DXC TECHNOLOGY COMPANY Introduction
The purpose of the MD&A is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the third quarter and the first nine months of fiscal 2020 and our financial condition as ofDecember 31, 2019 . The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes. The MD&A is organized in the following sections: • Background • Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements
• Contractual Obligations
• Critical Accounting Policies and Estimates
The following discussion includes a comparison of our results of operations and liquidity and capital resources for the third quarters and the first nine months of fiscal 2020 and fiscal 2019.
Background
DXC Technology helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, the world's largest companies trust DXC to deploy our enterprise technology stack to deliver new levels of performance, competitiveness and customer experiences. We generate revenue by offering a wide range of information technology services and solutions primarily inNorth America ,Europe ,Asia andAustralia . We operate through two segments: GBS and GIS. We market and sell our services directly to clients through our direct sales force operating out of sales offices around the world. Our clients include commercial businesses of many sizes and in many industries and public sector enterprises. 55 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth certain financial data for the third quarters and first nine months of fiscal 2020 and fiscal 2019:
Three Months Ended Nine Months Ended
(In millions, except per-share
amounts) December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Revenues $ 5,021 $ 5,178 $ 14,762 $ 15,473
Income (loss) from continuing
operations, before taxes 127 469 (1,666 ) 1,161
Income tax expense 37 3 191 205
Income (loss) from continuing
operations 90 466 (1,857 ) 956
Income from discontinued operations,
net of taxes - - - 35
Net income (loss) $ 90 $ 466 $ (1,857 ) $ 991
Diluted earnings (loss) per share:
Continuing operations $ 0.32 $ 1.66 $ (7.20 ) $ 3.33
Discontinued operations $ - $ - $ - $ 0.12
Fiscal 2020 Highlights
Financial highlights for the third quarter and first nine months of fiscal 2020 include the following:
• Revenues for the third quarter and first nine months of fiscal 2020 were
respectively, as compared to the same periods of the prior fiscal year.
• Income from continuing operations and diluted EPS from continuing
operations for the third quarter of fiscal 2020 were
and integration-related costs, amortization of acquired intangible assets
and a tax adjustment related to
from continuing operations and diluted EPS from continuing operations of
$466 million and$1.66 , respectively, for the same period of the prior fiscal year.
• Loss from continuing operations and diluted EPS from continuing operations
for the first nine months of fiscal 2020 were
respectively, including the cumulative impact of certain items of
million, reflecting restructuring costs, transaction, separation and
integration-related costs, amortization of acquired intangible assets,
goodwill impairment losses, gain on arbitration award and a tax adjustment
related to
operations and diluted EPS from continuing operations of
• Our cash and cash equivalents were
• We generated
months of fiscal 2020, as compared to cash generated of
during the first nine months of fiscal 2019.
• We returned
dividends and share repurchases during the first nine months of fiscal
2020, as compared to
2019.
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Revenues
Three Months Ended
(in millions) December 31, 2019 December 31, 2018 Change Percentage Change
GBS $ 2,359 $ 2,169 $ 190 8.8 %
GIS 2,662 3,009 (347 ) (11.5 )%
Total Revenues $ 5,021 $ 5,178 $ (157 ) (3.0 )%
Nine Months Ended
(in millions) December 31, 2019 December 31, 2018 Change Percentage Change
GBS $ 6,803 $ 6,493 $ 310 4.8 %
GIS 7,959 8,980 (1,021 ) (11.4 )%
Total Revenues $ 14,762 $ 15,473 $ (711 ) (4.6 )%
The decrease in revenues for the first nine months of fiscal 2020, compared with
fiscal 2019 of the same period, reflects an ongoing decline in our traditional
application maintenance business and legacy infrastructure services. Fiscal 2020
revenues included an unfavorable foreign currency exchange rate impact of 2.2%,
primarily driven by the strengthening of the U.S. dollar against the Euro and
British Pound.
During the third quarter and first nine months of fiscal 2020 and fiscal 2019, the distribution of our revenues across geographies was as follows:
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[[Image Removed: chart-ddb3f0beba6a5eec9a9.jpg]]
For the discussion of risks associated with our foreign operations, see Part 1,
Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year
ended March 31, 2019 .
