DXC Technology Company — Form 10-Q Summary
Business context and reporting period
DXC provides IT services to commercial and public-sector clients in approximately 70 countries. This filing covers the third quarter and first nine months of fiscal 2019, ended December 31, 2018. Following the May 31, 2018 separation of its U.S. Public Sector business into Perspecta, DXC reports two segments: Global Business Services (GBS) and Global Infrastructure Services (GIS). Prior-period operating results were recast to present the separated business as discontinued operations.
Financial results and position
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding prior-year periods; balance-sheet comparisons are with March 31, 2018.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $5,178 | $5,460 | $15,473 | $16,149 |
| Income from continuing operations | $466 | $706 | $956 | $1,019 |
| Diluted EPS from continuing operations | $1.66 | $2.43 | $3.33 | $3.43 |
| Net income | $466 | $779 | $991 | $1,217 |
| Cash from operating activities | Not separately stated in the summarized text | Not separately stated in the summarized text | $1,035 | $2,010 |
| Adjusted EBIT (non-GAAP) | $840 | $797 | $2,442 | $2,107 |
- Q3 revenue fell 5.2% reported and 2.6% in constant currency. Nine-month revenue declined 4.2% reported and 3.6% in constant currency.
- Q3 GBS revenue was $2,169 (down 6.3%); GIS revenue was $3,009 (down 4.3%). Management attributed GBS weakness mainly to declines in traditional application maintenance and management, partly offset by enterprise and cloud applications growth. GIS weakness reflected completed transformation projects and ongoing declines in legacy infrastructure services.
- Q3 cost of services was 71.8% of revenue, versus 74.3% a year earlier; total costs and expenses were 90.9% versus 93.8%. Management cited workforce and procurement efficiencies. SG&A and depreciation and amortization rose as percentages of revenue.
- Q3 pretax income increased to $469 from $341, while continuing-operations income and EPS declined. The comparison was affected by the prior-year tax benefit, lower restructuring expense, and current-period items; the prior-year quarter also included $73 of discontinued-operations income.
- At December 31, cash was $2,475; total debt was $7,560 and net debt was $5,085. Debt-to-total capitalization was 40.0%, up from 36.7% at March 31; net debt-to-total capitalization was 26.9%, up from 24.8%. Current assets and current liabilities were each $8,522.
- Nine-month investing cash flow was a $40 use, versus $770 provided in the prior-year period; financing cash flow was a $1,183 use. Cash declined $254 from the beginning of the fiscal year. Operating cash flow fell $975 year over year, with management citing weaker working-capital movements and other factors.
Material changes, outlook, and notable items
- DXC completed the USPS separation and combination with Vencore and KeyPoint to form Perspecta. Perspecta paid DXC net cash consideration of $984 million. The separation reduced DXC’s reported business scope, and USPS cash flows remain included in the cash-flow statements.
- DXC repurchased 17.7 million shares for approximately $1.25 billion during the first nine months and paid approximately $159 million in dividends. The board authorized an additional $2.0 billion repurchase program in November 2018.
- Management expects existing cash, operating cash generation, and available financing to meet normal operating requirements for the next 12 months. Reported liquidity was $6.475 billion, including $4.0 billion available under the revolving credit facility. Management cautioned that future financing may not be available on acceptable terms.
- Remaining performance obligations were approximately $29.0 billion; DXC expected to recognize about 48% in fiscal 2019 and fiscal 2020. Contract awards were $2.3 billion for Q3 in GBS and $3.4 billion in GIS; nine-month awards were lower year over year in both segments.
- No specific full-year revenue or earnings guidance is stated in the filing text. Management emphasized continued cost and integration initiatives. A new global restructuring plan contributed to $418 million of nine-month restructuring costs; the related liability was $474 million at quarter-end.
- DXC agreed to acquire Luxoft for $59 per share in cash, with an equity value of approximately $2 billion. Closing was anticipated by June 2019, subject to approvals and other conditions. The filing identifies integration, customer, employee, and execution risks.
- Other notable items include a $113 million release of valuation allowance on certain German deferred tax assets, a $137 million gain on dispositions in the nine-month cash-flow reconciliation, and significant foreign-currency translation losses in other comprehensive income. Adoption of ASC 606 increased opening retained earnings by approximately $114 million; the company also retrospectively recast certain cash-flow presentations, so comparisons may reflect accounting presentation changes.
- Legal matters include an adverse jury verdict in a wage-and-hour collective action, an $84.2 million Kemper arbitration award plus interest and fees that DXC is appealing, a pending New York Medicaid-related case, and a newly filed securities class action. The filing says a reasonable loss estimate or range generally cannot be determined for the disclosed contingencies; management did not expect pending matters to materially impair financial position or ability to meet obligations.
- Minimum purchase commitments totaled $4.740 billion, and outstanding surety bonds, letters of credit, and standby letters of credit totaled $1.152 billion. DXC reported compliance with debt covenants and effective disclosure controls at December 31, 2018.
Important facts for investors to verify
- Whether revenue declines and weaker contract awards stabilize, particularly in GBS and legacy GIS services.
- Whether operating cash flow recovers from the nine-month decline, and how working capital and receivables-facility cash-flow classification affect comparisons.
- How much of reported GAAP and non-GAAP earnings depends on restructuring, integration costs, acquired-intangible amortization, tax adjustments, and disposition gains.
- Whether the $29 billion remaining-performance-obligation estimate converts to revenue as expected and whether the Luxoft acquisition closes on schedule and delivers anticipated benefits.
- Potential outcomes and financial exposure from the wage-and-hour verdict, Kemper appeal, Medicaid litigation, securities class action, tax examinations, and other contingencies.
- Debt and liquidity after the share repurchases, dividends, and any financing required for the Luxoft acquisition; the filing does not provide a clear pro forma financing plan for that transaction.