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 second quarter and first six months of fiscal 2021 and our financial condition as ofSeptember 30, 2020 . 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 into 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 second quarters and first six months of fiscal 2021 and fiscal 2020. BackgroundDXC 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: Global Business Services ("GBS") and Global Infrastructure Services ("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. 50 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth certain financial data for the second quarters and first six months of fiscal 2021 and fiscal 2020:
Three Months Ended Six Months Ended
(In millions, except per-share September 30, September 30, September 30, September 30,
amounts) 2020 2019 2020 2019
Revenues $ 4,554 $ 4,851 $ 9,056 $ 9,741
Loss before income taxes (306) (1,999) (531) (1,793)
Income tax (benefit) expense (60) 116 (86) 154
Net loss $ (246) $ (2,115) $ (445) $ (1,947)
Diluted loss per share: $ (0.96) $
(8.19)
Fiscal 2021 Highlights
Financial highlights for the second quarter and first six months of fiscal 2021 include the following:
•Revenues for the second quarter and first six months of fiscal 2021 were$4.6 billion and$9.1 billion , respectively, a decrease of 6.1% and 7.0%, respectively, as compared to the second quarter and first six months of fiscal 2020. These decreases were primarily due to prior terminations and price-downs along with customer settlements that were actioned in the quarter. The decrease in revenue for the first six months of fiscal 2021 was partially offset by contributions from ourLuxoft acquisition which was executed during the first quarter of fiscal 2020. Refer to the section below captioned "Revenues." •Net loss and diluted loss per share for the second quarter of fiscal 2021 were$246 million and$0.96 , respectively. Net loss decreased by$1,869 million during the second quarter of fiscal 2021 as compared to the same period of the prior fiscal year. The reduction was primarily due to goodwill impairment recognized in the prior year and cost optimization realized in the current year offset by a reduction in revenue previously mentioned and gain on arbitration in the prior year. Refer to the section below captioned "Cost and Expenses." Net loss included the cumulative impact of certain items of$407 million , reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, and tax adjustment. This compares with net loss and diluted loss per share of$2,115 million and$8.19 , respectively, for the second quarter of fiscal 2020. •Net loss and diluted loss per share for the first six months of fiscal 2021 were$445 million and$1.77 , respectively. Net loss decreased by$1,502 million during the first six months of fiscal 2021 as compared to the same period of the prior fiscal year. The reduction was primarily due to goodwill impairment recognized in the prior year and cost optimization realized in the current year offset by a reduction in revenue previously mentioned and gain on arbitration in the prior year. Refer to the section below captioned "Cost and Expenses." Net loss included the cumulative impact of certain items of$665 million , reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, pension and other post-retirement benefit ("OPEB") actuarial and settlement losses, and tax adjustment. This compares with net loss and diluted loss per share of$1,947 million and$7.44 , respectively, for the first six months of fiscal 2020. •Our cash and cash equivalents were$3.1 billion as ofSeptember 30, 2020 . •We generated$591 million of cash from operations during the first six months of fiscal 2021, as compared to$1,585 million during the first six months of fiscal 2020. 51 --------------------------------------------------------------------------------
Revenues
Three Months Ended
(in millions) September 30, 2020 September 30, 2019 Change Percentage Change
GBS $ 2,242 $ 2,285 $ (43) (1.9) %
GIS 2,312 2,566 (254) (9.9) %
Total Revenues $ 4,554 $ 4,851 $ (297) (6.1) %
Six Months Ended
(in millions) September 30, 2020 September 30, 2019 Change Percentage Change
GBS $ 4,416 $ 4,444 $ (28) (0.6) %
GIS 4,640 5,297 (657) (12.4) %
Total Revenues $ 9,056 $ 9,741 $ (685) (7.0) %
The decrease in revenues for the second quarter and first six months of fiscal
2021, compared with fiscal 2020 of the same period, reflects prior terminations
and price-downs along with customer settlements that were actioned in the
quarter. The decrease in revenue for the first six months of fiscal 2021 was
partially offset by contributions from our Luxoft acquisition which was executed
during the first quarter of fiscal 2020. Revenues for the second quarter
included a favorable foreign currency exchange rate impact of 1.6% and an
unfavorable foreign currency exchange rate impact of 0.2% for the first six
months of fiscal 2021. These impacts were primarily driven by the weakening of
the U.S. dollar against the Australian Dollar, Euro, and British Pound during
the second quarter of fiscal 2021 and an overall strengthening of the U.S.
dollar against those currencies for the first six months of fiscal 2021.
