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 fiscal year endedMarch 31, 2020 , and our financial condition as ofMarch 31, 2020 . The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and 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 fiscal 2020 and fiscal 2019. A discussion of changes in our results of operations from fiscal 2018 to fiscal 2019 may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" on Form 10-K filed with theSecurities and Exchange Commission onJune 13, 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 customers through our direct sales force operating out of sales offices around the world. Our customers include commercial businesses of many sizes and in many industries and public sector enterprises. 35 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth certain financial data for fiscal 2020 and 2019:
Fiscal Years Ended
(In millions, except per-share amounts) March 31, 2020 March 31, 2019
Revenues $ 19,577 $ 20,753
(Loss) income from continuing operations, before taxes (5,228 ) 1,515
Income tax expense 130 288 (Loss) income from continuing operations (5,358 )
1,227
Income from discontinued operations, net of taxes - 35 Net (loss) income$ (5,358 )
$ 1,262
Diluted (loss) earnings per share: Continuing operations$ (20.76 ) $ 4.35 Discontinued operations - 0.12$ (20.76 ) $ 4.47 Fiscal 2020 Highlights
Fiscal 2020 financial highlights include the following:
• Fiscal 2020 revenues were
• Fiscal 2020 loss from continuing operations and diluted EPS from
continuing operations were
including the cumulative impact of certain items of
and integration-related costs, amortization of acquired intangible assets,
goodwill impairment losses, gain on arbitration award, pension and other
post-retirement benefit ("OPEB") actuarial and settlement gains, and a tax
adjustment related to U.S. tax reform.
• Our cash and cash equivalents were
• We generated
• We returned
dividends and share repurchases during fiscal 2020.
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Revenues
Fiscal Years Ended
(in millions) March 31, 2020 March 31, 2019 Change Percent Change
GBS $ 9,111 $ 8,684 $ 427 4.9 %
GIS 10,466 12,069 (1,603 ) (13.3 )%
Total Revenues $ 19,577 $ 20,753 $ (1,176 ) (5.7 )%
The decrease in revenues for fiscal 2020 compared with fiscal 2019 reflects the
impact of price-downs, run-off, and termination of certain accounts offset by
increase in revenue in fiscal 2020 due to contributions from the Luxoft
acquisition. 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 Australian Dollar, Euro, and British Pound.
During fiscal 2020 and fiscal 2019, the distribution of our revenues across geographies was as follows:
[[Image Removed: chart-e0119ab461b35fc695a.jpg]]For a discussion of risks associated with our foreign operations, see Part I, Item 1A "Risk Factors" of this Annual Report.
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As a global company, over 63% of our fiscal 2020 revenues were earned
internationally. As a result, the comparison of revenues denominated in
currencies other than the U.S. dollar from period to period is impacted, and we
expect will continue to be impacted, by fluctuations in foreign currency
exchange rates. Constant currency revenues are a non-GAAP measure calculated by
translating current period activity into U.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:
Fiscal Years Ended
Constant Currency Percentage
(in millions) March 31, 2020 March 31, 2019 Change Change
GBS $ 9,292 $ 8,684 $ 608 7.0%
GIS 10,731 12,069 (1,338 ) (11.1)%
Total Revenues $ 20,023 $ 20,753 $ (730 ) (3.5)%
Global Business Services
Our GBS segment revenues were$9.1 billion for fiscal 2020, representing an increase of$0.4 billion , or 4.9%, compared to fiscal 2019. The revenue increase included an unfavorable foreign currency exchange rate impact of$0.2 billion , or 2.1%. GBS revenues in constant currency were$9.3 billion for fiscal 2020, representing an increase of$0.6 billion , or 7.0%. The increase in GBS revenue in fiscal 2020 is due to contributions from theLuxoft acquisition which closed inJune 2019 .
Global Infrastructure Services
Our GIS segment revenues were$10.5 billion for fiscal 2020, representing a decrease of$1.6 billion , or 13.3%, compared to fiscal 2019. The revenue decline included an unfavorable foreign currency exchange rate impact of$0.3 billion , or 2.2%. GIS revenues in constant currency were$10.7 billion for fiscal 2020, representing a decrease of$1.3 billion , or 11.1%. The decrease in GIS revenue in fiscal 2020 reflects the impact of price-downs, run-off, and termination of certain accounts.
During fiscal 2020, GBS and GIS had contract awards of
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--------------------------------------------------------------------------------Costs and Expenses
Our total costs and expenses were as follows:
Fiscal Years Ended Percentage of Revenues
(in millions) March 31, 2020 March 31, 2019 2020 2019
Costs of services (excludes
depreciation and amortization and
restructuring costs) $ 14,901 $ 14,946 76.0 % 72.1 %
Selling, general and administrative
(excludes depreciation and
amortization and restructuring
costs) 2,050 1,959 10.5 9.4
Depreciation and amortization 1,942 1,968 9.9 9.5
Goodwill impairment losses 6,794 - 34.7 -
Restructuring costs 252 465 1.3 2.2
Interest expense 383 334 2.0 1.6
Interest income (165 ) (128 ) (0.8 ) (0.6 )
Gain on arbitration award (632 ) - (3.2 ) -
Other income, net (720 ) (306 ) (3.7 ) (1.5 )
Total costs and expenses $ 24,805 $ 19,238 126.7 % 92.7 %
The 34.0 point increase in costs and expenses as a percentage of revenue for fiscal 2020 primarily reflects our goodwill impairment losses, which were partially offset by the gain on arbitration award and other income.