58-------------------------------------------------------------------------------- As a global company, approximately 63% of our revenues for the first nine months of fiscal 2020 were earned internationally. As a result, the comparison of revenues denominated in currencies other than theU.S. dollar, from period to period, is impacted by fluctuations in foreign currency exchange rates. Constant currency revenues are a non-GAAP measure calculated by translating current period activity intoU.S. dollars using the comparable prior period's currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. The table below summarizes our constant currency revenues: Three Months Ended Constant Currency (in millions) December 31, 2019 December 31, 2018 Change Percentage Change GBS $ 2,384 $ 2,169 $ 215 9.9 % GIS 2,691 3,009 (318 ) (10.6 )% Total $ 5,075 $ 5,178$ (103 ) (2.0 )% Nine Months Ended Constant Currency (in millions) December 31, 2019 December 31, 2018
Change Percentage Change GBS $ 6,942 $ 6,493 $ 449 6.9 % GIS 8,165 8,980 (815 ) (9.1 )% Total$ 15,107 $ 15,473$ (366 ) (2.4 )% Global Business Services GBS revenue was$2,359 million in the third quarter and$6,803 million in the first nine months of fiscal 2020, an increase of 8.8% and 4.8%, respectively, compared to the corresponding periods in fiscal 2019. GBS revenue in constant currency increased 9.9% and 6.9% in the third quarter and first nine months of fiscal 2020, respectively, as compared to the corresponding periods in fiscal 2019. The increase in GBS revenue in fiscal 2020 periods reflects the contributions from ourLuxoft and other acquisitions further discussed in Note 3 - "Acquisitions". For the third quarter and first nine months of fiscal 2020, GBS contract awards were$2.5 billion and$6.8 billion , respectively, as compared to$2.3 billion and$6.5 billion in the corresponding periods of fiscal 2019.
Global Infrastructure Services
GIS revenue was$2,662 million in the third quarter and$7,959 million in the first nine months of fiscal 2020, a decrease of 11.5% and 11.4%, respectively, compared to the corresponding periods in fiscal 2019. GIS revenue in constant currency decreased 10.6% and 9.1% in the third quarter and first nine months of fiscal 2020, respectively, as compared to the corresponding periods in fiscal 2019. The decrease in GIS revenues in fiscal 2020 periods reflects declines in our traditional infrastructure businesses. For the third quarter and first nine months of fiscal 2020, GIS contract awards were$2.8 billion and$6.5 billion , respectively, as compared to$3.4 billion and$8.5 billion in the corresponding periods of fiscal 2019. 59 --------------------------------------------------------------------------------
Costs and Expenses
Our total costs and expenses are shown in the tables below:
Three Months Ended
Amount Percentage of Revenues
December 31, December 31, December 31, Percentage Point
(in millions) 2019 2018 December 31, 2019 2018 Change
Costs of services (excludes
depreciation and amortization
and restructuring costs) $ 3,827 $ 3,725 76.1 % 71.8 % 4.3
Selling, general, and
administrative (excludes
depreciation and amortization
and restructuring costs) 518 491 10.3 9.5 0.8
Depreciation and amortization 479 508 9.5 9.8 (0.3 )
Goodwill impairment losses 53 - 1.1 - 1.1
Restructuring costs 74 76 1.5 1.5 -
Interest expense 93 81 1.9 1.6 0.3
Interest income (33 ) (27 ) (0.7 ) (0.5 ) (0.2 )
Other income, net (117 ) (145 ) (2.3 ) (2.8 ) 0.5
Total costs and expenses $ 4,894 $ 4,709 97.5 % 90.9 % 6.6
Nine Months Ended
Amount Percentage of Revenues
December 31, December 31, December 31, Percentage Point
(in millions) 2019 2018 December 31, 2019 2018 Change
Costs of services (excludes
depreciation and amortization
and restructuring costs) $ 11,128 $ 11,110 75.3 % 71.8 % 3.5
Selling, general, and
administrative (excludes
depreciation and amortization
and restructuring costs) 1,514 1,500 10.3 9.7 0.6
Depreciation and amortization 1,416 1,463 9.6 9.5 0.1
Goodwill impairment losses 2,940 - 19.9 - 19.9
Restructuring costs 248 418 1.7 2.7 (1.0 )
Interest expense 288 249 2.0 1.6 0.4
Interest income (130 ) (92 ) (0.9 ) (0.6 ) (0.3 )
Gain on arbitration award (632 ) - (4.3 ) - (4.3 )
Other income, net (344 ) (336 ) (2.3 ) (2.2 ) (0.1 )
Total costs and expenses $ 16,428 $ 14,312 111.3 % 92.5 % 18.8
The 6.6 point increase in costs and expenses as a percentage of revenue for the
third quarter primarily reflects the cumulative impact of increases in selling,
general and administrative costs and amortization costs. In addition, the third
quarter includes an adjustment that increased costs related to goodwill
impairment losses. The 18.8 point increase in costs and expenses as a percentage
of revenue for the first nine months of fiscal 2020 primarily reflects our
goodwill impairment losses, which were partially offset by the gain on
arbitration award.