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--------------------------------------------------------------------------------During the second quarter and first six months of fiscal 2021 and fiscal 2020, the distribution of our revenues across geographies was as follows:
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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, 2020 .
As a global company, approximately 63% of our revenues for the first six months
of fiscal 2021 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 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:
Three Months Ended
Constant Currency September 30,
(in millions) September 30, 2020 2019 Change Percentage Change
GBS $ 2,207 $ 2,285 $ (78) (3.4) %
GIS 2,269 2,566 (297) (11.6) %
Total $ 4,476 $ 4,851 $ (375) (7.7) %
Six Months Ended
Constant
Currency
September 30, September 30,
(in millions) 2020 2019 Change Percentage Change
GBS $ 4,419 $ 4,444 $ (25) (0.6) %
GIS 4,660 5,297 (637) (12.0) %
Total $ 9,079 $ 9,741 $ (662) (6.8) %
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Global Business Services
Our GBS revenues were$2,242 million in the second quarter and$4,416 million in the first six months of fiscal 2021, a decrease of 1.9% and 0.6%, respectively, compared to the corresponding periods in fiscal 2020. GBS revenue in constant currency decreased 3.4% and 0.6% in the second quarter and first six months of fiscal 2021, respectively, as compared to the corresponding periods in fiscal 2020. The decrease in GBS revenues for the second quarter and first six months of fiscal 2021 were primarily due to prior terminations and price-downs along with customer settlements that we actioned in the quarter. The decrease in revenue for the first six months of fiscal 2021 was partially offset by contributions from ourLuxoft acquisition which was executed during the first quarter of fiscal 2020. For the second quarter and first six months of fiscal 2021, GBS contract awards were$2.4 billion and$5.9 billion , respectively, as compared to$1.9 billion and$4.3 billion in the corresponding periods of fiscal 2020.
Global Infrastructure Services
Our GIS revenues were$2,312 million in the second quarter and$4,640 million in the first six months of fiscal 2021, a decrease of 9.9% and 12.4%, respectively, compared to the corresponding periods in fiscal 2020. GIS revenue in constant currency decreased 11.6% and 12.0% in the second quarter and first six months of fiscal 2021, respectively, as compared to the corresponding periods in fiscal 2020. The decrease in GIS revenues for the second quarter and first six months of fiscal 2021 reflects prior terminations and price-downs along with customer settlements that we actioned in the quarter. For the second quarter and first six months of fiscal 2021, GIS contract awards were$2.5 billion and$4.3 billion , respectively, as compared to$1.9 billion and$3.7 billion in the corresponding periods of fiscal 2020. 55 --------------------------------------------------------------------------------
Costs and Expenses
Our total costs and expenses are shown in the tables below:
Three Months Ended
Amount Percentage of Revenues
September 30, September 30, September 30, September 30,
(in millions) 2020 2019 2020 2019 Percentage Point Change
Costs of services (excludes
depreciation and amortization and
restructuring costs) $ 3,563 $ 3,679 78.3 % 75.8 % 2.5
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) 539 489 11.8 10.1
1.7
Depreciation and amortization 525 467 11.5 9.6
1.9
Goodwill impairment losses - 2,887 - 59.5 (59.5) Restructuring costs 265 32 5.8 0.7 5.1 Interest expense 96 104 2.1 2.1 - Interest income (25) (67) (0.5) (1.4) 0.9 Gain on arbitration award - (632) - (13.0) 13.0 Other income, net (103) (109) (2.3) (2.2) (0.1) Total costs and expenses$ 4,860 $ 6,850 106.7 % 141.2 % (34.5) Six Months Ended Amount Percentage of Revenues September 30, September 30, September 30, September 30, (in millions) 2020 2019 2020 2019 Percentage Point Change Costs of services (excludes depreciation and amortization and restructuring costs)$ 7,192 $ 7,301 79.5 % 75.0 % 4.5 Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) 1,078 996 11.9 10.2 1.7 Depreciation and amortization 1,017 937 11.2 9.6 1.6 Goodwill impairment losses - 2,887 - 29.6 (29.6) Restructuring costs 337 174 3.7 1.8 1.9 Interest expense 202 195 2.2 2.0 0.2 Interest income (48) (97) (0.5) (1.0) 0.5 Gain on arbitration award - (632) - (6.5) 6.5 Other income, net (191) (227) (2.1) (2.3) 0.2 Total costs and expenses$ 9,587 $ 11,534 105.9 % 118.4 % (12.5) The 34.5 and 12.5 point decrease in total costs and expenses as a percentage of revenue for the second quarter and first six months of fiscal 2021 primarily reflects our goodwill impairment losses incurred during the second quarter and first six months of fiscal 2020 partially offset by gain on arbitration during the same periods in fiscal 2020 that didn't occur in fiscal 2021.
