GIS provides a portfolio of technology offerings that deliver predictable outcomes and measurable results while reducing business risk and operational costs for customers. GIS enterprise stack elementsofferings include:
General economic conditions have an impact on our business and financial results. The markets in which we sell our products,solutions, services and solutionsproducts occasionally experience weak economic conditions that may negatively affect sales. We also experience some seasonal trends in the sale of our services. For example, contract awards and certain revenue are often tied to the timing of our customers' fiscal year-ends, and we also experience seasonality related to our own fiscal year-end selling activities.
The principal methods of competition in the markets for our solutions and services include:
Our ability to obtain new business and retain existing business is dependent upon the following:
We rely on a combination of trade secrets, patents, copyrights, and trademarks, as well as contractual protections to protect our business interests. While our technical services and products are not generally dependent upon patent protection, we do selectively seek patent protection for certain inventions likely to be incorporated into products and services or where obtaining such proprietary rights will improve our competitive position.
As our patent portfolio has been built over time, the remaining terms of the individual patents across the patent portfolio vary. We believe that our patents and patent applications are important for maintaining the competitive differentiation of our solutions and services and enhancing our freedom of action to sell solutions and services in markets in which we choose to participate. No single patent is in itself essential to our company as a whole or to any business segment.
In addition to developing our intellectual property portfolio, we license intellectual property rights from third parties as we deem appropriate. We have also granted and plan to continue to grant licenses to others under our intellectual property rights when we consider these arrangements to be in our interest. These license arrangements
Our operations are subject to regulation under various federal, state, local, and foreign laws concerning the environment and sustainability, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the clean-up of contaminated sites. Environmental costs and accruals are presently not material to our operations, cash flows or financial position,position; and, we do not currently anticipate material capital expenditures for environmental control facilities. However, we could incur substantial costs including clean-up costs, fines and civil or criminal sanctions and third-party damage or personal injury claims if we were to violate or become liable under existing and future environmental laws or if new environmental legislation is passed which impacts our business.legislation. To limit future risks, DXC has committed to set near-term company-wide emission reductions in line with the Science Based Targets initiative (SBTi).
James R. Smith serves as Executive Vice President, Digital Transformation and Customer Advocacy of DXC. Mr. Smith previously served as CSC's Executive Vice President and General Manager for GBS since he joined in August 2013. Prior to joining CSC, Mr. Smith served as Chief Executive Officer of Motricity, a provider of cloud-based mobile enterprise and analytics solutions from 2009 to 2012. Under his direction, Motricity had a successful initial public offering on NASDAQ after completing a business model transformation and global expansion. Mr. Smith held various executive leadership positions at Avaya from 2001 to 2008, where he helped drive a 10-fold increase in the company’s market capitalization and reinvented a global software platform. Prior to that, he was an Associate Partner at Accenture.
Vinod Bagal was appointedserves as President, Cloud and Infrastructure Services since March 2022. He previously served as Executive Vice President, Global Delivery and Transformation of DXC in December 2019.from October 2019 to March 2022. Prior to joining DXC, Mr. Bagal served at Cognizant Technology Solutions as Senior Vice President - Global Multi-Service Integration and North America Delivery and as Senior Vice President - Global Technology Consulting &and Multi-Service Integration from September 2014 to October 2019, where he led the transformation of Cognizant's client delivery organization to position it for the next wave of professional services demands. From 1994 to 2014, Mr. Bagal held a series of leadership roles at Accenture.
NeilChristopher R. Drumgoole was appointed as Executive Vice President and Chief Operating Officer of DXC in August 2021. He previously served as Executive Vice President and Chief Information Officer since April 2020. Before joining DXC, Mr. Drumgoole served as Chief Information Officer at GE from May 2018 to April 2020, where he led the company’s global technology operations, including applications, infrastructure, and related shared services. Prior to that role, he was GE’s Chief Technology Officer from April 2014 to April 2018. Mr. Drumgoole joined GE from Verizon, where he was Chief Operating Officer of Verizon’s Terremark subsidiary, a cloud, hosting, and data center provider, from January 2012 to April 2014. Mr. Drumgoole serves on the Board of Directors of PetSmart; on the Advisory Board of Florida International University’s College of Engineering & Computing; and on the Board of Directors of ONUG, a forum for IT business leaders interested in open technologies.
Christopher A. MannaVoci has served aswas appointed Senior Vice President, Corporate Controller and Principal Accounting Officer ofin June 2021. Before joining DXC, since the completion of the HPES Merger. Mr. Manna previouslyVoci served as Principal Accounting Officer,Senior Vice President, and Controller of CSC. Mr. Manna joined CSC in June 2016. Prior to joining CSC, he served as theand Chief Accounting Officer and Seniorfor CACI International Inc. from November 2018 to May 2021. From 2016 to November 2018, Mr. Voci served as Vice President, Controller and Chief Accounting Officer of CA,Orbital ATK (subsequently purchased by Northrop Grumman). Prior to that, he spent eleven years at Air Products and Chemicals, Inc. (“APD”). While at APD from December 20082004 to June 3, 2016. He2015, Mr. Voci was Global Controller Industrial Gases from 2014 to 2015, Global Controller Merchant Gases from 2011 to 2014, Director, Financial Planning & Analysis from 2007 to 2011 and Global Healthcare Controller from 2004 to 2007. Mr. Voci served as Principal Accounting OfficerSenior Manager, Audit and Vice President of Worldwide Accounting for RealNetworks, Inc.Risk Advisory Services at KPMG LLP from July 20072002 to November 2008. He served as the Chief Financial Officer of TimePlus Systems, LLC (formerly TimePlus, Inc.)2004 and in various roles at Arthur Andersen LLP from November 20051994 to April 2007. From February 2000 to October 2005, he served as a Director of Finance for the Payroll Division of Intuit and Controller of Employee Matters, Inc. From July 1990 to February 2000 he served as the Principal Accounting Officer, Vice President of Finance, Controller and Treasurer of CHI Energy, Inc. He is a Certified Public Accountant and holds a Bachelor’s degree in Accounting and a Master’s degree in Business Administration.2002.
Item 1A.RISK FACTORS
Any of the following
Our operations and financial results are subject to various risks could and uncertainties, which maymaterially and adversely affect our business, financial condition, and results of operations, and the actual outcome of matters as to which forward-looking statements are made in this Annual Report. In such case, the trading price for DXC common stock could decline, and you could lose all or part of your investment. ThePast performance may not be a reliable indicator of future financial performance and historical trends should not be used to anticipate results or trends in future periods. Future performance and historical trends may be adversely affected by the aforementioned risks, described below are not the only risks that DXC currently faces. Additionaland other variables and risks and uncertainties not currently known or that are currently expected to be immaterial may also materially and adversely affect our business, financial condition, and results of operations or the price of shares of our common stock in the future. Past
Risk Factor Summary
Risks Related to Our Business
•Our business and financial performanceresults have been adversely affected and could continue to be materially adversely affected by the COVID-19 crisis.
•We may not succeed in our strategic objectives.
•We could be vulnerable to security breaches, cyber-attacks or disclosure of confidential or personal information.
•Our ability to continue to develop and expand our service offerings to address emerging business demands and technological trends, including our ability to sell differentiated services up the Enterprise Technology Stack, may impact our future growth.
•Our operations in certain offshore locations may expose us to risks inherent to these locations such as Russia's recent invasion of Ukraine, which may adversely affect our revenue and profitability.
•Failure to maintain 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.
•Our indebtedness could have a material adverse effect on our financial condition and results of operations.
•Our primary markets are highly competitive. If we are unable to compete in these highly competitive markets, our results of operations may be materially and adversely affected.
•If we are unable to accurately estimate the cost of services and the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected.
•Performance under contracts, including those on which we have partnered with third parties, may be adversely affected if we or the third parties fail to deliver on commitments or otherwise breach obligations to our customers.
•Natural disasters may affect our worldwide business operations and financial results.
•We may not be able to attract and retain qualified personnel.
•Prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts could increase costs, have an adverse effect on general economic conditions and impact consumer budgeting, which could impact our profitability and have a reliable indicatormaterial adverse effect on our business and results of future performance,operations.
•Our international operations are exposed to risks, including fluctuations in exchange rates and historical trends shouldBrexit.
•Failure to comply with federal, state, local and foreign laws and regulations that could result in costs or sanctions that adversely affect our business. Social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands, may adversely affect our relationships with customers and investors.
•We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring may adversely affect our business.
•We may inadvertently infringe on the intellectual property rights of others and our inability to procure third-party licenses may result in decreased revenue or increased costs.
•Disruption of our supply chain could adversely impact our business.
•We may be exposed to negative publicity and other potential risks if we are unable to achieve and maintain effective internal controls over financial reporting.
•We could suffer additional losses due to asset impairment charges.
•We may not be usedable to anticipatepay dividends or repurchase shares of our common stock.
•Pending litigations may have a material and adverse impact on our profitability and liquidity.
•Disruptions in the credit markets may reduce our customers' access to credit and increase the costs to our customers of obtaining credit, and our hedging program is subject to counterparty default risk.
•We derive significant revenues and profit from contracts awarded through costly competitive bidding processes, and we may not achieve revenue and profit objectives if we fail to bid on these projects effectively.
•If our customers experience financial difficulties, we may not be able to collect our receivables.
•If we are unable to maintain and grow our customer relationships over time or to comply with customer contracts or government contracting regulations or requirements, our operating results or trendsand cash flows will suffer.
•Our strategic transactions may prove unsuccessful.
•Changes in future periods.tax legislation and our tax rates may materially affect our financial condition and results of operations.
Risks RelatingRelated to Our Completed Strategic Transactions
•We could have an indemnification obligation to HPE if the stock distribution in connection with the HPES business separation were determined not to qualify for tax-free treatment.
•If the HPES Merger does not qualify as a reorganization under Section 368(a) of the Code, CSC's former stockholders may incur significant tax liabilities.
•We assumed certain material pension benefit obligations following the HPES Merger. These liabilities and future funding obligations could restrict our cash available for operations, capital expenditures and other requirements.
•The USPS Separation and Mergers and NPS Separation could result in substantial tax liability to DXC and our stockholders.
Risks Related to Our Business
Our business and financial results have been adversely affected and could continue to be materially adversely affected by the COVID-19 crisis.
The COVID-19 crisis has caused disruptions in global economies, financial and commodities markets and rapid shifts in governmental and public health policies in the countries where we operate or our customers are located or the industries in which we and our customers compete. The COVID-19 crisis and the actions taken by governments, businesses and individuals to curtail the spread of the disease have negatively impacted, and are expected to continue to negatively impact our business, results of operations, cash flows and financial condition. The extent of such impact will depend on future developments, including the duration and spread of COVID-19, the speed at which the vaccine is distributed, public acceptance of the vaccine along with the number of our employees receiving the vaccine. In addition, COVID-19 strain mutations may also hamper the vaccine's effectiveness. Requirements related to COVID-19 safety precautions, including vaccine mandates of varying scope and applicability, may apply to our operations in the U.S. or other jurisdictions. Failure to comply with the applicable requirements may result in governmental penalties and loss of business, including our contracts or subcontracts with U.S. federal, state or local governments or international government entities, which could have an adverse effect on our business and results of operations. Our implementation of various vaccination, testing or other requirements related to COVID-19 may result in a reduction in productivity and employee morale, or attrition, which could have an adverse effect on our business and results of operations.
Negative impacts that have occurred, or may occur in the future, include disruptions or restrictions on our employees’ ability to work effectively, as well as temporary closures of our facilities or the facilities of our customers or our subcontractors, or the requirements to deliver our services remotely. In addition, our employees continue to face challenges in their well-being, given the additional financial, family and health burdens that many employees have experienced and could continue to experience because of the COVID-19 crisis that may negatively impact our people’s mental and physical health, engagement, retention and performance. Continued public health threat and government responses could materially adversely affect our operations and the delivery of our services. Negative impacts from COVID-19 could potentially affect our ability to perform under our contracts with customers. Cost increases may not be recoverable from customers or covered by insurance, which could impact our profitability. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected.
In addition, the COVID-19 crisis has resulted in a widespread global health crisis that adversely affected the economies and financial markets of many countries. Any future economic downturn, depending upon its severity and duration, could also lead to a deterioration of worldwide credit and financial markets that could negatively affect the financial health of customers, lower their demand for our services, limit their ability or willingness to pay us in a timely manner and our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in a higher rate of losses on our accounts receivables due to credit defaults.
Our financial results may also be materially and adversely impacted by a variety of factors related to COVID-19 that have not yet been determined, including potential impairments of goodwill and other assets, and changes to our contingent liabilities, for which actual amounts may materially exceed management estimates and our calculation of global tax liabilities. Even after the COVID-19 crisis has subsided, depending upon its duration and potential recurrence, and the governmental policies in response thereto, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that may occur or be continuing as a result.
We continue to evaluate the extent to which the COVID-19 crisis has impacted us and our employees, customers and suppliers and the extent to which it and other emerging developments will impact us and our employees, customers and suppliers in the future. We caution investors that any of the factors mentioned above could have material and adverse impacts on our current and future business, results of operations, cash flows and financial condition.
To the extent the COVID-19 crisis and the resulting economic disruption continue to adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our ability to generate sufficient cash flows to service our indebtedness and to comply with the covenants contained in the agreements that govern our indebtedness and our counterparty credit risk.
We may not succeed in our strategic objectives, which could adversely affect our business, financial condition, results of operations and cash flows.
We recently announced a number of senior leadership changes as well as updates toOur transformation journey focuses on our customers, optimizing costs and seizing the market. Our strategic priorities includinginclude an initiative to assist DXC customers across a broader range of their information technology needs, which we refer to as “the enterprise technology stack.” We may not be able to implement our strategic priorities and progress on our transformation journey in accordance with our expectations for a variety of reasons, including failure to execute on our plans in a timely fashion, lack of adequate skills, ineffective management, inadequate incentives, customer resistance to new initiatives, inability to control costs or maintain competitive offerings. We also cannot be certain that executing on our strategy will generate the benefits we expect. If we fail to execute successfully on our strategic priorities, or if we pursue strategic priorities that prove to be unsuccessful, our business, financial position, results of operations and cash flows may be materially and adversely affected.
Strategic alternatives we are considering may not achieve the results we expect, could result in operating difficulties, harm to one or more of our businesses and negative impacts our financial condition, results of operations and cash flows.
We recently announced our intention to explore strategic alternatives for our U.S. State and Local Health and Human Services business, our horizontal BPS business and our workplace & mobility business. Among the alternatives we may consider for those businesses are potential divestiture transactions. Any such transactions may involve significant challenges and risks, including:
the potential loss of key customers, suppliers, vendors and other key business partners;
declining employee morale and retention issues affecting employees, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or perceived expectations;
difficulty making new and strategic hires of new employees;
diversion of management time and a shift of focus from operating the businesses to transaction execution considerations;
the need to provide transition services, which may result in stranded costs and the diversion of resources and focus;
the need to separate operations, systems (including accounting, management, information, human resource and other administrative systems), technologies, products and personnel, which is an inherently risky and potentially lengthy and costly process;
the inefficiencies and lack of control that may result if such separation is delayed or not implemented effectively, and unforeseen difficulties and expenditures that may arise as a result including potentially significant stranded costs;
our desire to maintain an investment grade credit rating may cause us to use cash proceeds, if any, from any divestitures or other strategic alternatives that we might otherwise have used for other purposes in order to reduce our financial leverage;
the inability to obtain necessary regulatory approvals or otherwise satisfy conditions required in order consummate any such transactions; and
our dependence on accounting, financial reporting, operating metrics and similar systems, controls and processes of divested businesses could lead to challenges in preparing our consolidated financial statements or maintaining effective financial control over financial reporting.
At any given time, we may be engaged in discussions or negotiations with respect to one or more strategic alternatives, and any of these strategic alternatives could be material to our business, financial condition, results of operations and cash flows. In addition, we may explore a divestiture or spin-off or other transaction involving one or more of these businesses and ultimately determine not to proceed with any transaction or other strategic alternative for commercial, financial, strategic or other reasons. As a result, we may not realize benefits expected from exploring one or more strategic alternatives or may realize benefits further in the future and those benefits may ultimately be significantly smaller than anticipated, which could adversely affect our business, financial condition, operating results and cash flows.
We expect our business and financial results to potentially be negatively impacted by the recent COVID-19 outbreak as well as other recent developments.
The recent outbreak of COVID-19 and global pandemic along with other recent developments, including disruptions in global economies, financial and commodities markets and rapid shifts in governmental and public health policies in response to these and other factors affecting the countries where we operate or our customers are located or the industries in which we and our customers compete, are expected to potentially have a negative effect on our business, results of operations, cash flows and financial condition. These effects could include disruptions or restrictions on our employees’ ability to work effectively, as well as temporary closures of our facilities or the facilities of our clients or our subcontractors, or the requirements to deliver our services by working remotely. This could potentially affect our ability to perform under our contracts with customers. Cost increases may not be recoverable from customers or covered by insurance, which could impact our profitability. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected. In addition, the outbreak of COVID-19 has resulted in a widespread global pandemic health crisis that is adversely affecting the economies and financial markets of many countries, which could result in an economic downturn that may negatively affect demand for our services, including the financial failure of some of our clients. This economic downturn, depending upon its severity and duration, could also lead to the deterioration of worldwide credit and financial markets that could limit our customers’ ability or willingness to pay us in a timely manner and our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in a higher rate of losses on our accounts receivables due to credit defaults. Our financial results may be materially and adversely impacted by a variety of factors that have not yet been determined, including potential impairments of goodwill and other assets, our evaluation of contingent liabilities, for which actual amounts may materially exceed management estimates and our calculation of global tax liabilities. Even after the COVID-19 outbreak has subsided, depending upon its duration and frequency of recurrence, and the governmental policies in response thereto, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that may occur or be continuing as a result. We are evaluating the extent to which COVID-19 has impacted us and our employees, customers and suppliers and the extent to which it and other emerging developments are expected to impact us in the future and caution investors that any of those factors could have material and adverse impacts on our current and future business, results of operations, cash flows and financial condition.
To the extent the global COVID-19 pandemic and resulting economic disruption adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our ability to generate sufficient cash flows to service our indebtedness and to comply with the covenants contained in the agreements that govern our indebtedness and our counterparty credit risk.
We could be held liable for damages, our reputation could suffer, or we may experience service interruptions, from security breaches, cyber-attacks, other security incidents or disclosure of confidential information or personal data, which could cause significant financial loss.
As a provider of IT services to private and public sector customers operating in a number of regulated industries and countries, we store and process increasingly large amounts of data for our clients,customers, including sensitive and personally identifiable information. We also manage IT infrastructure of our own and of clients. We possess valuable proprietary information, including copyrights, trade secrets and other intellectual property and we collect and store certain personal and financial information from customers and employees. We also manage IT infrastructure and systems (collectively, “IT Systems”) of our own and of customers, and we rely on third parties who provide various critical hardware, software and services to support our IT Systems and business operations.