Costs of Services
Cost of services, excluding depreciation and amortization and restructuring
costs ("COS"), was $14.9 billion for fiscal 2020, including Luxoft , which was
flat compared to fiscal 2019. COS as percentage of revenue increased 3.9 points,
compared to fiscal 2019. This increase was driven by the ongoing investments we
are making to secure our customers and higher cost take-out activities in the
prior year.
Selling, General and Administrative
Selling, general and administrative expense, excluding depreciation and
amortization and restructuring costs ("SG&A"), was $2.1 billion for fiscal 2020,
as compared to $2.0 billion for fiscal 2019. SG&A increased $0.1 billion , and as
a percentage of revenue increased 1.1 points, compared to fiscal 2019. The
increase includes SG&A related to the Luxoft Acquisition, which we acquired
during the first quarter of fiscal 2020.
Integration, separation and transaction-related costs, included in SG&A, were
Depreciation and Amortization
Depreciation and amortization expense ("D&A") was $1.9 billion for fiscal 2020,
compared to $2.0 billion for fiscal 2019. The decrease in D&A was primarily due
to a $225 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 increases in software amortization and amortization related to
accelerated transition and transformation contract costs.
Goodwill Impairment Losses
DXC recognized goodwill impairment charges totaling$6,794 million during fiscal 2020. The impairment charges were primarily the result of a sustained decline in market capitalization during the fiscal 2020. See Note 11, "Goodwill" for additional information. 39 --------------------------------------------------------------------------------
Restructuring Costs
Restructuring costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization.
During fiscal 2020, management approved global cost savings initiatives designed to reduce operating costs by re-balancing our workforce and facilities structures. The fiscal 2020 global cost savings initiatives were designed to better align our organizational structure with our strategic initiatives and continue the integration of HPES and other acquisitions. Total restructuring costs recorded, net of reversals, during fiscal 2020 and 2019 were$252 million and$465 million , respectively. The net amounts recorded included$10 million and$2 million of pension benefit augmentations for fiscal 2020 and 2019, respectively, owed to certain employees under legal or contractual obligations. These augmentations will be paid as part of normal pension distributions over several years.
See Note 21 - "Restructuring Costs" for additional information about our restructuring actions.
Interest Expense and Interest Income
Interest expense for fiscal 2020 was$383 million as compared to$334 million in fiscal 2019. The increase in interest expense was primarily due to an increase in borrowings and asset financing activities. See the "Capital Resources" caption below and Note 13 - "Debt" for additional information. Interest income for fiscal 2020 was$165 million , as compared to$128 million in fiscal 2019. The year-over-year increase in interest income 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 includes 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, gain on sale of non-operating assets and
other miscellaneous gains and losses.
The components of other income, net for fiscal 2020 and 2019 are as follows:
Fiscal Years Ended
(in millions) March 31, 2020 March 31, 2019
Non-service cost components of net periodic
pension income $ (658 ) $ (182 )
Foreign currency (gain) loss (25 ) 31
Other gain (37 ) (155 )
Total $ (720 ) $ (306 )
The $414 million increase in other income for fiscal 2020, as compared to the
prior fiscal year, was due to a year-over-year increase of $476 million in
non-service components of net periodic pension income and a year-over-year
favorable foreign currency impact of $56 million . These increases were offset by
a $118 million decrease in other gains related to sales of non-operating assets.
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--------------------------------------------------------------------------------Taxes
Our effective tax rate ("ETR") on income (loss) from continuing operations,
before taxes, for fiscal 2020 and 2019 was 2.5% and 19.0% respectively. A
reconciliation of the differences between the
In fiscal 2020, the ETR was primarily impacted by: • Non-deductible goodwill impairment charge, which increased income tax
expense and increased the ETR by
• Non-taxable gain on the arbitration award, which decreased income tax
expense and decreased the ETR by $186 million and 3.6%, respectively
• A change in the net valuation allowance on certain deferred tax assets,
primarily in Australia , Brazil , China , Luxembourg, and Singapore , which
increased income tax expense and increased the ETR by $631 million and
12.1% respectively.
• An increase in Income Tax and Foreign Tax Credits, primarily relating to
research and development credits recognized for prior years, which
decreased income tax expense and decreased the ETR by $135 million and
2.6%, respectively.
• Local losses on investments in Luxembourg that increased the foreign rate
differential and decreased the ETR by
respectively, with an offsetting increase in the ETR due to an increase in
the valuation allowance of the same amount.
In fiscal 2019, the ETR was primarily impacted by: • Local tax losses on investments in Luxembourg that decreased the foreign
tax rate differential and decreased the ETR by
respectively, with an offsetting increase in the ETR due to an increase in
the valuation allowance of the same amount.
• A change in the net valuation allowance on certain deferred tax assets,
primarily in Luxembourg, Germany , Spain , UK , and Switzerland , which
increased income tax expense and increased the ETR by $256 million and
16.9%, respectively.