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--------------------------------------------------------------------------------Costs of Services
Cost of services, excluding depreciation and amortization and restructuring
costs ("COS"), was $3.8 billion and $11.1 billion for the third quarter and
first nine months of fiscal 2020, respectively. COS increased $102 million
during the third quarter of fiscal 2020 and increased $18 million during the
first nine months of fiscal 2020, as compared to the same periods of the prior
fiscal year.
COS as a percentage of revenue increased 4.3 points and 3.5 points for the third
quarter and first nine months of fiscal 2020, respectively. These increases were
driven by the decline in revenue exceeding associated cost reductions in our
traditional infrastructure businesses.
Selling, General, and Administrative
Selling, general, and administrative expense, excluding depreciation and
amortization and restructuring costs ("SG&A"), was $518 million and $1,514
million for the third quarter and first nine months of fiscal 2020,
respectively. SG&A increased $27 million and $14 million during the third
quarter and first nine months of fiscal 2020, respectively, as compared to the
same periods of the prior fiscal year. These increases included SG&A related to
the Luxoft Acquisition, which we acquired during the first quarter of fiscal
2020.
Transaction, separation and integration-related costs of $68 million and $226
million were included in SG&A for the third quarter and first nine months of
fiscal 2020, respectively, as compared to $107 million and $305 million for the
comparable periods of the prior fiscal year.
Depreciation and Amortization
Depreciation expense decreased$88 million and amortization expense increased$59 million for the three months endedDecember 31, 2019 , compared to the three months endedDecember 31, 2018 . For the first nine months of fiscal 2020, depreciation expense decreased$138 million and amortization expense increased$91 million compared to the first nine months of fiscal 2019. The net decrease in depreciation for the third quarter and first nine months of fiscal 2020 was primarily due to a$68 million and$179 million benefit, respectively, from a change in estimated useful lives of certain equipment described in Note 1 - "Summary of Significant Accounting Policies", offset by an increase in depreciation on assets placed into service, as well as dissipation of the benefit from the conversion of assets from operating to finance leases. The increases in amortization expense for the third quarter and first nine months of fiscal 2020 were primarily due to increases in software amortization and amortization related to accelerated transition and transformation contract costs. Goodwill Impairment Losses DXC recognized goodwill impairment charges totaling$53 million and$2,940 million for the third quarter and the first nine months of fiscal 2020. The impairment charge was primarily as a result of a decline in market capitalization during the fiscal 2020 second quarter. The impairment charge was adjusted during the third quarter of fiscal 2020 due to an out-of-period correction that also affected income tax benefit. See Note 11, "Goodwill" for additional information. Restructuring Costs During fiscal 2020, management approved global cost savings initiatives designed to reduce operating costs by re-balancing our workforce and facilities structures. During the third quarter and first nine months of fiscal 2020, restructuring costs, net of reversals, were$74 million and$248 million , respectively, as compared to$76 million and$418 million during the same periods of the prior fiscal year. Restructuring costs for the first nine months of fiscal 2020 included$23 million of reversals under the Fiscal 2020 Plan.
For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 14 - "Restructuring Costs" to the financial statements.
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--------------------------------------------------------------------------------Interest Expense and Interest Income
Interest expense for the third quarter and first nine months of fiscal 2020 increased$12 million and$39 million , respectively, over the same periods in the prior fiscal year. The increase in interest expense in the third quarter and first nine months of fiscal 2020, versus the same periods in fiscal 2019, was primarily due to an increase in borrowings and asset financing activities. See the "Capital Resources" caption below and Note 12 - "Debt" for additional information. Interest income for the third quarter and first nine months of fiscal 2020 increased$6 million and$38 million , respectively over the same periods in the prior fiscal year. The year-over-year increase in interest income during the third quarter of fiscal 2020 was due to an increase in income from cash pool arrangements and deposits. The increase in interest income in the first nine months of fiscal 2020, versus the same periods in fiscal 2019, includes pre-award interest of$34 million and post-award interest of$2 million related to arbitration discussed below under the caption "Gain on Arbitration Award."
Gain on Arbitration Award
During the second quarter of fiscal 2020, DXC received final arbitration award proceeds of$666 million related to the HPE Enterprise Services merger completed in fiscal 2018. The arbitration award included$632 million in damages that were recorded as a gain. The remaining$34 million of the award related to pre-award interest. Dispute details are subject to confidentiality obligations.
