DXC Technology Company — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; unaudited. DXC provides IT services through Global Business Services (GBS) and Global Infrastructure Services (GIS).
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $3.707 billion | $4.141 billion |
| Income before tax | $122 million | $424 million |
| Net income | $103 million | $282 million |
| Net income attributable to DXC shareholders | $102 million | $278 million |
| Diluted EPS | $0.43 | $1.07 |
| Operating cash flow | $163 million | $(29) million |
- Revenue declined 10.5% reported and 4.7% in constant currency; foreign exchange reduced the year-over-year comparison by 5.8%.
- GBS revenue was $1.758 billion, down 6.8% reported and 1.0% constant currency. GIS revenue was $1.949 billion, down 13.5% reported and 7.8% constant currency.
- Adjusted EBIT was $259 million versus $332 million; adjusted EBIT margin was approximately 7.0% versus 8.0%. Reportable-segment profit was $337 million versus $403 million.
- GAAP total costs and expenses were $3.585 billion. Costs of services were $2.930 billion, SG&A was $349 million, depreciation and amortization was $389 million, and restructuring costs were $33 million. The filing says costs of services as a percentage of revenue increased 40 basis points.
- Cash and cash equivalents were $2.209 billion at June 30, down from $2.672 billion at March 31. Investing cash flow was $(192) million and financing cash flow was $(394) million; cash declined $463 million during the quarter.
- Total debt was $4.778 billion, down from $4.965 billion at March 31; long-term debt, net of current maturities, was $3.874 billion. DXC reported $5.2 billion of total liquidity, including $3.0 billion available under its revolving credit facility, and compliance with financial covenants.
Material changes and notable items
- Revenue weakness reflected project completions and terminations, divestitures, and lower GIS pass-through revenue. Cost optimization savings partly offset lower revenue; management also cited increased labor investment.
- Prior-year results included a $377 million gain on dispositions, principally the HPS sale. Current-quarter disposition gains were $29 million net in the income statement. This makes the reported decline in income materially affected by a nonrecurring prior-year gain.
- The effective tax rate fell to 15.6% from 33.5%; management cited income mix, U.S. tax on foreign income and base erosion payments, and a decrease in uncertain tax positions.
- DXC repurchased 8.85 million shares for approximately $266 million during the quarter. Quarterly dividends remained suspended for fiscal 2023.
- Contract awards declined: GBS awards were $1.7 billion versus $2.4 billion, and GIS awards were $1.5 billion versus $2.2 billion. Remaining performance obligations were approximately $20 billion; DXC expected to recognize about 32% in fiscal 2023.
Outlook, risks and contingencies
- DXC expects existing cash and cash generated from operations to cover normal operating requirements for the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management approved fiscal 2023 workforce and facility cost-saving initiatives; restructuring expense was $33 million in the quarter, and the related liability was $113 million at June 30.
- DXC’s planned sale of its German financial services subsidiary, FDB, for approximately $314 million was subject to conditions including regulatory consent. FDB held approximately $566 million in cash, primarily related to customer deposits.
- A jury awarded Oracle $30 million in its case against HPE; DXC may have indemnification exposure for a portion related to former HPE business units. Final judgment and post-trial motions were pending.
- Disputed IRS positions could result in approximately $462 million of federal and state tax expense, including estimated interest and penalties, and related cash cost if DXC does not prevail. The company said resolution of key tax court matters was not expected in the next 12 months.
- Other risks include the remaining securities lawsuit, an SEC informal investigation into historical non-GAAP cost disclosures, cyber and operational risks, foreign exchange exposure, indebtedness, and execution of restructuring plans. Management said it could not reasonably estimate losses for certain contingencies.
Investor verification priorities
- Track constant-currency revenue, segment trends, and contract awards to assess whether declines from project completions and terminations are stabilizing.
- Reconcile GAAP and adjusted results, especially the effect of the prior-year HPS gain and current restructuring and amortization charges.
- Monitor operating cash flow, working capital, share repurchases, and cash availability, including cash subject to foreign or FDB-related restrictions.
- Review the FDB sale’s regulatory progress and the Oracle-related indemnification exposure and final judgment.
- Follow IRS disputes and the SEC investigation, and assess any resulting cash, earnings, or disclosure effects.