Costs of Services
Cost of services, excluding depreciation and amortization and restructuring
costs ("COS"), was $3.6 billion and $7.2 billion for the second quarter and
first six months of fiscal 2021, respectively. COS decreased $116 million and
$109 million during the second quarter and first six months of fiscal 2021,
respectively, as compared to the same periods of the prior fiscal year. These
decreases were primarily due to cost optimization savings realized during fiscal
2021. COS as a percentage of revenue increased 2.5 and 4.5 points, respectively,
as compared to the same periods of the prior fiscal year. These point increases
were driven by a reduction in revenue during the same periods of the previous
fiscal year.
56
--------------------------------------------------------------------------------Selling, General, and Administrative
Selling, general, and administrative expense, excluding depreciation and
amortization and restructuring costs ("SG&A"), was $539 million and $1,078
million for the second quarter and first six months of fiscal 2021,
respectively. SG&A increased $50 million and $82 million during the second
quarter and first six months of fiscal 2021, respectively, as compared to the
same periods of the prior fiscal year. These increases were driven by higher
transaction, separation and integration-related costs and SG&A related to the
Luxoft Acquisition, which we acquired during the first quarter of fiscal 2020.
Transaction, separation and integration-related costs of $101 million and $211
million were included in SG&A for the second quarter and first six months of
fiscal 2021, respectively, as compared to $53 million and $158 million for the
comparable period of the prior fiscal year.
Depreciation and Amortization
Depreciation expense was$200 million and$378 million for the second quarter and first six months of fiscal 2021, respectively. Depreciation expense increased$31 million and$42 million during the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of the prior fiscal year. The net increase in depreciation expense for the second quarter and first six months of fiscal 2021 was primarily due to an increase in assets placed into service. Amortization expense was$325 million and$639 million for the second quarter and first six months of fiscal 2021, respectively. Amortization expense increased$27 million and$38 million during the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of the prior fiscal year. The increase in amortization expense was primarily due to an increase in amortization related to software and customer related intangibles.
Goodwill Impairment Losses
DXC recognized goodwill impairment charges totaling$2,887 million for the second quarter and first six months of fiscal 2020.The impairment charge was primarily as a result of a decline in market capitalization during the fiscal 2020 second quarter. See Note 11, "Goodwill" for additional information.
Restructuring Costs
During fiscal 2021, management approved global cost savings initiatives designed to better align our workforce and facility structures. During the second quarter and first six months of fiscal 2021, restructuring costs, net of reversals, were$265 million and$337 million , respectively, as compared to$32 million and$174 million during the same periods of the prior fiscal year.
For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 14 - "Restructuring Costs" to the financial statements.