• A decrease in the transition tax liability and a change in tax accounting
method for deferred revenue, which decreased income tax expense and
decreased the ETR by $66 million and 4.3%, respectively.
In fiscal 2018, the ETR was primarily impacted by: • Due to the Company's change in repatriation policy, the reversal of a
deferred tax liability relating to the outside basis difference of foreign
subsidiaries which increased the income tax benefit and decreased the ETR
by
• The accrual of the one-time transition tax on estimated unremitted foreign
earnings, which decreased the income tax benefit and increased the ETR by
• The remeasurement of deferred tax assets and liabilities, which increased
the income tax benefit and decreased the ETR by
respectively.
The IRS is examining CSC's federal income tax returns for fiscal 2008 through
2017. With respect to CSC's fiscal 2008 through 2010 federal tax returns, we
previously entered into negotiations for a resolution through settlement with
the IRS Office of Appeals . The IRS examined several issues for this audit that
resulted in various audit adjustments. We have an agreement in principle with
the IRS Office of Appeals as to some but not all of these adjustments. We have
agreed to extend the statute of limitations associated with this audit through
September 30, 2020 .
In the first quarter of fiscal 2020, we filed for competent authority relief
relating to certain legacy CSC foreign restructuring expenses deducted for the
U. S. federal tax return for tax year March 31, 2013 . The Company has agreed to
extend the statute of limitations associated with the fiscal years 2011 through
2013 through December 31, 2020 . In the second quarter of fiscal 2020, the
Company received a Revenue Agent's Report with proposed adjustments to CSC's
fiscal 2014 through 2017 federal returns. The Company has filed a protest for
certain of these adjustments with the IRS Office of Appeals . The Company has
agreed to extend the statute of limitations for the fiscal 2014 through fiscal
2016 through December 31, 2020 and for the employment tax audit of fiscal years
2015 and 2016 until January 31, 2021 . The Company expects to reach a resolution
for all years no earlier than the first quarter of fiscal 2022 except agreed
issues related to fiscal 2008 through 2010 and fiscal 2011 through 2013 federal
tax returns, which are expected to be resolved within twelve months.
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In addition, we may settle certain other tax examinations, have lapses in
statutes of limitations, or voluntarily settle income tax positions in
negotiated settlements for different amounts than we have accrued as uncertain
tax positions. We may need to accrue and ultimately pay additional amounts for
tax positions that previously met a more likely than not standard if such
positions are not upheld. Conversely, we could settle positions by payment with
the tax authorities for amounts lower than those that have been accrued or
extinguish a position through payment. We believe the outcomes that are
reasonably possible within the next twelve months may result in a reduction in
liability for uncertain tax positions of $25 million to $27 million , excluding
interest, penalties, and tax carryforwards.
Income from Discontinued Operations
The$35 million of income from discontinued operations for the fiscal year 2019 reflects the net income generated byUSPS during the first quarter of fiscal 2019. Earnings Per Share Diluted EPS from continuing operations for fiscal 2020 was$20.76 , a decrease of$25.11 per share compared with the prior fiscal year. The EPS decrease was due to a decrease of$6,585 million in income from continuing operations. Diluted EPS for fiscal 2020 includes$0.80 per share of restructuring costs,$0.98 per share of transaction, separation and integration-related costs,$1.73 per share of amortization of acquired intangible assets,$25.78 per share of goodwill impairment losses,$(2.43) per share of arbitration award gains,$(0.74) per share of pension and OPEB actuarial and settlement gains, and$0.13 per share of tax adjustment relating to prior restructuring charges.
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.
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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.
Non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:
Fiscal Years Ended
(in millions) March 31, 2020 March 31, 2019 Change Percentage Change
(Loss) income from continuing
operations $ (5,228 ) $ 1,515 $ (6,743 ) (445.1 )%
Non-GAAP income from continuing
operations $ 1,843 $ 3,063 $ (1,220 ) (39.8 )%
Net (loss) income $ (5,358 ) $ 1,262 $ (6,620 ) (524.6 )%
Adjusted EBIT $ 2,061 $ 3,269 $ (1,208 ) (37.0 )%
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include: • Restructuring - 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 and costs to execute on strategic alternatives.
• 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.
• Pension and OPEB actuarial and settlement gains and losses - reflects
pension and OPEB actuarial and settlement gains and losses.
• Tax adjustment - Fiscal 2020 includes the impact of an adjustment to the
Transition Tax and tax liabilities related to prior restructuring charges.
