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, 2021 and our financial condition as ofMarch 31, 2021 . 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 2021 and fiscal 2020. A comparison of our results of operations and liquidity and capital resources for fiscal 2020 and 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 1, 2020 .
Background
DXC helps global companies across the entire Enterprise Technology Stack, running their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds.
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 customers through our direct sales offices around the world. Our customers include commercial businesses of many sizes and in many industries and public sector enterprises. 37 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth certain financial data for fiscal 2021 and 2020:
Fiscal Years Ended
(In millions, except per-share amounts) March 31, 2021 March 31, 2020
Revenues $ 17,729 $ 19,577
Income (loss) from continuing operations, before taxes 654 (5,228)
Income tax expense 800 130
Net loss $ (146) $ (5,358)
Diluted loss per common share: $
(0.59)
Fiscal 2021 Highlights
Fiscal 2021 financial highlights include the following:
•Fiscal 2021 revenues were$17,729 million , a decrease of 9.4% as compared to fiscal 2020. The decrease was primarily due to project terminations, the disposition of theU.S. State and Local Health and Human Services business ("HHS") business at the beginning of the third quarter of fiscal 2021, decrease in run-rate project volume, and project completions, offset by contributions from ourLuxoft acquisition which was executed during the first quarter of fiscal 2020 and additional services provided to new and existing customers. Refer to the section below captioned "Revenues." •Fiscal 2021 net loss and diluted loss per share were$146 million and$0.59 , respectively. Net loss decreased by$5,212 million during fiscal 2021 as compared to the prior fiscal year. The decrease was primarily due to goodwill impairment offset by a gain on arbitration recognized in the prior year with fiscal 2021 benefiting from a gain on disposition of the HHS business, cost optimization realized in the current year and a reduction in revenue in the current year previously mentioned. Refer to the section below captioned "Cost and Expenses." Net loss included the cumulative impact of certain items of$773 million during fiscal 2021, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, impairment losses, gains on dispositions, pension and other post-retirement benefit ("OPEB") actuarial and settlement losses, debt extinguishment costs, and tax adjustment. This compares with net loss and diluted loss per share of$5,358 million and$20.76 , respectively, for fiscal 2020. •Fiscal 2021 income tax expense increased significantly over fiscal 2020 as a result of the gain on disposition of the HHS business, which included the impact of non-tax deductible goodwill. Fiscal 2020 income tax expense also reflected the impact of non-tax deductible goodwill impairments. •Our cash and cash equivalents were$2,968 million atMarch 31, 2021 . •We generated$124 million of cash from operations during fiscal 2021, as compared to$2,350 million during fiscal 2020. 38 --------------------------------------------------------------------------------
Revenues
During fiscal 2021 and fiscal 2020, the distribution of our revenues across geographies was as follows:
[[Image Removed: dxc-20210331_g2.jpg]]
Fiscal Years Ended
(in millions) March 31, 2021 March 31, 2020 Change Percent Change
GBS $ 8,336 $ 9,111 $ (775) (8.5) %
GIS 9,393 10,466 (1,073) (10.3) %
Total Revenues $ 17,729 $ 19,577 $ (1,848) (9.4) %
The decrease in revenues for fiscal 2021 compared with fiscal 2020 reflects
project terminations, the disposition of the HHS business at the beginning of
the third quarter of fiscal 2021, decrease in run-rate project volume, and
project completions offset by contributions from our Luxoft acquisition which
was executed during the first quarter of fiscal 2020 and additional services
provided to new and existing customers. Fiscal 2021 revenues included a
favorable foreign currency exchange rate impact of 1.7%, primarily driven by the
weakening of the U.S. dollar against the Australian Dollar, Euro, and British
Pound.
39
--------------------------------------------------------------------------------For a discussion of risks associated with our foreign operations, see Part I, Item 1A "Risk Factors" of this Annual Report.
As a global company, over 66% of our fiscal 2021 revenues were earned internationally. As a result, the comparison of revenues denominated in currencies other than theU.S. dollar, from period to period, is impacted by fluctuations in foreign currency exchange rates. Constant currency revenues are a non-GAAP measure calculated by translating current period activity intoU.S. dollars using the comparable prior period's currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. The table below summarizes our constant currency revenues: Fiscal Years Ended Constant Currency March 31, (in millions) 2021 March 31, 2020 Change Percentage Change GBS$ 8,188 $ 9,111$ (923) (10.1)% GIS 9,224 10,466 (1,242) (11.9)% Total Revenues$ 17,412 $ 19,577 $ (2,165) (11.1)% Global Business Services Our GBS revenues were$8.3 billion for fiscal 2021, a decrease of 8.5% compared to fiscal 2020. GBS revenue in constant currency decreased 10.1% compared to fiscal 2020. The decrease in GBS revenues was primarily due to the disposition of the HHS business at the beginning of the third quarter of fiscal 2021, project completions, and decrease in run-rate project volume. The decrease in revenue for fiscal 2021 was partially offset by contributions from ourLuxoft acquisition which was executed during the first quarter of fiscal 2020 and additional services provided to existing customers.