Interest Expense and Interest Income
Interest expense was$96 million and$202 million for second quarter and first six months of fiscal 2021, respectively. Interest expense decreased$8 million during the second quarter of fiscal 2021 and increased$7 million during the first six months of fiscal 2021, as compared to the same periods of the prior fiscal year. The decrease during the second quarter of fiscal 2021 was primarily driven by decrease in term loans. The increase during the first six months of fiscal 2021 was primarily driven by increased amounts drawn on our revolving credit facilities partially offset by a decrease in term loans. See the "Capital Resources" caption below and Note 12 - "Debt" for additional information. Interest income was$25 million and$48 million for second quarter and first six months of fiscal 2021, respectively. Interest income decreased$42 million and$49 million during the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of the prior fiscal year. These decreases were primarily driven by interest income in the second quarter of fiscal year 2020 related to arbitration discussed below under the caption "Gain on Arbitration Award." 57 --------------------------------------------------------------------------------
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.
Other income was$103 million and$191 million for the second quarter and first six months of fiscal 2021, respectively, as compared to$109 million and$227 million during the same periods of the prior fiscal year. The$6 million decrease in other income, net for the second quarter of fiscal 2021, as compared to the same period of the prior fiscal year, was primarily due to foreign exchange hedging and revaluations offset by a year-over-year increase of$2 million in other gains related to sales of non-operating assets and a year-over-year increase of$2 million in non-service components of net periodic pension income. The$36 million decrease in other income, net for the first six months of fiscal 2021, as compared to the same period of the prior fiscal year, was primarily due to foreign exchange hedging and revaluations and a year-over-year decrease of$7 million in non-service components of net periodic pension income.
Taxes
Our effective tax rate ("ETR") was 19.6% and (5.8)% for the three months ended
September 30, 2020 and September 30, 2019 , respectively, and 16.2% and (8.6)%
for the six months ended September 30, 2020 and September 30, 2019 ,
respectively. For the three and six months ended September 30, 2020 , the primary
drivers of the ETR were the global mix of income, foreign tax credits and
adjustment of the prior tax provisions due to the filing of tax returns in the
U.S and non-U.S. jurisdictions. For the three and six months ended September 30,
2019 , the primary drivers of the ETR were the impact of the non-deductible
goodwill impairment charge, the non-taxable gain on the arbitration award, the
global mix of income, an increase in unrecognized tax benefits primarily related
to the disallowance of certain legacy CSC foreign restructuring expenses
deducted on the U.S. federal tax return for tax year March 31, 2013 and an
increase in prior year U.S. federal research and development income tax credits.
Loss Per Share
Diluted loss per share for the second quarter and first six months of fiscal 2021 was$(0.96) and$(1.77) , respectively. Diluted loss per share increased$7.23 and$5.67 during the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of the prior fiscal year. This increase was due to a reduction of$1,869 million and$1,502 million in net loss for the second quarter and first six months of fiscal 2021, respectively, over the same periods in the prior fiscal year. Diluted loss per share for the second quarter of fiscal 2021 includes$0.83 per share of restructuring costs,$0.29 per share of transaction, separation and integration-related costs,$0.46 per share of amortization of acquired intangible assets, and$0.01 per share of tax adjustment.
Diluted loss per share for the first six months of fiscal
2021 includes
58
--------------------------------------------------------------------------------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
diluted 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. Selected references are made on a "constant currency basis" so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a "constant currency basis" are non GAAP measures calculated by translating current period activity intoU.S. dollars using the comparable prior period's currency conversion rates. This approach is used for all results where the functional currency is not theU.S. dollar. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Fiscal 2021 Highlights." 59 -------------------------------------------------------------------------------- Non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include: Three Months Ended September 30, (in millions) September 30, 2020 2019 Change Loss before income taxes$ (306) $ (1,999) $ 1,693 Non-GAAP income before income taxes $ 212$ 492 $ (280) Net loss$ (246) $ (2,115) $ 1,869 Adjusted EBIT $ 283$ 529 $ (246) Six Months Ended September 30, September 30, (in millions) 2020 2019 Change Loss before income taxes$ (531) $ (1,793) $ 1,262 Non-GAAP income before income taxes $ 319$ 1,083 $ (764) Net loss$ (445) $ (1,947) $ 1,502 Adjusted EBIT $ 473$ 1,181 $ (708)
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 ("TSI") costs - reflects costs
to execute on strategic alternatives, costs related to integration, planning,
financing and advisory fees associated with the HPES Merger and other
acquisitions and costs related to the separation of USPS and other
divestitures.(1)
•Amortization of acquired intangible assets - reflects amortization of
intangible assets acquired through business combinations.