Fiscal 2019 reflects the estimated non-recurring benefit of the Tax Cuts
and Jobs Act of 2017. Fiscal 2018 reflects the application of an
approximate 28% tax rate, which is within the targeted effective tax rate
range for fiscal year 2018. Income tax expense of other non-GAAP
adjustments is computed by applying the jurisdictional 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:
Fiscal Year Ended March 31, 2020
Amortization of
Acquired Pension and OPEB
(in millions, except Transaction, Separation and Intangible Goodwill Gain on Actuarial and Non-GAAP
per-share amounts) As Reported Restructuring Costs Integration-Related Costs
Assets Impairment Losses Arbitration Award Settlement Gains Tax Adjustment Results
Costs of services
(excludes depreciation
and amortization and
restructuring costs) $ 14,901 $ - $ - $ - $ - $ - $ - $ - $ 14,901
Selling, general and
administrative
(excludes depreciation
and amortization and
restructuring costs) 2,050 - (318 ) - - - - - 1,732
(Loss) income from
continuing operations,
before taxes (5,228 ) 252 318 583 6,794 (632 ) (244 ) - 1,843
Income tax expense
(benefit) 130 44 63 133 95 - (51 ) (33 ) 381
Net (loss) income (5,358 ) 208 255 450 6,699 (632 ) (193 ) 33 1,462
Less: net income
attributable to
non-controlling
interest, net of tax 11 - - - - - - - 11
Net (loss) income
attributable to DXC
common stockholders $ (5,369 ) $ 208 $ 255 $ 450 $ 6,699 $ (632 ) $ (193 ) $ 33 $ 1,451
Effective Tax Rate (2.5 )% 20.7 %
Basic EPS from $ 25.91 $ (2.44 ) $ (0.75 )
continuing operations $ (20.76 ) $ 0.80 $ 0.99 $ 1.74 $ 0.13 $ 5.61
Diluted EPS from
continuing operations $ (20.76 ) $ 0.80 $ 0.98 $ 1.73 $ 25.78 $
(2.43 ) $ (0.74 ) $ 0.13
Weighted average common
shares outstanding for:
Basic EPS 258.57 258.57 258.57 258.57 258.57 258.57 258.57 258.57 258.57
Diluted EPS 258.57 259.81 259.81 259.81 259.81 259.81 259.81 259.81 259.81
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Fiscal Year Ended March 31, 2019
Pension and
Amortization of OPEB
Acquired Actuarial and
(in millions, except Transaction, Separation and Intangible Settlement
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) $ 14,946 $ - $ - $ - $ - $ - $ 14,946
Selling, general and
administrative (excludes
depreciation and
amortization and
restructuring costs) 1,959 - (401 ) - - - 1,558
Income from continuing
operations, before taxes 1,515 465 401 539 143 - 3,063
Income tax expense 288 112 102 138 27 44 711
Income from continuing
operations 1,227 353 299 401 116 (44 ) 2,352
Income from discontinued 35 - - - - - 35
operations, net of taxes
Net income 1,262 353 299 401 116 (44 ) 2,387
Less: net income
attributable to
non-controlling interest,
net of tax 5 - - - - - 5
Net income attributable to
DXC common stockholders $ 1,257 $ 353 $ 299 $ 401 $ 116 $ (44 ) $ 2,382
Effective Tax Rate 19.0 % 23.2 %
Basic EPS from continuing
operations $ 4.40 $ 1.27 $ 1.08 $ 1.44 $ 0.42 $ (0.16 ) $ 8.46
Diluted EPS from
continuing operations $ 4.35 $ 1.25 $ 1.06 $ 1.42 $ 0.41 $ (0.16 ) $ 8.34
Weighted average common
shares outstanding for:
Basic EPS 277.54 277.54 277.54 277.54 277.54 277.54 277.54
Diluted EPS 281.43 281.43 281.43 281.43 281.43 281.43 281.43
* The net periodic pension cost within income from continuing operations
includes $700 million of actual return on plan assets, whereas the net periodic
pension cost within non-GAAP income from continuing operations includes $570
million of expected long-term return on pension assets of defined benefit plans
subject to interim remeasurement.
Reconciliations of net income to adjusted EBIT are as follows:
Fiscal Years Ended
(in millions) March 31, 2020 March 31, 2019
Net (loss) income $ (5,358 ) $ 1,262
Income from discontinued operations, net of taxes - (35 )
Income tax expense 130 288
Interest income (165 ) (128 )
Interest expense 383 334
EBIT (5,010 ) 1,721
Restructuring costs 252 465
Transaction, separation and integration-related
costs 318 401
Amortization of acquired intangible assets 583 539
Goodwill impairment losses 6,794 -
Gain on arbitration award (632 ) -
Pension and OPEB actuarial and settlement (gains)
losses (244 ) 143
Adjusted EBIT $ 2,061 $ 3,269
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Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As ofMarch 31, 2020 , our cash and cash equivalents ("cash") were$3.7 billion , of which$1.2 billion was held outside ofthe United States . A substantial portion of funds can be returned to theU.S. from funds advanced previously to finance our foreign acquisition initiatives. As a result of the Tax Cuts and Jobs Act of 2017, and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries and current income inclusions for global intangible low taxed income, we expect a significant portion of the cash held by our foreign subsidiaries will no longer be subject toU.S. federal income tax consequences upon subsequent repatriation to theU.S. However, a portion of this cash may still be subject to foreign income tax consequences upon future remittance. Therefore, if additional funds held outside theU.S. are needed for our operations in theU.S. we plan to repatriate these funds.
