DXC Technology Co. (Everett SpinCo, Inc.) — Form 10-Q Summary
Business context and period: This filing reports the Enterprise Services business of Hewlett Packard Enterprise (HPE), then named Everett SpinCo, Inc.; it is not a report for DXC Technology as an already-combined public company. The unaudited quarter ended January 31, 2017, compared with the quarter ended January 31, 2016. Everett provided technology consulting, outsourcing and support services through Infrastructure Technology Outsourcing (ITO) and Application and Business Services (ABS). HPE’s planned spin-off and merger with CSC was targeted for around April 1, 2017, subject to customary closing conditions.
Financial performance and liquidity
| Metric | Quarter ended Jan. 31, 2017 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $4.147 billion | $4.472 billion | Down 7.3%; down 5.3% at constant currency |
| Gross profit / margin | $578 million / 13.9% | $487 million / 10.9% | Margin up 3.0 percentage points |
| Operating loss / margin | $30 million loss / (0.7)% | $174 million loss / (3.9)% | Improved by 3.2 percentage points |
| Net loss | $37 million | $178 million | Improved by $141 million |
| Operating cash flow | $1.938 billion used | $268 million used | Use increased, mainly due to pension funding and working capital |
| Cash and cash equivalents | $1.263 billion | $448 million at Oct. 31, 2016 | Quarter-end balance; cash is not directly comparable to prior-year quarter-end here |
| Debt and capital leases | $395 million debt; $1.762 billion leases | $394 million debt; $1.990 billion leases at Oct. 31, 2016 | Term facility remained undrawn at quarter end |
Segments: ITO revenue was $2.744 billion, down 10.5%, and operating earnings were $139 million, or 5.1% of revenue, versus $46 million and 1.5% a year earlier. ABS revenue was $1.403 billion, down 0.2%, and operating earnings were $155 million, or 11.0%, versus $153 million and 10.9%. Segment earnings exclude corporate and unallocated costs and several other expenses.
Liquidity and balance sheet: Current assets were $6.160 billion and current liabilities were $4.679 billion at January 31, 2017. Long-term debt was $392 million; total debt including short-term borrowings was $395 million. Capital lease obligations totaled $1.762 billion. Cash increased by $815 million during the quarter, supported by $2.824 billion of financing cash flow, including $3.019 billion of net transfers from HPE. Investing cash flow used $71 million.
Material changes versus the prior comparable period
- Revenue fell, primarily from weaker EMEA demand—particularly U.K. public sector business—contract wind-downs, and unfavorable currency movements. Growth in selected Strategic Enterprise Services, including managed cloud and analytics/data management, partly offset declines.
- Gross margin improved through service-delivery efficiencies and restructuring-related cost savings. SG&A and restructuring charges also fell; intangible amortization ended after the assets were fully amortized in fiscal 2016.
- Separation costs rose to $195 million from $34 million, primarily reflecting costs of the planned CSC transaction. This offset some of the operating improvement.
- Operating cash use rose sharply, chiefly reflecting approximately $1.9 billion of HPE pension funding payments and an increase in accounts receivable. HPE’s December 2016 pension funding reduced reported pension liabilities.
Outlook, management commentary, risks and unusual items
- Transaction financing: Everett expected to issue $3.5 billion of new debt before separation: a $2.0 billion delayed-draw term facility and $1.5 billion of senior notes, primarily to support a planned $3.008 billion dividend to HPE and transaction/general purposes. The term facility was undrawn at January 31. The $1.5 billion senior-note offering was completed March 27, 2017, after quarter end, with maturities in 2020, 2024 and 2027 and coupons of 2.875%, 4.250% and 4.750%. Certain capital leases were also reclassified as operating leases after quarter end.
- Business outlook and execution: No quantified revenue or earnings guidance is provided in the supplied filing text. Management cited cloud-market shifts, intense competition and pricing pressure, commoditization of traditional infrastructure services, weak EMEA demand, contract run-offs and macroeconomic challenges. Its turnaround priorities included cost reduction, new customer wins, growth in strategic services, and improved sales, contracting and pricing execution.
- Restructuring: The 2015 plan could involve up to approximately 27,700 employee exits by the end of 2018; estimated aggregate pre-tax charges through fiscal 2018 were approximately $2.0 billion. Expected future restructuring cash payments were approximately $1.3 billion, including about $800 million for the remainder of fiscal 2017. Older-plan payments extend through fiscal 2021.
- Pensions: Under the transaction agreement, HPE was obligated to fund Everett’s unfunded net pension liability above $570 million at closing. HPE had made $1.9 billion of funding payments; the remaining amount above that threshold was estimated at zero as of January 31, but the final amount depended on the closing date.
- Tax and legal exposures: Unrecognized tax benefits were $348 million; recorded liabilities and related interest and penalties for uncertain tax positions totaled approximately $381 million. The filing discusses litigation including the Cisco contract-credit dispute, Navy Yard shooting-related lawsuits, and an age-discrimination class/collective action. Management said it had recorded adequate provisions and did not consider additional material litigation losses reasonably possible at January 31, while noting outcomes could affect results or cash flows.
- Comparability limitation: These are combined carve-out financial statements with HPE allocations; management cautioned that allocated corporate costs may differ from costs Everett would incur as a standalone company. Parent cash and most Parent debt were not attributed to Everett.
Most important facts for investors to verify
- Whether and when the HPE spin-off/CSC merger closed, and the final ownership, transaction terms and integration results.
- Actual borrowing under the $2.0 billion term facility, use of proceeds, dividend paid to HPE, and resulting debt service and leverage after separation.
- Final pension funding at closing, ongoing pension obligations, and the cash and lease-liability effects of post-quarter-end lease reclassifications.
- Whether revenue stabilizes after the reported decline, especially in ITO and EMEA, and whether margin gains from restructuring persist despite contract run-offs and pricing pressure.
- Cash conversion excluding the exceptional pension funding and parent cash-pooling transfers, alongside restructuring payments and working-capital needs.
- Standalone operating costs, tax exposures and outcomes of the disclosed legal matters, which could differ from the carve-out presentation or current estimates.