•Pension and OPEB actuarial and settlement gains and losses - reflects pension
and OPEB actuarial and settlement gains and losses.
•Goodwill impairment losses - reflects impairment losses on goodwill.
•Gain on arbitration award - reflects a gain related to the HPES merger
arbitration award.
•Tax adjustment - for fiscal 2021 periods, reflects the impact of tax entries
related to prior restructuring charges and an adjustment to the tax expense
relating to USPS , and for fiscal 2020 periods, reflects the impact of tax
entries related to prior restructuring charges. Income tax expense of non-GAAP
adjustments is computed by applying the jurisdictional tax rate to the pre-tax
adjustments on a jurisdictional basis.
(1) TSI costs for all periods presented include fees and other expenses
associated with legal, accounting, consulting, due diligence, investment banking
advisory, and other services, as well as financing fees, retention incentives,
and resolution of transaction related claims in connection with, or resulting
from, exploring or executing potential acquisitions, dispositions and strategic
alternatives, whether or not announced or consummated.
60
--------------------------------------------------------------------------------A reconciliation of reported results to non-GAAP results is as follows:
Three Months Ended September 30, 2020
Amortization of
(in millions, except per-share Transaction, Separation and Acquired Intangible
amounts) As Reported Restructuring Costs Integration-Related Costs Assets Tax Adjustment Non-GAAP Results
Costs of services (excludes
depreciation and amortization and
restructuring costs) $ 3,563 $ - $ - $ - $ - $ 3,563
Selling, general, and
administrative (excludes
depreciation and amortization and
restructuring costs) 539 - (108) - - 431
(Loss) income before income taxes (306) 265 101 152 - 212
Income tax (benefit) expense (60) 52 26 35 (2) 51
Net (loss) income (246) 213 75 117 2 161
Less: net loss attributable to
non-controlling interest, net of
tax (2) - - - - (2)
Net (loss) income attributable to
DXC common stockholders $ (244) $ 213 $ 75 $ 117 $ 2 $ 163
Effective Tax Rate 19.6 % 24.1 %
Basic EPS $ (0.96) $ 0.84 $ 0.30 $ 0.46 $ 0.01 $ 0.64
Diluted EPS $ (0.96) $ 0.83 $ 0.29 $ 0.46 $ 0.01 $ 0.64
Weighted average common shares
outstanding for:
Basic EPS 254.13 254.13 254.13 254.13 254.13 254.13
Diluted EPS 254.13 255.18 255.18 255.18 255.18 255.18
Six Months Ended September 30, 2020
Pension and
Amortization of OPEB Actuarial
(in millions, except per-share Transaction, Separation and Acquired Intangible and Settlement Non-GAAP
amounts) As Reported Restructuring Costs Integration-Related Costs Assets Losses Tax Adjustment Results
Costs of services (excludes
depreciation and amortization and
restructuring costs) $ 7,192 $ - $ - $ - $ - $ - $ 7,192
Selling, general, and
administrative (excludes
depreciation and amortization and
restructuring costs) 1,078 - (218) - - - 860
(Loss) income before income taxes (531) 337 211 300 2 - 319
Income tax (benefit) expense (86) 64 54 69 - (2) 99
Net (loss) income (445) 273 157 231 2 2 220
Less: net income attributable to
non-controlling interest, net of
tax 4 - - - - - 4
Net (loss) income attributable to
DXC common stockholders $ (449) $ 273 $ 157 $ 231 $ 2 $ 2 $ 216
Effective Tax Rate 16.2 % 31.0 %
Basic EPS $ (1.77) $ 1.08 $ 0.62 $ 0.91 $ 0.01 $ 0.01 $ 0.85
Diluted EPS $ (1.77) $ 1.07 $ 0.62 $ 0.91 $ 0.01 $ 0.01 $ 0.85
Weighted average common shares
outstanding for:
Basic EPS 253.88 253.88 253.88 253.88 253.88 253.88 253.88
Diluted EPS 253.88 254.76 254.76 254.76 254.76 254.76 254.76
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Three Months Ended September 30, 2019
Amortization of Goodwill
