DXC Technology Company — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (DXC fiscal 2018 Q2). Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and comparability
DXC was formed on April 1, 2017 through the combination of Computer Sciences Corporation (CSC) and Hewlett Packard Enterprise’s Enterprise Services business (HPES). CSC is the accounting predecessor, so reported prior-year comparisons exclude HPES and are not directly comparable. Management also presents pro forma comparisons combining CSC and HPES results for 2016; those figures are unaudited and subject to limitations.
DXC reports Global Business Services (GBS), Global Infrastructure Services (GIS), and U.S. Public Sector (USPS). It acquired Microsoft Dynamics integrator Tribridge for $152 million on July 1, 2017.
Financial performance
| Metric | Three months ended Sep. 30, 2017 | Six months ended Sep. 30, 2017 |
|---|---|---|
| Revenue | $6,163 | $12,076 |
| Income before taxes | $387 | $572 |
| Net income | $265 | $438 |
| Net income attributable to DXC common stockholders | $256 | $415 |
| Diluted EPS | $0.88 | $1.43 |
| Operating cash flow | Not separately stated for quarter | $1,543 |
Quarterly net margin was approximately 4.3% of revenue; six-month net margin was approximately 3.6%. Management’s non-GAAP adjusted EBIT was $876 million for the quarter and $1,555 million for six months, equivalent to approximately 14.2% and 12.9% of revenue, respectively. Adjusted EBIT excludes restructuring, transaction and integration costs, and acquired-intangible amortization, among other specified items.
Quarterly segment revenue and profit were: GBS $2,311 and $380; GIS $3,142 and $469; USPS $710 and $109. Segment profit excludes certain corporate costs, restructuring, transaction costs, and acquired-intangible amortization.
For a more comparable pro forma basis, revenue declined 3.0% in the quarter and 5.5% for six months versus 2016; at constant currency, declines were 3.8% and 5.0%. Management attributed the weakness in GBS and GIS mainly to contracts ending or renewing at lower rates, partly offset by new business and Tribridge. USPS revenue was broadly flat to higher on the pro forma comparisons.
Cash, debt, and liquidity
- Cash and cash equivalents were $2,671 at September 30, 2017, including $1.4 billion held outside the U.S. Six-month cash increased $1,408.
- Six-month operating cash flow was $1,543; investing activities provided $437, principally reflecting cash acquired in the merger; financing activities used $621.
- Total debt was $8,525, including $2,200 of short-term debt and current maturities; net debt was $5,854. The increase in debt from March 31 was primarily merger-related.
- Current assets were $9,440 and current liabilities $9,437. Reported total liquidity was $6,158, comprising cash and available revolving and lease-credit-facility borrowings.
- DXC reported compliance with its debt covenants. Credit ratings were BBB+ (Fitch, stable), Baa2 (Moody’s, stable), and BBB (S&P, negative outlook).
Material changes, outlook, and risks
- Restructuring: The post-merger Fiscal 2018 Plan targets workforce, offshore mix, organizational structure, and facilities/data centers amid continuing business contraction. Restructuring charges were $192 million for the quarter and $382 million for six months; related liabilities totaled $498 million at quarter-end.
- Merger accounting and unusual adjustments: DXC identified an immaterial $126 million classification error in the June quarter between cost of services and SG&A; it was corrected in the September quarter and did not affect six-month results. A lease-classification reassessment added a $977 million lease liability and $594 million of leased assets, increased goodwill by $383 million, and raised prior-quarter pretax income by $54 million through a cumulative adjustment recorded in Q2. Purchase-price allocations remained preliminary.
- Revenue outlook: The filing does not provide a specific revenue or earnings forecast. Management said existing cash and operating cash generation should cover normal requirements for the next 12 months. It described anticipated first-year merger synergies of approximately $1.0 billion, but gave no assurance on timing, amount, or realization costs.
- Capital returns: The board authorized a $2.0 billion share-repurchase program; $66 million had been spent through September 30. The stated fiscal 2018 dividend target was $0.72 per share, subject to board approval; $0.36 per share was declared for the first six months.
- Proposed USPS separation: Announced October 11, 2017, the proposed separation and combination with Vencore and KeyPoint targeted completion by March 2018, subject to approvals and other conditions. The proposed structure included $1.05 billion of consideration to DXC and a possible $50 million termination fee in specified circumstances. Completion, intended benefits, and tax-free treatment were not assured.
- Legal and contingent matters: An arbitrator awarded Kemper $84.2 million plus prejudgment interest in October 2017; additional costs and fees remained to be determined, and DXC said it was assessing options and insurance coverage. Other disclosed proceedings include the New York City Medicaid billing litigation, Navy Yard wrongful-death suits, and wage-and-hour litigation. The company generally could not estimate possible losses for the disclosed contingencies.
- Execution and other risks: Key risks include integrating CSC and HPES, achieving synergies, contract performance and renewals, currency exposure, litigation and tax outcomes, and implementation of a new consolidation/reporting system. Management reported disclosure controls effective, while continuing to monitor controls during system implementation and integration.
Investor facts to verify
- Use pro forma and constant-currency revenue trends—not the non-comparable reported year-over-year figures—to assess underlying performance.
- Track whether GBS and GIS contract renewals and new business stabilize revenue, and whether restructuring produces sustainable savings.
- Review final merger purchase-price allocations, the lease accounting dispute with HPE, and the effect of acquired intangible amortization and debt on future earnings and cash flow.
- Monitor leverage, refinancing needs, available liquidity, and cash held overseas, alongside repurchases and dividends.
- Follow USPS separation approvals, financing and tax conditions, and the Kemper award and other material litigation developments.