Global Infrastructure Services
Our GIS revenues were$9.4 billion for fiscal 2021, a decrease of 10.3% compared to fiscal 2020. GIS revenue in constant currency decreased 11.9% compared to fiscal 2020. The decrease in GIS revenues reflects project completions, terminations, and decrease in run-rate project volume. The decrease in revenue for fiscal 2021 was partially offset by additional services provided to new and existing customers.
During fiscal 2021, GBS and GIS had contract awards of
40
--------------------------------------------------------------------------------Costs and Expenses
Our total costs and expenses were as follows:
Fiscal Years Ended
Amount Percentage of Revenues
March 31, March 31,
(in millions) 2021 2020 March 31, 2021 March 31, 2020 Percentage Point Change
Costs of services (excludes
depreciation and amortization $ 14,086 $ 14,901 79.5 % 76.0 % 3.5
and restructuring costs)
Selling, general and
administrative (excludes 2,066 2,050 11.7 10.5 1.2
depreciation and amortization
and restructuring costs)
Depreciation and amortization 1,970 1,942 11.1 9.9 1.2
Goodwill impairment losses - 6,794 - 34.7 (34.7)
Restructuring costs 551 252 3.1 1.3 1.8
Interest expense 361 383 2.0 2.0 -
Interest income (98) (165) (0.6) (0.8) 0.2
Debt extinguishment costs 41 - 0.2 - 0.2
Gain on disposition of (2,004) - (11.3) - (11.3)
businesses
Gain on arbitration award - (632) - (3.2) 3.2
Other expense (income), net 102 (720) 0.6 (3.7) 4.3
Total costs and expenses $ 17,075 $ 24,805 96.3 % 126.7 % (30.4)
The 30.4 point decrease in total costs and expenses as a percentage of revenue
for fiscal 2021 primarily reflects gains net of losses on dispositions in the
current year and our fiscal 2020 goodwill impairment losses, partially offset by
the gain on arbitration award that didn't occur in fiscal 2021.
Costs of Services
Cost of services, excluding depreciation and amortization and restructuring
costs ("COS"), was $14.1 billion for fiscal 2021, as compared to $14.9 billion
in fiscal 2020. COS decreased $0.8 billion compared to the prior fiscal year.
The decrease was primarily due to cost optimization savings partially offset by
$190 million in impairments realized during fiscal 2021. The majority of
impairments were on assets pre-purchased through preferred vendor agreements,
which are scheduled to expire in fiscal 2022. The remainder of impairments
primarily relate to software. COS as a percentage of revenue increased 3.5% as
compared to the prior fiscal year. The increase was driven by a decline in
revenue exceeding associated cost reductions that were further impacted by asset
impairment during the current fiscal 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 2021,
consistent with fiscal 2020. SG&A as a percentage of revenue increased 1.2%,
compared to fiscal 2020. The increase was driven by a reduction in revenue
during the current fiscal year.
Transaction, separation and integration-related costs, included in SG&A, were
Depreciation and Amortization
Depreciation expense was
Amortization expense was$1,216 million for fiscal 2021, as compared to$1,299 million in fiscal 2020. Amortization expense decreased$83 million primarily due to a decrease in customer related intangibles related to the disposition of the HHS business at the beginning of the third quarter of fiscal 2021. See Note 3 - "Divestitures" for additional information. 41 --------------------------------------------------------------------------------
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 12 - "Goodwill" for additional information.
Restructuring Costs
Restructuring costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization.
During fiscal 2021, management approved global cost savings initiatives designed to better align our workforce and facility structures. Total restructuring costs recorded, net of reversals, during fiscal 2021 and 2020 were$551 million and$252 million , respectively. The net amounts recorded included$13 million and$10 million of pension benefit augmentations for fiscal 2021 and 2020, 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 22 - "Restructuring Costs" for additional information about our restructuring actions.
Interest Expense and Interest Income
Interest expense for fiscal 2021 was$361 million , as compared to$383 million in fiscal 2020. The decrease in interest expense was primarily due to lower interest rates on finance leases, a reduction in interest charges within our multicurrency cash pools, and retirement of debt instruments. The decrease in interest expense for fiscal 2021 was partially offset by increased amounts drawn on our revolving credit facility. Interest income for fiscal 2021 was$98 million , as compared to$165 million in fiscal 2020. The year-over-year decrease in interest income was 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" and lower income from our multicurrency cash pools and money market accounts.
Debt Extinguishment Costs
During fiscal 2021, we recorded$41 million of debt extinguishment costs within the consolidated statement of operations, which consists primarily of costs related to the redemption of 4.00% Senior Notes due fiscal 2024. There were no debt extinguishment costs recorded in fiscal 2020.