Transaction, Separation and Acquired Intangible Impairment Gain on Non-GAAP
(in millions, except per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Losses Arbitration Award Tax Adjustment Results
Costs of services (excludes depreciation and
amortization and restructuring costs) $ 3,679 $ - $ - $ - $ - $ - $ - $ 3,679
Selling, general, and administrative (excludes
depreciation and amortization and
restructuring costs) 489 - (53) - - - - $ 436
(Loss) income before income taxes (1,999) 32 53 151 2,887 (632) - 492
Income tax expense (benefit) 116 4 5 34 - - (29) 130
Net (loss) income (2,115) 28 48 117 2,887 (632) 29 362
Less: net income attributable to
non-controlling interest, net of tax 4 - - - - - - 4
Net (loss) income attributable to DXC common
stockholders $ (2,119) $ 28 $ 48 $ 117 $ 2,887 $ (632) $ 29 $ 358
Effective Tax Rate (5.8) % 26.4 %
Basic EPS $ (8.19) $ 0.11 $ 0.19 $ 0.45 $ 11.16 $ (2.44) $ 0.11 $ 1.38
Diluted EPS $ (8.19) $ 0.11 $ 0.18 $ 0.45 $ 11.10 $ (2.43) $ 0.11 $ 1.38
Weighted average common shares outstanding
for:
Basic EPS 258.71 258.71 258.71 258.71 258.71 258.71 258.71 258.71
Diluted EPS 258.71 260.03 260.03 260.03 260.03 260.03 260.03 260.03
Six Months Ended September 30, 2019
Amortization of Goodwill
Transaction, Separation and Acquired Intangible Impairment Gain on Non-GAAP
(in millions, except per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Losses Arbitration Award Tax Adjustment Results
Costs of services (excludes depreciation and
amortization and restructuring costs) $ 7,301 $ - $ - $ - $ - $ - $ - $ 7,301
Selling, general, and administrative (excludes
depreciation and amortization and
restructuring costs) 996 - (158) - - - - $ 838
(Loss) income before income taxes (1,793) 174 158 289 2,887 (632) - 1,083
Income tax expense (benefit) 154 32 27 65 - - (29) 249
Net (loss) income (1,947) 142 131 224 2,887 (632) 29 834
Less: net income attributable to
non-controlling interest, net of tax 9 - - - - - - 9
Net (loss) income attributable to DXC common
stockholders $ (1,956) $ 142 $ 131 $ 224 $ 2,887 $ (632) $ 29 $ 825
Effective Tax Rate (8.6) % 23.0 %
Basic EPS $ (7.44) $ 0.54 $ 0.50 $ 0.85 $ 10.98 $ (2.40) $ 0.11 $ 3.14
Diluted EPS $ (7.44) $ 0.54 $ 0.50 $ 0.85 $ 10.91 $ (2.39) $ 0.11 $ 3.12
Weighted average common shares outstanding
for:
Basic EPS 262.83 262.83 262.83 262.83 262.83 262.83 262.83 262.83
Diluted EPS 262.83 264.61 264.61 264.61 264.61 264.61 264.61 264.61
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A reconciliation of net income to EBIT and adjusted EBIT is as follows:
Three Months Ended Six Months Ended
September 30, September 30, September 30,
(in millions) September 30, 2020 2019 2020 2019
Net loss $ (246) $ (2,115) $ (445) $ (1,947)
Income tax (benefit) expense (60) 116 (86) 154
Interest income (25) (67) (48) (97)
Interest expense 96 104 202 195
EBIT (235) (1,962) (377) (1,695)
Restructuring costs 265 32 337 174
Transaction, separation and
integration-related costs 101 53 211 158
Amortization of acquired intangible
assets 152 151 300 289
Pension and OPEB actuarial and settlement
losses - - 2 -
Goodwill impairment losses - 2,887 - 2,887
Gain on arbitration award - (632) - (632)
Adjusted EBIT $ 283 $ 529 $ 473 $ 1,181
63--------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As ofSeptember 30, 2020 , our cash and cash equivalents ("cash") was$3.1 billion , of which$1.2 billion was held outside of theU.S. As ofMarch 31, 2020 , our cash was$3.7 billion , of which$1.2 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 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 andU.S. state 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 not designated as indefinitely reinvested.