At the same time, the continued occurrence of high-profile data breaches and cyber-attacks, including by state actors, reflects an external environment that is increasingly hostile to information and corporate security. CybersecuritySecurity incidents can result from unintentional events or deliberate attacks by insiders such as employees, contractors or service providers or third parties, including criminals, competitors, nation-states, and hacktivists. LikeThese incidents can result in significant disruption to our business (for example, due to ransomware or denial-of-service) through an impact on our operations or those of our clients, employees, vendors or other companies, we face an evolving arraypartners; loss of cybersecuritydata (including proprietary, confidential or otherwise sensitive or valuable information) belonging to us, our clients, employees, vendors or partners; reputational damage, and injury to customer relationships. We may also incur costs and liability (whether contractual or otherwise) such as monetary damages resulting from litigation, remediation costs, and regulatory actions, fines or penalties. Any of the foregoing, or a combination of the foregoing, could have a material impact on our results of operations or financial condition. In addition, the regulatory environment related to information security and data privacy is evolving rapidly and the Company will need to expend time and resources to ensure compliance with these evolving regulations, and failure to understand and comply with these regulations can negatively impact the Company, its results of operations, and financial condition.
We have experienced cyberattacks and security threats that pose risksincidents in the past, and we continue to us and our clients. We can also be harmed by attacks on third parties, such as denial-of-service attacks. We see regular unauthorized efforts to access our systems,IT Systems, which we evaluate for severity and frequency. While incidents experienced thus far have not resulted in significant disruption to our business, it is possible that we could suffer a severe attack or incident, with potentially material and adverse effects on our business, reputation, customer relations, results of operations or financial condition.
We must expend capital and other resources to protect against attempted security The continued occurrence globally of high-profile data breaches and cyber-attacks, including by nation-state actors, reflects an external environment that is increasingly hostile to information and to alleviate problems caused by successful breaches or attacks. We considercorporate security. Like other companies, we face an evolving array of information security to be a top priority and are undertaking cybersecurity planning and activities throughout the company. This includes the acquisition of technology and services, review and refinement of cybersecurity and data security policiesthreats that pose risks to us and proceduresour customers.
Threat actors are increasingly sophisticated and employee training, among many other investments. Senior managementusing tools and the Board of Directors are appropriately and actively engaged in cybersecurity risk management.
Our security measures aretechniques designed to identifycircumvent security controls, to evade detection and protect against security breaches and cyber-attacks; no threat incident identified to date has resulted in a material adverse effect onremove or obfuscate forensic evidence, which may make it more difficult for us or our customers. However, there is no perfect security system, and our failure to detect, preventidentify, investigate contain or adequately respond to arecover from, future threat incident could subject us to liabilitycyberattacks and reputational damage, and have a material adverse effect on our business. In addition, the cost and operational consequences of responding to breaches and cyber-attacks and implementing remediation measures could be significant.
We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. Security breaches such as through an advanced persistent threat attack, or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our clients or our customers, could expose us to risk of loss of this information, regulatory scrutiny, actions and penalties, extensive contractual liability and other litigation, reputational harm, and a loss of customer confidence which could potentially have an adverse impact on future business with current and potential customers.
incidents. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect our data and that of clients,customers, including sensitive customer transaction data. A party who is able to circumvent our security measures or those of our contractors, partners or vendors could access our systems and misappropriate proprietary information, the confidential data of our customers, employees or business partners or cause interruption in our or their operations.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers alsohave deployed and may be ablecontinue to develop and deploy ransomware, malware and other malicious software programs through phishing and other methods that attack our products or otherwise exploit any security vulnerabilities of these products. In addition, sophisticated hardware and operating system software and applications produced or procured from third parties may contain defects in design or manufacture, including “bugs” and other problemsvulnerabilities that could unexpectedly interfere with the security and operation of our systems, or harm those of third parties with whom we may interact. A party, whether an insider or third party operating outside the Company, who is able to circumvent our security measures or those of our contractors, partners or vendors could access our IT Systems, or those of a critical third party, and misappropriate proprietary information, the confidential data of our customers, employees or business partners or cause interruption in our or their operations. The costs to eliminate or alleviate cyber or other security problems, including ransomware, malware, bugs, malicious software programs and other security vulnerabilities, could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers, which may impede our sales, distribution or other critical functions.
IncreasingIn the event of a cyberattack or security incident, we could be exposed to regulatory actions, customer attrition due to reputational concerns or otherwise, containment and remediation expenses, and claims brought by our customers or others for breaching contractual confidentiality and security provisions or data protection or privacy laws. We must expend capital and other resources to protect against security incidents, including attempted security breaches and cyber-attacks and to alleviate problems caused by successful breaches or attacks. The cost, potential monetary damages, and operational consequences of responding to security incidents and implementing remediation measures could be significant and may be in excess of insurance policy limits or be not covered by our insurance at all. Moreover, failure to maintain effective internal accounting controls related to data security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and could subject us to regulatory scrutiny.
We expect increasing cybersecurity, data privacy and information security obligations around the world could alsoto impose additional regulatory pressures on our customers’ businesses and, indirectly, on our operations, or lead to inquiries, investigations or enforcement actions. In the United States, we are seeing increasing obligations and expectations from federalgovernment and non-federalnon-government customers. In response, some of our customers have sought, and may continue to seek, to contractually impose certain strict data privacy and information security obligations on us. Some of our customer contracts may not limit our liability for the loss of confidential information.information or other business impact. If we are unable to adequately address these concerns, our business and results of operations could suffer.
Compliance with new privacy and security laws, requirements and regulations such as the European Union General Data Protection Regulation, which became effective in May 2018, where required or undertaken by us, may result in cost increases due to expanded compliance obligations, potential systems changes, the development of additional administrative processes and increased enforcement actions, litigation, fines and penalties. The regulatory landscape in these areas continues to evolve rapidly, and there is a risk that the Company could fail to address or comply with the fast changing regulatory environment, which could lead to regulatory or other actions which result in material liability for the Company.For example, in 2020, the California Consumer Privacy Act (“CCPA”) came into force and provides new data privacy rights for California consumers and new operational requirements for covered companies. The CCPA also includes a private right of action for certain data breaches that is expected to increase data breach litigation. Failure to comply with the CCPA could result in civil penalties of $2,500 for each violation or $7,500 for each intentional violation. Additionally, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in the November 3, 2020 election. The CPRA, which takes effect on January 1, 2023 and significantly modifies the CCPA, potentially results in further uncertainty and could require us to incur additional costs and expenses in an effort to comply. Some observers have noted the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could also increase our potential liability and adversely affect our business. For example, the CCPA has encouraged “copycat” laws in other states across the country, such as in Virginia, New Hampshire, Illinois and Nebraska. This legislation may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment in compliance programs, and could impact strategies and availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies.
In addition, the data protection landscape in the European Union (“EU”) and further member states of the European Economic Area (“EEA”)is continually evolving, resulting in possible significant operational costs for internal compliance and risks to our business. The EU adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018, and contains numerous requirements and changes from previously existing EU laws, including more robust obligations on data processors and heavier documentation requirements for data protection compliance programs by companies.
Among other requirements, the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States. Recent legal developments in Europe have created complexity and uncertainty regarding such transfers. For instance, on July 16, 2020, the Court of Justice of the European Union (the “CJEU”) invalidated the EU-U.S. Privacy Shield Framework (the “Privacy Shield”) under which personal data could be transferred from the EEA to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield), it made clear that reliance on such clauses alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, including, in particular, applicable surveillance laws and rights of individuals, and additional measures and/or contractual provisions may need to be put in place; however, the nature of these additional measures is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country and that the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer.
Failure to comply with the GDPR could result in penalties for noncompliance (including possible fines of up to the greater of €20 million and 4% of our total annual revenue for the preceding financial year for the most serious violations, as well as the right to compensation for financial or non-financial damages claimed by individuals under Article 82 of the GDPR).
Further, in March 2017, the United Kingdom (“U.K.”) formally notified the European Council of its intention to leave the EU pursuant to Article 50 of the Treaty on European Union (“Brexit”). The U.K. ceased to be an EU Member State on January 31, 2020, but enacted a Data Protection Act substantially implementing the GDPR (the “UK GDPR”), effective in May 2018, which was further amended to align more substantially with the GDPR following Brexit. It is unclear how U.K. data protection laws or regulations will develop in the medium to longer term. Since the beginning of 2021 we must comply with both the GDPR and the U.K. GDPR, with each regime having the ability to fine up to the greater of €20 million (in the case of the GDPR) or £17 million (in the case of the U.K. GDPR) and 4% of total annual revenue for the preceding financial year.
While we strive to comply with all applicable data protection laws and regulations, as well as internal privacy policies, any failure or perceived failure to comply or any misappropriation, loss or other unauthorized disclosure of sensitive or confidential information may result in proceedings or actions against us by government or other entities, private lawsuits against us (including class actions) or the loss of customers, which could potentially have an adverse effect on our business, reputation and results of operations.
Portions of our infrastructure and IT Systems also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could reduce our revenues, increase our expenses, damage our reputation, and adversely affect our stock price.
Achieving our growth objectives may prove unsuccessful. We may be unable to identify future attractive acquisitions and strategic partnerships, which may adversely affect our growth. In addition, if we are unable to integrate acquisitions and implement strategic partnerships or achieve anticipated revenue improvements and cost reductions, our profitability may be materially and adversely affected.
We may fail to complete strategic transactions. Closing strategic transactions is subject to uncertainties and risks, including the risk that we will be unable to satisfy conditions to closing, such as regulatory and financing conditions and the absence of material adverse changes to our business. In addition, our inability to successfully integrate the operations we acquire and leverage these operations to generate substantial cost savings, as well as our inability to avoid revenue erosion and earnings decline, could have a material adverse effect on our results of operations, cash flows and financial position. In order to achieve successful acquisitions, we will need to:
successfully integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems, of acquired businesses with existing operations and systems;
maintain third-party relationships previously established by acquired companies;
attract and retain senior management and other key personnel at acquired businesses; and
successfully manage new business lines, as well as acquisition-related workload.
We may not be successful in meeting these challenges or any others encountered in connection with historical and future acquisitions. In addition, the anticipated benefits of one or more acquisitions may not be realized and future acquisitions could require dilutive issuances of equity securities and/or the assumption of contingent liabilities. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.
We have also entered into and intend to identify and enter into additional strategic partnerships with other industry participants that will allow us to expand our business. However, we may be unable to identify attractive strategic partnership candidates or complete these partnerships on terms favorable to us. In addition, if we are unable to successfully implement our partnership strategies or our strategic partners do not fulfill their obligations or otherwise prove disadvantageous to our business, our investments in these partnerships and our anticipated business expansion could be adversely affected.
Our ability to continue to develop and expand our service offerings to address emerging business demands and technological trends, including our ability to sell differentiated services up the demand for digital technologies and services,Enterprise Technology Stack, may impact our future growth. If we are not successful in meeting these business challenges, our results of operations and cash flows may be materially and adversely affected.
Our ability to implement solutions for our customers, incorporating new developments and improvements in technology that translate into productivity improvements for our customers, and our ability to develop digital and other new service offerings that meet current and prospective customers' needs, as well as evolving industry standards are critical to our success. The markets we serve are highly competitive and characterized by rapid technological change which has resulted in deflationary pressure in the price of services which in turn can adversely impact our margins. Our competitors may develop solutions or services that make our offerings obsolete or may force us to decrease prices on our services which can result in lower margins. Our ability to develop and implement up to date solutions utilizing new technologies that meet evolving customer needs in digital cloud, information technology outsourcing, consulting, industry software and solutions, and application services markets,, and in areas such as artificial intelligence, automation, Internet of Things and as-a-service solutions,
in a timely or cost-effective manner, will impact our ability to retain and attract customers and our future revenue growth and earnings. If we are unable to continue to develop digitalexecute our strategy and other new service offeringsbuild our business across the Enterprise Technology Stack in a highly competitive and rapidly evolving environment or if we are unable to commercialize such services and solutions, expand and scale them with sufficient speed and versatility, our growth, productivity objectives and profit margins could be negatively affected.
Technological developments may materially affect the cost and use of technology by our customers. Some of these technologies have reduced and replaced some of our traditional services and solutions and may continue to do so in the future. This has caused, and may in the future cause, customers to delay spending under existing contracts and engagements and to delay entering into new contracts while they evaluate new technologies. Such delays can negatively impact our results of operations if the pace and level of spending on new technologies by some of our customers is not sufficient to make up any shortfall. by other customers. Our growth strategy focuses on responding to these types of developments by driving innovation that will enable us to expand our business into new growth areas. If we do not sufficiently invest in new technology and adapt to industry developments, or evolve and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and successfully drive innovation, our services and solutions, our results of operations, and our ability to develop and maintain a competitive advantage and to execute on our growth strategy could be negatively affected.
Our ability to compete in certain markets we serve is dependent on our ability to continue to expand our capacity in certain offshore locations. However, as our presence in these locations increases, we are exposed to risks inherent to these locations which may adversely affect our revenue and profitability.
A significant portion of our application outsourcing and software development activities has been shifted to India and we plan to continue to expand our presence there and in other lower-cost locations. As a result, we are exposed to the risks inherent in operating in India or other locations, including (1) public health crisis such as the COVID-19 pandemic and government responses, (2) a highly competitive labor market for skilled workers which may result in significant increases in labor costs, as well as shortages of qualified workers in the future and (2)(3) the possibility that the U.S. Federal Government or the European Union may enact legislation that creates significant disincentives for customers to locate certain of their operations offshore, which would reduce the demand for the services we provide in such locations and may adversely impact our cost structure and profitability. In addition, India has experienced, and other countries may experience, political instability, civil unrest and hostilities with neighboring countries. Negative or uncertain political climates in countries or locations where we operate, such as Ukraine and Russia, including but not limited to, military activityactivities or civil hostilities, criminal activities and other acts of violence, infrastructure disruption, natural disasters or other conditions could adversely affect our operations.operations or cause us to exit certain markets.
On February 24, 2022, Russia invaded Ukraine. Although the length, impact and outcome of the ongoing military conflict in Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social instability, currency exchange limitations, export controls, changes in consumer or purchaser preferences as well as increase in cyberattacks and espionage. As a result of this war, some of our Ukraine team members have been forced to relocate to other countries and within Ukraine. As of March 31, 2022, we had more than 4,000 employees in Ukraine. We are closely monitoring the developing situation, are committed to caring for our colleagues in the region, and are adapting to developments as they occur to protect the safety of our people and handle potential impacts to our delivery resources, including relocating some of our employees and reallocating work to other geographies within our global footprint, which may increase our costs. The ongoing conflict could cause harm to our team members and otherwise impair their ability to work for extended periods of time, as well as disrupt telecommunications systems, banks and other critical infrastructure necessary to conduct business in Ukraine. In addition, the United States created two new regional embargoes targeting the non-Ukrainian government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine, the so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine. If large parts of Ukraine become the target of further U.S. or other applicable sanctions, we may be legally unable to do business or otherwise continue to operate in Ukraine. If these contingencies come to pass, our results of operations and cash flows may be adversely affected.
In response to Russian military actions in Ukraine, we have stopped pursuing business in Russia and we are committed to exit the Russian market. As of March 31, 2022, we had approximately 4,000 employees in Russia and sales into Russia represented approximately 1% of our consolidated revenues for the year ended March 31, 2022. We also have a back office, and a delivery center in Russia serving our international customers. In connection with our exit of the Russian market, we also expect to experience increased costs as we shift our operations and resources to other geographies, especially if we are not able to find alternate delivery resources to serve our international customers or achieve the same level of cost efficiencies. We may also experience increased costs in relation to the replacement of employees, severance payments, and termination of our leases. Disruption to our services in the region may also arise from the knock-on impact of the decisions of our customers or other companies that form part of our business ecosystem to withdraw or end their services in the region. In addition, sanctions and trade control measures implemented against Russia or certain Russian customers may have an impact on our ability to operate or to fulfill existing contracts as we wind down our business operations. Our ability to sell assets located in Russia may also be impacted by sanctions affecting potential purchasers. Governmental authorities in the U.S., the EU and the UK, among others, launched an expansion of coordinated sanctions and export control measures, including, among others, blocking and other sanctions against some of the largest state-owned and private Russian financial institutions (and their subsequent removal from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system) and certain Russian businesses, which may have a material impact on our ability to make and receive payments to/from our Russian business partners and customers. Any alleged or actual failure to comply with these measures as we extricate our business operations from Russia may subject us to government scrutiny, civil and/or criminal proceedings, sanctions and other liabilities, which may have a material adverse effect on our international operations, financial condition and results of operations. Actions taken by Russia in response to such sanctions could also have a material adverse effect on our operations. For example, in response to increased sanctions, Russia or another government could attempt to take control of assets in Russia or Ukraine of Western companies that are suspending or withdrawing their operations from Russia, such as DXC. Should our assets in the region be seized, there is no guarantee that we would be able to recover those assets in the future. Our Board has overall responsibility for oversight of risk at the Company and has been engaged and provided oversight for the Company's response to Russia's invasion of Ukraine, including the planned exit of Russia, our continuing compliance with sanctions, the relocation and support of our people in the affected countries and the other risks described above.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended ("FCPA") and similar anti-bribery laws in other jurisdictions. We pursue opportunities in certain parts of the world that experience government corruption and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our employees, partners, subcontractors, agents, and others to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our omissions, or due to the acts or omissions of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged violations of the FCPA or other anti-bribery violations is expensive and could consume significant time and attention of our senior management.
Failure to maintain 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.
We currently maintain investment grade credit ratings with Moody's Investors Service, Fitch Rating Services, and Standard & Poor's Ratings Services. Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may review the ratings assigned to us due to developments that are beyond our control, including potential new standards requiring the agencies to reassess rating practices and methodologies. Ratings agencies may consider changes in credit ratings based on changes in expectations about future profitability and cash flows even if short-term liquidity expectations are not negatively impacted. If changes in our credit ratings were to occur, it could result in higher interest costs under certain of our credit facilities. It would also cause our future borrowing costs to increase and limit our access to capital markets. For example, we currently fund a portion of our working capital requirements in the U.S. and European commercial paper markets. Any downgrade below our current rating would, absent changes to current market liquidity, substantially reduce or eliminate our ability to access that source of funding and could otherwise negatively impact the perception of our company by lenders and other third parties. In addition, certain of our major contracts provide customers with a right of termination in certain circumstances in the event of a rating downgrade below investment grade. There can be no assurance that we will be able to maintain our credit ratings, and any additional actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.
Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties. In addition, like many multinational regulated enterprises, our operations are subject to a variety of tax, foreign exchange and regulatory capital requirements in different jurisdictions that have the effect of limiting, delaying or increasing the cost of moving cash between jurisdictions or using our cash for certain purposes. Our ability to maintain sufficient liquidity going forward is subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control. An increase in our borrowing costs, limitations on our ability to access the global capital and credit markets or a reduction in our liquidity can adversely affect our financial condition and results of operations.