Other Income, Net
Other income, net comprises non-service cost components of net periodic pension income, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses.
The
The$8 million increase in other income, net for the first nine months of fiscal 2020, as compared to the same period of the prior fiscal year, was due to a year-over-year increase of$61 million in non-service components of net periodic pension income and a year-over-year favorable foreign currency impact of$57 million . These increases were offset by a$110 million decrease in other gains related to sales of non-operating assets.
Taxes
Our ETR from continuing operations was 29.1% and 0.6% for the three months endedDecember 31, 2019 andDecember 31, 2018 , respectively, and (11.5)% and 17.7% for the nine months endedDecember 31, 2019 andDecember 31, 2018 , respectively. For the three months endedDecember 31, 2019 , the primary drivers of the ETR were the impact of previously unrecognized tax effects on the tax deductible goodwill impaired during the fiscal 2020 second quarter, the global mix of income, an increase in prior yearU.S. federal research and development income tax credits, and an increase in unrecognized tax benefits primarily related to audit activity. For the nine months endedDecember 31, 2019 , the primary drivers of the ETR were the impact of the non-deductible goodwill impairment charge, the non-taxable gain on the arbitration award, the global mix of income, an increase in unrecognized tax benefits primarily related to audit activity, and an increase in prior yearU.S. federal research and development income tax credits, net. For the three and nine months endedDecember 31, 2018 , the primary drivers of the ETR were the global mix of income, the impact ofU.S. proposed regulations on the ability to claim certain foreign tax credits, the filing of theOctober 31, 2017 U.S. federal tax return, the decrease to the provisional transition tax and a decrease in valuation allowances on certain foreign subsidiary deferred tax assets.
Income from Discontinued Operations
The
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--------------------------------------------------------------------------------Earnings (Loss) Per Share
Diluted EPS from continuing operations for the third quarter and first nine months of fiscal 2020 decreased$1.34 and$10.53 , respectively, from the same periods in the prior fiscal year. This decrease reflects a decrease of$376 million and$2,813 million in income from continuing operations for the third quarter and first nine months of fiscal 2020, respectively, over the same periods in the prior fiscal year.
Diluted EPS from continuing operations for the third quarter of fiscal
2020 includes
Diluted EPS from continuing operations for the first nine months of fiscal
2020 includes
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--------------------------------------------------------------------------------Non-GAAP Financial Measures
We present non-GAAP financial measures of performance which are derived from the
statements of operations of DXC. These non-GAAP financial measures include
earnings before interest and taxes ("EBIT"), adjusted EBIT, non-GAAP income
before income taxes, non-GAAP net income and non-GAAP EPS, constant currency
revenues, net debt and net debt-to-total capitalization.
We present these non-GAAP financial measures to provide investors with
meaningful supplemental financial information, in addition to the financial
information presented on a GAAP basis. Non-GAAP financial measures exclude
certain items from GAAP results which DXC management believes are not indicative
of core operating performance. DXC management believes these non-GAAP measures
allow investors to better understand the financial performance of DXC exclusive
of the impacts of corporate-wide strategic decisions. DXC management believes
that adjusting for these items provides investors with additional measures to
evaluate the financial performance of our core business operations on a
comparable basis from period to period. DXC management believes the non-GAAP
measures provided are also considered important measures by financial analysts
covering DXC, as equity research analysts continue to publish estimates and
research notes based on our non-GAAP commentary, including our guidance around
non-GAAP EPS targets.
Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of operating performance such as the amortization of acquired intangible assets and transaction, separation and integration-related costs.
Incremental amortization of intangible assets acquired through business
combinations may result in a significant difference in period over period
amortization expense on a GAAP basis. We exclude amortization of certain
acquired intangibles assets as these non-cash amounts are inconsistent in amount
and frequency and are significantly impacted by the timing and/or size of
acquisitions. Although DXC management excludes amortization of acquired
intangible assets primarily customer related intangible assets, from its
non-GAAP expenses, we believe that it is important for investors to understand
that such intangible assets were recorded as part of purchase accounting and
support revenue generation. Any future transactions may result in a change to
the acquired intangible asset balances and associated amortization expense.
There are limitations to the use of the non-GAAP financial measures presented in
this report. One of the limitations is that they do not reflect complete
financial results. We compensate for this limitation by providing a
reconciliation between our non-GAAP financial measures and the respective most
directly comparable financial measure calculated and presented in accordance
with GAAP. Additionally, other companies, including companies in our industry,
may calculate non-GAAP financial measures differently than we do, limiting the
usefulness of those measures for comparative purposes between companies.