Cash was
Fiscal Year Ended
(in millions) March 31, 2020 March 31, 2019 March 31, 2018 Net cash provided by operating$ 2,350 $ 1,783 $ 2,567 activities Net cash (used in) provided by (2,137 ) 69 719 investing activities Net cash provided by (used in) 657 (1,663 ) (1,890 ) financing activities Effect of exchange rate changes on cash (90 ) (19 ) 65 and cash equivalents Net increase in cash and cash 780 170 1,461 equivalents Cash and cash equivalents at beginning 1,268 of year 2,899
2,729
Cash and cash equivalents at the end of
Operating cash flow Net cash provided by operating activities during fiscal 2020 was$2,350 million as compared to$1,783 million during fiscal 2019. The increase of$567 million was due to an increase in net income, net of adjustments of$458 million , which includes an increase in working capital movements of$109 million . Net income, net of adjustments includes cash received on arbitration award of$668 million .
Investing cash flow
Net cash (used in) provided by investing activities during fiscal 2020 was$(2,137) million as compared to$69 million during fiscal 2019. The increase of$2,206 million was primarily due to an increase in cash paid for acquisitions of$1,632 million , a decrease in cash collections related to deferred purchase price receivable of$413 million , a decrease in proceeds from sale of assets of$284 million , and net short-term investing of$37 million . The increase is partially offset by a decrease in payments for transition and transformation costs of$113 million and cash paid for business dispositions of$65 million in fiscal 2019. Financing cash flow Net cash provided by (used in) financing activities during fiscal 2020 was$657 million , as compared to$(1,663) million during fiscal 2019. The$2,320 million increase was primarily due to borrowings under lines of credit in fiscal 2020 of$1.5 billion , additional borrowings on long-term debt of$552 million , a decrease in payments on long-term debt of$1,586 million , and lower repurchases of common stock and advance payment for accelerated share repurchase of$608 million . This was partially offset by an increase in repayments of commercial paper of$44 million , borrowings for theUSPS spin transaction of$1,114 million in fiscal 2019, and proceeds from bond issuance of$753 million in fiscal 2019. 46 --------------------------------------------------------------------------------
Capital Resources
See Note 22 - "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) March 31, 2020 March 31, 2019
Short-term debt and current maturities of long-term debt $ 1,276 $ 1,942
Long-term debt, net of current maturities 8,672 5,470
Total debt $ 9,948 $ 7,412
The $2.5 billion increase in total debt during fiscal 2020 was primarily
attributed to the $1.5 billion borrowing from the credit facility agreement and
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 term loan credit agreement was used to finance
the Luxoft Acquisition. Additionally, we repaid the $500 million Senior Notes
due 2020 and $500 million Senior Notes due 2021 during fiscal 2020. See Note 13
- "Debt" for more information.
We were in compliance with all financial covenants associated with our
borrowings as of
The debt maturity chart below summarizes the future maturities of long-term debt principal for fiscal years subsequent toMarch 31, 2020 and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities. See Note 13 - "Debt" for more information. [[Image Removed: chart-1ff908cea3235ebc884.jpg]] 47
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The following table summarizes our capitalization ratios:
As of
(in millions) March 31, 2020 March 31, 2019
Total debt $ 9,948 $ 7,412
Cash and cash equivalents 3,679 2,899
Net debt(1) $ 6,269 $ 4,513
Total debt $ 9,948 $ 7,412
Equity 5,129 11,725
Total capitalization $ 15,077 $ 19,137
Debt-to-total capitalization 66.0 % 38.7 %
Net debt-to-total capitalization(1) 41.6 % 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 March 31, 2020 increased as compared to
March 31, 2019 , primarily due to the increase in total debt attributed to the
Luxoft Acquisition, borrowing from the credit facility agreement, 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 fiscal 2020.
As of March 31, 2020 , our credit ratings were as follows:
Rating Agency Long Term Ratings Short Term Ratings Outlook
Fitch BBB+ F-2 Negative
Moody's Baa2 P-2 Negative
S&P BBB - Negative
For information on the risks of ratings downgrades, see Item 1A - Risk Factors
"Our credit rating and ability to manage working capital, refinance and raise
additional capital for future needs, could adversely affect our liquidity,
capital position, borrowing, cost and access to capital markets."
See Note 22 - "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.
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 using 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 raise capital through the
issuance of capital market debt instruments such as commercial paper, term
loans, and bonds. In addition, we currently utilize, and will further utilize,
our cross currency cash pool for liquidity needs. However, 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.
48
--------------------------------------------------------------------------------The following table summarizes our total liquidity:
As of
(in millions) March 31, 2020
Cash and cash equivalents $ 3,679
Available borrowings under our revolving credit facility 2,500
Total liquidity $ 6,179
During March 2020 as the evolving global COVID-19 pandemic crisis resulted in
increasing government actions to shut down economic activity and enforce
stay-at-home orders, global capital markets were disrupted and became
tumultuous, including the near shut down of commercial paper markets for issuers
such as the Company as short-term fixed income investors prepared for potential
redemptions. On March 24, 2020 , the Company announced the draw-down of $1.5
billion from its Revolving Credit Facility due 2025 in order to increase cash on
hand and eliminate the reliance on commercial paper markets along with the
suspension of the Company's Euro and USD commercial paper program until the
Company deems such capital markets stabilized and reliable. As a result, the
Company's commercial paper outstanding was reduced to $542 million as of
March 31, 2020 , and another $318 million is scheduled to mature during the
quarter ending June 30, 2020 , which the Company currently expects to fund such
maturing Euro commercial paper from its cash on hand. While central bank actions
have improved liquidity in commercial paper markets overall, there is no
assurance that the Company, at its commercial program ratings of P2/F2, will
have reliable access in the future or if accessible, at reasonable costs.