Information regarding our credit ratings is included in Part II, Item 7 of this Annual Report on Form 10-K under the caption "Liquidity and Capital Resources."
We have a substantial amount of indebtedness, which could have a material adverse effect on our business, financial condition and results of operations.
We have a significant amount of indebtedness totaling approximately $9.9$5.0 billion as of March 31, 20202022 (including capital lease obligations). We may incur substantial additional indebtedness in the future for many reasons, including to fund acquisitions. Our existing indebtedness, together with the incurrence of additional indebtedness and the restrictive covenants contained in, or expected to be contained in the documents evidencing such indebtedness, could have significant consequences on our future operations, including:
•events of default if we fail to comply with the financial and other covenants contained in the agreements governing our debt instruments, which could, if material and not cured, result in all of our debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;
•subjecting us to the risk of increased sensitivity to interest rate increases in our outstanding variable-rate
indebtedness that could cause our debt service obligations to increase significantly;
•increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs
and limit the future availability for debt financing;
•debt service may reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
•placing us at a competitive disadvantage compared to less leveraged competitors;
•increasing our vulnerability to the impact of adverse economic and industry conditions; and
•causing us to reduce or eliminate our return of cash to our stockholders, including via dividends and share repurchases.
In addition, we could be unable to refinance our outstanding indebtedness on reasonable terms or at all.
Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. There can be no assurance that our business will generate sufficient cash flow from operations, or that current or future borrowings will be sufficient to meet our current debt obligations and to fund other liquidity needs.
A substantial portion of our borrowing capacity bears interest at a variable rate based on the London Interbank Offered Rate ("LIBOR"). In July 2017,March 2021, the United Kingdom’sKingdom Financial Conduct Authority (“FCA”), which regulatesand the administrator of LIBOR announced that it intendsU.S. dollar LIBOR settings will cease to phase outbe provided or cease to be representative after June 30, 2023. The publication of all other LIBOR bysettings ceased to be provided or ceased to be representative as of December 31, 2021. In November 2020, U.S. banking agencies issued guidance encouraging banks to stop entering new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable but no later than December 31, 2021. As such, we have amended the endRevolving Credit Agreement and certain of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing LIBOR withour other financing agreements to allow us to reference the Secured Overnight Financing Rate ("SOFR"(“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities.
Certain of our financing agreements include language to determine a replacement rate for as the primary benchmark rate. Because SOFR is fundamentally different from LIBOR, if necessary. However, if LIBOR ceases to exist, we may need to renegotiate some financing agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, however, we are not able to predict whether LIBOR will cease to be available after 2021,it is unknown whether SOFR will becomeattain market acceptance as a widely accepted benchmark in place ofreplacement for LIBOR or what the impact of such a possible transitionand there is no assurance as to how SOFR may beperform or that it is a comparable substitute for LIBOR. As a result, we cannot reasonably predict the potential effect of the establishment of SOFR or other alternative reference rates on our business, financial condition andor results of operations.
Our primary markets are highly competitive. If we are unable to compete in these highly competitive markets, our results of operations may be materially and adversely affected.
Our competitors include large, technically competent and well capitalizedwell-capitalized companies, some of which have emerged as a result of industry consolidation, as well as “pure-play” companies that have a single product focus. This competition may place downward pressure on operating margins in our industry, particularly for technology outsourcing contract extensions or renewals. As a result, we may not be able to maintain our current operating margins, or achieve favorable operating margins, for technology outsourcing contracts extended or renewed in the future. If we fail to effectively reduce our cost structure during periods with declining margins, our results of operations may be adversely affected.
We encounter aggressive competition from numerous and varied competitors. Our competitiveness is based on factors including technology, innovation, performance, price, quality, reliability, brand, reputation, range of products and services, account relationships, customer training, service and support and security. If we are unable to compete based on such factors, we could lose customers or we may experience reduced profitability from our customers and our results of operations and business prospects could be harmed. We have a large portfolio of services and we need to allocate financial, personnel and other resources across all services while competing with companies that have smaller portfolios or specialize in one or more of our service lines. As a result, we may invest less in certain business areas than our competitors do, and competitors may have greater financial, technical and marketing resources available to them compared to the resources allocated to our services. Industry consolidation may also affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we operate. Additionally, competitors may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers.
Companies with whom we have alliances in certain areas may be or become competitors in other areas. In addition, companies with whom we have alliances also may acquire or form alliances with competitors, which could reduce their business with us. If we are unable to effectively manage these complicated relationships with alliance partners, our business and results of operations could be adversely affected.
We face aggressive price competition and may have to lower prices to stay competitive, while simultaneously seeking to maintain or improve revenue and gross margin. This price competition may continue to increase from emerging companies that sell products and services into the same markets in which we operate. In addition, competitors who have a greater presence in some of the lower-cost markets in which we compete, or who can obtain better pricing, more favorable contractual terms and conditions, may be able to offer lower prices than we are able to offer. If we experience pressure from competitors to lower our prices, we may have lower than expected profit margins and lost business opportunities if we are unable to match the price declines. Our cash flows, results of operations and financial condition may be adversely affected by these and other industry-wide pricing pressures.
If we are unable to accurately estimate the cost of services and the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected.
Our commercial contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the expected cost to provide the services. We generally provide services under time and materials contracts, unit price contracts, fixed-price contracts, and multiple-element software sales. We are dependent on our internal forecasts and predictions about our projects and the marketplace and, to generate an acceptable return on our investment in these contracts, we must be able to accurately estimate our costs to provide the services required by the contract and to complete the contracts in a timely manner. We face a number of risks when pricing our contracts, as many of our projects entail the coordination of operations and workforces in multiple locations and utilizing workforces with different skill sets and competencies across geographically diverse service locations. In addition, revenues from some of our contracts are recognized using the percentage-of-completion method, which requires estimates of total costs at completion, fees earned on the contract, or both. This estimation process, particularly due to the technical nature of the services being performed and the long-term nature of certain contracts, is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained, and additional information becomes known, even though the scope of the work required under the contract may not change. If we fail to accurately estimate our costs or the time required to complete a contract, the profitability of our contracts may be materially and adversely affected.
Some ITO services agreements contain pricing provisions that permit a clientcustomer to request a benchmark study by a mutually acceptable third party. The benchmarking process typically compares the contractual price of services against the price of similar services offered by other specified providers in a peer comparison group, subject to agreeduponagreed-upon adjustment, and normalization factors. Generally, if the benchmarking study shows that the pricing differs from the peer group outside a specified range, and the difference is not due to the unique requirements of the client,customer, then the parties will negotiate in good faith appropriate adjustments to the pricing. This may result in the reduction of rates for the benchmarked services performed after the implementation of those pricing adjustments, which could harm the financial performance of our services business.
Some IT service agreements require significant investment in the early stages that is expected to be recovered through billings over the life of the agreement. These agreements often involve the construction of new IT systems and communications networks and the development and deployment of new technologies. Substantial performance risk exists in each agreement with these characteristics, and some or all elements of service delivery under these agreements are dependent upon successful completion of the development, construction, and deployment phases. Failure to perform satisfactorily under these agreements may expose us to legal liability, result in the loss of customers or harm our reputation, which could harm the financial performance of our IT services business.
Performance under contracts, including those on which we have partnered with third parties, may be adversely affected if we or the third parties fail to deliver on commitments or if we incur legal liability in connection with providingotherwise breach obligations to our services and solutions.customers.
Our contracts are complex and, in some instances, may require that we partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' delivery schedules.schedules, which is affected by a multitude of factors, including climate change. If we or our partners fail to deliver services or products on time, our ability to complete the contract may be adversely affected. Additionally, our customers may perform audits or require us to perform audits and provide audit reports with respect to the controls and procedures that we use in the performance of services for such customers. Our ability to acquire new customers and retain existing customers may be adversely affected and our reputation could be harmed if we receive a qualified opinion, or if we cannot obtain an unqualified opinion in a timely manner, with respect to our controls and procedures in connection with any such audit. We could also incur liability if our controls and procedures, or the controls and procedures we manage for a customer, were to result in an internal control failure or impair our customer’s ability to comply with its own internal control requirements. If we or our partners fail to meet our contractual obligations or otherwise breach obligations to our customers, we could be subject to legal liability, which may have a material and adverse impact on our revenues and profitability.
Natural disasters may affect our worldwide business operations and financial results.
Climate change increases both the frequency and severity of natural disasters that may affect our worldwide business operations. We have facilities around the world and our facilities, our employees’ ability to work or our supply chain may be impacted by climate change-related weather events or effects, including natural disasters like hurricanes and storms, as well as sea level rise, drought, flooding, wildfires, temperature changes and more intense weather events. Increasing temperatures resulting from global warming could lead to increasing energy costs and unfavorable operating cost impacts, as well as extreme weather events that could cause loss of power to data centers and service disruptions, resulting in contractual fines or loss of business. Additionally, our customers’ facilities may be impacted by climate change-related weather events or effects, which may impact our ability to serve our customers. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.
Our ability to provide customers with competitive services is dependent on our ability to attract and retain qualified personnel.
Our ability to grow and provide our customers with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills necessary to serve our customers. The markets we serve are highly competitive and competition for skilled employees in the technology outsourcing, consulting, and systems integration and enterprise services markets is intense for both onshore and offshore locales. Immigration laws in the countries in which we operate are subject to legislative changes, as well as to variations in the standards of application and enforcement due to political forces and economic conditions. Changes in immigration laws or varying applications of immigration laws to limit the availability of certain work visas in the U.S. may impact our ability to hire talent that we need to enhance our products and services and for our operations. It is also difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our international personnel. The loss of personnel could impair our ability to perform under certain contracts, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Additionally, the inability to adequately develop and train personnel and assimilate key new hires or promoted employees could have a material adverse effect on relationships with third parties, our financial condition and results of operations and cash flows.
We also must manage leadership development and succession planning throughout our business. Any significant leadership change and accompanying senior management transition such as our recent change in Chief Executive Officer, Chief Human Resources Officer and the hiring of new leaders in key roles, involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning, execution and future performance. While we strive to mitigate the negative impact associated with changes to our senior management team, such changes may cause uncertainty among investors, employees, customers, creditors and others concerning our future direction and performance. If we fail to effectively manage our leadership changes, including ongoing organizational and strategic changes, our business, financial condition, results of operations, cash flows and reputation, as well as our ability to successfully attract, motivate and retain key employees, could be harmed.
In addition, uncertainty around future employment opportunities, facility locations, organizational and reporting structures, and other related concerns may impair our ability to attract and retain qualified personnel. If employee attrition is high, it may adversely impact our ability to realize the anticipated benefits of our strategic priorities.
If we do not hire, train, motivate, and effectively utilize employees with the right mix of skills and experience in the right geographic regions and for the right offerings to meet the needs of our clients,customers, our financial performance and cash flows could suffer. For example, if our employee utilization rate is too low, our profitability, and the level of engagement of our employees could decrease. If that utilization rate is too high, it could have an adverse effect on employee engagement and attrition and the quality of the work performed, as well as our ability to staff projects. If we are unable to hire and retain enough employees with the skills or backgrounds needed to meet current demand, we may need to redeploy existing personnel, increase our reliance on subcontractors or increase employee compensation levels, all of which could also negatively affect our profitability. In addition, if we have more employees than necessary with certain skill sets or in certain geographies, we may incur increased costs as we work to rebalance our supply of skills and resources with clientcustomer demand in those geographies.
Prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts could increase costs, have an adverse effect on general economic conditions and impact consumer budgeting, which could impact our profitability and have a material adverse effect on our business and results of operations.
We generally provide services under time and materials contracts, unit price contracts, fixed-price contracts, and multiple-element software sales. In many of our contracts, we bear the risk of cost overruns, completion delays, resource requirements, wage inflation and adverse movements in exchange rates in connection with these contracts. Certain, but not all, of these contracts provide for price adjustments for inflation or abnormal escalation. However, if one or more raw materials or components for our products (e.g., semiconductors) were to experience an isolated price increase without inflationary impacts on the broader economy, we may not be entitled to inflation protection under those contracts.
Additionally, inflation has risen worldwide and the United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, it can also push up the costs of labor and our employee compensation expenses. Moreover, the United States is experiencing a workforce shortage, which in turn, has created a hyper-competitive wage environment that may increase our operating costs. There is no assurance that our revenues will increase at the same rate to maintain the same level of profitability.
Inflation and government efforts to combat inflation, such as raising benchmark interest rate, could increase market volatility and have an adverse effect on the financial market and general economic conditions. In a time of uncertainty, our customers may have difficulty in budgeting for external IT services, delay procurement of products and services from us or delay their payment for products and services we have already provided, all of which could adversely affect our profitability, results of operations and cash flow.
Our international operations are exposed to risks, including fluctuations in exchange rates, which may be beyond our control.
Our exposure to currencies other than the U.S. dollar may impact our results, as they are expressed in U.S. dollars. Currency variations also contribute to variations in sales of products and services in affected jurisdictions. For example, in the event that one or more European countries were to replace the Euro with another currency, sales in that country or in Europe generally may be adversely affected until stable exchange rates are established. While historically we have partially mitigated currency risk, including exposure to fluctuations in currency exchange rates by matching costs with revenues in a given currency, our exposure to fluctuations in other currencies against the U.S. dollar increases, as revenue in currencies other than the U.S. dollar increases and as more of the services we provide are shifted to lower cost regions of the world. Approximately 63%71% of revenues earned during fiscal 20202022 were derived from sales denominated in currencies other than the U.S. dollar and are expected to continue to represent a significant portion of our revenues. Also, we believe that our ability to match revenues and expenses in a given currency will decrease as more work is performed at offshore locations.
We may use forward and option contracts to protect against currency exchange rate risks. The effectiveness of these hedges will depend on our ability to accurately forecast future cash flows, which may be particularly difficult during periods of uncertain demand and highly volatile exchange rates. We may incur significant losses from our hedging activities due to factors such as demand volatility and currency variations. In addition, certain or all of our hedging activities may be ineffective, may expire and not be renewed or may not offset the adverse financial impact resulting from currency variations. Losses associated with hedging activities may also impact our revenues and to a lesser extent our cost of sales and financial condition.
The U.K. withdrew from the European Union on January 31, 2020 (“Brexit”). In connection with Brexit, the U.K. and the European Union agreed on the Trade and Cooperation Agreement (“TCA”) that governs the future trading relationship between the U.K. and the European Union in specified areas. The TCA took effect on January 1, 2021. The U.K. is no longer in the European Union customs union and is outside of the European Union single market. The TCA addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the U.K. and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about whether the terms of the relationship will differ materially from the terms before withdrawal. Uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as new and proposed changes relating to Brexit affectingany potential impact on tax laws and trade policy in the U.S. and elsewhere may adversely impact our operations.
Our future business and financial performance could suffer due to a variety of international factors, including:
•ongoing instability or changes in a country’s or region’s economic or geopolitical and security conditions, including inflation, recession, interest rate fluctuations, and actual or anticipated military or political conflict, civil unrest, crime, political instability, human rights concerns, and terrorist activity;
•natural or man-made disasters, industrial accidents, public health issues, cybersecurity incidents, interruptions of service from utilities, transportation or telecommunications providers, or other catastrophic events;
•longer collection cycles and financial instability among customers;
•trade regulations and procedures and actions affecting production, pricing and marketing of products, including policies adopted by countries that may champion or otherwise favor domestic companies and technologies over foreign competitors;
•local labor conditions and regulations;
•managing our geographically dispersed workforce;
•changes in the international, national or local regulatory and legal environments;
•differing technology standards or customer requirements;
•difficulties associated with repatriating earnings generated or held abroad in a tax-efficient manner and
•changes in tax laws.
Our business operations are subject to various and changing federal, state, local and foreign laws and regulations that could result in costs or sanctions that adversely affect our business and results of operations. Social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands, may adversely affect our relationships with customers and investors.
We operate in approximately 70 countries in an increasingly complex regulatory environment. Among other things, we provide complex industry specific insurance processing in the United Kingdom,U.K., which is regulated by authorities in the United Kingdom.U.K. and elsewhere, such as the U.K.’s Financial Conduct Authority and Her Majesty’s Treasury and the U.S. Department of Treasury, which increases our exposure to compliance risk. For example, in February 2017, CSC submitted an initial notification of voluntary disclosure to the U.S. Department of Treasury's Office of Foreign Assets Control (“OFAC”) regarding certain possible violations of U.S. sanctions laws pertaining to insurance premium data and claims data processed by two partially-owned joint ventures of Xchanging, which CSC acquired during the first quarter of fiscal 2017. A copy of the disclosure was also provided to Her Majesty’s Treasury Office of Financial Sanctions Implementation in the United Kingdom. Our related internal investigation is continuing, and we have undertaken to cooperate with and provide a full report of our findings to OFAC when completed. Our retail investment account management business in Germany is another example of a regulated business, which must maintain a banking license, is regulated by the German Federal Financial Supervisory Authority and the European Central Bank and must comply with German banking laws and regulations.
In addition, businesses in the countries in which we operate are subject to local, legal and political environments and regulations including with respect to employment, tax, statutory supervision and reporting and trade restriction.restriction, along with industry regulations such as regulation by bank regulators in the U.S. and Europe. These regulations and environments are also subject to change.
Adjusting business operations to changing environments and regulations may be costly and could potentially render the particular business operations uneconomical, which may adversely affect our profitability or lead to a change in the business operations. Notwithstanding our best efforts, we may not be in compliance with all regulations in the countries in which we operate at all times and may be subject to sanctions, penalties or fines as a result. These sanctions, penalties or fines may materially and adversely impact our profitability.
Our operations are also subject to a broad array of domestic and international environmental, health, and safety laws and regulations, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the clean-up of contaminated sites. Environmental costs and accruals are presently not material to our operations, cash flows or financial position; and, we do not currently anticipate material capital expenditures for environmental control facilities. However, our failure to comply with these laws or regulations can result in civil, criminal or regulatory penalties, fines, and legal liabilities; suspension, delay or alterations of our operations; damage to our reputation; and restrictions on our operations or sales. Our business could also be affected if new environmental legislation is passed which impacts our current operations and business. For example, if we are unable to comply with fast-moving regulatory requirements, we could be disqualified from RFP processes, leading to a loss of sales. In addition, as climate change laws, regulations, treaties and national and global initiatives are adopted and implemented regionally or throughout the world, we may be required to comply or potentially face market access limitations, fines or reputational injury. Such laws, regulations, treaties or initiatives in response to climate change, including, but not limited to, the introduction of a carbon tax, could result in increased operational costs associated with air pollution requirements and increased compliance and energy costs, which could harm our business and results of operations by increasing our expenses or requiring us to alter our business operations. Moreover, we may experience loss of market share if we are unable to provide competitive products and services that incorporate climate-change mitigations, and if we are unable to achieve and sustain a carbon-neutral business model in a meaningful time frame, we could lose stockholder confidence, resulting in loss of business and loss of access to the financial markets.