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Non-GAAP financial measures and the respective most directly comparable
financial measures calculated and presented in accordance with GAAP include:
Three Months Ended
December 31,
(in millions) 2019 December 31, 2018 Change Percentage Change
Income from continuing operations before
income taxes $ 127 $ 469 $ (342 ) (72.9 )%
Non-GAAP income from continuing
operations before income taxes $ 468 $ 786 $ (318 ) (40.5 )%
Net income $ 90 $ 466 $ (376 ) (80.7 )%
Adjusted EBIT $ 528 $ 840 $ (312 ) (37.1 )%
Nine Months Ended
(in millions) December 31, 2019 December 31, 2018 Change Percentage Change
(Loss) income from continuing operations
before income taxes $ (1,666 ) $ 1,161 $ (2,827 ) (243.5 )%
Non-GAAP income from continuing
operations before income taxes $ 1,551 $ 2,285 $ (734 ) (32.1 )%
Net (loss) income $ (1,857 ) $ 991 $ (2,848 ) (287.4 )%
Adjusted EBIT $ 1,709 $ 2,442 $ (733 ) (30.0 )%
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include:
• Restructuring costs - reflects costs, net of reversals, related to
workforce optimization and real estate charges.
• Transaction, separation and integration-related costs - reflects costsrelated to integration planning, financing and advisory fees associated
with the HPES Merger and other acquisitions and costs related to the
separation of USPS .
• Amortization of acquired intangible assets - reflects amortization of
intangible assets acquired through business combinations.
•
• Gain on arbitration award - reflects a gain related to the HPES merger
arbitration award.
• Tax adjustment - for fiscal 2020 periods include the impact of Transition
Tax (affecting the three and nine months ended
entries related to prior restructuring charges (affecting the nine months
ended December 31, 2019 ). Fiscal 2019 periods reflect the estimated
non-recurring benefit of the Tax Cuts and Jobs Act of 2017. Income tax
expense of other non-GAAP adjustments is computed by applying thejurisdictional tax rate to the pre-tax adjustments on a jurisdictional
basis.
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A reconciliation of reported results to non-GAAP results is as follows:
Three Months Ended December 31, 2019
Amortization of
Acquired Goodwill
(in millions, except Transaction, Separation and Intangible Impairment per-share amounts) As Reported Restructuring Costs Integration-Related Costs
Assets Losses Tax Adjustment Non-GAAP Results
Costs of services
(excludes depreciation
and amortization and
restructuring costs) $ 3,827 $ - $ - $ - $ - $ - $ 3,827
Selling, general, and
administrative (excludes
depreciation and
amortization and
restructuring costs) 518 - (68 ) - - - 450
Income from continuing
operations before income
taxes 127 74 68 146 53 - 468
Income tax expense 37 10 16 34 53 (10 ) 140
Net income 90 64 52 112 - 10 328
Less: net income
attributable to
non-controlling
interest, net of tax 8 - - - - - 8
Net income attributable
to DXC common
stockholders $ 82 $ 64 $ 52 $ 112 $ - $ 10 $ 320
Effective Tax Rate 29.1 % 29.9 %
Basic EPS from
continuing operations $ 0.32 $ 0.25 $ 0.20 $ 0.44 $ - $ 0.04 $ 1.25
Diluted EPS from
continuing operations $ 0.32 $ 0.25 $ 0.20 $ 0.44 $ - $ 0.04 $ 1.25
Weighted average common
shares outstanding for:
Basic EPS 255.09 255.09 255.09 255.09 255.09 255.09 255.09
Diluted EPS 256.05 256.05 256.05 256.05 256.05 256.05 256.05
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Nine Months Ended December 31, 2019
Amortization of
Acquired
(in millions, except Transaction, Separation and Intangible Goodwill Gain on
per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Impairment Losses Arbitration Award Tax Adjustment Non-GAAP Results
Costs of services
(excludes depreciation
and amortization and
restructuring costs) $ 11,128 $ - $ - $ - $ - $ - $ - $ 11,128
Selling, general, and
administrative (excludes
depreciation and
amortization and
restructuring costs) 1,514 - (226 ) - - - - 1,288
(Loss) income from
continuing operations
before income taxes (1,666 ) 248 226 435 2,940 (632 ) - 1,551
Income tax expense 191 42 43 99 53 - (39 ) 389
Net (loss) income (1,857 ) 206 183 336 2,887 (632 ) 39 1,162
Less: net income
attributable to