Gain on Dispositions
During fiscal 2021, DXC sold its HHS business for$5.0 billion which resulted in an estimated pre-tax gain on sale of$2,014 million , net of closing costs. Insignificant businesses were also sold during fiscal 2021 that resulted in a loss of$10 million . 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 Expense (Income), Net
Other expense (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.
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The components of other expense (income), net for fiscal 2021 and 2020 are as
follows:
Fiscal Years Ended
(in millions) March 31 ,
2021
$ 110 $ (658)
Foreign currency loss (gain) 14 (25)
Other gain (22) (37)
Total $ 102 $ (720)
The $822 million decrease in other income for fiscal 2021, as compared to the
prior fiscal year, was due to a year-over-year decrease of $768 million in
non-service components of net periodic pension income attributable to changes in
mark-to-market actuarial assumptions and asset valuations, a year-over-year
unfavorable foreign currency impact of $39 million , and a $15 million decrease
in other gains related to sales of non-operating assets.
Taxes
Our effective tax rate ("ETR") on income (loss) from continuing operations,
before taxes, for fiscal 2021, 2020 and 2019 was 122.3%, 2.5% and 19%
respectively. A reconciliation of the differences between the
In fiscal 2021, the ETR was primarily impacted by: •Impact of the HHS and other business divestitures, which increased tax expense and increased the ETR$344 million and 52.6%, respectively. The HHS tax gain increased tax expense and the ETR as the tax basis of assets sold, primarily goodwill, was lower than the book basis. •Continued losses in countries where we are recording a valuation allowance on certain deferred tax assets, primarily inBelgium ,Denmark ,Italy ,France , Luxembourg, andU.S. , and an impairment of the full German deferred tax asset, which increased income tax expense and increased the ETR by$1,565 million and 239.3%, respectively. •An increase in Income Tax and Foreign Tax Credits, which decreased income tax expense and decreased the ETR by$319 million and 48.7%, respectively. •Local losses on investments in Luxembourg that increased the foreign rate differential and decreased the ETR by$1,226 million and 187.5%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount. •The Company recognized adjustments to uncertain tax positions that increased the overall income tax expense and the ETR by$112 million and 17.2% respectively. 43 -------------------------------------------------------------------------------- In fiscal 2020, the ETR was primarily impacted by: •Non-deductible goodwill impairment charge, which increased income tax expense and increased the ETR by$1,482 million and 28.3%, respectively. •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 inAustralia ,Brazil ,China , Luxembourg, andSingapore , 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$637 million and 12.2%, 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$360 million and 23.7%, 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 ,U.K. , andSwitzerland , 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. TheIRS is examining the Company's federal income tax returns for fiscal 2008 through the tax year endedOctober 31, 2018 . With respect to CSC's fiscal 2008 through 2017 federal tax returns, the Company has entered into negotiations for a resolution on the years under audit through settlement with theIRS Office of Appeals . TheIRS examined several issues for these years that resulted in various audit adjustments. The Company and theIRS Office of Appeals have an agreement in principle as to some of these adjustments, and we disagree with theIRS' disallowance of certain losses and deductions resulting from restructuring costs and tax planning strategies in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and intend to challenge them in theIRS Office of Appeals or Tax Court, these matters are not fully reserved and would result in a federal and state tax expense of$405 million (including estimated interest and penalties) and related cash cost for the unreserved portion of the these items if we do not prevail in Tax Court. We do not expect these matters that proceed to tax court to be resolved in the next 12 months. We have received a notice of deficiency with respect to fiscal 2011 and 2013, and have filed a petition in Tax Court with respect to fiscal 2013 and expect to file in Tax Court with respect to fiscal 2011 in the first quarter of fiscal 2022. We also expect fiscal 2010 to proceed to Tax Court. The Company has agreed to extend the statute of limitations for fiscal years 2008 through 2012 throughAugust 31, 2021 to provide forIRS completion of their review. The Company has agreed to extend the statute of limitations for fiscal years 2014 through fiscal 2017 throughOctober 31, 2021 to provide forIRS completion of their review.
The Company expects to reach a resolution for all years no earlier than the first quarter of fiscal 2023 except for agreed issues related to fiscal 2008 through 2010 and fiscal 2011 through 2017 federal tax returns, which are expected to be resolved within twelve months.
In addition, the Company 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. The Company 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, the Company could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through less payment than previously estimated. 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$52 million , excluding interest, penalties, and tax carryforwards. 44 --------------------------------------------------------------------------------
Loss Per Share
Diluted loss per share for fiscal 2021 was
Diluted loss per share for fiscal 2021 includes$1.79 per share of restructuring costs,$1.06 per share of transaction, separation and integration-related costs,$1.59 per share of amortization of acquired intangible assets,$0.55 per share of impairment losses,$(4.22) per share of net gains on dispositions,$1.57 per share of pension and OPEB actuarial and settlement losses,$0.12 per share of debt extinguishment costs, and$0.55 per share of tax adjustment relating to a valuation allowance on deferred tax assets offset by changes in outside basis related to held for sale classification of the HPS business. 45 --------------------------------------------------------------------------------
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 from
continuing operations before income taxes, non-GAAP net income and non-GAAP EPS,
constant currency revenues, net debt and net debt-to-total capitalization.