We are also subject to risks associated with environmental, social and governance (“ESG”) regulations. Governmental bodies, investors, clients and businesses are increasingly focused on prioritizing ESG practices, which has resulted in and may in the future continue to result in the adoption of new laws and regulations. Our inability to keep pace with any ESG regulations, trends and developments or failure to meet the expectations, including, but not limited to, any expectations resulting from goals we have established, or interests of our clients and investors could adversely affect our business and reputation and could result in undesirable investor actions or customer or talent retention and attraction issues.
We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring may adversely affect our business.
Our Board of Directors has approvedWe have implemented several restructuring plans to realign our cost structure due to the changing nature of our business and to achieve operating efficiencies to reduce our costs. We may not be able to obtain the costs savings and benefits that were initially anticipated in connection with our restructuring plans. Additionally, as a result of our restructuring, we may experience a loss of continuity, loss of accumulated knowledge and/or inefficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees' time and focus, which may divert attention from operating and growing our business. There are also significant costs associated with restructuring which can have a significant impact on our earnings and cash flow. If we fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. For more information about our restructuring plans, see Note 2122 - "Restructuring Costs."Restructuring Costs".
In the course of providing services to customers, we may inadvertently infringe on the intellectual property rights of others and be exposed to claims for damages.
The solutions we provide to our customers may inadvertently infringe on the intellectual property rights of third parties, resulting in claims for damages against us or our customers. Our contracts generally indemnify our clientscustomers from claims for intellectual property infringement for the services and equipment we provide under the applicable contracts. We also indemnify certain vendors and customers against claims of intellectual property infringement made by third parties arising from the use by such vendors and customers of software products and services and certain other matters. Some of the applicable indemnification arrangements may not be subject to maximum loss clauses. The expense and time of defending against these claims may have a material and adverse impact on our profitability. If we lose our ability to continue using any such services and solutions because they are found to infringe the rights of others, we will need to obtain substitute solutions or seek alternative means of obtaining the technology necessary to continue to provide such services and solutions. Our inability to replace such solutions, or to replace such solutions in a timely or cost-effective manner, could materially adversely affect our results of operations. Additionally, the publicity resulting from infringing intellectual property rights may damage our reputation and adversely impact our ability to develop new business.
Our inability to procure third-party licenses required for the operation of our products and service offerings may result in decreased revenue or increased costs.
Many of our products and service offerings depends on the continued performance and availability of software licensed from third-party vendors under our contractual arrangements. Because of the nature of these licenses and arrangements, there can be no assurance that we would be able to retain all of these intellectual property rights upon renewal, expiration or termination of such licenses or that we will be able to procure, renew or extend such licenses on commercially reasonable terms which may result in increased costs. Certain of our licenses are concentrated in one or more third-party licensors where multiple licenses are up for renewal at the same time, which could decrease our ability to negotiate reasonable license fees and could result in our loss of rights under such licenses.
Disruption of our supply chain could adversely impact our business.
We are experiencing, and may continue to experience, delays and shortages of certain necessary components to the services and solutions we offer our clients resulting from issues with the global supply chain, the COVID-19 pandemic, the conflict between Russia and Ukraine, and any disruptions at our suppliers. This shortage may increase component delivery lead times and costs to source available components and delay the delivery of our hardware products and services, which may adversely affect our ability to comply with our contracts and our ability to support our existing customers and our growth through sales to new customers. In the event of a component shortage or interruptions at a supplier, we may not be able to develop alternate sources quickly, cost effectively, or at all. Supply chain interruptions could harm our relationships with our customers, prevent us from acquiring new customers, and materially and adversely affect our business.
We may be exposed to negative publicity and other potential risks if we are unable to achieve and maintain effective internal controls over financial reporting.
The Sarbanes-Oxley Act of 2002 and the related regulations require our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There can be no assurance that all control issues or fraud will be detected. As we continue to grow our business, our internal controls continue to become more complex and require more resources.
Any failure to maintain effective controls could prevent us from timely and reliably reporting financial results and may harm our operating results. In addition, if we are unable to conclude that we have effective internal control over financial reporting or, if our independent registered public accounting firm is unable to provide an unqualified report as to the effectiveness of our internal control over financial reporting, as of each fiscal year end, we may be exposed to negative publicity, which could cause investors to lose confidence in our reported financial information. Any failure to maintain effective internal controls and any such resulting negative publicity may negatively affect our business and stock price.
Additionally, the existence of any material weaknesses or significant deficiencies would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, subject us to litigation or regulatory scrutiny and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us and the market price of our common stock.
We have identified a material weakness in our internal control over financial reporting. Without effective internal control over financial reporting, we may fail to detect or prevent a material misstatement in our financial statements, which could materially harm our business, our reputation and our stock price.
While we have not identified any material misstatements in our previously reported consolidated financial statements, During the third quarter of fiscal 2020, our management identified a material weakness in our internal control over financial reporting as of December 31, 2019. See "Item 9A. Controls2019 related to reassessing policies and Procedures." Without effective internal control over financial reporting, we may failprocedures to detect or prevent a material misstatement in our financial statements. In that event, we may be required to restate our financial statements. A restatement or an unremediateddetermine their continued relevance, as impacted by complex transactions and processes. Although this material weakness could result in a losswas remediated during the fourth quarter of confidence in us by our investors, customers, regulators and/or counterparties. In addition, iffiscal 2022, we are unable to promptly remediate thecannot assure you that we will not identify another material weakness identified above, or if we were to conclude in the future that we have one or more additional weaknesses, our investors, regulators, customers and/or counterparties may lose confidence in our reported financial information. Additionally, management may be required to devote significant time and incur significant expense to remediate the material weakness, and management may not be able to complete such remediation in a timely manner. Any of the foregoing could materially harm our business, our reputation and the market price of our common stock.future.
We could suffer additional losses due to asset impairment charges.
We acquired substantial goodwill and other intangibles as a result of the HPES Merger and the Luxoft Acquisition, increasing our exposure to this risk. We test our goodwill for impairment during the second quarter of every year and on an interim date should events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the fair value of a reporting unit is revised downward due to declines in business performance or other factors or if the Company suffers further declines in share price, an impairment could result and a non-cash charge could be required. We test intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This assessment of the recoverability of finite-lived intangible assets could result in an impairment and a non-cash charge could be required. For example, during fiscal 2020, we recorded non-cash goodwill impairment charges of $6,794 million which is discussed in Note 11 - "Goodwill." We also test certain equipment and deferred cost balances associated with contracts when the contract is materially underperforming or is expected to materially underperform in the future, as compared to the original bid model or budget. If the projected cash flows of a particular contract are not adequate to recover the unamortized cost balance of the asset group, the balance is adjusted in the tested period based on the contract's fair value. Either of these impairments could materially affect our reported net earnings.
We may not be able to pay dividends or repurchase shares of our common stock in accordance with our announced intent or at all.
On April 3, 2017, we announced the establishment of a share repurchase plan approved by the Board of Directors with an initial authorization of up to $2.0 billion for future repurchases of outstanding shares of our common stock. On November 8, 2018, DXC announced that its Board of Directors approved an incremental $2.0 billion share repurchase authorization. Starting fiscal 2018,On February 2, 2022, we announced our intention to repurchase incrementally up to $1.0 billion of our outstanding shares of common stock in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. However, we are not obligated to make any purchases of our shares, and our decision to repurchase our shares, as well as the timing of such repurchases, will depend on a variety of factors as determined by our management and Board of Directors.
In addition, while we paid quarterly cash dividends to our stockholders starting fiscal 2018 in accordance with our announced dividend policy. Wepolicy, we suspended the payment of quarterly dividends starting in fiscal 2021 to enhance our financial flexibility. At this time, we do not intend to continue to pay areinstate our quarterly cash dividend during fiscal 2021 but thedividends. The declaration and payment of future dividends, the amount of any such dividends, and the establishment of record and payment dates for dividends, if any, are subject to final determination by our Board of Directors after review of our current strategy and financial performance and position, among other things.
The Board of Directors’ determinations regarding dividends and share repurchases will depend on a variety of factors, including net income, cash flow generated from operations, amount and location of our cash and investment balances, overall liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results. There can be no guarantee that we will achieve our financial goals in the amounts or within the expected time frame, or at all. Our ability to declare future dividends or repurchase shares will depend on our future financial performance, which in turn depends on the successful implementation of our strategy and on financial, competitive, regulatory and other factors, general economic conditions, demand and prices for our services and other factors specific to our industry or specific projects, many of which are beyond our control. Therefore, our ability to generate cash flow depends on the performance of our operations and could be limited by decreases in our profitability or increases in costs, regulatory changes, capital expenditures or debt servicing requirements.
Any failure to achieve our financial goals could negatively impact our reputation, harm investor confidence in us, and cause the market price of our common stock to decline.
We are defendants in pending litigation that may have a material and adverse impact on our profitability and liquidity.
As noted in Note 2223 - "Commitments"Commitments and Contingencies,", we are currently party to a number of disputes that involve or may involve litigation or arbitration, including a securities class action and other lawsuitslitigation in which we and certain of our current or former officers and directors have been named as defendants. The result of these lawsuits and any other future legal proceedings cannot be predicted with certainty. Regardless of their subject matter or merits, such legal proceedings may result in significant cost to us, including in the form of legal fees and/or damages, which may not be covered by insurance, may divert the attention of management or may otherwise have an adverse effect on our business, financial condition and results of operations. Negative publicity from litigation, whether or not resulting in a substantial cost, could materially damage our reputation and could have a material adverse effect on our business, financial condition, results of operations, and the price of our common stock. In addition, such legal proceedings may make it more difficult to finance our operations.
We are also subject to continuous examinations of our income tax returns by tax authorities. Although we believe our tax estimates are reasonable, the final results of any tax examination or related litigation could be materially different from our related historical income tax provisions and accruals. Adverse developments in an audit, examination or litigation related to previously filed tax returns, or in the relevant jurisdiction’s tax laws, regulations, administrative practices, principles and interpretations could have a material effect on our results of operations and cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. For more details, including on current tax examinations of our income tax returns by tax authorities, see Note 13 – “Income Taxes.”
We may be adversely affected by disruptions in the credit markets, including disruptions that reduce our customers' access to credit and increase the costs to our customers of obtaining credit.
The credit markets have historically been volatile and therefore it is not possible to predict the ability of our clients and customers to access short-term financing and other forms of capital. If a disruption in the credit markets were to occur, it could pose a risk to our business if customers or suppliers are unable to obtain financing to meet payment or delivery obligations to us. In the event that one or more customers or suppliers' defaults on its payment or delivery obligations, we could incur significant losses, which may harm our business, reputation, results of operations, cash flows and financial condition. In addition, customers may decide to downsize, defer or cancel contracts which could negatively affect our revenues.
Further, as of March 31, 2020,2022, we have $5.2$0.4 billion of floating interest rate debt. Accordingly, a spike in interest rates could adversely affect our results of operations and cash flows.
Our hedging program is subject to counterparty default risk.
We enter into foreign currency forward contracts and interest rate swaps with a number of counterparties. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults on its performance under the contract. During an economic downturn, the counterparty's financial condition may deteriorate rapidly and with little notice and we may be unable to take action to protect our exposure. In the event of a counterparty default, we could incur significant losses, which may harm our business and financial condition. In the event that one or more of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty.
We derive significant revenues and profit from contracts awarded through competitive bidding processes, which can impose substantial costs on us and we may not achieve revenue and profit objectives if we fail to bid on these projects effectively.
We derive significant revenues and profit from government contracts that are awarded through competitive bidding processes. We expect that most of the non-U.S. government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding is expensive and presents a number of risks, including:
•the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us;
•the need to estimate accurately the resources and costs that will be required to service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design;
•the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding;
•the requirement to resubmit bids protested by our competitors and in the termination, reduction, or modification of the awarded contracts; and
•the opportunity cost of not bidding on and winning other contracts we might otherwise pursue.
If our customers experience financial difficulties, we may not be able to collect our receivables, which would materially and adversely affect our profitability and cash flows from operations.
Over the course of a contract term, a customer's financial condition may decline and limit its ability to pay its obligations. This could cause our cash collections to decrease and bad debt expense to increase. While we may resort to alternative methods to pursue claims or collect receivables, these methods are expensive and time consuming and successful collection is not guaranteed. Failure to collect our receivables or prevail on claims would have an adverse effect on our profitability and cash flows.
If we are unable to maintain and grow our customer relationships over time, our operating results and cash flows will suffer. Failure to comply with customer contracts or government contracting regulations or requirements could adversely affect our business, results of operations and cash flows.
We devote significant resources to establish relationships with our customers and implement our offerings and related services, particularly in the case of large enterprises that often request or require specific features or functions specific to their particular business profile. Accordingly, our operating results of operations depend in substantial part on our ability to deliver a successful customer experience and persuade customers to maintain and grow ourtheir relationship with us over time. If we are not successful in implementing an offering or delivering a successful customer experience, including achieving cost and staffing levels that meet our customers’ expectations, customers could terminate or elect not to renew their agreements with us and our operating results may suffer.
Contracts with customers may include unique and specialized performance requirements. In particular, our contracts with federal, state, provincial, and local governmental customers are generally subject to various procurement regulations, contract provisions, and other requirements relating to their formation, administration, and performance, including the maintenance of necessary security clearances. Contracts with U.S. government agencies are also subject to audits and investigations, which may include a review of performance on contracts, pricing practices, cost structure, and compliance with applicable laws and regulations.
Any failure on our part to comply with the specific provisions in customer contracts or any violation of government contracting regulations or other requirements could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments, and, in the case of government contracts, fines and suspension from future government contracting. Such failures could also cause reputational damage to our business. In addition, we may be subject to qui tam litigation brought by private individuals on behalf of the government relating to government contracts, which could include claims for treble damages. Further, any negative publicity with respect to customer contracts or any related proceedings, regardless of accuracy, may damage our business by harming our ability to compete for new contracts.
Contracts with the U.S. federal government and related agencies are also subject to issues with respect to federal budgetary and spending limits or matters. Any changes to the fiscal policies of the U.S. federal government may decrease overall government funding, result in delays in the procurement of products and services due to lack of funding, cause the U.S. federal government and government agencies to reduce their purchases under existing contracts, or cause them to exercise their rights to terminate contracts at willat-will or to abstain from exercising options to renew contracts, any of which would have an adverse effect on our business, financial condition, results of operations and/or cash flows.
If our customer contracts are terminated, if we are suspended or disbarred from government work, or our ability to compete for new contracts is adversely affected, our financial performance could suffer.
RecentOur strategic transactions may prove unsuccessful and our profitability may be materially and adversely affected.
At any given time, we may be engaged in discussions or negotiations with respect to one or more transactions, including acquisitions, divestitures or spin-offs, strategic partnerships or other transaction involving one or more of our businesses. Any of these transactions could be material to our business, financial condition, results of operations and cash flows. We may ultimately determine not to proceed with any transaction for commercial, financial, strategic or other reasons. As a result, we may not realize benefits expected from exploring one or more strategic transactions, may realize benefits further in the future or those benefits may ultimately be significantly smaller than anticipated, which could adversely affect our business, financial condition, results of operations and cash flows.
In addition, we may fail to complete transactions. Closing transactions is subject to uncertainties and risks, including the risk that we may be unable to satisfy conditions to closing, such as regulatory and financing conditions and the absence of material adverse changes to our business.
For acquisitions, our inability to successfully integrate the operations we acquire and leverage these operations to generate substantial cost savings, as well as our inability to avoid revenue erosion and earnings decline, could have a material adverse effect on our results of operations, cash flows and financial position. In order to achieve successful acquisitions, we will need to:
•integrate the operations and business cultures, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems, of acquired businesses with existing operations and systems;
•maintain third-party relationships previously established by acquired companies;
•attract and retain senior management and key personnel at acquired businesses; and
•manage new business lines, as well as acquisition-related workload.
Existing contractual restrictions may limit our ability to engage in certain integration activities for varying periods. We may not be successful in meeting these or any other challenges encountered in connection with historical and future acquisitions. Even if we successfully integrate, we cannot predict with certainty if or when these cost and revenue synergies, growth opportunities and benefits will occur, or the extent to which they actually will be achieved. In addition, the quantification of previously announced synergies expected to result from an acquisition is based on significant estimates and assumptions that are subjective in nature and inherently uncertain. Realization of any benefits and synergies could be affected by a number of factors beyond our control, including, without limitation, general economic conditions, increased operating costs, regulatory developments and other risks. In addition, future acquisitions could require dilutive issuances of equity securities and/or the assumption of contingent liabilities. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.
Divestiture transactions also involve significant challenges and risks, including:
•the potential loss of key customers, suppliers, vendors and other key business partners;
•declining employee morale and retention issues affecting employees, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or perceived expectations;
•difficulty making new and strategic hires of new employees;
•diversion of management time and a shift of focus from operating the businesses to transaction execution considerations;
•customers delaying or deferring decisions or ending their relationships;
•the need to provide transition services, which may result in stranded costs and the diversion of resources and focus;
•the need to separate operations, systems (including accounting, management, information, human resource and other administrative systems), technologies, products and personnel, which is an inherently risky and potentially lengthy and costly process;
•the inefficiencies and lack of control that may result if such separation is delayed or not implemented effectively, and unforeseen difficulties and expenditures that may arise as a result including potentially significant stranded costs;
•our desire to maintain an investment grade credit rating may cause us to use cash proceeds, if any, from any divestitures or other strategic transactions that we might otherwise have used for other purposes in order to reduce our financial leverage;
•the inability to obtain necessary regulatory approvals or otherwise satisfy conditions required in order consummate any such transactions;
•our dependence on accounting, financial reporting, operating metrics and similar systems, controls and processes of divested businesses could lead to challenges in preparing our consolidated financial statements or maintaining effective financial control over financial reporting; and
•contractual terms limiting our ability to compete for or perform certain contracts or services.
We have also entered into and intend to identify and enter into additional strategic partnerships with other industry participants that will allow us to expand our business. However, we may be unable to identify attractive strategic partnership candidates or complete these partnerships on terms favorable to us. In addition, if we are unable to successfully implement our partnership strategies or our strategic partners do not fulfill their obligations or otherwise prove disadvantageous to our business, our investments in these partnerships and our anticipated business expansion could be adversely affected.
Changes in U.S. tax legislation may materially affect our financial condition, results of operations and cash flows.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, adopting elements of a territorial tax system, imposing a one-time transition tax (or “repatriation tax”) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, revising the rules governing net operating losses and the rules governing foreign tax credits, and introducing new anti-base erosion provisions.provisions and the ability to expense research and experimentation costs. Many of these changes were effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Department of the Treasury and Internal Revenue Service ("IRS"), any of which could lessen or increase certain impacts of the legislation. In addition, state and local jurisdictions continue to issue guidance on how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While our analysis and interpretation of this legislation is ongoing, based on our current evaluation, we recorded a provisional reduction of our deferred income tax liabilities resulting in a material non-cash benefit to earnings during fiscal 2018, the period in which the tax legislation was enacted, which was adjusted in fiscal 2019. Additionally, theThe repatriation tax resulted in a material amount of additional U.S. tax liability, the majority of which was reflected as an income tax expense in fiscal 2018, when the tax legislation was enacted, despite the fact that the resulting tax may be paid over eight years. Further, there may be other material adverse effects resulting from future guidance, including technical corrections.
