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DXC Technology Reports Third Quarter Fiscal 2020 Results

  • Q3 earnings per share from continuing operations was $0.32, including the cumulative impact of certain items of $(0.93) per share, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, and a tax adjustment
  • Q3 non-GAAP earnings per share was $1.25
  • Q3 income from continuing operations was $90 million, including the cumulative impact of certain items of $(238) million, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, and a tax adjustment
  • Q3 non-GAAP income from continuing operations was $328 million
  • Q3 EBIT of $187 million, adjusted for certain items is $528 million and adjusted EBIT margin was 10.5%, compared with 16.2% in the prior year
  • Q3 net cash provided by operating activities was $477 million
  • Q3 adjusted free cash flow was $397 million

DXC Technology (NYSE: DXC) today reported results for the third quarter of fiscal year 2020, representing the period from October 1 through December 31, 2019.

"We delivered third quarter results that are in-line with our plan. I am pleased with the initial progress we have made on our two key priorities, running the business and unlocking value," said Mike Salvino, president and CEO. "We are executing on our focused strategy centered on the enterprise technology stack. Our third quarter performance is a positive first step in positioning DXC for long-term success."

Financial Highlights - Third Quarter Fiscal 2020

  • Diluted earnings per share from continuing operations was $0.32 in the third quarter, including $(0.25) per share of restructuring costs, $(0.20) per share of transaction, separation and integration-related costs, $(0.44) per share of amortization of acquired intangible assets, and $(0.04) per share of tax adjustment. This compares with $1.66 in the year ago period.
  • Non-GAAP diluted earnings per share from continuing operations was $1.25. This compares with $2.23 in the year ago period.
  • Revenue in the third quarter was $5,021 million. Revenue decreased 3.0% compared with $5,178 million in the prior year.
  • Income from continuing operations before income taxes was $127 million in the third quarter, including $(53) million of goodwill impairment, $(74) million of restructuring costs, $(68) million of transaction, separation and integration-related costs, and $(146) million of amortization of acquired intangibles. This compares with $469 million in the year ago period.
  • Non-GAAP income from continuing operations before income taxes was $468 million compared with $786 million in the year ago period.
  • Net income was $90 million for the third quarter, including $(64) million of restructuring costs, $(52) million of transaction, separation and integration-related costs, $(112) million of amortization of acquired intangibles, and $(10) million of tax adjustment. This compares with $466 million in the prior year period.
  • Non-GAAP net income was $328 million.
  • Adjusted EBIT was $528 million in the third quarter compared with $840 million in the prior year. Adjusted EBIT margin was 10.5% compared with 16.2% in the year ago quarter.
  • Net cash provided by operating activities was $477 million in the third quarter, compared with $186 million in the year ago period.
  • Adjusted free cash flow was $397 million in the third quarter.

Global Business Services (GBS)

GBS revenue was $2,359 million in the quarter compared with $2,169 million for the prior year. GBS revenue increased 8.8% year-over-year, including an unfavorable foreign currency exchange rate impact of 1.1%. GBS revenues increased 9.9% year-over-year at constant currency including the acquisition of Luxoft. GBS profit margin in the quarter was 15.0%, compared with 18.2% in the prior year, reflecting investments we are making in digital hiring as well as the slower pace of cost takeout. New business awards for GBS were $2.5 billion in the third quarter.

Global Infrastructure Services (GIS)

GIS revenue was $2,662 million in the quarter compared with $3,009 million for the prior year. GIS revenues decreased 11.5% year-over-year, including an unfavorable foreign currency exchange rate impact of 0.9%. GIS revenues decreased 10.6% year-over-year at constant currency, reflecting declines in our infrastructure businesses due to run-off from a few accounts. GIS profit margin in the quarter was 8.7%, compared with 17.5% in the prior year, reflecting a slowdown in delivery cost take-out actions and the investments we are making in select customer accounts. New business awards for GIS were $2.8 billion in the third quarter.

Returning Capital to Shareholders

During the third quarter, DXC Technology returned $140 million to shareholders, consisting of $54 million in common stock dividends and $86 million in share repurchases.

Earnings Conference Call and Webcast

DXC Technology senior management will host a conference call and webcast to discuss these results today at 4:45 p.m. EST. The dial-in number for domestic callers is 888-204-4368. Callers who reside outside of the United States should dial +1-929-477-0402. The passcode for all participants is 6955326. The webcast audio and any presentation slides will be available on DXC Technology’s Investor Relations website.

A replay of the conference call will be available from approximately two hours after the conclusion of the call until February 13, 2020. The replay dial-in number is 888-203-1112 for domestic callers and +1-719-457-0820 for callers who reside outside of the United States. The replay passcode is also 6955326. A replay of this webcast will also be available on DXC Technology’s Investor Relations website.