We believe EBIT, adjusted EBIT, non-GAAP income before income taxes, non-GAAP
net income and non-GAAP EPS provide investors with useful supplemental
information about our operating performance after excluding certain categories
of expenses.
We believe constant currency revenues provides investors with useful
supplemental information about our revenues after excluding the effect of
currency exchange rate fluctuations for currencies other than U.S. dollars in
the periods presented. See below for a description of the methodology we use to
present constant currency revenues. We believe net debt and net debt-to-total
capitalization provide investors with useful supplemental information about
DXC's net leverage and capitalization.
One category of expenses excluded from adjusted EBIT, non-GAAP income from
continuing operations before tax, non-GAAP net income and non-GAAP EPS,
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 intangible 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.
Another category of expenses excluded from adjusted EBIT, non-GAAP income from
continuing operations before tax, non-GAAP net income and non-GAAP EPS,
impairment losses, may result in a significant difference in period over period
expense on a GAAP basis. We exclude impairment losses as these non-cash amounts,
generally an acceleration of what would be multiple periods of expense and do
not expect to occur frequently. Further assets such as goodwill may be
significantly impacted by market conditions outside of management's control.
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 into U.S. dollars
using the comparable prior period's currency conversion rates. This approach is
used for all results where the functional currency is not the U.S. dollar.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Results of Operations-Fiscal 2021 Highlights."
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Certain 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, 2021 March 31, 2020 Change Percentage Change
Income (loss) from continuing
operations $ 654 $ (5,228) $ 5,882 112.5 %
Non-GAAP income from continuing
operations $ 839 $ 1,843 $ (1,004) (54.5) %
Net income loss $ (146) $ (5,358) $ 5,212 97.3 %
Adjusted EBIT $ 1,102 $ 2,061 $ (959) (46.5) %
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include:
•Restructuring costs - includes costs, net of reversals, related to workforce
and real estate optimization and other similar charges.
•Transaction, separation and integration-related ("TSI") costs - includes costs
related to integration, planning, financing and advisory fees and other similar
charges associated with mergers, acquisitions, strategic investments, joint
ventures, and dispositions and other similar transactions.(1)
•Amortization of acquired intangible assets - includes amortization of
intangible assets acquired through business combinations.
•Gains and losses on dispositions - gains and losses related to dispositions of
businesses, strategic assets and interests in less than wholly-owned
entities.(2)
•Pension and OPEB actuarial and settlement gains and losses - pension and OPEB
actuarial mark to market adjustments and settlement gains and losses.
•Debt extinguishment costs - costs associated with early retirement, redemption,
repayment or repurchase of debt and debt-like items including any breakage,
make-whole premium, prepayment penalty or similar costs as well as solicitation
and other legal and advisory expenses.(3)
•Impairment losses - impairment losses on assets classified as long-term on the
balance sheet.(4)
•Gain on arbitration award - reflects a gain related to the HPES merger
arbitration award.
•Tax adjustments - adjustments to impair tax assets, merger and divestiture
related tax matters, restructuring charges and income tax expense of non-GAAP
adjustments. 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.(5)
(1) TSI-Related Costs for all periods presented include fees and other internal
and external 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 investments, whether or not announced
or consummated.
(2) Gains and losses on dispositions for fiscal 2021 includes a $2,014 million
gain on sale of the HHS business, a gain of $5 million on sales of other
insignificant businesses, and a $15 million loss on equity securities without
readily determinable fair value, which were adjusted to fair value following
receipt of a bona fide offer to purchase. We expect to close the sale of the
equity securities during fiscal 2022.
(3) Debt extinguishment costs adjustments for all periods presented includes $34
million to fully redeem our 4.00% senior notes due fiscal 2024 and $7 million to
partially redeem two series of our 4.45% senior notes due fiscal 2023 via tender
offer.
(4) Impairment losses for the fourth quarter of fiscal 2021 of
Impairment losses for the fourth quarter of fiscal 2021 were$190 million . This includes$165 million impairment for assets pre-purchased through preferred vendor agreements and determined undeployable,$12 million partial impairment of acquired software,$7 million partial impairment of internally developed software intended for internal use and external sale, and$6 million of capitalized transition and transformation contract costs. 47 -------------------------------------------------------------------------------- (5) Tax adjustment for fiscal 2021 includes$175 million for the impairment of the German deferred tax asset via a valuation allowance,$9 million for tax expense relating to theUSPS spin-off, offset by$35 million tax benefit related to the held for sale classification of theHealthcare Provider Software business, and$7 million tax benefit related to prior restructuring charges. The German tax asset was created from multiple periods of losses inGermany that, if not for certain non-GAAP adjustments of restructurings, pension mark to market loss, and impairments, would not have required the asset to be impaired and a valuation allowance established. Tax adjustments for fiscal 2020 includes tax expense related to prior restructuring charges.