non-controlling interest,
net of tax 17 - - - - - - 17
Net (loss) income
attributable to DXC
common stockholders $ (1,874 ) $ 206 $ 183 $ 336 $ 2,887 $ (632 ) $ 39 $ 1,145
Effective Tax Rate (11.5 )% 25.1 %
Basic EPS from continuing
operations $ (7.20 ) $ 0.79 $ 0.70 $ 1.29 $ 11.09 $ (2.43 ) $ 0.15 $ 4.40
Diluted EPS from
continuing operations $ (7.20 ) $ 0.79 $ 0.70 $ 1.28 $ 11.03 $ (2.42 ) $ 0.15 $ 4.38
Weighted average common
shares outstanding for:
Basic EPS 260.24 260.24 260.24 260.24 260.24 260.24 260.24 260.24
Diluted EPS 260.24 261.69 261.69 261.69 261.69 261.69 261.69 261.69
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Three Months Ended December 31, 2018
Amortization of
Acquired
(in millions, except Transaction, Separation and Intangible
per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Tax Adjustment Non-GAAP Results
Costs of services
(excludes depreciation and
amortization and
restructuring costs) $ 3,725 $ - $ - $ - $ - $ 3,725
Selling, general, and
administrative (excludes
depreciation and
amortization and
restructuring costs) 491 - (107 ) - - $ 384
Income from continuing
operations before income
taxes 469 76 107 134 - 786
Income tax expense 3 18 26 36 77 160
Income from continuing
operations 466 58 81 98 (77 ) 626
Income from discontinued
operations, net of tax - - - - - -
Net income 466 58 81 98 (77 ) 626
Less: net income
attributable to
non-controlling interest,
net of tax 4 - - - - 4
Net income attributable to
DXC common stockholders $ 462 $ 58 $ 81 $ 98 $ (77 ) $ 622
Effective Tax Rate 0.6 % 20.4 %
Basic EPS from continuing
operations $ 1.68 $ 0.21 $ 0.29 $ 0.36 $ (0.28 ) $ 2.26
Diluted EPS from
continuing operations $ 1.66 $ 0.21 $ 0.29 $ 0.35 $ (0.28 ) $ 2.23
Weighted average common
shares outstanding for:
Basic EPS 275.66 275.66 275.66 275.66 275.66 275.66
Diluted EPS 278.99 278.99 278.99 278.99 278.99 278.99
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Nine Months Ended December 31, 2018
Amortization of
Acquired
(in millions, except Transaction, Separation and Intangible
per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Tax Adjustment Non-GAAP Results
Costs of services
(excludes depreciation and
amortization and
restructuring costs) $ 11,110 $ - $ - $ - $ - $ 11,110
Selling, general, and
administrative (excludes
depreciation and
amortization and
restructuring costs) 1,500 - (305 ) - - $ 1,195
Income from continuing
operations before income
taxes 1,161 418 305 401 - 2,285
Income tax expense 205 100 72 101 44 522
Income from continuing
operations 956 318 233 300 (44 ) 1,763
Income from discontinued
operations, net of tax 35 - - - - 35
Net income 991 318 233 300 (44 ) 1,798
Less: net income
attributable to
non-controlling interest,
net of tax 8 - - - - 8
Net income attributable to
DXC common stockholders $ 983 $ 318 $ 233 $ 300 $ (44 ) $ 1,790
Effective Tax Rate 17.7 % 22.8 %
Basic EPS from continuing
operations $ 3.38 $ 1.13 $ 0.83 $ 1.07 $ (0.16 ) $ 6.26
Diluted EPS from
continuing operations $ 3.33 $ 1.12 $ 0.82 $ 1.05 $ (0.15 ) $ 6.16
Weighted average common
shares outstanding for:
Basic EPS 280.47 280.47 280.47 280.47 280.47 280.47
Diluted EPS 284.70 284.70 284.70 284.70 284.70 284.70
A reconciliation of net income to adjusted EBIT is as follows:
Three Months Ended Nine Months Ended
(in millions) December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Net income (loss) $ 90 $ 466 $ (1,857 ) $ 991
Income from discontinued
operations, net of taxes - - - (35 )
Income tax expense 37 3 191 205
Interest income (33 ) (27 ) (130 ) (92 )
Interest expense 93 81 288 249
EBIT 187 523 (1,508 ) 1,318
Restructuring costs 74 76 248 418
Transaction, separation and
integration-related costs 68 107 226 305
Amortization of acquired intangible
assets 146 134 435 401
Goodwill impairment losses 53 - 2,940 -
Gain on arbitration award - - (632 ) -
Adjusted EBIT $ 528 $ 840 $ 1,709 $ 2,442