In addition, on March 27, 2020,January 2022, the Coronavirus Aid, Relief,U.S. Treasury published final foreign tax credit regulations which included provisions that are applicable to fiscal 2022, prior and Economic Security Act (“CARES Act”) was enacted in respect to the recent outbreak of COVID-19.future years. The CARES Act,final regulations, among other things, includes provisions relatingprovide guidance regarding whether certain foreign taxes qualify for U.S. foreign tax credit purposes and how foreign taxes are apportioned for purposes of computing the U.S. foreign tax credit. We have considered the impact of the new regulations in our fiscal 2022 income tax provision and evaluated the impact on prior years, noting no significant impact to refundable payrollprior year's income tax credits,provisions. In addition, the ability2017 Tax Cuts & Jobs Act (TCJA) contained a provision that requires taxpayers to utilizecapitalize research and carryback certain net operating losses, alternative minimumdevelopment costs effective for tax refundsyears beginning after December 31, 2021, which will be applicable the Company for FY23 and modifications to rules regarding the deductibility of net interest expense.subsequent years.
While some of the changes made by recent tax legislation may be beneficial to the Company in one or more reporting periods and prospectively, other changes may be adverse on a going forward basis. We continue to work with our tax advisors to determine the full impact that recent tax legislation as a whole will have on us. Further, there may be other material adverse effects resulting from future guidance, including technical corrections.
Changes in our tax rates, tax laws and the outcome of tax examinations could affect our future results.
Our future effective tax rates, could be affectedwhich are largely driven by changes in the mix of our global earnings in countries withand the differing statutory tax rates in the jurisdictions where we operate, are subject to change as a result of changes in statutory tax rates enacted in those jurisdictions, or by changes in the valuation of deferred tax assets and liabilities, or by changes in tax laws or their interpretation. We are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our financial condition and operating results.
Risks Related to the HPES Mergerour Completed Strategic Transactions
We may not realize the anticipated benefits from the HPES Merger.
There can be no assurance that we will be able to realize the intended benefits of the HPES Merger or that we will perform as anticipated.
Our success in realizing cost and revenues synergies, growth opportunities, and other financial and operating benefits as a result of the HPES Merger, and the timing of this realization, depends on the successful integration of our business operations. Even if we successfully integrate, we cannot predict with certainty if or when these cost and revenue synergies, growth opportunities and benefits will occur, or the extent to which they actually will be achieved. In addition, the quantification of previously announced synergies expected to result from the HPES Merger is based on significant estimates and assumptions that are subjective in nature and inherently uncertain. Realization of any benefits and synergies could be affected by a number of factors beyond our control, including, without limitation, general economic conditions, increased operating costs, regulatory developments and other risks. The amount of synergies actually realized, if any, and the time periods in which any such synergies are realized, could differ materially from the expected synergies, regardless of whether the two business operations are combined successfully. If the integration is unsuccessful or if we are unable to realize the anticipated synergies and other benefits of the HPES Merger, there could be a material adverse effect on our business, financial condition and results of operations.
The integration following the HPES Merger may continue to present significant challenges.
There is a significant degree of difficulty inherent in the process of integrating HPES and CSC. These difficulties include:
integration activities while carrying on ongoing operations;
the challenge of integrating the business cultures of HPES and CSC;
the challenge and cost of integrating certain IT systems and other systems; and
the potential difficulty in retaining key officers and other personnel.
The ongoing process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our businesses. Members of senior management may be required to devote considerable amounts of time to this integration process, which would decrease the time they have to manage our business, service existing businesses and develop new services or strategies. In addition, certain existing contractual restrictions limit the ability to engage in certain integration activities for varying periods after the HPES Merger. There is no assurance we will be able to continue to manage this integration to the extent or in the time horizon anticipated, particularly given the larger scale of the HPES business in comparison to CSC's business. If senior management is not able to timely and effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. The delay or inability to achieve anticipated integration goals could have a material adverse effect on our business, financial condition and results of operations after the HPES Merger.
We could have an indemnification obligation to HPE if the stock distribution in connection with the HPES business separation (the "Distribution") were determined not to qualify for tax-free treatment, which could materially adversely affect our financial condition.
If, due to any of our representations being untrue or our covenants being breached, the Distribution was determined not to qualify for tax-free treatment under Section 355 of the Internal Revenue Code (the "Code"), HPE would generally be subject to tax as if it sold the DXC common stock in a taxable transaction, which could result in a material tax liability. In addition, each HPE stockholder who received DXC common stock in the Distribution would generally be treated as receiving a taxable Distribution in an amount equal to the fair market value of the DXC common stock received by the stockholder in the Distribution.
Under the Tax Matters Agreement,tax matters agreement that we entered into with HPE in connection with the HPES Merger, we were required to indemnify HPE against taxes resulting from the Distribution or certain aspects of the HPES Merger arising as a result of an Everett Tainting Act (as defined in the Tax Matters Agreement). If we were required to indemnify HPE for taxes resulting from an Everett Tainting Act, that indemnification obligation would likely be substantial and could materially adversely affect our financial condition.
If the HPES Merger does not qualify as a reorganization under Section 368(a) of the Code, CSC's former stockholders may incur significant tax liabilities.
The completion of the HPES Merger was conditioned upon the receipt by HPE and CSC of opinions of counsel to the effect that, for U.S. federal income tax purposes, the HPES Merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code (the "HPES Merger Tax Opinions"). The parties did not seek a ruling from the IRS regarding such qualification. The HPES Merger Tax Opinions were based on current law and relied upon various factual representations and assumptions, as well as certain undertakings made by HPE, HPES and CSC. If any of those representations or assumptions is untrue or incomplete in any material respect or any of those undertakings is not complied with, or if the facts upon which the HPES Merger Tax Opinions are based are materially different from the actual facts that existed at the time of the HPES Merger, the conclusions reached in the HPES Merger Tax Opinions could be adversely affected and the HPES Merger may not qualify for tax-free treatment. Opinions of counsel are not binding on the IRS or the courts. No assurance can be given that the IRS will not challenge the conclusions set forth in the HPES Merger Tax Opinions or that a court would not sustain such a challenge. If the HPES Merger were determined to be taxable, previous holders of CSC common stock would be considered to have made a taxable disposition of their shares to HPES, and such stockholders would generally recognize taxable gain or loss on their receipt of HPES common stock in the HPES Merger.
We assumed certain material pension benefit obligations in connection with the HPES Merger. These liabilities and the related future funding obligations could restrict our cash available for operations, capital expenditures and other requirements, and may materially adversely affect our financial condition and liquidity.
Pursuant to the Employee Matters Agreement entered into in connection with the HPES Merger, while HPE retained all U.S. defined benefit pension plan liabilities, DXC retained all liabilities relating to the International Retirement Guarantee (“IRG”) programs for all HPES employees. The IRG is a non-qualified retirement plan for employees who transfer internationally at the request of the HPE Group. The IRG determines the country of guarantee, which is generally the country in which an employee has spent the longest portion of his or her career with the HPE Group, and the present value of a full career benefit for the employee under the HPE defined benefit pension plan and social security or social insurance system in the country of guarantee. The IRG then offsets the present value of the retirement benefits from plans and social insurance systems in the countries in which the employee earned retirement benefits for his or her total period of HPE Group employment. The net benefit value is payable as a single sum as soon as practicable after termination or retirement. This liability could restrict cash available for our operations, capital expenditures and other requirements, and may materially affect our financial condition and liquidity.
In addition, pursuant to the Employee Matters Agreement, DXC assumed certain other defined benefit pension liabilities in a number of non-U.S. countries (including the United Kingdom,U.K., Germany and Switzerland). Unless otherwise agreed or required by local law, where a defined benefit pension plan was maintained solely by a member of the HPES business, DXC assumed all assets and liabilities arising out of those non-U.S. defined benefit pension plans, and where a defined benefit pension plan was not maintained solely by a member of the HPES business, DXC assumed all assets and liabilities for those eligible HPES employees in connection with the HPES Merger. These liabilities and the related future payment obligations could restrict cash available for our operations, capital expenditures and other requirements, and may materially affect our financial condition and liquidity.
Risks Related to the Luxoft Acquisition
The Luxoft Acquisition may result in disruptions to relationships with customers and other business partners.
This transaction could cause disruptions in our business and the Luxoft business, including by disrupting operations or causing customers to delay or to defer decisions or to end their relationships, or otherwise limiting the ability to compete for or perform certain contracts or services. If we and Luxoft face difficulties in integrating our businesses, or the Luxoft business faces difficulties in its business generally, the Luxoft Acquisition may not achieve the intended results.
Further, it is possible that current or prospective employees of our business and the Luxoft business could experience uncertainty about their future roles with the combined company, which could harm our ability to attract and retain key personnel. Any of the foregoing could adversely affect our business, financial condition and results of operations.
The actions required to implement the Luxoft Acquisition will take management time and attention and may require us to incur additional costs.
The Luxoft Acquisition will require management's time and resources, which will be in addition to, and may divert from, management's time and attention to the operation of our existing businesses and the execution of our other strategic initiatives. Additionally, we may incur additional costs in connection with the Luxoft Acquisition beyond those that are currently anticipated.
Risks Related to Previous Spin-Offs
The USPS Separation and Mergers and NPS Separation could result in substantial tax liability to DXC and our stockholders.
Among the closing conditions to completing the USPS Separation and Mergers, we received a legal opinion of tax counsel substantially to the effect that, for U.S. federal income tax purposes: (i) the USPS Separation qualifies as a “reorganization” within the meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) each of DXC and Perspecta is a “party to a reorganization” within the meaning of Section 368(b) of the Code with respect to the USPS Separation; (iii) the DistributionUSPS distribution qualifies as (1) a tax-free spin-off, resulting in nonrecognition under Sections 355(a), 361 and 368(a) of the Code, and (2) a transaction in which the stock distributed thereby should constitute “qualified property” for purposes of Sections 355(d), 355(e) and 361(c) of the Code; and (iv) none of the Mergersrelated mergers causes Section 355(e) of the Code to apply to the Distribution.USPS distribution. If, notwithstanding the conclusions expressed in these opinions, the USPS Separation and Mergers were determined to be taxable, DXC and its stockholders could incur significant tax liabilities.
In addition, prior to the HPES Merger, CSC spun off its North American Public Sector business ("NPS") on November 27, 2015 (the "NPS Separation"). In connection with the NPS Separation, CSC received an opinion of counsel substantially to the effect that, for U.S. federal income tax purposes, the NPS Separation qualified as a tax-free transaction to CSC and holders of CSC common stock under Section 355 and related provisions of the Code. The completion of the HPES Merger was conditioned upon the receipt of CSC of an opinion of counsel to the effect that the HPES Merger should not cause Section 355(e) of the Code to apply to the NPS Separation or otherwise affect the qualification of the NPS Separation as a tax-free distribution under Section 355 of the Code. If, notwithstanding the conclusions expressed in these opinions, the NPS Separation were determined to be taxable, CSC and CSC stockholders that received CSRA IncInc. ("CSRA") stock in the NPS Separation could incur significant tax liabilities.
The opinions of counsel we received were based on, among other things, various factual representations and assumptions, as well as certain undertakings made by DXC, Perspecta and CSRA. If any of those representations or assumptions is untrue or incomplete in any material respect or any of those undertakings is not complied with, the conclusions reached in the opinion could be adversely affected and the USPS Separation or the NPS Separation may not qualify for tax-free treatment. Furthermore, an opinion of counsel is not binding on the IRS or the courts. Accordingly, no assurance can be given that the IRS will not challenge the conclusions set forth in the opinions or that a court would not sustain such a challenge. If, notwithstanding our receipt of the opinions, the USPS Separation or NPS Separation is determined to be taxable, we would recognize taxable gain as if we had sold the shares of Perspecta or CSRA in a taxable sale for its fair market value, which could result in a substantial tax liability. In addition, if the USPS Separation or NPS Separation is determined to be taxable, each holder of our common stock who received shares of Perspecta or CSRA would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares received, which could materially increase such holder’s tax liability.
Additionally, even if the USPS Separation otherwise qualifies as a tax-free transaction, the DistributionUSPS distribution could be taxable to us (but not to our shareholders) in certain circumstances if future significant acquisitions of our stock or the stock of Perspecta are deemed to be part of a plan or series of related transactions that includes the Distribution.USPS distribution. In this event, the resulting tax liability could be substantial. In connection with the USPS Separation, we entered into a tax matters agreement with Perspecta, under which it agreed not to undertake any transaction without our consent that could reasonably be expected to cause the USPS Separation to be taxable to us and to indemnify us for any tax liabilities resulting from such transactions. These obligations and potential tax liabilities could be substantial.
Risks Related to the proposed sale of the U.S. State and Local Health and Human Services Business to Veritas Capital
The HHS Sale is contingent upon the satisfaction of a number of conditions, and the transaction may not be consummated on the terms or timeline currently contemplated, or at all.
On March 9, 2020, we entered into a Purchase Agreement with Milano Acquisition Corp. (“Milano”), a corporation affiliated with Veritas Capital Fund Management, L.L.C. We currently expect that the transaction, if completed, will occur by the December 31, 2020. Pursuant to the Purchase Agreement, Milano will acquire DXC’s U.S. State and Local Health and Human Services Business for total cash consideration of $5.0 billion (the “HHS Sale”). We expect to use the after-tax proceeds from the HHS Sale to repay outstanding indebtedness.
The consummation of the HHS Sale is subject to certain conditions, including (i) expiration or termination of any required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (ii) the absence of any injunction or other order from a governmental authority that prevents the closing of the HHS Sale, and (iii) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, the other party. In addition, the closing of the HHS Sale is subject to certain conditions for the benefit of Milano, including (a) the absence of a material adverse effect on the HHS Business or the ability of DXC to consummate the HHS Sale and (b) HHS customer contracts that generated 87.5% or more of the aggregate revenue for all HHS customer contracts for the nine month period ending December 31, 2019 are able to be conveyed at the closing of the HHS Sale without receipt of additional customer consents. For these and other reasons, the HHS Sale may not be completed by the end of December 31, 2020 or otherwise on the terms or timeline contemplated, if at all. In the event that the HHS Sale is not completed, we will not be able to use the after-tax sale proceeds to repay outstanding indebtedness, which would have an adverse effect on our business, financial condition, results of operations and/or cash flows.
The proposed transaction may result in disruptions to relationships with customers and other business partners or may not achieve the intended results.
If we complete the proposed HHS Sale, there can be no assurance that we will be able to realize the intended benefits of the transaction. Specifically, the proposed HHS Sale could cause disruptions in our remaining businesses, including by disrupting operations or causing customers to delay or to defer decisions or to end their relationships, or otherwise limiting the ability to compete for or perform certain contracts or services. Any of the foregoing could adversely affect our remaining businesses, the financial condition of such businesses and their results of operations and prospects. The HHS business is accounted for as part of the GBS segment.
The actions required to implement the HHS Sale will take significant management time and attention and will require us to incur significant costs.
The HHS Sale will require significant amounts of management’s time and resources, which will be in addition to and may divert management’s time and attention from the operation of our remaining businesses and the execution of our other strategic initiatives. Additionally, we will incur costs in connection with the HHS Sale. These costs must be paid regardless of whether the HHS Sale is consummated.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters areis located at a leased facility in Tysons,Ashburn, VA. We own or lease numerous general office facilities, global security operations centers, strategic delivery centersoffices and data centers with approximately 400 locations around the world. We do not identify properties by segment, as they are interchangeable in nature and used by multipleboth segments.
During fiscal 2020, fiscal 2019, and fiscal 2018, we initiated facilities rationalization programsWe continue to reduce our space capacity at low utilization and sub-scale locations, increase co-location,exit co-locations, align locations by skill type and optimize our data center footprint. At a number of the locations described below, we are not currently occupying all of the space under our control. Where commercially reasonable and to the extent it is not needed for future expansion, we seek to sell, lease or sublease thisour excess space.
The following tables providetable provides a summary of properties we ownowned and leaseleased as of March 31, 2020:2022:
|
| | | | | | | | | | | | |
Geographic Area | | | | Approximate Square Footage (in thousands) |
| Number of Locations | | Owned | | Leased | | Total |
United States | | 126 |
| | 4,714 |
| | 3,064 |
| | 7,778 |
|
India | | 26 |
| | 760 |
| | 3,748 |
| | 4,508 |
|
United Kingdom | | 71 |
| | 1,357 |
| | 1,756 |
| | 3,113 |
|
France | | 31 |
| | 921 |
| | 195 |
| | 1,116 |
|
Germany | | 45 |
| | 170 |
| | 835 |
| | 1,005 |
|
Malaysia | | 7 |
| | 194 |
| | 640 |
| | 834 |
|
Brazil | | 8 |
| | 227 |
| | 175 |
| | 402 |
|
Spain | | 14 |
| | — |
| | 532 |
| | 532 |
|
Canada | | 12 |
| | 217 |
| | 255 |
| | 472 |
|
Philippines | | 5 |
| | — |
| | 413 |
| | 413 |
|
China | | 12 |
| | 5 |
| | 374 |
| | 379 |
|
Australia & other Pacific Rim locations | | 37 |
| | — |
| | 1,025 |
| | 1,025 |
|
Other Europe locations | | 130 |
| | 385 |
| | 4,086 |
| | 4,471 |
|
Rest of World | | 60 |
| | 213 |
| | 1,280 |
| | 1,493 |
|
Total | | 584 |
| | 9,163 |
| | 18,378 |
| | 27,541 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Approximate Square Feet (in millions) |
Geographic Area | | Owned | | Leased | | Total |
United States | | 2.7 | | | 1.4 | | | 4.1 | |
EMEA | | 1.1 | | | 4.6 | | | 5.7 | |
APAC | | 1.0 | | | 3.8 | | | 4.8 | |
All other | | 0.7 | | | 0.3 | | | 1.0 | |
Real estate in restructuring | | — | | | 1.6 | | | 1.6 | |
Inactive space | | 0.6 | | | 0.1 | | | 0.7 | |
Sublet space | | 0.6 | | | — | | | 0.6 | |
Assets held for sale | | 0.5 | | | — | | | 0.5 | |
Total | | 7.2 | | | 11.8 | | | 19.0 | |
| | | | | | | | | | | | | | | | | | | | |
Type | | Owned | | Leased | | Total |
Offices | | 2.2 | | | 8.2 | | | 10.4 | |
Data centers | | 3.3 | | | 1.9 | | | 5.2 | |
Real estate in restructuring | | — | | | 1.6 | | | 1.6 | |
Inactive space | | 0.6 | | | 0.1 | | | 0.7 | |
Sublet space | | 0.6 | | | — | | | 0.6 | |
Assets held for sale | | 0.5 | | | — | | | 0.5 | |
Total | | 7.2 | | | 11.8 | | | 19.0 | |
We believe that the facilities described above are well-maintained, suitable and adequate to meet our current and anticipated requirements. As we transition to a more permanent virtual model we believe we will have excess facilities space. See Note 910 - "Property and Equipment",Equipment," which provides additional information related to our land, buildings and leasehold improvements, and Note 67 - "Leases"Leases," which provides additional information related to our real estate lease commitments.