The following table summarizes our cash flow activity:
Six Months Ended
September 30,
(in millions) September 30, 2020 2019 Change
Net cash provided by operating activities $ 591 $ 1,585 $ (994)
Net cash used in investing activities (234) (2,047) 1,813
Net cash (used in) provided by financing (963) 480 (1,443)
activities
Effect of exchange rate changes on cash and cash 9 (37) 46
equivalents
Cash classified within current assets held for (3) - (3)
sale
Net decrease in cash and cash equivalents $
(600) $ (19)
3,679 2,899
Cash and cash equivalents at the end-of-period $ 3,079 $ 2,880
Operating cash flow
Net cash provided by operating activities during the first six months of fiscal
2021 was $591 million as compared to $1,585 million during the comparable period
of the prior fiscal year. The decrease of $994 million was due to a decrease in
net income, net of adjustments of $1,244 million , partially offset by a decrease
in working capital cash outflows of $250 million . Net loss, net of adjustments
include cash received on arbitration award of $668 million in the prior fiscal
year.
Investing cash flow
Net cash used in investing activities during the first six months of fiscal 2021
was $234 million as compared to $2,047 million during the comparable period of
the prior fiscal year. The decrease in cash used of $1,813 million was primarily
due to a decrease in cash paid for acquisitions of $1,911 million , short-term
investing of $75 million during fiscal 2020 that didn't occur during fiscal
2021, and a decrease in purchases of property and equipment of $36 million . This
was partially offset by a decrease in cash collections related to deferred
purchase price receivable of $212 million .
Financing cash flow
Net cash (used in) provided by financing activities during the first six months of fiscal 2021 was$(963) million as compared to$480 million during the comparable period of the prior fiscal year. The$1,443 million increase in cash used was primarily due to a decrease in borrowings on term loans and other long-term debt of$1,205 million , repayments of borrowings under lines of credit of$2,750 million , and an increase in payments on long-term debt of$957 million . This was partially offset by borrowings under lines of credit of$2,500 million , absence of common stock repurchases and advance payment for accelerated share repurchase of$650 million in fiscal 2020, and an increase of commercial paper borrowings, net of repayments of$309 million . 64 --------------------------------------------------------------------------------
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) September 30, 2020 March 31, 2020
Short-term debt and current maturities of long-term debt $ 1,622 $ 1,276
Long-term debt, net of current maturities 8,046 8,672
Total debt $ 9,668 $ 9,948
The $0.3 billion decrease in total debt during the first six months of fiscal
2021 was primarily attributed to the prepayment of our term loan facilities of
€500 million of Euro Term Loan due fiscal 2023, £450 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, offset by the issuance of new senior
notes with an aggregate principal of $1.0 billion , consisting of (i) $500
million of 4.00% Senior Notes due fiscal 2024 and (ii) $500 million of 4.13%
Senior Notes due fiscal 2026.
During the first quarter of fiscal 2021, we applied for and were confirmed
eligible to participate in the Bank of England's ("BOE") COVID Corporate Funding
Facility, a BOE program that provides term liquidity funding to investment grade
corporate issuers with significant operations in the UK , in order to stabilize
and facilitate continued access to sterling commercial paper markets. At our
option, we can borrow up to a maximum of €1 billion or its equivalent in Euro,
British Pound and U.S. dollar. On June 15, 2020 , DXC Capital Funding DAC
(previously named DXC Capital Funding Limited ), an indirect subsidiary of the
Company, issued £600 million in commercial paper maturing May 2021 under its
existing €1.0 billion commercial paper program via direct sale to the BOE.
