DXC Technology Company — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018 (fiscal 2019 Q2). Financial statements are unaudited. DXC provides IT services globally through Global Business Services (GBS) and Global Infrastructure Services (GIS).
Business context and comparability
- DXC completed the separation of its U.S. Public Sector business on May 31, 2018; it combined with Vencore and KeyPoint to form Perspecta. USPS is reported as discontinued operations, and prior periods have been recast accordingly. Fiscal 2019 six-month USPS results include only operations through the separation date.
- Unless stated otherwise, figures below are in millions of dollars. Prior-period comparisons may also reflect accounting-standard presentation changes; ASC 606 adoption was modified retrospective and prior revenue figures were not recast.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $5,013 | $5,453 | $10,295 | $10,689 |
| Income from continuing operations | $259 | $205 | $490 | $313 |
| Net income | $259 | $265 | $525 | $438 |
| Diluted EPS, continuing operations | $0.92 | $0.67 | $1.69 | $1.00 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $885 | $1,510 |
| Adjusted EBIT (non-GAAP) | $799 | $740 | $1,602 | $1,310 |
- Revenue declined 8.1% in Q2 and 3.7% for the six-month period. On a constant-currency basis, declines were 6.2% and 4.1%, respectively.
- Q2 segment revenue: GBS $2,111 (down 8.7%); GIS $2,902 (down 7.6%). Management attributed GBS weakness mainly to traditional application maintenance and management declines, partly offset by enterprise and cloud applications growth; GIS weakness reflected the timing of client migrations from traditional to cloud environments.
- Costs and expenses were 93.4% of revenue in Q2 versus 94.8% a year earlier, and 93.3% for six months versus 96.5%. Management cited workforce optimization, procurement efficiencies and real-estate rationalization. Q2 GAAP continuing income included $157 million restructuring, $128 million transaction/separation/integration costs and $132 million acquired-intangible amortization; these items materially affect comparisons with adjusted results.
- Q2 diluted EPS from continuing operations was $0.92 GAAP and $2.02 non-GAAP; six-month figures were $1.69 and $3.94. Non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $2,780 at September 30, up from $2,593 at March 31, 2018. Six-month operating cash flow was $885, down $625 year over year, primarily due to less favorable working-capital movements.
- Total debt was $7,027, down from $8,010; net debt was $4,247, down from $5,417. Debt-to-total capitalization was 37.3% versus 36.7%, while net debt-to-total capitalization improved to 22.5% from 24.8%.
- Reported total liquidity was $6,780, comprising $2,780 cash and $4,000 available under the revolving credit facility. Management expects cash and operating cash generation to cover normal operating requirements for the next 12 months, while noting future financing may not be available on acceptable terms.
- DXC repurchased $451 of shares and declared approximately $109 of dividends in the first six months. It reported $552 returned to shareholders through repurchases and dividends. The board approved an additional $2.0 billion repurchase authorization after quarter-end; $1.3 billion remained under the prior authorization as of October 31.
Outlook, changes and notable items
- DXC disclosed approximately $30.4 billion of remaining performance obligations at September 30; it expects to recognize about 24% in fiscal 2019 and the balance thereafter. No specific revenue or earnings guidance is stated in the provided filing text.
- The company adopted ASC 606 on April 1, 2018. Adoption increased opening retained earnings by about $114 and changed the timing and presentation of certain contract balances and costs. Its reported Q2 net income attributable to DXC common stockholders was $14 higher than it would have been without adoption; the six-month difference was $29.
- Restructuring expense was $342 for the six months. A new fiscal 2019 plan targets workforce optimization and rationalization of facilities and data-center assets; the filing does not quantify total expected savings or the plan’s full cost.
- The Tax Cuts and Jobs Act accounting remained incomplete. DXC had recorded a $386 transition-tax obligation, payable over up to eight years, and continued evaluating several provisional tax items.
- Subsequent to quarter-end, DXC entered into a £450 million term loan, using proceeds to repay a £185 million loan and $150 million of senior notes. It also completed several acquisitions in October and November 2018.
Risks, contingencies and unusual matters
- DXC disclosed a jury verdict against it in a wage-and-hour classification case involving system administrators; the court denied post-trial motions, damages scope remained pending, and DXC said it intended to appeal.
- In the Kemper dispute, an $84.2 million arbitration award plus interest, fees and costs was confirmed by a federal court; DXC appealed and was pursuing insurance coverage. The ultimate exposure is not clearly quantified in the filing.
- Other disclosed matters include government claims concerning New York City Medicaid billing, age-discrimination claims, and a continuing review of possible sanctions-law violations. Management said it could not reasonably estimate possible losses for the disclosed matters generally, and warned that resolution of disputes could materially adversely affect a future period.
- DXC has $5.164 billion of minimum purchase commitments, principally under software, hardware, telecommunications and service-provider agreements. It also disclosed $1.068 billion of surety bonds and letters of credit. Management considered its financial guarantees unlikely to have a material adverse effect.
- Other risks include execution of post-merger integration and restructuring, revenue declines, customer migration timing, foreign-currency exposure, contract performance and tax examinations. Management reported no material change in risk factors during the quarter and stated disclosure controls were effective.
Important facts for investors to verify
- Whether revenue declines in GBS and GIS stabilize, and whether contract-award trends recover; awards were lower year over year in both segments.
- How much reported earnings and cash flow reflect recurring performance versus restructuring, integration costs, acquired-intangible amortization, working-capital changes and ASC 606 effects.
- Whether the new restructuring initiatives deliver savings sufficient to offset continued business contraction and the substantial remaining restructuring liabilities.
- Debt maturities, refinancing costs and cash needs, including the post-quarter loan refinancing and the large purchase commitments.
- Developments in the wage-and-hour appeal, Kemper appeal and insurance recovery, tax examinations, and completion of Tax Act accounting.
- Progress against the $30.4 billion remaining performance obligations and the company’s stated expectation that about 24% will be recognized in fiscal 2019.