ITEM 3. LEGAL PROCEEDINGS
See Note 2223 - "Commitments and Contingencies" under the caption “Contingencies” for information regarding legal proceedings in which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the New York Stock Exchange under the symbol "DXC"."DXC."
Number of Holders
As of May 26, 2020,23, 2022, there were 44,35640,767 holders of record of our common stock.
Dividends
Cash dividends declared on DXC common stock for each quarter of fiscal 2020 are included in Selected Quarterly Financial Data (Unaudited) in Part II, Item 8 of this Annual Report.
The Board of Directors (the “Board”) hasindefinitely suspended the Company’s cash dividend payment beginning in the first quarter to preserve cash and provide additional flexibility in the current environment as a result of the economic impact of COVID-19. Furthermore, the Board has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and global economic climate has passed and the Board determines that resumption of dividend payments is in the best interest of the Company and its stockholders.fiscal 2021.
Issuer Purchases of Equity Securities
Share repurchase activity during the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
January 1, 2022 to January 31, 2022 | | 1,119,994 | | | $ | 33.36 | | | 1,119,994 | | | $ | 1,387,691,431 | |
February 1, 2022 to February 28, 2022 | | 2,619,956 | | | $ | 36.16 | | | 2,619,956 | | | $ | 1,292,960,125 | |
March 1, 2022 to March 31, 2022 | | 4,461,217 | | | $ | 31.14 | | | 4,461,217 | | | $ | 1,154,057,908 | |
On April 3, 2017, we announced the establishment of a share repurchase plan approved by the Board of Directors with an initial authorization of $2.0 billion for future repurchases of outstanding shares of our common stock. On November 8, 2018, our Board of Directors approved an incremental $2.0 billion share repurchase authorization. On February 2, 2022, we announced our intention to repurchase incrementally up to $1.0 billion of our outstanding shares of common stock in the open market. An expiration date has not been established for this repurchase plan. Share repurchases may be made from time to time through various means, including in open market purchases, 10b5-1 plans, privately-negotiated transactions, accelerated stock repurchases, block trades and other transactions, in compliance with Rule 10b-18 under the Exchange Act as well as, to the extent applicable, other federal and state securities laws and other legal requirements. The timing, volume, and nature of share repurchases pursuant to the share repurchase plan are at the discretion of management and may be suspended or discontinued at any time. See Note 1516 - "Stockholders' Equity""Stockholders' Equity" for further discussion regarding share repurchases.more information.
There was no share repurchase activity during the three months ended March 31, 2020.
Performance Graph
The following graph shows a comparison from April 3, 2017 (the date our common stock commenced trading on the NYSE) through March 31, 20202022 of the cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index ("S&P 500 Index") and the Standard & Poor’s North American Technology Index ("S&P North American Technology Index"). The graph assumes that $100 was invested at the market close on April 3, 2017 in our common stock, the S&P 500 Index, and the S&P North American Technology Index and that dividends have been reinvested. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Comparison of Cumulative Total Return
The following table provides indexed returns assuming $100 was invested on April 3, 2017, with annual returns using our fiscal year-end date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Indexed Return |
| | Return 2018* | | Return 2019 | | Return 2020 | | Return 2021 | | Return 2022 |
DXC Technology Company | | 48.9 | % | | (25.0) | % | | (76.9) | % | | 121.5 | % | | 4.1 | % |
S&P 500 Index | | 14.2 | % | | 9.5 | % | | (7.0) | % | | 56.4 | % | | 15.6 | % |
S&P North American Technology Index | | 31.4 | % | | 15.7 | % | | 3.8 | % | | 72.0 | % | | 8.7 | % |
|
| | | | | | | | | |
Indexed Return | | |
| | Return 2018 | | Return 2019 | | Return 2020 |
DXC Technology Company | | 48.9 | % | | (25.0 | )% | | (76.9 | )% |
S&P 500 Index | | 14.2 | % | | 9.5 | % | | (7.0 | )% |
S&P North American Technology Index | | 31.4 | % | | 15.7 | % | | 3.8 | % |
* Since April 3, 2017
Equity Compensation Plans
See Part III, Item 12 contained in Part III of this Annual Report for information regarding our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)RESERVED
The following table sets forth our selected consolidated historical financial data as of the dates and for the periods indicated and should be read in conjunction with the financial statements and notes and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this Annual Report on Form 10-K.
Our selected consolidated financial data set forth below, as of March 31, 2020 and March 31, 2019, and for the fiscal years ended March 31, 2020, March 31, 2019, and March 31, 2018, have been derived from the audited consolidated financial statements included elsewhere herein. Our selected consolidated financial data set forth below, as of March 31, 2018, March 31, 2017, and April 1, 2016 and for the fiscal years ended March 31, 2017, and April 1, 2016, are derived from our consolidated financial statements not included elsewhere herein.
Selected consolidated financial data as of and for the fiscal years ended March 31, 2020, March 31, 2019 and March 31, 2018 are not directly comparable to prior periods which reflect CSC's financial results before the HPES Merger. Additionally, as a result of the USPS Separation, the statement of operations, balance sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations. See Note 1 - "Summary of Significant Accounting Policies".
Statement of Operations Data:
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions, except per-share amounts) | | March 31, 2020(1) | | March 31, 2019(2) | | March 31, 2018(3) | | March 31, 2017(4) | | April 1, 2016(5) |
Revenues | | $ | 19,577 |
| | $ | 20,753 |
| | $ | 21,733 |
| | $ | 7,607 |
| | $ | 7,106 |
|
(Loss) income from continuing operations | | (5,358 | ) | | 1,227 |
| | 1,546 |
| | (100 | ) | | 72 |
|
Income from discontinued operations, net of taxes | | — |
| | 35 |
| | 236 |
| | — |
| | 191 |
|
Net (loss) income attributable to DXC common stockholders | | (5,369 | ) | | 1,257 |
| | 1,751 |
| | (123 | ) | | 251 |
|
Diluted EPS | | $ | (20.76 | ) | | $ | 4.35 |
| | $ | 5.23 |
| | $ | (0.88 | ) | | $ | 0.50 |
|
| | | | | | | | | | |
Cash dividend per common share | | $ | 0.84 |
| | $ | 0.76 |
| | $ | 0.72 |
| | $ | 0.56 |
| | $ | 2.99 |
|
Balance Sheet Data:
|
| | | | | | | | | | | | | | | | | | | | |
| | As of |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 | | March 31, 2017 | | April 1, 2016 |
Cash and cash equivalents | | $ | 3,679 |
| | $ | 2,899 |
| | $ | 2,593 |
| | $ | 1,268 |
| | $ | 1,181 |
|
| | | | | | | | | | |
Total assets | | 26,006 |
| | 29,574 |
| | 33,921 |
| | 8,663 |
| | 7,736 |
|
| | | | | | | | | | |
Debt | | | | | | | | | | |
Long-term debt, net of current maturities | | $ | 8,672 |
| | $ | 5,470 |
| | $ | 6,092 |
| | $ | 2,225 |
| | $ | 1,934 |
|
Short-term debt and current maturities of long-term debt | | 1,276 |
| | 1,942 |
| | 1,918 |
| | 738 |
| | 710 |
|
Total Debt | | $ | 9,948 |
| | $ | 7,412 |
| | $ | 8,010 |
| | $ | 2,963 |
| | $ | 2,644 |
|
| | | | | | | | | | |
Total equity | | $ | 5,129 |
| | $ | 11,725 |
| | $ | 13,837 |
| | $ | 2,166 |
| | $ | 2,032 |
|
Net debt-to-total capitalization (6) | | 41.6 | % | | 23.6 | % | | 24.8 | % | | 33.0 | % | | 31.3 | % |
(1) Fiscal 2020 included $6,794 millionof goodwill impairment losses and $252 million of restructuring costs.
(2) Fiscal 2019 included $465 million of restructuring costs.
(3) Fiscal 2018 net income attributable to DXC common stockholders and earnings per common share were impacted by the Tax Cuts and Jobs Act. Fiscal 2018 included $789 million of restructuring costs.
(4) Fiscal 2017 included $238 million of restructuring costs.
(5) Fiscal 2016 included $95 million of debt extinguishment costs.
(6) Net debt-to-total capitalization is a non-GAAP measure used by management to assess our ability to service our debts using only our cash and cash equivalents. See Part II, Item 7 of this Annual Report on Form 10-K under the heading "Liquidity and Capital Resources" for additional information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended March 31, 2020,2022 and our financial condition as of March 31, 2020.2022. 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 20202022 and fiscal 2019.2021. A discussioncomparison of changes in our results of operations fromand liquidity and capital resources for fiscal 2018 to2021 and fiscal 20192020 may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” on Form 10-K filed with the Securities and Exchange Commission on June 13, 2019.May 28, 2021.
Background
DXC Technology helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, theThe world’s largest companies and public sector organizations trust DXC to deploy our enterprise technology stackservices across the Enterprise Technology Stack to deliverdrive new levels of performance, competitiveness, and customer experiences.experience.
We generate revenue by offering a wide range of information technology services and solutions primarily in North America, Europe, Asia, and Australia. We operate through two segments: GBSGlobal Business Services ("GBS") and GIS.Global Infrastructure Services ("GIS"). We market and sell our services directly to customers through our direct sales force operating out of sales offices around the world. Our customers include commercial businesses of many sizes and in many industries and public sector enterprises.clients.
Results of Operations
The following table sets forth certain financial data for fiscal 20202022 and 2019:2021:
| | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
(In millions, except per-share amounts) | | March 31, 2022 | | March 31, 2021 | | | | |
| | | | | | | | |
Revenues | | $ | 16,265 | | | $ | 17,729 | | | | | |
| | | | | | | | |
Income before income taxes | | 1,141 | | | 654 | | | | | |
Income tax expense | | 405 | | | 800 | | | | | |
Net income (loss) | | $ | 736 | | | $ | (146) | | | | | |
| | | | | | | | |
Diluted income (loss) per common share: | | $ | 2.81 | | | $ | (0.59) | | | | | |
|
| | | | | | | | |
| | Fiscal Years Ended |
(In millions, except per-share amounts) | | March 31, 2020 | | March 31, 2019 |
| | | | |
Revenues | | $ | 19,577 |
| | $ | 20,753 |
|
| | | | |
(Loss) income from continuing operations, before taxes | | (5,228 | ) | | 1,515 |
|
Income tax expense | | 130 |
| | 288 |
|
(Loss) income from continuing operations | | (5,358 | ) | | 1,227 |
|
Income from discontinued operations, net of taxes | | — |
| | 35 |
|
Net (loss) income | | $ | (5,358 | ) | | $ | 1,262 |
|
| | | | |
Diluted (loss) earnings per share: | | | | |
Continuing operations | | $ | (20.76 | ) | | $ | 4.35 |
|
Discontinued operations | | — |
| | 0.12 |
|
| | $ | (20.76 | ) | | $ | 4.47 |
|
Fiscal 20202022 Highlights
Fiscal 20202022 financial highlights include the following:
•Fiscal 20202022 revenues were $19,577 million.$16,265 million, a decrease of 8.3% as compared to fiscal 2021. See "Revenues” below for additional information.
•Fiscal 2020 loss from continuing operations2022 net income and diluted EPS from continuing operationsincome per share were $5,358$736 million and $(20.76),$2.81, respectively, includingcompared to net loss and diluted loss per share of $146 million and $0.59, respectively, for fiscal 2021. Net income increased by $882 million during fiscal 2022 as compared to the prior fiscal year. The increase was primarily due to increases in non-service components of net periodic pension income attributable to changes in mark-to-market actuarial assumptions and asset valuations, cost optimization realized in the current period, lower costs after the dispositions of the HPS and HHS businesses, lower transaction, separation and integration-related costs, a reduction in restructuring activities, and decreases in depreciation and amortization, partially offset by a reduction in revenue, an increase in debt extinguishment costs, and the gain on disposition of the HHS business during the third quarter fiscal 2021. Net income included the cumulative impact of certain items of $6,820totaling $171 million or $26.34 per share,during fiscal 2022, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, goodwillgains on dispositions, impairment losses, gain on arbitration award,debt extinguishment costs, pension and other post-retirement benefit ("OPEB") actuarial and settlement gains, and a tax adjustment relatedadjustment.
•Fiscal 2022 income tax expense decreased significantly compared to U.S. tax reform.fiscal 2021 as a result of the gain on disposition of the HHS business, which included the impact of non-tax deductible goodwill in fiscal 2021.
•Our cash and cash equivalents were $3,679$2,672 million at March 31, 2020.2022.
•We generated $2,350$1,501 million of cash from operations during fiscal 2020.
We returned $9502022, as compared to $124 million to shareholders in the form of common stock dividends and share repurchases during fiscal 2020.2021.
Revenues
|
| | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
(in millions) | | March 31, 2020 | | March 31, 2019 | | Change | | Percent Change |
GBS | | $ | 9,111 |
| | $ | 8,684 |
| | $ | 427 |
| | 4.9 | % |
GIS | | 10,466 |
| | 12,069 |
| | (1,603 | ) | | (13.3 | )% |
Total Revenues | | $ | 19,577 |
| | $ | 20,753 |
| | $ | (1,176 | ) | | (5.7 | )% |
The decrease in revenues for fiscal 2020 compared with fiscal 2019 reflects the impact of price-downs, run-off, and termination of certain accounts offset by increase in revenue in fiscal 2020 due to contributions from the Luxoft acquisition. Fiscal 2020 revenues included an unfavorable foreign currency exchange rate impact of 2.2%, primarily driven by the strengthening of the U.S. dollar against the Australian Dollar, Euro, and British Pound.
During fiscal 20202022 and fiscal 2019,2021, the distribution of our revenues across operating segments and geographies waswere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | | | Fiscal Year Ended | | |
(in millions) | | March 31, 2022 | | March 31, 2021 | | Percentage Change | | | | | | Constant Currency March 31, 2022(1) | | Percentage Change in Constant Currency(1) |
Geographic Market | | | | | | | | | | | | | | |
United States | | $ | 4,775 | | | $ | 5,983 | | | (20.2) | % | | | | | | $ | 4,775 | | | (20.2) | % |
U.K. | | 2,295 | | | 2,413 | | | (4.9) | % | | | | | | 2,199 | | | (8.9) | % |
Other Europe | | 5,117 | | | 5,129 | | | (0.2) | % | | | | | | 5,132 | | | 0.1 | % |
Australia | | 1,549 | | | 1,529 | | | 1.3 | % | | | | | | 1,508 | | | (1.4) | % |
Other International | | 2,529 | | | 2,675 | | | (5.5) | % | | | | | | 2,504 | | | (6.4) | % |
Total Revenues | | $ | 16,265 | | | $ | 17,729 | | | (8.3) | % | | | | | | $ | 16,118 | | | (9.1) | % |
| | | | | | | | | | | | | | |
Reportable Segments | | | | | | | | | | | | | | |
GBS | | $ | 7,598 | | | $ | 8,336 | | | (8.9) | % | | | | | | $ | 7,561 | | | (9.3) | % |
GIS | | 8,667 | | | 9,393 | | | (7.7) | % | | | | | | 8,557 | | | (8.9) | % |
Total Revenues | | $ | 16,265 | | | $ | 17,729 | | | (8.3) | % | | | | | | $ | 16,118 | | | (9.1) | % |
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 63% of our fiscal 2020 revenues were earned internationally. As a result, the comparison of revenues denominated in currencies other than the U.S. dollar from period to period is impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. (1)Constant currency revenues are a non-GAAP measure calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. The table below summarizes our constant currency revenues:
|
| | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
(in millions) | | Constant Currency March 31, 2020 | | March 31, 2019 | | Change | | Percentage Change |
GBS | | $ | 9,292 |
| | $ | 8,684 |
| | $ | 608 |
| | 7.0% |
GIS | | 10,731 |
| | 12,069 |
| | (1,338 | ) | | (11.1)% |
Total Revenues | | $ | 20,023 |
| | $ | 20,753 |
| | $ | (730 | ) | | (3.5)% |
Global Business Services
For more information, see "Non-GAAP Financial Measures."
Our GBS segment
The decrease in revenues were $9.1 billion for fiscal 2020, representing an increase2022 compared with fiscal 2021, reflects the disposition of $0.4 billion, or 4.9%, comparedthe HPS business during the first quarter of fiscal 2022, in addition to disposition of the HHS business during the third quarter of fiscal 2019.2021. Project completions, project terminations, and contractual price adjustments also contributed to the decrease in revenues. The decrease in revenues was partially offset by additional services provided to new and existing customers, increased pass-through revenue increaseassociated with the resale of hardware and software, and increased run-rate project volumes. Fiscal 2022 revenues included an unfavorablea favorable foreign currency exchange rate impact of $0.20.8%, primarily driven by the weakening of the U.S. dollar against the British Pound, Canadian Dollar, and Australian Dollar.
For a discussion of risks associated with our foreign operations, see Part I, Item 1A - Risk Factors subsections titled, "Our ability to compete in certain markets we serve is dependent on our ability to continue to expand our capacity in certain offshore locations. However, as our presence in these locations increases, we are exposed to risks inherent to these locations which may adversely affect our revenue and profitability." and “Our international operations are exposed to risks, including fluctuations in exchange rates, which may be beyond our control."
Global Business Services
Our GBS revenues were $7.6 billion or 2.1%.for fiscal 2022, a decrease of 8.9% compared to fiscal 2021. GBS revenuesrevenue in constant currency were $9.3 billion fordecreased 9.3% compared to fiscal 2020, representing2021. The decrease in GBS revenues was primarily due to the disposition of the HPS business at the beginning of the first quarter of fiscal 2022, the disposition of the HHS business during the third quarter of fiscal 2021, and project completions. The decrease in GBS revenues was partially offset by an increase of $0.6 billion, or 7.0%. The increase in GBS revenue in fiscal 2020 is duerun-rate project volumes and additional services provided to contributions from the Luxoft acquisition which closed in June 2019new and existing customers.
.
Global Infrastructure Services
Our GIS segment revenues were $10.5$8.7 billion for fiscal 2020, representing2022, a decrease of $1.6 billion, or 13.3%,7.7% compared to fiscal 2019. The2021. GIS revenue decline included an unfavorable foreign currency exchange rate impact of $0.3 billion, or 2.2%. GIS revenues in constant currency were $10.7 billion fordecreased 8.9% compared to fiscal 2020, representing a decrease of $1.3 billion, or 11.1%.2021. The decrease in GIS revenues reflects project completions, project terminations, a decrease in run-rate project volumes, and contractual price adjustments. The decrease in GIS revenues was partially offset by additional services provided to new and existing customers and increased pass-through revenue in fiscal 2020 reflectsassociated with the impactresale of price-downs, run-off,hardware and termination of certain accounts.software.