Non-GAAP Measures

In an effort to provide investors with supplemental financial information, in addition to the preliminary and unaudited financial information presented on a GAAP basis, we have also disclosed in this press release preliminary non-GAAP information including: constant currency, earnings before interest and taxes ("EBIT"), adjusted EBIT, adjusted EBIT margin, adjusted free cash flow, and non-GAAP results including non-GAAP income from continuing operations before taxes, non-GAAP income from continuing operations and non-GAAP EPS from continuing operations.

About DXC Technology

DXC Technology (NYSE: DXC) 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. Learn more about the DXC story and our focus on people, customers and operational execution at www.dxc.technology.

All statements in this press release that do not directly and exclusively relate to historical facts constitute "forward-looking statements." These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. For a written description of these factors, see the section titled "Risk Factors" in DXC's Annual Report on Form 10-K for the fiscal year ended March 31, 2019, and any updating information in subsequent SEC filings including DXC's upcoming Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2019. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events except as required by law.

Condensed Consolidated Statements of Operations

(preliminary and unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

(in millions, except per-share amounts)

 

December 31,

2019

 

December 31,

2018

 

December 31,

2019

 

December 31,

2018

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,021

 

 

$

5,178

 

 

$

14,762

 

 

$

15,473

 

 

 

 

 

 

 

 

 

 

Costs of services

 

3,827

 

 

3,725

 

 

11,128

 

 

11,110

 

Selling, general and administrative

 

518

 

 

491

 

 

1,514

 

 

1,500

 

Depreciation and amortization

 

479

 

 

508

 

 

1,416

 

 

1,463

 

Goodwill impairment losses

 

53

 

 

 

 

2,940

 

 

 

Restructuring costs

 

74

 

 

76

 

 

248

 

 

418

 

Interest expense

 

93

 

 

81

 

 

288

 

 

249

 

Interest income

 

(33

)

 

(27

)

 

(130

)

 

(92

)

Gain on arbitration award

 

 

 

 

 

(632

)

 

 

Other income, net

 

(117

)

 

(145

)

 

(344

)

 

(336

)

Total costs and expenses

 

4,894

 

 

4,709

 

 

16,428

 

 

14,312

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

127

 

 

469

 

 

(1,666

)

 

1,161

 

Income tax expense

 

37

 

 

3

 

 

191

 

 

205

 

Income (loss) from continuing operations

 

90

 

 

466

 

 

(1,857

)

 

956

 

Income from discontinued operations, net of tax

 

 

 

 

 

 

 

35

 

Net income (loss)

 

90

 

 

466

 

 

(1,857

)

 

991

 

Less: net income attributable to non-controlling interest, net of tax

 

8

 

 

4

 

 

17

 

 

8

 

Net income (loss) attributable to DXC common stockholders

 

$

82

 

 

$

462

 

 

$

(1,874

)

 

$

983

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.32

 

 

$

1.68

 

 

$

(7.20

)

 

$

3.38

 

Discontinued operations

 

 

 

 

 

 

 

0.12

 

 

 

$

0.32

 

 

$

1.68

 

 

$

(7.20

)

 

$

3.50

 

Diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.32

 

 

$

1.66

 

 

$

(7.20

)

 

$

3.33

 

Discontinued operations

 

 

 

 

 

 

 

0.12

 

 

 

$

0.32

 

 

$

1.66

 

 

$

(7.20

)

 

$

3.45

 

 

 

 

 

 

 

 

 

 

Cash dividend per common share

 

$

0.21

 

 

$

0.19

 

 

$

0.63

 

 

$

0.57

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for:

 

 

 

 

 

 

 

 

Basic EPS

 

255.09

 

 

275.66

 

 

260.24

 

 

280.47

 

Diluted EPS

 

256.05

 

 

278.99

 

 

260.24

 

 

284.70

 

Selected Consolidated Balance Sheet Data

(preliminary and unaudited)

 

 

 

As of

(in millions)

 

December 31, 2019

 

March 31, 2019

Assets

 

 

 

 

Cash and cash equivalents

 

$

2,560

 

 

$

2,899

 

Receivables, net

 

4,619

 

 

5,181

 

Prepaid expenses

 

660

 

 

627

 

Other current assets

 

344

 

 

359

 

Total current assets

 

8,183

 

 

9,066

 

 

 

 

 

 

Intangible assets, net

 

6,140

 

 

5,939

 

Operating right-of-use assets, net

 

1,484

 

 

 

Goodwill

 

6,003

 

 

7,606

 

Deferred income taxes, net

 

372

 

 

355

 

Property and equipment, net

 

3,631

 

 

3,179

 

Other assets

 

3,786

 

 

3,429

 

Total Assets

 

$

29,599

 

 

$

29,574

 

 

 

 

 

 

Liabilities

 

 

 

 