On
Subsequent to the end of the fiscal period, the Company issued$1.0 billion in principal amount of Senior Notes in the form of$500 million principal amount of 4.0% Senior Notes due 2023 and$500 million principal amount of 4.125% Senior Notes due 2025. All the net proceeds from the Notes offerings were applied towards the early prepayment of the Company's term loan facilities, including prepayment of €500 million of Euro Term Loan due fiscal 2022, £150 million of GBP Term Loan due fiscal 2022,A$300 million of AUD Term Loan due fiscal 2022, and$100 million of USD Term Loan due fiscal 2025. OnMay 15, 2020 , the Company agreed with its lenders and modified the definition of Leverage Ratio to be measured on a "net of cash" basis across all of the Company's bank credit and term loan facilities, and for such newly defined Leverage Ratio limitation of Total Consolidated Net Indebtedness to Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, as defined in such credit and term loan facilities, currently at 3.0x, to be reduced to 2.25x thereafter beginning the fiscal year endingMarch 31, 2022 (with the first quarterly measurement date as ofJune 30, 2021 ). The net effect of such adjustment to the Leverage Ratio definition in the Company's credit and term loan facilities is to allow the Company the flexibility to maintain elevated cash balances going forward both during current circumstances and thereafter, without constraining the Company's strategy of maintaining strong access to liquidity during the COVID pandemic crisis. The Company's credit and term loan facilities that were modified include:$4.0 billion Revolving Credit Facilities due fiscal year 2025 (including a$70 million sub-tranche due fiscal 2024), €250 million Euro Term Loan due fiscal year 2022 (a substantial portion was extended to mature in fiscal year 2023 pursuant to the Euro Term Loan Extension, see below), €750 million Euro Term Loan due fiscal year 2023 (a substantial portion was extended to mature in fiscal year 2024 pursuant to the Euro Term Loan Extension, see below), £300 million in GBP Term Loan due fiscal year 2022,A$500 million in AUD Term Loan due fiscal year 2022, and approximately$382 million in outstanding USD Term Loan due fiscal year 2025. 49 -------------------------------------------------------------------------------- OnMay 15, 2020 , the Company initiated elective extension amendments in accordance with the terms of the aggregate €1.0 billion principal amount of Euro Term Loans outstanding. Accordingly, €216.7 million out of €250 million Euro Term Loan due fiscal year 2022 agreed to extend maturity 12-months to mature fiscal year 2023, and €700 million out of total €750 million Euro Term Loan due fiscal year 2023 agreed to extend maturity 12-months to mature fiscal year 2024. Margin would increase during the 12-month extension terms to Euribor + 125bps and Euribor + 175bps respectively, for the Euro Term Loans originally due fiscal years 2022 and 2023, which would be an increase from the current applicable margin of Euribor + 65bps, and Euribor + 80 bps, respectively. There is no change to current margin or terms through the original maturity term of the Euro Term Loans. The debt maturity chart below summarizes the future maturities of long-term debt principal taking into effect borrowings and prepayments as mentioned above, for fiscal years subsequent toMay 15, 2020 , and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities. [[Image Removed: chart-5a64850f82812ac6d75.jpg]]
Share Repurchases
During fiscal 2018, our Board of Directors authorized the repurchase of up to$2.0 billion of our common stock and during fiscal 2019, we announced that our Board of Directors had approved an incremental$2.0 billion share repurchase authorization. An expiration date has not been established for this repurchase plan. During fiscal 2020, we repurchased 15,933,651 shares of our common stock at an aggregate cost of$736 million . See Note 15 - "Stockholders' Equity" for more information. Dividends During fiscal 2020, our Board of Directors declared aggregate cash dividends to our stockholders of$0.84 per share, or approximately$219 million . To enhance our financial flexibility under current uncertain market conditions, we have elected to suspend payment of a quarterly dividend. This decision will be reevaluated by the Board ofDXC Technology as market conditions stabilize.
Off-Balance Sheet Arrangements
In the normal course of business, we are a 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 balance sheets. See Note 5 - "Receivables" and Note 22 -
"Commitments and Contingencies" for additional information regarding these
off-balance sheet arrangements.
50
--------------------------------------------------------------------------------Contractual Obligations
Our contractual obligations as of
Less than More than
(in millions) 1 year 2-3 years 4-5 years 5 years Total
Debt(1) $ 290 $ 3,698 $ 2,870 $ 1,458 $ 8,316
Capitalized lease liabilities 444 510 92 - 1,046
Operating Leases(2) 508 645 325 221 1,699
Purchase Obligations(3) 1,911 1,180 286 - 3,377
U.S. Tax Reform - Transition
Tax(4) 24 46 102 73 245
Interest and preferred dividend
payments(5) 253 441 325 159 1,178
Total(6) $ 3,430 $ 6,520 $ 4,000 $ 1,911 $ 15,861
(1) Amounts represent scheduled principal payments of long-term debt and
mandatory redemption of preferred stock of a consolidated subsidiary.
(2) Amounts represent present value of operating leases including imputed
interests. See Note 6 - "Leases" for more information.