A reconciliation of reported results to non-GAAP results is as follows:
Fiscal Year Ended March 31, 2021
Pension and
OPEB Actuarial
Amortization of and Settlement
(in millions, except Transaction, Separation and Acquired Intangible Impairment Gains and Losses Gains and Debt Extinguishment Non-GAAP
per-share amounts) As Reported Restructuring Costs Integration-Related Costs Assets Losses on Dispositions Losses Costs Tax Adjustment Results
Costs of services (excludes
depreciation and amortization
and restructuring costs) $ 14,086 $ - $ (2) $ - $ (190) $ - $ - $ - $ - $ 13,894
Selling, general and
administrative (excludes
depreciation and amortization
and restructuring costs) 2,066 - (363) - - - - - - 1,703
Income from continuing
operations, before taxes 654 551 358 530 190 (2,004) 519 41 - 839
Income tax expense (benefit) 800 92 87 121 49 (920) 115 10 (142) 212
Net (loss) income (146) 459 271 409 141 (1,084) 404 31 142 627
Less: net income attributable
to non-controlling interest,
net of tax 3 - - - - - - - - 3
Net (loss) income
attributable to DXC common
stockholders $ (149) $ 459 $ 271 $ 409 $ 141 $ (1,084) $ 404 $ 31 $ 142 $ 624
Effective Tax Rate 122.3 % 25.3 %
Basic EPS $ (0.59) $ 1.81 $ 1.07 $ 1.61 $ 0.55 $ (4.27) $ 1.59 $ 0.12 $ 0.56 $ 2.46
Diluted EPS $ (0.59) $ 1.79 $ 1.06 $ 1.59 $ 0.55 $ (4.22) $ 1.57 $ 0.12 $ 0.55 $ 2.43
Weighted average common
shares outstanding for:
Basic EPS 254.14 254.14 254.14 254.14 254.14 254.14 254.14 254.14 254.14 254.14
Diluted EPS 254.14 256.86 256.86 256.86 256.86 256.86 256.86 256.86 256.86 256.86
* The net periodic pension cost within net loss includes
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Fiscal Year Ended March 31, 2020
Amortization of Pension and OPEB
(in millions, except per-share Transaction, Separation and Acquired Intangible Impairment Gain on Actuarial and Non-GAAP
amounts) As Reported Restructuring Costs Integration-Related Costs Assets 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 $ (20.76) $ 0.80 $ 0.99 $ 1.74 $ 25.91 $ (2.44) $ (0.75) $ 0.13 $ 5.61
Diluted EPS $ (20.76) $ 0.80 $ 0.98 $ 1.73 $ 25.78 $ (2.43) $ (0.74) $ 0.13 $ 5.58
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
* The net periodic pension cost within net loss includes $526 million of actual
return on plan assets, whereas the net periodic pension cost within non-GAAP net
income includes $651 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, 2021 March 31, 2020
Net loss $ (146) $ (5,358)
Income tax expense 800 130
Interest income (98) (165)
Interest expense 361 383
EBIT 917 (5,010)
Restructuring costs 551 252
Transaction, separation and integration-related costs 358 318
Amortization of acquired intangible assets 530 583
(Gains) and losses on dispositions (2,004) -
Pension and OPEB actuarial and settlement losses (gains) 519 (244)
Debt extinguishment costs 41 -
Impairment losses 190 6,794
Gain on arbitration award - (632)
Adjusted EBIT $ 1,102 $ 2,061
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Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As ofMarch 31, 2021 , our cash and cash equivalents ("cash") was$3.0 billion , of which$1.3 billion was held outside of theU.S. We maintain various multi-currency, multi-entity, cross-border, physical and notional cash and pool arrangements with various counterparties to manage liquidity efficiently that enable participating subsidiaries to draw on the Company's pooled resources to meet liquidity needs. A significant portion of the cash held by our foreign subsidiaries is not expected to be impacted byU.S. federal income tax upon repatriation. 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. We have$0.2 billion in cash held by foreign subsidiaries used for local operations that is subject to country-specific limitations which may restrict or result in increased costs in the repatriation of these funds. In addition, other practical considerations may limit our use of consolidated cash. This includes cash of$0.6 billion held in a German financial services subsidiary subject to regulatory requirements, and$0.1 billion held by majority owned consolidated subsidiaries where third-parties or public shareholders hold minority interests.