Short-term debt and current maturities of long-term debt

 

$

1,581

 

 

$

1,942

 

Accounts payable

 

1,576

 

 

1,666

 

Accrued payroll and related costs

 

678

 

 

652

 

Current operating lease liabilities

 

498

 

 

 

Accrued expenses and other current liabilities

 

3,139

 

 

3,355

 

Deferred revenue and advance contract payments

 

1,069

 

 

1,630

 

Income taxes payable

 

243

 

 

208

 

Total current liabilities

 

8,784

 

 

9,453

 

 

 

 

 

 

Long-term debt, net of current maturities

 

7,315

 

 

5,470

 

Non-current deferred revenue

 

747

 

 

256

 

Non-current operating lease liabilities

 

1,097

 

 

 

Non-current income tax liabilities and deferred tax liabilities

 

1,189

 

 

1,184

 

Other long-term liabilities

 

1,366

 

 

1,486

 

Total Liabilities

 

20,498

 

 

17,849

 

 

 

 

 

 

Total Equity

 

9,101

 

 

11,725

 

 

 

 

 

 

Total Liabilities and Equity

 

$

29,599

 

 

$

29,574

 

Condensed Consolidated Statements of Cash Flows

(preliminary and unaudited)

 

 

 

Nine Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

Cash flows from operating activities:

 

 

 

 

Net (loss) income

 

$

(1,857

)

 

$

991

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

1,429

 

 

1,514

 

Goodwill impairment losses

 

2,940

 

 

 

Operating right-of-use expense

 

506

 

 

 

Share-based compensation

 

57

 

 

57

 

Loss (gain) on dispositions

 

6

 

 

(137

)

Unrealized foreign currency exchange loss (gain)

 

14

 

 

(32

)

Other non-cash charges, net

 

7

 

 

(21

)

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

Decrease (increase) in assets

 

141

 

 

(1,012

)

Decrease in operating lease liability

 

(506

)

 

 

Decrease in other liabilities

 

(675

)

 

(325

)

Net cash provided by operating activities

 

2,062

 

 

1,035

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Purchases of property and equipment

 

(240

)

 

(219

)

Payments for transition and transformation contract costs

 

(220

)

 

(294

)

Software purchased and developed

 

(178

)

 

(183

)

Payments for acquisitions, net of cash acquired

 

(1,997

)

 

(332

)

Business dispositions

 

 

 

(65

)

Cash collections related to deferred purchase price receivable

 

513

 

 

761

 

Proceeds from sale of assets

 

55

 

 

283

 

Short-term investing

 

(75

)

 

 

Other investing activities, net

 

20

 

 

9

 

Net cash used in investing activities

 

(2,122

)

 

(40

)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Borrowings of commercial paper

 

4,010

 

 

1,853

 

Repayments of commercial paper

 

(3,893

)

 

(1,853

)

Borrowings on long-term debt, net of discount

 

2,198

 

 

1,646

 

Principal payments on long-term debt

 

(1,029

)

 

(2,619

)

Payments on finance leases and borrowings for asset financing

 

(646

)

 

(710

)

Borrowings for USPS spin transaction

 

 

 

1,114

 

Proceeds from bond issuance

 

 

 

753

 

Proceeds from stock options and other common stock transactions

 

11

 

 

40

 

Taxes paid related to net share settlements of share-based compensation awards

 

(15

)

 

(52

)

Repurchase of common stock and advance payment for accelerated share repurchase

 

(736

)

 

(1,253

)

Dividend payments

 

(161

)

 

(159

)

Other financing activities, net

 

(44

)

 

57

 

Net cash used in financing activities

 

(305

)

 

(1,183

)

Effect of exchange rate changes on cash and cash equivalents

 

26

 

 

(66

)

Net decrease in cash and cash equivalents

 

(339

)

 

(254

)

Cash and cash equivalents at beginning of year

 

2,899

 

 

2,729

 

Cash and cash equivalents at end of period

 

$

2,560

 

 

$

2,475

 

Segment Results

The following table summarizes segment revenue for the third quarter and first nine months of fiscal 2020 and 2019:

Segment Revenue

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

 

% Change

 

% Change in

Constant Currency

Global Business Services

 

$

2,359

 

 

$

2,169

 

 

8.8

%

 

9.9%

Global Infrastructure Services

 

2,662

 

 

3,009

 

 

(11.5

)%

 

(10.6)%

Total Revenues

 

$

5,021

 

 

$

5,178

 

 

(3.0

)%

 

(2.0)%

 

 

Nine Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

 

% Change

 

% Change in

Constant Currency

Global Business Services

 

$

6,803

 

 

$

6,493

 

 

4.8

%

 

6.9%

Global Infrastructure Services

 

7,959

 

 

8,980

 

 

(11.4

)%

 

(9.1)%

Total Revenues

 

$

14,762

 

 

$

15,473

 

 

(4.6

)%

 

(2.4)%

We define segment profit as segment revenues less costs of services, segment selling, general and administrative, depreciation and amortization, and other income (excluding the movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, pension and OPEB actuarial and settlement gains and losses, restructuring costs, transaction, separation and integration-related costs, and amortization of acquired intangible assets.