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Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As ofDecember 31, 2019 , our cash and cash equivalents were$2.6 billion , of which$1.5 billion was held outside of theU.S. A substantial portion of funds can be returned to theU.S. from funds advanced previously to finance our foreign acquisition initiatives. As a result of the Tax Cuts and Jobs Act of 2017, and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries, we expect a significant portion of the cash and cash equivalents held by our foreign subsidiaries will no longer be subject toU.S. income tax consequences upon subsequent repatriation tothe United States . However, a portion of this cash may still be subject to foreign income tax consequences upon future remittance. Therefore, if additional funds held outside theU.S. are needed for our operations in theU.S. , we plan to repatriate these funds. Cash and cash equivalents ("cash") were$2.9 billion and$2.6 billion forMarch 31, 2019 andDecember 31, 2019 , respectively. The following table summarizes our cash flow activity: Nine Months Ended (in millions) December 31, 2019 December 31, 2018 Change Net cash provided by operating $ 2,062 $ 1,035$ 1,027 activities Net cash used in investing activities (2,122 ) (40 ) (2,082 ) Net cash used in financing activities (305 ) (1,183 ) 878 Effect of exchange rate changes on cash 26 (66 ) 92 and cash equivalents Net decrease in cash and cash $ (339 ) $ (254 ) $ (85 ) equivalents Cash and cash equivalents at beginning-of-year 2,899 2,729 Cash and cash equivalents at the $ 2,560 $ 2,475 end-of-period Net cash provided by operating activities during the first nine months of fiscal 2020 was$2,062 million as compared to$1,035 million during the comparable period of the prior fiscal year. The year-over-year increase of$1,027 million was due to an increase in net income, net of adjustments of$730 million , which includes cash received on arbitration award of$668 million and a decrease in working capital cash outflows of$297 million . Net cash used in investing activities during the first nine months of fiscal 2020 was$2,122 million as compared to$40 million during the comparable period of the prior fiscal year. The increase of$2,082 million was predominately due to an increase in cash paid for acquisitions of$1,665 million , a decrease in cash collections related to deferred purchase price receivable of$248 million , a decrease in proceeds from sale of assets of$228 million , and short-term investing of$75 million . The increase is partially offset by a decrease in payments for transition and transformation contract costs of$74 million and cash paid for business dispositions of$65 million in fiscal 2019. Net cash used in financing activities during the first nine months of fiscal 2020 was$305 million as compared to$1,183 million during the comparable period of the prior fiscal year. The$878 million decrease was primarily due to additional borrowings on long-term debt of$552 million , a decrease in payments on long-term debt of$1,590 million , and lower repurchases of common stock and advance payment for accelerated share repurchase of$517 million . This was partially offset by borrowings for theUSPS spin transaction of$1,114 million and proceeds from bond issuance of$753 million in the prior fiscal year. 70 --------------------------------------------------------------------------------
Capital Resources
See Note 21 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."
The following table summarizes our total debt:
As of
(in millions) December 31, 2019 March 31, 2019 Short-term debt and current maturities of long-term debt $ 1,581 $ 1,942 Long-term debt, net of current maturities 7,315 5,470 Total debt $ 8,896 $ 7,412 The$1.5 billion increase in total debt during the first nine months of fiscal 2020 was primarily attributed to the new term loan credit agreement in an aggregate principal of$2.2 billion , consisting of three tranches: (i)$500 million maturing on fiscal 2025; (ii) €750 million maturing on fiscal 2022; and (iii) €750 million maturing on fiscal 2023. The proceeds from the new borrowing was used to finance the Luxoft Acquisition. Additionally, we repaid the$500 million Senior Notes due 2020 during the first quarter of fiscal 2020 and$500 million Senior Notes due 2021 during the third quarter of fiscal 2020. We were in compliance with all financial covenants associated with our borrowings as ofDecember 31, 2019 andDecember 31, 2018 .