Cash was
Fiscal Year Ended
(in millions) March 31, 2021 March 31, 2020 March 31, 2019
Net cash provided by operating activities $ 124 $ 2,350 $ 1,783
Net cash provided by (used in) investing 4,665 (2,137) 69
activities
Net cash (used in) provided by financing (5,476) 657 (1,663)
activities
Effect of exchange rate changes on cash and 39 (90) (19) cash equivalents Cash classified within current assets held (63) - - for sale Net (decrease) increase in cash and cash (711) 780 170
equivalents
Cash and cash equivalents at beginning of 2,729 year 3,679
2,899
Cash and cash equivalents at end of year$ 2,968 $ 3,679 $ 2,899 Operating cash flow Net cash provided by operating activities during fiscal 2021 was$124 million as compared to$2,350 million during fiscal 2020. The decrease of$2,226 million was due to a decrease in net income, net of adjustments of$2,923 million . The net decrease in cash provided by operating activities was partially offset by a$697 million favorable change in working capital due to lower working capital outflows during fiscal 2021 as compared to fiscal 2020.
The following table contains certain key working capital metrics:
As of
March 31, 2021 March 31, 2020 March 31, 2019
Days of sales outstanding in accounts receivable 67 65 64
Days of purchases outstanding in accounts (41) (66) (69)
payable
Cash conversion cycle 26 (1) (5)
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Investing cash flow
Net cash provided by (used in) investing activities during fiscal 2021 was$4,665 million as compared to$(2,137) million during fiscal 2020. The increase of$6,802 million was primarily due to cash proceeds received from business divestitures of$4,947 million in fiscal 2021, a decrease in cash paid for acquisitions of$2,181 million , an increase in proceeds from sale of assets of$91 million , a decrease in purchases of property and equipment of$89 million , and the absence of short-term investing, net of proceeds, of$37 million in fiscal 2020. This was partially offset by a decrease in cash collections related to deferred purchase price receivable of$512 million and a$48 million increase in payments for software licenses related to the divestitures of the HHS business.
Financing cash flow
Net cash (used in) provided by financing activities during fiscal 2021 was$(5,476) million , as compared to$657 million during fiscal 2020. The$6,133 million increase in cash used was primarily due to an increase in repayments, net of borrowings, of$3,718 million on term loans and other long-term debt,$3,000 million on lines of credit, and$229 million on commercial paper. In total, we used$3.5 billion of the net proceeds from the sale of the HHS business to repay debt during the fiscal year. We also had an increase in payments on finance leases and borrowings for asset financing of$65 million and payments of debt extinguishment costs of$41 million in fiscal 2021. This was partially offset by elimination of stock repurchases during fiscal 2021 while common stock repurchases totaled$736 million in fiscal 2020 and a decrease in dividend payments of$161 million from fiscal 2020.
Capital Resources
See Note 23 - "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, 2021 March 31, 2020
Short-term debt and current maturities of long-term debt $ 1,167 $ 1,276
Long-term debt, net of current maturities 4,345 8,672
Total debt $ 5,512 $ 9,948
The $4.4 billion decrease in total debt during fiscal 2021 was primarily
attributed to the prepayment of $1.5 billion of Revolver Credit Facility
outstanding at fiscal year-end March 31, 2020 , €312 million of Euro commercial
paper, and the following term loan facilities: €750 million of Euro Term Loan
due fiscal 2022 and 2023, A$800 million of AUD Term Loan due fiscal 2022, £450
million of GBP Term Loan due fiscal 2022, $481 million of USD Term Loan due
fiscal 2025, €350 million of Euro Term Loan due fiscal 2024 and the retirement
of $127 million principal amount of 4.45% Senior Notes due fiscal 2023 via
tender offer. (See Note 14 - "Debt - Tender Offers.") In addition, we issued
irrevocable redemption notice to retire all the remaining two series of 4.45%
Senior Notes (approximately $319 million ) due fiscal 2023. These were partially
offset by the issuance of $500 million of 4.13% Senior Notes due fiscal 2026.
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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 U.K. , in order to stabilize
and facilitate continued access to sterling commercial paper markets. At our
option, we can borrow up to a maximum of €1.0 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. The
issued £600 million in commercial paper was subsequently prepaid as discussed
below.
In October 2020 , we sold the HHS business and used approximately $3.5 billion of
the proceeds to prepay $1,250 million of Revolver Credit Facility, £600 million
of GBP commercial paper (approximately $772 million ), €350 million of Euro Term
Loan due fiscal 2024 (approximately $410 million ), $381 million of USD Term loan
due fiscal 2025, A$500 million of AUD Term Loan due fiscal 2022 (approximately
$358 million ), and €250 million of Euro Term Loan due fiscal 2022 and 2023
(approximately $292 million ).
