DXC Technology Company — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, DXC’s first quarter of fiscal 2019. Comparatives are for the three months ended June 30, 2017; USPS results are presented as discontinued operations in both periods.
Business context and material changes
DXC provides IT services globally and reports two segments: Global Business Services (GBS) and Global Infrastructure Services (GIS). On May 31, 2018, DXC separated its U.S. Public Sector business and combined it with Vencore and KeyPoint to form Perspecta. DXC received a net cash payment of $984 million; the separation was reported with no gain or loss on disposition. USPS contributed $431 million revenue and $35 million net income before separation in the current quarter, versus $677 million revenue and $65 million net income in the prior-year quarter.
DXC adopted ASC 606 on April 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by approximately $114 million and affected the timing and classification of certain contract balances and costs. Prior-period amounts were not recast for this standard.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $5.282 billion | $5.236 billion |
| Income from continuing operations | $231 million | $108 million |
| Net income attributable to DXC common stockholders | $259 million | $159 million |
| Diluted EPS from continuing operations | $0.78 | $0.33 |
| Cash from operating activities | $473 million | $519 million |
| Adjusted EBIT (non-GAAP) | $803 million | $570 million |
Revenue rose 0.9% as reported, including a favorable 2.7% foreign-exchange impact, but declined 1.8% at constant currency. GBS revenue fell 2.4% reported and 4.6% constant currency; GIS revenue grew 3.4% reported and 0.3% constant currency. Management cited growth in digital offerings, Enterprise and Cloud Applications, and GIS cloud, security, workplace and mobility services; GBS was affected by completion of traditional application contracts. Contract awards fell year over year: GBS $2.0 billion versus $2.4 billion, and GIS $2.6 billion versus $3.7 billion.
Costs and expenses were $4.922 billion, or 93.2% of revenue, compared with $5.145 billion, or 98.3%. Management attributed the improvement to workforce optimization, procurement efficiencies and real-estate rationalization. GAAP continuing-operations income included $185 million restructuring costs, $70 million transaction, separation and integration costs, and $135 million acquired-intangible amortization. The filing also identifies a $25 million transition-tax measurement adjustment. The 35.8% effective tax rate compares with a prior-year benefit-rate of 18.7%; the periods had materially different tax items. Adjusted EBIT is a non-GAAP measure and should be considered alongside GAAP results.
Cash, debt and liquidity
Cash and cash equivalents were $2.579 billion at June 30, 2018, including $0.8 billion held outside the U.S. Operating cash flow decreased $46 million year over year, which management primarily attributed to less favorable working-capital movements. Investing activities used $284 million; financing activities used $300 million. Cash declined $150 million from the beginning of the fiscal year.
Total debt was $7.054 billion, down from $8.010 billion at March 31, 2018, primarily following repayment of $800 million of a USD term loan using proceeds associated with the Perspecta separation. Net debt was $4.475 billion. Cash plus available revolving-credit borrowings totaled $6.389 billion, including $3.810 billion of available borrowings. DXC said existing cash and expected operating cash flow should cover normal requirements for the next 12 months; it was in compliance with financial covenants.
DXC repurchased 3.78 million shares for $324 million and declared dividends of $0.19 per share. The quarter’s cash return to shareholders was approximately $375 million. Remaining performance obligations were approximately $31.7 billion; DXC expected about 32% to be recognized in fiscal 2019, with the balance thereafter.
Outlook, risks and unusual items
The filing provides no specific full-year revenue or earnings guidance. Management described cost and integration initiatives and reported ongoing digital-offering growth. It also disclosed a new fiscal 2019 restructuring plan targeting workforce and facilities/data-center optimization; restructuring liabilities totaled $526 million at quarter-end. The fiscal 2018 plan had incurred $823 million of costs to date.
Key risks include execution and customer or employee disruption from the Perspecta separation, potential tax consequences if the separation fails to qualify for intended tax-free treatment, integration and synergy realization, competition, foreign-exchange exposure, contract performance and operational liquidity needs. DXC’s accounting for certain Tax Cuts and Jobs Act effects remained provisional, including transition-tax and GILTI matters. The IRS was examining CSC tax years 2008–2017.
Notable contingencies include a jury verdict against the company in a wage-and-hour collective action, with damages and post-trial matters still pending; an $84.2 million Kemper arbitration award plus interest and fees that DXC was seeking to vacate; and government claims relating to New York City Medicaid billing. DXC said it intended to defend these matters; it generally could not estimate possible losses for the disclosed contingencies. The company also disclosed minimum purchase commitments of $4.25 billion across future periods.
Most important facts for investors to verify
- Whether constant-currency revenue trends and declining contract awards stabilize, particularly in GBS.
- How much reported earnings improvement reflects sustainable operations versus restructuring, integration, amortization and tax items; review the non-GAAP reconciliations and the prior-period classification adjustment disclosed in MD&A.
- Whether the $31.7 billion remaining performance obligations convert to revenue as expected, and the cash-flow effects of contract working capital and transition costs.
- Resolution of the Kemper award, wage-and-hour verdict, other litigation, and the potential tax exposure associated with the Perspecta separation and tax examinations.
- Progress on restructuring and integration, and the effect of debt repayment, share repurchases and dividends on liquidity and leverage.