for tax-free treatment.
Outlook, risks and contingencies
The filing provides no specific FY2019 revenue or earnings guidance. Management cited continued digital and cloud demand, but also noted ongoing pressure in traditional infrastructure outsourcing, including contract renewals at lower rates. Major risks include integration and synergy execution, competition and pricing pressure, cybersecurity and data privacy, employee retention, foreign exchange exposure, and the ability to deliver complex contracts profitably.
DXC disclosed substantial litigation and investigations. A jury found against the company in an employee misclassification case, with damages and post-trial matters pending. An arbitrator awarded Kemper $84.2 million plus interest and fees; DXC was challenging the award and pursuing insurance coverage. The company also reported an ongoing voluntary disclosure investigation concerning possible sanctions-law violations involving acquired joint ventures. Management stated it could not reasonably estimate potential losses for several disclosed matters. DXC reported compliance with its financial covenants and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- Assess underlying revenue trends using the pro forma constant-currency comparison, not the non-comparable reported year-over-year increase.
- Track whether the announced integration savings translate into durable operating performance after restructuring and integration costs.
- Review debt maturities, lease obligations, floating-rate exposure, and refinancing needs; gross debt was $8.379 billion at year-end.
- Monitor the final tax effects of U.S. tax reform, including provisional estimates and the company’s $1.442 billion deferred-tax-asset valuation allowance.
- Check the resolution and financial exposure of the disclosed litigation, sanctions investigation, and proposed USPS separation, including tax treatment and closing conditions.