During fiscal 2021, we borrowed the remaining $2.5 billion under the $4.0
billion credit facility agreement and repaid the full $4.0 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 the COVID-19 crisis and its potential impact on our
customers and our business. The credit facility repayment resulted from the
availability of other liquidity resources. The entire $4.0 billion credit
facility is available for redraw at our request.
In March 2021 , we used cash on hand and redeemed the entire issue of $500
million of 4.00% Senior Notes due fiscal 2024 in anticipation of divestiture
proceeds from the sale of our HPS business that was completed on April 1, 2021 .
We also commenced in March 2021 a concurrent tender offer and issued irrevocable
redemption notice that resulted in the retirement of $127 million principal
amount 4.45% Notes due fiscal 2023.
Subsequent to the fiscal year, we used the proceeds from the sale of our HPS
business to complete the retirement of all remaining $319 million of the two
series of 4.45% Senior Notes due fiscal 2023. We also repurchased $33 million of
the 4.125% Senior Notes due fiscal 2026 and took measures to retire and prepay
certain capital leases and equipment related financing whose balance was about
$300 million as of fiscal 2021 using the proceeds from the divestitures of other
businesses and existing cash on hand.
We were in compliance with all financial covenants associated with our
borrowings as of
52
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The debt maturity chart below summarizes the future maturities of long-term debt
principal for fiscal years subsequent to March 31, 2021 and excludes maturities
of borrowings for assets acquired under long-term financing and finance lease
liabilities. The chart does not reflect the redemption of the remaining
$319 million in Notes due fiscal 2023 that were initiated via redemption notice
in March 2021 , which was completely retired in April 2021 . See Note 14 - "Debt"
for more information.
[[Image Removed: dxc-20210331_g3.jpg]]The following table summarizes our capitalization ratios:
As of
(in millions) March 31, 2021 March 31, 2020
Total debt $ 5,512 $ 9,948
Cash and cash equivalents(1) 2,968 3,679
Net debt(2) $ 2,544 $ 6,269
Total debt $ 5,512 $ 9,948
Equity 5,308 5,129
Total capitalization $ 10,820 $ 15,077
Debt-to-total capitalization 50.9 % 66.0 %
Net debt-to-total capitalization(2) 23.5 % 41.6 %
(1) Cash and cash equivalents includes previously described cash held outside of
the U.S. , at a German financial services subsidiary and at majority owned
consolidated subsidiaries.
(2) Net debt and Net debt-to-total capitalization are non-GAAP measures used by
management to assess our ability to service our debts using our cash and cash
equivalents, including cash subject to limitations, as previously described in
Cash and Cash Equivalents and Cash Flows. 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.
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Net debt-to-total capitalization as of March 31, 2021 decreased as compared to
March 31, 2020 , primarily due to the decrease in total debt attributed to the
prepayment of the credit facility agreement and various term loans, bonds and
commercial papers during the fiscal year as mentioned above, and by the increase
in equity primarily attributed to the gain on disposition of businesses during
fiscal 2021.
As of
Rating Agency Long Term Ratings Short Term Ratings Outlook
Fitch BBB F-2 Stable
Moody's Baa2 P-2 Negative
S&P BBB- - Stable
For information on the risks of ratings downgrades, see Item 1A - Risk Factors
subsection titled, "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 23 - "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 debt financing, including the issuance of capital market debt instruments such as commercial paper 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.
The following table summarizes our total liquidity:
As of
(in millions) March 31, 2021
Cash and cash equivalents $ 2,968
Available borrowings under our revolving credit facility
4,000
Total liquidity $ 6,968
During March 2020 as the evolving global COVID-19 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 from $863 million to $542 million as of March 31,
2020 , and further reduced to $213 million as of March 31, 2021 . During fiscal
2021, capital markets have stabilized and central bank actions have improved
liquidity in commercial paper markets and our access to such commercial paper
markets have normalized.
54
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On April 6, 2020 , the Company drew the entire $2.5 billion remaining
availability under its Revolving Credit Facilities, in order to secure liquidity
as additional cash on hand to support the Company's liquidity resources during
the COVID-19 crisis and to mitigate the uncertainties caused by volatile capital
markets, changing governmental policies, and evolving impact on world economies.
In May 2020 , the Company issued $1.0 billion in principal amount of Senior Notes
in the form of $500 million principal amount of 4.00% Senior Notes due fiscal
2024 and $500 million principal amount of 4.13% Senior Notes due fiscal 2026.
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.