Segment Profit

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

 

December 31,

2019

 

December 31,

2018

Profit

 

 

 

 

 

 

 

 

GBS profit

 

$

353

 

 

$

395

 

 

$

1,078

 

 

$

1,198

 

GIS profit

 

232

 

 

528

 

 

815

 

 

1,475

 

All other loss

 

(57

)

 

(83

)

 

(184

)

 

(231

)

Interest income

 

33

 

 

27

 

 

130

 

 

92

 

Interest expense

 

(93

)

 

(81

)

 

(288

)

 

(249

)

Restructuring costs

 

(74

)

 

(76

)

 

(248

)

 

(418

)

Transaction, separation and integration-related costs

 

(68

)

 

(107

)

 

(226

)

 

(305

)

Amortization of acquired intangible assets

 

(146

)

 

(134

)

 

(435

)

 

(401

)

Goodwill impairment losses

 

(53

)

 

 

 

(2,940

)

 

 

Gain on arbitration award

 

 

 

 

 

632

 

 

 

Income (loss) from continuing operations before income taxes

 

$

127

 

 

$

469

 

 

$

(1,666

)

 

$

1,161

 

 

 

 

 

 

 

 

 

 

Segment profit margins

 

 

 

 

 

 

 

 

GBS

 

15.0

%

 

18.2

%

 

15.8

%

 

18.5

%

GIS

 

8.7

%

 

17.5

%

 

10.2

%

 

16.4

%

Non-GAAP Financial Measures

We present non-GAAP financial measures of performance which are derived from the statements of operations of DXC. These non-GAAP financial measures include earnings before interest and taxes ("EBIT"), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income and non-GAAP EPS, constant currency revenues, net debt and net debt-to-total capitalization.

We present these non-GAAP financial measures to provide investors with meaningful supplemental financial information, in addition to the financial information presented on a GAAP basis. Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures allow investors to better understand the financial performance of DXC exclusive of the impacts of corporate-wide strategic decisions. DXC management believes that adjusting for these items provides investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period. DXC management believes the non-GAAP measures provided are also considered important measures by financial analysts covering DXC, as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS targets.

Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of operating performance such as the amortization of acquired intangible assets and transaction, separation and integration-related costs.

Incremental amortization of intangible assets acquired through business combinations may result in a significant difference in period over period amortization expense on a GAAP basis. We exclude amortization of certain acquired intangibles assets as these non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Although DXC management excludes amortization of acquired intangible assets, primarily customer related intangible assets from its non-GAAP expenses, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and support revenue generation. Any future transactions may result in a change to the acquired intangible asset balances and associated amortization expense.

There are limitations to the use of the non-GAAP financial measures presented in this report. One of the limitations is that they do not reflect complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Additionally, other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes between companies.

Reconciliation of Non-GAAP Financial Measures

DXC's non-GAAP adjustments include:

  • Restructuring costs - reflects costs, net of reversals, related to workforce optimization and real estate charges.
  • Transaction, separation and integration-related costs - reflects 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.
  • Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business combinations.
  • 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 2020 periods include the impact of Transition Tax (affecting the three and nine months ended December 31, 2019) and tax entries related to prior restructuring charges (affecting the nine months ended December 31, 2019). Fiscal 2019 periods reflect the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017. Income tax expense of other non-GAAP adjustments is computed by applying the jurisdictional tax rate to the pre-tax adjustments on a jurisdictional basis.

EBIT and Adjusted EBIT

A reconciliation of net income (loss) to adjusted EBIT is as follows:

 

 

Three Months Ended

 

Nine Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

 

December 31,

2019

 

December 31,

2018

Net income (loss)

 

$

90

 

 

$

466

 

 

$

(1,857

)

 

$

991

 

Income from discontinued operations, net of taxes

 

 

 

 

 

 

 

(35

)

Income tax expense

 

37

 

 

3

 

 

191

 

 

205

 

Interest income

 

(33

)

 

(27

)

 

(130

)

 

(92

)

Interest expense

 

93

 

 

81

 

 

288

 

 

249

 

EBIT

 

187

 

 

523

 

 

(1,508

)

 

1,318

 

Restructuring costs

 

74

 

 

76

 

 

248

 

 

418

 

Transaction, separation, and integration-related costs

 

68

 

 

107

 

 

226

 

 

305

 

Amortization of acquired intangible assets

 

146

 

 

134

 

 

435

 

 

401

 

Goodwill impairment losses

 ...