The maturity chart below summarizes the future maturities of long-term debt
principal for fiscal years subsequent to
[[Image Removed: chart-516070e633215e0394f.jpg]]
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--------------------------------------------------------------------------------The following table summarizes our capitalization ratios:
As of
(in millions) December 31, 2019 March 31, 2019
Total debt $ 8,896 $ 7,412
Cash and cash equivalents 2,560 2,899
Net debt(1) $ 6,336 $ 4,513
Total debt $ 8,896 $ 7,412
Equity 9,101 11,725
Total capitalization $ 17,997 $ 19,137
Debt-to-total capitalization 49.4 % 38.7 %
Net debt-to-total capitalization(1) 35.2 % 23.6 %
(1) Net debt and Net debt-to-total capitalization are non-GAAP measures used by
management to assess our ability to service our debts using only our cash and
cash equivalents. We present these non-GAAP measures to assist investors in
analyzing our capital structure in a more comprehensive way compared to gross
debt based ratios alone.
Net debt-to-total capitalization as of December 31, 2019 increased as compared
to March 31, 2019 , primarily due to the increase in total debt attributed to the
Luxoft Acquisition, the decrease in cash and cash equivalents used to pay down
Senior Notes, and the decrease in equity resulting from goodwill impairment
charges reported during the second quarter of fiscal 2020.
As of December 31, 2019 , our credit ratings were as follows:
Rating Agency Rating Outlook Short Term Ratings
Fitch BBB+ Negative F-2
Moody's Baa2 Stable P-2
S&P BBB Negative -
Following our announcement in November to explore strategic alternatives for
certain of our businesses, Fitch and S&P each affirmed DXC's credit ratings and
revised their ratings outlook to negative from stable. Moody's identified the
strategic alternatives as credit negative and indicated its DXC's ratings and
outlook were unaffected by the announcement.
See Note 21 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below.
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--------------------------------------------------------------------------------Liquidity
We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our normal operating requirements for the next 12 months. We expect to continue to use cash generated by operations as a primary source of liquidity, however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to draw on our multi-currency revolving credit facility or raise capital through the issuance of capital market debt instruments such as commercial paper, term loans, and bonds. In addition, we also currently utilize and will further utilize our cross currency cash pool for liquidity needs. However, potential future ratings agency actions may impair our ability to access certain segments of the capital markets and there is no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future. Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.
The following table summarizes our total liquidity:
As of
(in millions) December 31, 2019
Cash and cash equivalents $ 2,560
Available borrowings under our revolving credit facility 4,000
Total liquidity $ 6,560
Share Repurchases
During the first quarter of fiscal 2018, our Board of Directors authorized the
repurchase of up to $2.0 billion of our common stock and during the third
quarter of fiscal 2019, our Board of Directors approved an incremental $2.0
billion share repurchase. This program became effective on April 3, 2017 with no
end date established. During the nine months ended December 31, 2019 , we
repurchased 15,933,651 shares of our common stock at an aggregate cost of $736
million . The repurchase included 3,654,544 shares under the accelerated share
repurchase ("ASR") agreement at an average price of $54.73 per share. See Note
17 - "Stockholders' Equity" to the financial statements.
Dividends
During the nine months ended
Off-Balance Sheet Arrangements
In the normal course of business, we are party to arrangements that include
guarantees, the receivables securitization facility and certain other financial
instruments with off-balance sheet risk, such as letters of credit and surety
bonds. We also use performance letters of credit to support various risk
management insurance policies. No liabilities related to these arrangements are
reflected in our condensed consolidated balance sheets. There have been no
material changes to our off-balance-sheet arrangements reported under Part II,
Item 7 of our Annual Report on Form 10-K other than as disclosed below and in
Note 6 - "Sale of Receivables" and Note 21 - "Commitments and Contingencies" to
the financial statements in this Quarterly Report on Form 10-Q.
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--------------------------------------------------------------------------------Contractual Obligations
With the exception of the new term loan credit agreement in an aggregate principal of$2.2 billion , consisting of three tranches: (i)$500 million maturing during fiscal 2025; (ii) €750 million maturing during fiscal 2022; and (iii) €750 million maturing during fiscal 2023, and repayment of the$500 million Senior Notes due 2020 and$500 million Senior Notes due 2021 as discussed above under the subheading "Capital Resources," there have been no material changes, outside the ordinary course of business, to our contractual obligations sinceMarch 31, 2019 . For further information see "Contractual Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 .
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider the following policies to be critical because of their complexity and the high degree of judgment involved in implementing them: revenue recognition, income taxes, business combinations, defined benefit plans and valuation of assets. We have discussed the selection of our critical accounting policies and the effect of estimates with the audit committee of our board of directors. During the three months and nine months endedDecember 31, 2019 , there were no changes to our accounting estimates from those described in our fiscal 2019 Annual Report on Form 10-K except as mentioned in Note 1 - "Summary of Significant Accounting Policies".
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