During the first six months of fiscal 2021, we borrowed the remaining $2.5
billion under the $4.0 billion credit facility agreement and repaid $2.75
billion on the same. The purpose of the borrowing was to mitigate our reliance
on volatile short-term commercial paper markets and to strengthen our cash and
liquidity position given the uncertainties related to COVID-19 pandemic and its
potential impact on our clients and our business. The credit facility repayment
resulted from accessing other liquidity resources. The repaid credit facility
amounts became available under the revolving credit facility for redraw at the
request of the Company. Subsequent to September 30, 2020 , we repaid the entire
$1.25 billion outstanding on our credit facility, making the entire $4.0 billion
available for redraw at the request of the Company.
We were in compliance with all financial covenants associated with our
borrowings as of
65
--------------------------------------------------------------------------------
The debt maturity chart below summarizes the future maturities of long-term debt
principal for fiscal years subsequent to
[[Image Removed: dxc-20200930_g4.jpg]]The following table summarizes our capitalization ratios:
As of
(in millions) September 30, 2020 March 31, 2020
Total debt $ 9,668 $ 9,948
Cash and cash equivalents 3,079 3,679
Net debt(1) $ 6,589 $ 6,269
Total debt $ 9,668 $ 9,948
Equity 4,751 5,129
Total capitalization $ 14,419 $ 15,077
Debt-to-total capitalization 67.1 % 66.0 %
Net debt-to-total capitalization(1) 45.7 % 41.6 %
(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.
66--------------------------------------------------------------------------------
Our credit ratings are as follows:
Rating Agency Long Term Ratings Short Term Ratings Outlook
Fitch BBB F-2 Stable
Moody's Baa2 P-2 Negative
S&P BBB- - Stable
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 at "Liquidity".
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 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 contracts. The recovery of these investments is over the life of contracts and is dependent upon our performance as well as customer acceptance.
The following table summarizes our total liquidity:
As of
(in millions) September 30, 2020
Cash and cash equivalents $ 3,079
Available borrowings under our revolving credit facility 2,750
Total liquidity $ 5,829
67-------------------------------------------------------------------------------- InOctober 2020 subsequent to the end of the current quarter, the company used the proceeds from the sale of HHS Business to prepay the following debt:$1,250 million of Revolver Credit Facility, £600 million of GBP commercial paper, €350 million of Euro Term Loan due fiscal 2024,$381 million of USD Term loan due fiscal 2025,A$500 million of AUD Term Loan due fiscal 2022, and €250 million of Euro Term Loan due fiscal 2022 and 2023. The debt maturity chart below summarizes the future maturities of long-term debt principal taking into effect of prepayments as mentioned above for fiscal years subsequent toNovember 5, 2020 and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities. [[Image Removed: dxc-20200930_g5.jpg]]
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 onApril 3, 2017 with no end date established. There were no share repurchases during the second quarter endedSeptember 30, 2020 . Dividends
To enhance our financial flexibility we elected to suspend payment of quarterly dividends.
68
--------------------------------------------------------------------------------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 - "Receivables" and Note 21 - "Commitments and Contingencies" to the financial statements in this Quarterly Report on Form 10-Q.
Contractual Obligations
With the exception of the new senior notes with an aggregate principal amount of$1.0 billion , consisting of (i)$500 million of 4.00% Senior Notes due fiscal 2024; and (ii)$500 million of 4.13% Senior Notes due fiscal 2026; and repayment of term loan facilities consisting of (i) €500 million of Euro Term Loan due fiscal 2023, (ii) £450 million of GBP Term Loan due fiscal 2022, (iii)A$300 million of AUD Term Loan due fiscal 2022, and (iv)$100 million of USD Term Loan due fiscal 2025 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, 2020 . 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, 2020 .
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 endedSeptember 30, 2020 , there were no changes to our accounting estimates from those described in our fiscal 2020 Annual Report on Form 10-K except as mentioned in Note 1 - "Summary of Significant Accounting Policies."
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