(3) Includes long-term purchase agreements with certain software, hardware,
telecommunication and other service providers and exclude agreements that are
cancelable without penalty. If we do not meet the specified service minimums, we
may have an obligation to pay the service provider a portion of or the entire
shortfall.
(4) The transition tax resulted in recording a total transition tax obligation
of $288 million , of which $290 million was recorded as income tax liability and
$2 million recorded as a reduction in our unrecognized tax benefits, which has
been omitted from this table. The transition tax is payable over eight years; 8%
of net tax liability in each of years 1-5, 15% in year 6, 20% in year 7, and 25%
in year 8. We have made our first two payments. See Note 12 - "Income Taxes" for
additional information about the transition tax. See Note 12 - "Income Taxes"
for additional information about the estimated liability related to unrecognized
tax benefits, which has been omitted from this table.
(5) Amounts represent scheduled interest payments on long-term debt and
scheduled dividend payments associated with the mandatorily redeemable preferred
stock of a consolidated subsidiary excluding contingent dividends associated
with the participation and variable appreciation premium features. Also included
are scheduled interest payments of $246 million on new borrowings from our
credit facility agreement subsequent to period end. See Note 23 - "Subsequent
Events" for more information.
(6) See Note 14 - "Pension and Other Benefit Plans" for the estimated liability
related to estimated future benefit payments under our Pension and OPEB plans
that have been omitted from this table.
Critical Accounting Policies and Estimates
The preparation of financial statements, in accordance with 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.
51--------------------------------------------------------------------------------
Revenue Recognition
Most of our revenues are recognized based on objective criteria and do not require significant estimates that may change over time. However, some arrangements may require significant estimates, including contracts which include multiple performance obligations.
Contracts with Multiple performance obligations
Many of our contracts require us to provide a range of services or performance obligations to our customers, which may include a combination of services, products or both. As a result, significant judgment may be required to determine the appropriate accounting, including whether the elements specified in contracts with multiple performance obligations should be treated as separate performance obligations for revenue recognition purposes, and, when considered appropriate, how the total transaction price should be allocated among the performance obligations and the timing of revenue recognition for each. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Certain of our contracts involve the sale of DXC proprietary software, post contract customer support and other software-related services. The standalone selling price generally is determined for each performance obligation using an adjusted market assessment approach based on the price charged where each deliverable is sold separately. In certain limited cases (typically for software licenses) when the historical selling price is highly variable, the residual approach is used. This approach allocates revenue to the performance obligation equal to the difference between the total transaction price and the observable standalone selling prices for the other performance obligations. These methods involve significant judgments and estimates that we assess periodically by considering market and entity-specific factors, such as type of customer, features of the products or services and market conditions. Once the total revenues have been allocated to the various performance obligations, revenues for each are recognized based on the relevant revenue recognition method for each. Estimates of total revenues at contract inception often differ materially from actual revenues due to volume differences, changes in technology or other factors which may not be foreseen at inception.
Costs to obtain contracts with customers
Accounting for the costs to obtain contracts with customers requires significant judgments and estimates with regards to the determination of sales commission payments that qualify for deferral of costs and the related amortization period. Most of our sales commission plans are quota-based and payments are made by achieving targets related to a large number of new and renewed contracts. Certain sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. We defer and amortize these costs on a straight-line basis over an average period of benefit of five years, which is determined and regularly assessed by considering the length of our customer contracts, our technology and other factors. Significant changes in these estimates or impairment may result if material contracts terminate earlier than the expected benefit period, or if there are material changes in the average contract period.
Income Taxes
We are subject to income taxes inthe United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, analyzing our income tax reserves, the determination of the likelihood of recoverability of deferred tax assets and any corresponding adjustment of valuation allowances. In addition, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax provisions. As a global enterprise, our ETR is affected by many factors, including our global mix of earnings among countries with differing statutory tax rates, the extent to which our non-U.S. earnings are indefinitely reinvested outside theU.S. , changes in the valuation allowance for deferred tax assets, changes in tax regulations, acquisitions, dispositions and the tax characteristics of our income. We cannot predict what our ETR will be in the future because there is uncertainty regarding these factors. 52 -------------------------------------------------------------------------------- The majority of unremitted earnings has been taxed in theU.S. through the transition tax and global intangible low tax income tax in connection with 2017U.S. tax reform. The Company was not permanently reinvested in all jurisdictions with the exception ofIndia as ofMarch 31, 2019 . As a result of the issuance of newU.S. Treasury regulations in the first quarter of fiscal 2020, the Company changed its permanent reinvestment assertion in the first quarter of fiscal 2020 with respect to certain foreign corporations, reducing the amount that will ultimately be repatriated to theU.S. by approximately$492 million . However, as ofMarch 31, 2020 , the Company anticipates that future earnings inIndia will not be indefinitely reinvested. This change resulted from the Company's determination that it is now efficient to repatriate earnings inIndia as a result of the enactment of India Finance Act, 2020 onMarch 27, 2020 and change in cash needs resulting from the economic consequences of the COVID-19 pandemic. We expect a significant portion of the cash held by our foreign subsidiaries will no longer be subject toU.S. federal income tax upon repatriation to theU.S. , however, a portion of this cash may still be subject to foreign andU.S. state tax consequences when remitted. Considerations impacting the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. In determining whether the deferred tax assets are realizable, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations. We recorded a valuation allowance against deferred tax assets of approximately$2.2 billion as ofMarch 31, 2020 due to uncertainties related to the ability to utilize these assets. However, valuation allowances are subject to change in future reporting periods due to changes in various factors. Recent enactment of the CARES Act or changes in tax laws resulting from theOrganization for Economic Co-operation and Development's multi-jurisdictional plan of action to address "base erosion and profit shifting" could impact our effective tax rate. The calculation of our tax liabilities involves uncertainties in the application of complex changing tax regulations. The Company is currently evaluating the impact of the CARES Act. The CARES Act makes a technical correction to the 2017 U.S. tax reform to provide a 15-year recovery period for qualified improvement property ("QIP"). This correction makes QIP eligible for bonus depreciation and is effective as if enacted as part of the 2017 U.S. tax reform. Accordingly, the Company has applied bonus depreciation on certain QIP. CARES also includes provisions relating to refundable payroll tax credits, the ability to utilize and carryback certain net operating losses, alternative minimum tax refunds, and modifications to rules regarding the deductibility of net interest expense.
