DXC Technology Company — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, the first quarter of DXC’s fiscal 2020. The prior comparable period was the three months ended June 30, 2018. DXC provides IT and digital services through Global Business Services (GBS) and Global Infrastructure Services (GIS). Amounts below are in U.S. dollars.
Financial performance
- Revenue: $4.89 billion, down 7.4% year over year. At constant currency, revenue declined 4.2%. GBS revenue fell 2.4% as reported but grew 0.5% at constant currency; GIS revenue fell 11.0% as reported and 7.6% at constant currency.
- Profit and margins: Income from continuing operations was $168 million, versus $231 million; diluted continuing-operations EPS was $0.61, versus $0.78. Pre-tax income fell to $206 million from $360 million. Total costs and expenses were 95.8% of revenue, up from 93.2%. Adjusted EBIT, a non-GAAP measure, was $652 million versus $803 million.
- Significant reported-period adjustments: Continuing-operations results included $142 million of restructuring costs, $105 million of transaction, separation and integration costs, and $138 million of acquired-intangible amortization. DXC reported $304 million of after-tax adjustments in its reconciliation.
- Cash flow: Operating activities used $66 million, compared with $369 million provided in the prior-year quarter. Investing activities used $1.82 billion, primarily reflecting $1.91 billion paid for acquisitions. Financing activities provided $887 million. Cash declined by $1.03 billion to $1.87 billion.
- Debt and liquidity: Total debt was $9.40 billion, up from $7.41 billion at March 31, 2019; net debt was $7.54 billion versus $4.51 billion. Debt-to-total capitalization rose to 45.6% from 38.7%. Cash plus available revolving-credit borrowings totaled $5.87 billion, including $4.0 billion available under the facility. DXC said existing cash and expected operating cash flow should cover normal operating needs for the next 12 months.
- Other balance-sheet and shareholder measures: Total assets were $32.58 billion and total equity was $11.22 billion at June 30. DXC repurchased $400 million of shares and paid $51 million in dividends during the quarter; it reported returning $451 million to shareholders overall.
Material changes and business developments
- Revenue weakness reflected ongoing declines in traditional application maintenance and legacy infrastructure services. Management attributed GIS pressure to client savings on large contracts and customers shifting toward cloud environments.
- GBS contract awards were $2.4 billion, compared with $2.0 billion; GIS contract awards were $1.8 billion, compared with $2.6 billion.
- DXC completed its Luxoft acquisition on June 14 for estimated consideration of $2.02 billion. The preliminary allocation included $1.21 billion of goodwill. Since acquisition, Luxoft contributed $45 million of revenue and $4 million of net income. DXC financed the transaction with new term loans; the purchase-price allocation remained preliminary.
- Operating cash flow deteriorated year over year, with management citing a $497 million unfavorable change in working-capital movements among the drivers.
- DXC adopted the new lease accounting standard on April 1, 2019. Adoption initially added approximately $1.7 billion of assets and $1.8 billion of liabilities, with no material impact on earnings or cash flows. Separately, extending estimated computer-equipment useful lives reduced quarterly depreciation expense by $49 million.
- The prior-year comparison includes $35 million of income from discontinued operations related to the USPS business, which was separated in May 2018; there was no such income in the current quarter.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue or EPS guidance. Remaining performance obligations were approximately $28.0 billion; DXC expected to recognize about 34% in fiscal 2020, with the balance thereafter. Management cited ongoing pressure in traditional services and expected cash resources to meet normal operating requirements over the next 12 months.
- Cost actions: A new fiscal 2020 restructuring plan targets workforce, facilities and data-center costs. Restructuring liabilities totaled $327 million at June 30.
- Acquisition and execution risks: DXC warned that Luxoft integration could disrupt customer and employee relationships, require additional costs and divert management attention; expected benefits may not be achieved.
- Legal matters: On August 6, 2019, after quarter-end, a court awarded $18.75 million in damages in the Strauch wage-and-hour case; DXC said it intended to appeal. In the Kemper dispute, an $84.2 million arbitration award plus prejudgment interest had been entered as a judgment, and DXC was appealing. The filing also discusses securities and derivative lawsuits, tax examinations and other disputes; for most matters, DXC said it could not reasonably estimate a possible loss range.
- Other exposures: DXC had $4.07 billion of minimum purchase commitments and $1.27 billion of surety bonds and letters of credit outstanding. It also disclosed ongoing IRS examinations of CSC tax years 2008–2017 and possible sanctions-law violations under review.
Important facts for investors to verify
- Whether revenue declines in GIS and legacy services stabilize, and whether GBS constant-currency growth can continue.
- Whether contract awards convert into revenue and whether the $28.0 billion performance-obligation estimate is realized on the anticipated schedule.
- Whether operating cash flow improves after the quarter’s working-capital outflows, while DXC funds the acquisition, restructuring and shareholder returns.
- How Luxoft integration, acquisition-related borrowing and the higher net-debt position affect expected synergies and financial flexibility.
- Potential outcomes and financial exposure from the disclosed litigation, tax audits and sanctions-law review, including matters for which DXC could not estimate a loss range.