During fiscal 2020,2022, GBS and GIS had contract awards of $9.0$9.4 billion and $8.7 billion, respectively, compared with $9.3$11.0 billion and $11.4$8.8 billion, respectively, during fiscal 2019.2021.
Costs and Expenses
Our total costs and expenses were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | |
| | Amount | | Percentage of Revenues | | |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 | | Percentage Point Change |
Costs of services (excludes depreciation and amortization and restructuring costs) | | $ | 12,683 | | | $ | 14,086 | | | 77.8 | % | | 79.5 | % | | (1.7) | |
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 1,408 | | | 2,066 | | | 8.7 | | | 11.7 | | | (3.0) | |
Depreciation and amortization | | 1,717 | | | 1,970 | | | 10.6 | | | 11.1 | | | (0.5) | |
Restructuring costs | | 318 | | | 551 | | | 2.0 | | | 3.1 | | | (1.1) | |
Interest expense | | 204 | | | 361 | | | 1.3 | | | 2.0 | | | (0.7) | |
Interest income | | (65) | | | (98) | | | (0.4) | | | (0.6) | | | 0.2 | |
Debt extinguishment costs | | 311 | | | 41 | | | 1.9 | | | 0.2 | | | 1.7 | |
Gain on disposition of businesses | | (371) | | | (2,004) | | | (2.3) | | | (11.3) | | | 9.0 | |
Other (income) expense, net | | (1,081) | | | 102 | | | (6.6) | | | 0.6 | | | (7.2) | |
Total costs and expenses | | $ | 15,124 | | | $ | 17,075 | | | 93.0 | % | | 96.3 | % | | (3.3) | |
|
| | | | | | | | | | | | | | |
| | Fiscal Years Ended | | Percentage of Revenues |
(in millions) | | March 31, 2020 | | March 31, 2019 | | 2020 | | 2019 |
Costs of services (excludes depreciation and amortization and restructuring costs) | | $ | 14,901 |
| | $ | 14,946 |
| | 76.0 | % | | 72.1 | % |
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 2,050 |
| | 1,959 |
| | 10.5 |
| | 9.4 |
|
Depreciation and amortization | | 1,942 |
| | 1,968 |
| | 9.9 |
| | 9.5 |
|
Goodwill impairment losses | | 6,794 |
| | — |
| | 34.7 |
| | — |
|
Restructuring costs | | 252 |
| | 465 |
| | 1.3 |
| | 2.2 |
|
Interest expense | | 383 |
| | 334 |
| | 2.0 |
| | 1.6 |
|
Interest income | | (165 | ) | | (128 | ) | | (0.8 | ) | | (0.6 | ) |
Gain on arbitration award | | (632 | ) | | — |
| | (3.2 | ) | | — |
|
Other income, net | | (720 | ) | | (306 | ) | | (3.7 | ) | | (1.5 | ) |
Total costs and expenses | | $ | 24,805 |
| | $ | 19,238 |
| | 126.7 | % | | 92.7 | % |
The 34.0330 basis point increasedecrease in total costs and expenses as a percentage of revenue for fiscal 20202022 primarily reflects our goodwill impairment losses, which werecost optimization realized in the current period, lower costs after the dispositions of the HPS and HHS businesses, lower transaction, separation and integration-related costs, a reduction in restructuring activities, decreases in depreciation and amortization and an increase in other (income) expense attributed to income from non-service components of net periodic pension (income) expense, partially offset by thea decrease in gain on arbitration awarddisposition of businesses and other income.an increase in debt extinguishment costs.
Costs of Services
Cost of services, excluding depreciation and amortization and restructuring costs ("COS"), was $14.9$12.7 billion for fiscal 2020, including Luxoft, which was flat2022, as compared to $14.1 billion in fiscal 2019.2021. COS decreased $1.4 billion compared to the prior fiscal year. The decrease in COS was primarily due to cost optimization savings realized during fiscal 2022 and reduced costs resulting from the dispositions of the HPS business during the first quarter of fiscal 2022 and the HHS business during the third quarter of fiscal 2021. COS as a percentage of revenue increased 3.9 points,decreased 1.7% as compared to the prior fiscal 2019. This increaseyear. The decrease was primarily driven by cost reductions exceeding the ongoing investments we are makingassociated decline in revenue compared to secure our customers and higher cost take-out activitiesthe same period in the prior fiscal year.
Selling, General and Administrative
Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs ("SG&A"), was $2.1$1.4 billion for fiscal 2020,2022, as compared to $2.0$2.1 billion forin fiscal 2019.2021. SG&A increased $0.1decreased $0.7 billion and as a percentage of revenue increased 1.1 points, compared to the prior fiscal 2019.year. The increase includesdecrease in SG&A related towas primarily driven by lower transaction, separation and integration-related costs, cost optimization savings realized during fiscal 2022, and reduced costs resulting from the Luxoft Acquisition, which we acquireddispositions of the HPS business during the first quarter of fiscal 2020.2022 and the HHS business during the third quarter of fiscal 2021.
Integration,Transaction, separation and transaction-relatedintegration-related costs, included in SG&A, were $318$26 million during fiscal 2020,2022, as compared to $401$358 million during fiscal 2019.2021.
Depreciation and Amortization
Depreciation and amortization expense ("D&A") was $1.9 billion$625 million for fiscal 2020,2022, as compared to $2.0 billion for$754 million in fiscal 2019. The decrease in D&A was2021. Depreciation expense decreased $129 million primarily due to a $225reduction in assets due to impairment of un-deployed assets in the prior year, and asset retirements.
Amortization expense was $1,092 million benefit, respectively, fromfor fiscal 2022, as compared to $1,216 million in fiscal 2021. Amortization expense decreased $124 million primarily due to a changedecrease in estimated useful lives of certain equipment described in Note 1 - "Summary of Significant Accounting Policies", offset by an increase in depreciation on assets placed into service, as well as increases in software amortization and amortizationcustomer related intangibles related to acceleratedthe disposition of the HHS business during the third quarter of fiscal 2021 and a reduction in transition and transformation contract costs.cost amortization due to contract completions.
Goodwill Impairment Losses
DXC recognized goodwill impairment charges totaling $6,794 million during fiscal 2020. The impairment charges were primarily the result of a sustained decline in market capitalization during the fiscal 2020. See Note 11, "Goodwill" for additional information.
Restructuring Costs
Restructuring costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization.
During fiscal 2020,2022, management approved global cost savings initiatives designed to reduce operating costs by re-balancingbetter align our workforce and facilitiesfacility structures. The fiscal 2020 global cost savings initiatives were designed to better align our organizational structure with our strategic initiatives and continue the integration of HPES and other acquisitions.
Total restructuring costs recorded, net of reversals, during fiscal 20202022 and 20192021 were $252$318 million and $465$551 million, respectively. The net amounts recorded included $10 million and $2 million of pension benefit augmentations for fiscal 2020 and 2019, respectively, owed to certain employees under legal or contractual obligations. These augmentations will be paid as part of normal pension distributions over several years.
See Note 2122 - "Restructuring Costs" for additional information about our restructuring actions.
Interest Expense and Interest Income
Interest expense for fiscal 20202022 was $383$204 million, as compared to $334$361 million in fiscal 2019.2021, a decrease of 43%. The increasedecrease in interest expense was primarily due to an increasea reduction in borrowingsbonds and term loans and the Company's refinancing of its high coupon debt during fiscal 2022, decreased amounts drawn on our revolving credit facility, and decreases to finance leases and asset financing activities. See the "Capital Resources" caption below and Note 13 - “Debt” for additional information.financing.
Interest income for fiscal 20202022 was $165$65 million, as compared to $128$98 million in fiscal 2019.2021. The year-over-year increasedecrease in interest income includes pre-awardwas primarily driven by lower income from our multicurrency cash pools and money market accounts as well as decreases in lease interest of $34income.
Debt Extinguishment Costs
Debt extinguishment costs for fiscal 2022 were $311 million, and post-award interest of $2as compared to $41 million in fiscal 2021. Debt extinguishment costs for fiscal 2022 include costs related to arbitration discussed below under the caption “Gain on Arbitration Award.”full redemption of our Euro-denominated term loan facility, two series of 4.45% senior notes due fiscal 2023, 4.25% senior notes due fiscal 2025, 2.75% senior notes due fiscal 2025, 4.125% senior notes due fiscal 2026, 4.75% senior notes due fiscal 2028, 7.45% senior notes due fiscal 2030, extinguishment of debt associated with asset financing, and costs related to the decrease in our revolving credit facility limit from $4 billion to $3 billion.
Debt extinguishment costs for fiscal 2021 consisted primarily of costs related to the redemption of 4.00% senior notes due fiscal 2024.
Gain on Arbitration AwardDispositions
During the secondfirst quarter of fiscal 2020,2022, DXC received final arbitration award proceedssold its HPS business for $551 million which resulted in an estimated pre-tax gain on sale of $666$331 million, net of closing costs. Insignificant businesses were also sold during fiscal 2022 that resulted in a gain of $53 million. This was partially offset by $13 million in sales price adjustments related to prior year dispositions, which resulted from changes in projected closing net working capital.
During the HPE Enterprise Services merger completedthird quarter of 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 2018. The arbitration award included $632 million2021 that resulted in damages that were recorded as a gain. The remaining $34 millionloss of the award related to pre-award interest. Dispute details are subject to confidentiality obligations.$10 million.
Other Income,(Income) Expense, Net
Other income,(income) expense, net includescomprises non-service cost components of net periodic pension income,(income) expense, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates gain on sale of non-operating assets and other miscellaneous gains and losses.
The components of other income,(income) expense, net for fiscal 20202022 and 20192021 are as follows:
| | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 |
Non-service cost components of net periodic pension (income) expense | | $ | (1,066) | | | $ | 110 | |
Foreign currency loss | | 13 | | | 14 | |
Other gain | | (28) | | | (22) | |
Total | | $ | (1,081) | | | $ | 102 | |
|
| | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Non-service cost components of net periodic pension income | | $ | (658 | ) | | $ | (182 | ) |
Foreign currency (gain) loss | | (25 | ) | | 31 |
|
Other gain | | (37 | ) | | (155 | ) |
Total | | $ | (720 | ) | | $ | (306 | ) |
The $414$1,183 million increase in other income, net, for fiscal 2020,2022, as compared to the prior fiscal year, was due to a year-over-year increase of $476$1,176 million in non-service components of net periodic pension income attributable to changes in mark-to-market actuarial assumptions and asset valuations, a $6 million increase in other gains from sales of non-operating assets, and a year-over-year favorable foreign currency impact of $56$1 million. These increases were offset by a $118 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 20202022 and 20192021 was 2.5%35.5% and 19.0%122.3%, respectively. A reconciliation of the differences between the U.S. federal statutory rate and the ETR, as well as other information about our income tax provision, is provided in Note 1213 - "Income Taxes."Income Taxes."
In fiscal 2020,2022, the ETR was primarily impacted by:
Non-deductible•Income Tax and Foreign Tax Credits, which decreased income tax expense and decreased the ETR by $174 million and 15.2%, respectively.
•Changes in Luxembourg losses that increased the ETR by $1,609 million and 141.0%, respectively, with an offsetting decrease in the ETR due to a decrease in the valuation allowance of the same amount.
•Adjustments to uncertain tax positions that increased the overall income tax expense and the ETR by $78 million and 6.8%, respectively.
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 in Belgium, Denmark, Italy, France, Luxembourg, and U.S., and an impairment charge,of the full German deferred tax asset, which increased income tax expense and increased the ETR by $1,482$1,565 million and 28.3%239.3%, respectively.
Non-taxable gain on the arbitration award,•An increase in Income Tax and Foreign Tax Credits, which decreased income tax expense and decreased the ETR by $186$319 million and 3.6%, respectively
A change in the net valuation allowance on certain deferred tax assets, primarily in Australia, Brazil, China, Luxembourg, and Singapore, which increased income tax expense and increased the ETR by $631 million and 12.1% respectively.
An increase in Income Tax and Foreign Tax Credits, primarily relating to research and development credits recognized for prior years, which decreased income tax expense and decreased the ETR by $135 million and 2.6%48.7%, respectively.
•Local losses on investments in Luxembourg that increased the foreign rate differential and decreased the ETR by $637$1,226 million and 12.2%187.5%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount.
In fiscal 2019,•The Company recognized adjustments to uncertain tax positions that increased 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, UK, and Switzerland, which increasedoverall income tax expense and increased the ETR by $256$112 million and 16.9%17.2%, respectively.
A decrease in the transition tax liability and a change in tax accounting method for deferred revenue, which decreased income tax expense and decreased the ETR by $66 million and 4.3%, respectively.
In fiscal 2018, the ETR was primarily impacted by:
Due to the Company's change in repatriation policy, the reversal of a deferred tax liability relating to the outside basis difference of foreign subsidiaries which increased the income tax benefit and decreased the ETR by $554 million and 42.5%, respectively.
The accrual of the one-time transition tax on estimated unremitted foreign earnings, which decreased the income tax benefit and increased the ETR by $361 million and 27.7%, respectively.
The remeasurement of deferred tax assets and liabilities, which increased the income tax benefit and decreased the ETR by $338 million and 25.9%, respectively.
The IRSInternal Revenue Service (the “IRS”) has examined, or is examining, CSC'sthe Company’s federal income tax returns for fiscal 2008 through 2017.the tax year ended October 31, 2018. With respect to CSC'sCSC’s fiscal 2008 through 20102017 federal tax returns, we previously entered intothe Company participated in settlement negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this auditthese tax years that resulted in various audit adjustments. WeThe Company and the IRS Office of Appeals have an agreement in principle as to various audit adjustments, and we disagree with the IRS’ 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 are challenging them in the IRS Office of Appeals as to some butor the U.S. Tax Court, these matters are not allfully reserved and would result in a federal and state tax expense of approximately $458 million (including estimated interest and penalties) for the unreserved portion of these adjustments.items and related cash cost if we do not prevail. We have agreedreceived notices of deficiency with respect to extend the statute of limitations associated with this audit through September 30, 2020.
In the first quarter of fiscal 2020, we2009, 2010, 2011 and 2013 and have timely filed for competent authority relief relating to certain legacy CSC foreign restructuring expenses deducted for the U. S. federal tax return for tax year March 31, 2013. The Company has agreed to extend the statute of limitations associatedpetitions with the fiscal years 2011 through 2013 through December 31, 2020. InU.S. Tax Court. We do not expect the second quarter of fiscal 2020,U.S. Tax Court matters to be resolved in the Company received a Revenue Agent's Report with proposed adjustments to CSC's fiscal 2014 through 2017 federal returns. The Company has filed a protest for certain of these adjustments with the IRS Office of Appeals. next 12 months.
The Company has agreed to extend the statute of limitations for the fiscal years 2008 through 2010 to April 30, 2022, for fiscal years 2014 through fiscal 2016 through December 31, 20202017 to February 28, 2023, and for the employment tax audityears ended October 31, 2017, and October 31, 2018, to September 30, 2023. The statute of limitations on assessments for fiscal years 20152011 through 2013 has expired, with the exception of a $6 million refund claim for 2012 for which the statute remains open. However, as previously noted, fiscal years 2011 and 20162013 are in the U.S. Tax Court and consequently these years will remain open until January 31, 2021. the U.S. Tax Court proceedings have concluded.
The Company expects to reach a resolution with regard to disagreed items for allfiscal years 2009 through 2013 no earlier than the first quarter of fiscal 2022 except agreed issues related2025, and to reach resolution for fiscal 2008years 2014 through 2010 and fiscal 2011 through 2013 federal tax returns, which are expected to be resolved2017, within twelve12 months.
In addition, weThe 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 havethe Company has accrued as uncertain tax positions. WeConsequently, the Company may need to accrue and ultimately pay additional amounts for tax positions thator pay lower amounts than previously met a more likely than not standard if suchestimated and accrued when positions are not upheld. Conversely, we could settle positions by payment withsettled in the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. We believefuture. The Company believes the outcomes that are reasonably possible within the next twelve12 months mayto result in a reduction in its liability for uncertain tax positions, of $25 million to $27 million, excluding interest, penalties, and tax carryforwards.carry-forwards, would be approximately $44 million.
Income from Discontinued Operations
The $35 million of income from discontinued operations for the fiscal year 2019 reflects the net income generated by USPS during the first quarter of fiscal 2019.
Earnings (Loss) Per Share
Diluted EPS from continuing operationsearnings (loss) per share for fiscal 20202022 was $20.76, a decrease of $25.11$2.81, as compared to $(0.59) in fiscal 2021. The earnings per share compared with the prior fiscal year. The EPS decreaseincrease was due to a decreasean increase of $6,585$882 million in income from continuing operations.net income.
Diluted EPSearnings per share for fiscal 20202022 includes $0.80$0.99 per share of restructuring costs, $0.98$0.07 per share of transaction, separation and integration-related costs, $1.73$1.35 per share of amortization of acquired intangible assets, $25.78$0.09 per share of goodwill impairment losses, $(2.43)$(0.93) per share of arbitration awardnet gains $(0.74)on dispositions, $(1.99) per share of pension and OPEB actuarial and settlement gains, $0.93 per share of debt extinguishment costs, and $0.13$0.17 per share of tax adjustments primarily relating to tax adjustments to impair or recognize certain deferred tax assets and adjustments for changes in tax legislation.
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 prior restructuring charges.a valuation allowance on deferred tax assets offset by changes in outside basis related to held for sale classification of the HPS business.
Ukraine / Russia Update
Subsequent to the end of the quarter, DXC exited its domestic Russian business. This action achieves a significant portion of our commitment to exit Russia. The sale of this business has provided continuing employment opportunities for many former DXC employees who have chosen to stay in Russia. The exit of this market will reduce revenues by approximately $140 million annually. The company is transitioning global business previously serviced by our DXC Russian colleagues to international teams and expects to complete this process by the end of the second quarter.
DXC's Ukraine business supported approximately $250 million of revenue, predominantly serving international customers. Despite the ongoing conflict, these revenues have only seen a minor impact stemming from the conflict. Our global teams have worked to augment their Ukrainian colleagues, and to continue to deliver for our customers through the conflict.
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"(“EBIT”), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS, and constant currency revenues.
We believe EBIT, adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, 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 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 measuresuseful 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 evaluate the financial performancepresent constant currency revenues.
One category of our core business operations on a comparable basisexpenses excluded from periodadjusted EBIT, non-GAAP income before income tax, non-GAAP net income, non-GAAP net income attributable 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 estimatescommon stockholders, 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.