In
The Company retired via tender offer$127 million principal amount of its 4.45% Senior Notes due fiscal 2023 across two series inMarch 2021 and issued irrevocable redemption notice for the remaining amounts outstanding. InApril 2021 , the Company retired the remaining$319 million principal amount across two series through redemption. There is no amount outstanding under either series of the 4.45% Notes due fiscal 2023 after the completion of these two actions. 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 crisis. The Company's credit and term loan facilities that were modified include:$4.0 billion Revolving Credit Facilities due fiscal year 2025, €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. As of fiscal 2021, only$4.0 billion Revolving Credit Facilities due fiscal year 2026 (including a$390 million sub-tranche due fiscal 2025) and €400 million Euro Term Loan due fiscal year 2024 (including a small €27 million sub-tranche due fiscal 2023) remain outstanding and are subject to such amended Leverage Ratio limitations in the Company's credit and term loan facilities. 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. 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, our Board of Directors had 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 fiscal 2021. See Note 16 - "Stockholders' Equity" for more information. Dividends
To maintain our financial flexibility we continue to suspend payment of quarterly dividends for fiscal 2022.
55
--------------------------------------------------------------------------------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 6 - "Receivables" and Note 23 -
"Commitments and Contingencies" for additional information regarding these
off-balance sheet arrangements.
56
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Contractual Obligations
Our contractual obligations as of March 31, 2021 , were as follows:
(in millions) Less than 2-3 years 4-5 years More than Total
1 year 5 years
Debt(1) $ 555 $ 908 $ 2,173 $ 737 $ 4,373
Finance lease liabilities 398 425 71 - 894
Operating Leases(2) 452 629 305 208 1,594
Purchase Obligations(3) 1,487 1,650 352 15 3,504
U.S. Tax Reform - Transition Tax(4) 23 43 109 - 175
U.S. FICA payroll tax deferral 33 33 - - 66
U.K. VAT deferral 66 - - - 66
Interest and preferred dividend
payments(5) 132 241 162 104 639
Total(6) $ 3,146 $ 3,929 $ 3,172 $ 1,064 $ 11,311
(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 7 - "Leases" for more information.
(3) Includes long-term purchase agreements with certain software, hardware,
telecommunication and other service providers and exclude agreements that are
cancellable 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. See Note 23 - "Commitments and Contingencies" for more information.
(4) The transition tax resulted in recording a total transition tax obligation
of $237 million , of which $243 million was recorded as income tax liability and
$6 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 three payments.
(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.
(6) See Note 13 - "Income Taxes" for additional information about the estimated
liability related to unrecognized tax benefits, which has been omitted from this
table. See Note 15 - "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.
57
--------------------------------------------------------------------------------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. 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 and may also contain leases embedded in those arrangements. 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 any lease components and the timing of revenue recognition for each. For
contracts with multiple performance obligations and lease components, we
allocate the contract's transaction price to each performance obligation and
lease component 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 and lease components, 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.
Contract modifications
A contract modification is a legally binding change to the scope, price, or both
of an existing contract. Contract modifications are reviewed to determine
whether they should be accounted for as part of the original contract, the
termination of an existing contract and the creation of a new contract, or as a
separate contract, and whether they modify an embedded lease. This determination
requires significant judgment, which could impact the timing of revenue
recognition.
58
--------------------------------------------------------------------------------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. With the following exceptions, the majority of our global unremitted foreign earnings have been taxed or would be exempt from tax upon repatriation, except for the following earnings which are considered indefinitely reinvested: approximately$522 million that could be taxable when repatriated to theU.S. under section 1.245A-5(b) of the finalTreasury regulations issued during fiscal 2021; and our accumulated earnings inIndia . A portion of these indefinitely reinvested earnings may be subject to foreign andU.S. state tax consequences when remitted. The Company will continue to evaluate its position in the future based on its future strategy and cash needs. 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$3.9 billion as ofMarch 31, 2021 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. We determine whether it is more likely than not a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in our financial statements. A tax position is measured as the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information). We may be required to change our provision for income taxes when the ultimate treatment of certain items is challenged or agreed to by taxing authorities, when estimates used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur. Recent enactment of the tax laws 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. 59 --------------------------------------------------------------------------------
The India Finance Bill 2021 was enacted on
TheU.K. Finance Bill 2021 ("Finance Bill"), which will become Finance Act 2021 after Royal Assent was published inMarch 2021 . The Finance Bill included increases in the corporation tax and diverted profits tax rates fromApril 1, 2023 , the new temporary 130% super deduction first year capital allowances and the temporary extension to the carry-back of trading losses. As the detail of the legislation has yet to be finalized or enacted, it is difficult at this stage to determine the impact of the Finance Bill on our future financial results in theU.K.
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, 2021 March 31, 2020 March 31, 2019
Discount rates 2.4 % 2.4 % 2.5 %
Expected long-term rates of return on assets 5.6 % 5.8 % 5.3 %
60
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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 2021:
Approximate Change
in Settlement,
Approximate Contractual
Change in Net Termination, and
Periodic Pension Mark-to-Market
(in millions) Change Expense Charges
Expected long-term return on plan assets 0.5% $ (58) $ 61
Expected long-term return on plan assets (0.5)% $ 58 $ (61)
Discount rate 0.5% $ 25 $ (1,001)
Discount rate (0.5)% $ (29) $ 1,246
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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.
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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