Business Combinations
We account for the acquisition of a business using the acquisition method of accounting, which requires us to estimate the fair values of the assets acquired and liabilities assumed. This includes acquired intangible assets such as customer-related intangibles, the liabilities assumed and contingent consideration, if any. Liabilities assumed may include litigation and other contingency reserves existing at the time of acquisition and require judgment in ascertaining the related fair values. Independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities. Such appraisals are based on significant estimates provided by us, such as forecasted revenues or profits utilized in determining the fair value of contract-related acquired intangible assets or liabilities. Significant changes in assumptions and estimates subsequent to completing the allocation of the purchase price to the assets and liabilities acquired, as well as differences in actual and estimated results, could result in material impacts to our financial results. Adjustments to the fair value of contingent consideration are recorded in earnings. Additional information related to the acquisition date fair value of acquired assets and liabilities obtained during the allocation period, not to exceed one year, may result in changes to the recorded values of acquired assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.
Defined Benefit Plans
The computation of our pension and other post-retirement benefit costs and obligations is dependent on various assumptions. Inherent in the application of the actuarial methods are key assumptions, including discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases and medical cost trend rates. Our management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on observable inputs for similar assets or on significant unobservable inputs if not available. Two of the most significant assumptions are the expected long-term rate of return on plan assets and the discount rate.
Our weighted average rates used were:
March 31, 2020 March 31, 2019 March 31, 2018
Discount rates 2.4 % 2.5 % 2.5 %
Expected long-term rates of return on assets 5.8 % 5.3 % 4.9 %
The assumption for the expected long-term rate of return on plan assets is
impacted by the expected asset mix of the plan; judgments regarding the
correlation between historical excess returns and future excess returns and
expected investment expenses. The discount rate assumption is based on current
market rates for high-quality, fixed income debt instruments with maturities
similar to the expected duration of the benefit payment period. The following
table provides the impact changes in the weighted-average assumptions would have
had on our net periodic pension benefits and settlement and contractual
termination charges for fiscal 2020:
Approximate
Change in
Settlement,
Approximate Contractual
Change in Net Termination, and
Periodic Pension Mark-to-Market
(in millions) Change Expense ChargesExpected long-term return on plan assets 0.5% $ (55 )
$ 54
Expected long-term return on plan assets (0.5)% $ 55 $ (54 )
Discount rate 0.5% $ 25 $ (793 )
Discount rate (0.5)% $ (29 ) $ 994
Valuation of Assets
We review long-lived ("assets, intangible assets, and goodwill") for impairment
in accordance with our accounting policy disclosed in Note 1 - Summary of
Significant Accounting Policies. Assessing the fair value of assets involves
significant estimates and assumptions including estimation of future cash flows,
the timing of such cash flows, and discount rates reflecting the risk inherent
in projecting future cash flows. The valuation of long-lived and intangible
assets involves management estimates about future values and remaining useful
lives of assets, particularly purchased intangible assets. These estimates are
subjective and can be affected by a variety of factors, including external
factors such as industry and economic trends, and internal factors such as
changes in our business strategy and forecasts.
Evaluation of goodwill for impairment requires judgment, including the
identification of reporting units, assignment of assets, liabilities, and
goodwill to reporting units and determination of the fair value of each
reporting unit. The identification of reporting units involves consideration of
components of the operating segments and whether or not there is discrete
financial information available that is regularly reviewed by management.
Additionally, we consider whether or not it is reasonable to aggregate any of
the identified components that have similar economic characteristics. The
estimates used to calculate the fair value of a reporting unit change from year
to year based on operating results, market conditions, and other factors.
Changes in these estimates and assumptions include a significant change in the
business climate, established business plans, operating performance indicators
or competition which could materially affect the determination of fair value for
each reporting unit.
53--------------------------------------------------------------------------------
We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using performance-metric market multiples. The discount rate used in an income approach is based on our weighted-average cost of capital and may be adjusted for the relevant risks associated with business-specific characteristics and any uncertainty related to a reporting unit's ability to execute on the projected future cash flows.
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