Incrementalincremental amortization of intangible assets acquired through business combinations, if included, may result in a significant difference in period over period amortization expense on a GAAP basis. We exclude amortization of certain acquired intangiblesintangible 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 relatedcustomer-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 before income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS is impairment losses, which, if included, may result in a significant difference in period over period expense on a GAAP basis. We exclude impairment losses as these non-cash amounts reflect generally an acceleration of what would be multiple periods of expense and are not expected 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 2022 Highlights.”
Non-GAAPCertain 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, 2022 | | March 31, 2021 | | Change | | Percentage Change |
Income before income taxes | | $ | 1,141 | | | $ | 654 | | | $ | 487 | | | 74.5 | % |
Non-GAAP income before income taxes | | $ | 1,236 | | | $ | 839 | | | $ | 397 | | | 47.3 | % |
Net income (loss) | | $ | 736 | | | $ | (146) | | | $ | 882 | | | 604.1 | % |
Adjusted EBIT | | $ | 1,375 | | | $ | 1,102 | | | $ | 273 | | | 24.8 | % |
|
| | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
(in millions) | | March 31, 2020 | | March 31, 2019 | | Change | | Percentage Change |
(Loss) income from continuing operations | | $ | (5,228 | ) | | $ | 1,515 |
| | $ | (6,743 | ) | | (445.1 | )% |
Non-GAAP income from continuing operations | | $ | 1,843 |
| | $ | 3,063 |
| | $ | (1,220 | ) | | (39.8 | )% |
Net (loss) income | | $ | (5,358 | ) | | $ | 1,262 |
| | $ | (6,620 | ) | | (524.6 | )% |
Adjusted EBIT | | $ | 2,061 |
| | $ | 3,269 |
| | $ | (1,208 | ) | | (37.0 | )% |
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include:
•Restructuring - reflectscosts – includes costs, net of reversals, related to workforce optimization and real estate optimization and other similar charges.
•Transaction, separation and integration-related (“TSI”) costs - reflects– includes costs related to integration, planning, financing and advisory fees and other similar charges associated with the HPES Mergermergers, acquisitions, strategic investments, joint ventures, and dispositions and other acquisitions and costs related to the separation of USPS and costs to execute on strategic alternatives.similar transactions.(1)
•Amortization of acquired intangible assets - reflects– includes amortization of intangible assets acquired through business combinations.
Goodwill impairment losses - reflects impairment•Gains and losses on goodwill.
Gain on arbitration award - reflects a gaindispositions – gains and losses related to the HPES merger arbitration award.dispositions of businesses, strategic assets and interests in less than wholly-owned entities.(2)
•Pension and OPEB actuarial and settlement gains and losses - reflects– 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)
•Tax adjustment - Fiscal 2020 includes the impact of an adjustmentadjustments – reflects discrete tax adjustments to the Transition Taximpair or recognize certain deferred tax assets and adjustments for changes in tax liabilities related to prior restructuring charges. Fiscal 2019 reflects the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017. Fiscal 2018 reflects the application of an approximate 28% tax rate, which is within the targeted effective tax rate range for fiscal year 2018.legislation. Income tax expense of merger and divestitures is separately computed based on the underlying transaction. Income tax expense of all other (non-discrete) 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 both 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.
The TSI-Related costs for fiscal 2022 include $14 million of costs to execute dispositions (including $2 million for the sale of HHS which closed in October 2020 and $12 million for the sale of HPS which closed on April 1, 2021); $2 million legal costs and a $(12) million credit towards Perspecta Arbitration settlement; $5 million in expenses related to integration projects resulting from the CSC – HPE ES merger (including costs associated with continuing efforts to separate certain IT systems) and $17 million of costs incurred in connection with activities related to other acquisitions and divestitures.
The TSI-Related costs for fiscal 2021 include $250 million of costs to execute dispositions (including $142 million for the sale of HHS which closed in October 2020 and $61 million for the sale of the healthcare software business which closed on April 1, 2021); $42 million in expenses related to integration projects resulting from the CSC – HPES merger (including costs associated with continuing efforts to separate certain IT systems) and $66 million of costs incurred in connection with activities related to other acquisitions and divestitures.
(2) Gains and losses on dispositions for fiscal 2022 include a $331 million gain on sale of the HPS business, gains of $23 million on other dispositions and loss of $13 million on adjustments relating to the sale of the HHS business.
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.
(3) Debt extinguishment costs adjustments for fiscal 2022 includes $18 million to fully redeem two series of our 4.45% senior notes due fiscal 2023, $7 million associated with asset financing, $1 million to fully redeem our Euro-denominated term loan facility, $41 million to fully redeem our 4.25% senior notes due fiscal 2025, $26 million to fully redeem our 2.75% senior notes due fiscal 2025, $58 million to fully redeem our 4.125% senior notes due fiscal 2026, $87 million to fully redeem our 4.750% senior notes due fiscal 2028, $71 million to fully redeem our 7.45% senior notes due fiscal 2030, and $2 million related to the decrease in our revolving credit facility limit.
Debt extinguishment costs adjustments for fiscal 2021 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 fiscal 2022 includes a $10 million impairment charge of capitalized TSI related property and equipment and a $21 million impairment charge of loan receivable and stock warrants associated with a strategic investment.
Impairment losses for fiscal 2021 were $190 million. This includes $165 million impairment for assets pre-purchased through preferred vendor agreements and determined un-deployable, $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.
(5) Tax adjustment for fiscal 2022 includes a $50 million net revaluation of deferred taxes resulting from changes in non-US jurisdiction tax rates, and $(7) million of adjustment to the transition tax.
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 the USPS spin-off, offset by $35 million tax benefit related to the held for sale classification of the Healthcare Provider Software business, and $7 million tax benefit related to prior restructuring charges. The German tax asset was created from multiple periods of losses in Germany 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.
A reconciliation of reported results to non-GAAP results is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2020 |
(in millions, except per-share amounts) | | As Reported | | Restructuring Costs | | Transaction, Separation and Integration-Related Costs | | Amortization of Acquired Intangible Assets | | Goodwill Impairment Losses | | Gain on Arbitration Award | | Pension and OPEB Actuarial and Settlement Gains | | Tax Adjustment | | Non-GAAP Results |
Costs of services (excludes depreciation and amortization and restructuring costs) | | $ | 14,901 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14,901 |
|
| | | | | | | | | | | | | | | | | | |
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 2,050 |
| | — |
| | (318 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,732 |
|
| | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations, before taxes | | (5,228 | ) | | 252 |
| | 318 |
| | 583 |
| | 6,794 |
| | (632 | ) | | (244 | ) | | — |
| | 1,843 |
|
Income tax expense (benefit) | | 130 |
| | 44 |
| | 63 |
| | 133 |
| | 95 |
| | — |
| | (51 | ) | | (33 | ) | | 381 |
|
Net (loss) income | | (5,358 | ) | | 208 |
| | 255 |
| | 450 |
| | 6,699 |
| | (632 | ) | | (193 | ) | | 33 |
| | 1,462 |
|
Less: net income attributable to non-controlling interest, net of tax | | 11 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
|
Net (loss) income attributable to DXC common stockholders | | $ | (5,369 | ) | | $ | 208 |
| | $ | 255 |
| | $ | 450 |
| | $ | 6,699 |
| | $ | (632 | ) | | $ | (193 | ) | | $ | 33 |
| | $ | 1,451 |
|
| | | | | | | | | | | | | | | | | | |
Effective Tax Rate | | (2.5 | )% | | | | | | | | | | | | | | | | 20.7 | % |
| | | | | | | | | | | | | | | | | | |
Basic EPS from continuing operations | | $ | (20.76 | ) | | $ | 0.80 |
| | $ | 0.99 |
| | $ | 1.74 |
| | $ | 25.91 |
| | $ | (2.44 | ) | | $ | (0.75 | ) | | $ | 0.13 |
| | $ | 5.61 |
|
Diluted EPS from continuing operations | | $ | (20.76 | ) | | $ | 0.80 |
| | $ | 0.98 |
| | $ | 1.73 |
| | $ | 25.78 |
| | $ | (2.43 | ) | | $ | (0.74 | ) | | $ | 0.13 |
| | $ | 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2019 |
(in millions, except per-share amounts) | | As Reported | | Restructuring Costs | | Transaction, Separation and Integration-Related Costs | | Amortization of Acquired Intangible Assets | | Pension and OPEB Actuarial and Settlement Losses | | Tax Adjustment | | Non-GAAP Results |
Costs of services (excludes depreciation and amortization and restructuring costs) | | $ | 14,946 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14,946 |
|
| | | | | | | | | | | | | | |
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 1,959 |
| | — |
| | (401 | ) | | — |
| | — |
| | — |
| | 1,558 |
|
| | | | | | | | | | | | | | |
Income from continuing operations, before taxes | | 1,515 |
| | 465 |
| | 401 |
| | 539 |
| | 143 |
| | — |
| | 3,063 |
|
Income tax expense | | 288 |
| | 112 |
| | 102 |
| | 138 |
| | 27 |
| | 44 |
| | 711 |
|
Income from continuing operations | | 1,227 |
| | 353 |
| | 299 |
| | 401 |
| | 116 |
| | (44 | ) | | 2,352 |
|
Income from discontinued operations, net of taxes | | 35 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35 |
|
Net income | | 1,262 |
| | 353 |
| | 299 |
| | 401 |
| | 116 |
| | (44 | ) | | 2,387 |
|
Less: net income attributable to non-controlling interest, net of tax | | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Net income attributable to DXC common stockholders | | $ | 1,257 |
| | $ | 353 |
| | $ | 299 |
| | $ | 401 |
| | $ | 116 |
| | $ | (44 | ) | | $ | 2,382 |
|
| | | | | | | | | | | | | | |
Effective Tax Rate | | 19.0 | % | | | | | | | | | | | | 23.2 | % |
| | | | | | | | | | | | | | |
Basic EPS from continuing operations | | $ | 4.40 |
| | $ | 1.27 |
| | $ | 1.08 |
| | $ | 1.44 |
| | $ | 0.42 |
| | $ | (0.16 | ) | | $ | 8.46 |
|
Diluted EPS from continuing operations | | $ | 4.35 |
| | $ | 1.25 |
| | $ | 1.06 |
| | $ | 1.42 |
| | $ | 0.41 |
| | $ | (0.16 | ) | | $ | 8.34 |
|
| | | | | | | | | | | | | | |
Weighted average common shares outstanding for: | | | | | | | | | | | | | | |
Basic EPS | | 277.54 |
| | 277.54 |
| | 277.54 |
| | 277.54 |
| | 277.54 |
| | 277.54 |
| | 277.54 |
|
Diluted EPS | | 281.43 |
| | 281.43 |
| | 281.43 |
| | 281.43 |
| | 281.43 |
| | 281.43 |
| | 281.43 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2022 |
(in millions, except per-share amounts) | | As Reported | | Restructuring Costs | | Transaction, Separation and Integration-Related Costs | | Amortization of Acquired Intangible Assets | | Impairment Losses | | Gains and Losses on Dispositions | | Pension and OPEB Actuarial and Settlement Gains and Losses | | Debt Extinguishment Costs | | Tax Adjustment | | Non-GAAP Results |
Income before income taxes | | 1,141 | | | 318 | | | 26 | | | 434 | | | 31 | | | (341) | | | (684) | | | 311 | | | — | | | 1,236 | |
Income tax expense | | 405 | | | 65 | | | 7 | | | 90 | | | 7 | | | (104) | | | (171) | | | 73 | | | (43) | | | 329 | |
Net income | | 736 | | | 253 | | | 19 | | | 344 | | | 24 | | | (237) | | | (513) | | | 238 | | | 43 | | | 907 | |
Less: net loss attributable to non-controlling interest, net of tax | | 18 | | | — | | | — | | | — | | | — | | | — | | | (5) | | | — | | | — | | | 13 | |
Net income attributable to DXC common stockholders | | $ | 718 | | | $ | 253 | | | $ | 19 | | | $ | 344 | | | $ | 24 | | | $ | (237) | | | $ | (508) | | | $ | 238 | | | $ | 43 | | | $ | 894 | |
| | | | | | | | | | | | | | | | | | | | |
Effective Tax Rate | | 35.5 | % | | | | | | | | | | | | | | | | | | 26.6 | % |
| | | | | | | | | | | | | | | | | | | | |
Basic EPS | | $ | 2.87 | | | $ | 1.01 | | | $ | 0.08 | | | $ | 1.38 | | | $ | 0.10 | | | $ | (0.95) | | | $ | (2.03) | | | $ | 0.95 | | | $ | 0.17 | | | $ | 3.58 | |
Diluted EPS | | $ | 2.81 | | | $ | 0.99 | | | $ | 0.07 | | | $ | 1.35 | | | $ | 0.09 | | | $ | (0.93) | | | $ | (1.99) | | | $ | 0.93 | | | $ | 0.17 | | | $ | 3.50 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding for: | | | | | | | | | | | | | | | | | | | | |
Basic EPS | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | | | 250.02 | |
Diluted EPS | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | | | 255.21 | |
*The net periodic pension cost within net income from continuing operations includes $700$441 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP net income from continuing operations includes $570$581 million of expected long-term return on pension assets of defined benefit plans subject to interim remeasurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2021 |
(in millions, except per-share amounts) | | As Reported | | Restructuring Costs | | Transaction, Separation and Integration- Related Costs | | Amortization of Acquired Intangible Assets | | Impairment Losses | | Gains and Losses on Dispositions | | Pension and OPEB Actuarial and Settlement Gains and Losses | | Debt Extinguishment Costs | | Tax Adjustment | | Non-GAAP Results |
Income before income taxes | | 654 | | | 551 | | | 358 | | | 530 | | | 190 | | | (2,004) | | | 519 | | | 41 | | | — | | | 839 | |
Income tax expense | | 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 $1,401 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP net income includes $659 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, 2022 | | March 31, 2021 |
Net income (loss) | | $ | 736 | | | $ | (146) | |
Income tax expense | | 405 | | | 800 | |
Interest income | | (65) | | | (98) | |
Interest expense | | 204 | | | 361 | |
EBIT | | 1,280 | | | 917 | |
Restructuring costs | | 318 | | | 551 | |
Transaction, separation and integration-related costs | | 26 | | | 358 | |
Amortization of acquired intangible assets | | 434 | | | 530 | |
Gains on dispositions | | (341) | | | (2,004) | |
Pension and OPEB actuarial and settlement (gains) and losses | | (684) | | | 519 | |
Debt extinguishment costs | | 311 | | | 41 | |
Impairment losses | | 31 | | | 190 | |
Adjusted EBIT | | $ | 1,375 | | | $ | 1,102 | |
|
| | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Net (loss) income | | $ | (5,358 | ) | | $ | 1,262 |
|
Income from discontinued operations, net of taxes | | — |
| | (35 | ) |
Income tax expense | | 130 |
| | 288 |
|
Interest income | | (165 | ) | | (128 | ) |
Interest expense | | 383 |
| | 334 |
|
EBIT | | (5,010 | ) | | 1,721 |
|
Restructuring costs | | 252 |
| | 465 |
|
Transaction, separation and integration-related costs | | 318 |
| | 401 |
|
Amortization of acquired intangible assets | | 583 |
| | 539 |
|
Goodwill impairment losses | | 6,794 |
| | — |
|
Gain on arbitration award | | (632 | ) | | — |
|
Pension and OPEB actuarial and settlement (gains) losses | | (244 | ) | | 143 |
|
Adjusted EBIT | | $ | 2,061 |
| | $ | 3,269 |
|
Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As of March 31, 2020,2022, our cash and cash equivalents ("cash") were $3.7was $2.7 billion, of which $1.2$1.3 billion was held outside of the United States. A substantial portion of funds can be returnedU.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 U.S. from funds advanced previouslyCompany’s pooled resources to finance our foreign acquisition initiatives. As a result of the Tax Cuts and Jobs Act of 2017, and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries and current income inclusions for global intangible low taxed income, we expect ameet liquidity needs.
A significant portion of the cash held by our foreign subsidiaries will no longeris not expected to be subject toimpacted by U.S. federal income tax consequences upon subsequent repatriation to the U.S.repatriation. However, a portion of this cash may still be subject to foreign and U.S. state income tax consequences upon future remittance. Therefore, if additional funds held outside the U.S. are needed for our operations in the U.S., we plan to repatriate these funds.
funds not designated as indefinitely reinvested.
Cash was
$3.7
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, including cash of $0.6 billion held in a German financial services subsidiary subject to regulatory requirements, and $2.9$0.2 billion as held by majority owned consolidated subsidiaries where third-parties or public shareholders hold minority interests. During the third quarter of fiscal 2022, we entered into an agreement to sell our German financial services subsidiary.
March 31, 2020 and March 31, 2019, respectively.
The following table summarizes our cash flow activity:
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | |
Net cash provided by (used in): | | | | | | |
Operating activities | | $ | 1,501 | | | $ | 124 | | | |
Investing activities | | (60) | | | 4,665 | | | |
Financing activities | | (1,818) | | | (5,476) | | | |
Effect of exchange rate changes on cash and cash equivalents | | 29 | | | 39 | | | |
Cash classified within current assets held for sale | | 52 | | | (63) | | | |
Net decrease in cash and cash equivalents | | (296) | | | (711) | | | |
| | | | | | |
Cash and cash equivalents at beginning of year | | 2,968 | | | 3,679 | | | |
Cash and cash equivalents at end of year | | $ | 2,672 | | | $ | 2,968 | | | |
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Net cash provided by operating activities | | $ | 2,350 |
| | $ | 1,783 |
| | $ | 2,567 |
|
Net cash (used in) provided by investing activities | | (2,137 | ) | | 69 |
| | 719 |
|
Net cash provided by (used in) financing activities | | 657 |
| | (1,663 | ) | | (1,890 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (90 | ) | | (19 | ) | | 65 |
|
Net increase in cash and cash equivalents | | 780 |
| | 170 |
| | 1,461 |
|
Cash and cash equivalents at beginning of year | | 2,899 |
| | 2,729 |
| | 1,268 |
|
Cash and cash equivalents at the end of period | | $ | 3,679 |
| | $ | 2,899 |
| | $ | 2,729 |
|
Operating cash flow
Net cash provided by operating activities during fiscal 20202022 was $2,350$1,501 million as compared to $1,783$124 million during fiscal 2019.2021. The increase of $567$1,377 million was primarily due to an increase in net income, net of adjustments of $458$1,578 million, which includes an increasepartially offset by a $201 million unfavorable change in working capital movements of $109 million. Net income, net of adjustments includes cash received on arbitration award of $668 million.due to higher working capital outflows during fiscal 2022.
The following table contains certain key working capital metrics:
| | | | | | | | | | | | | | | | | | | | |
| | As of |
| | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Days of sales outstanding in accounts receivable | | 69 | | | 66 | | | 65 | |
| | | | | | |
Days of purchases outstanding in accounts payable | | (45) | | | (40) | | | (66) | |
Cash conversion cycle | | 24 | | | 26 | | | (1) | |
Investing cash flow
Net cash (used in) provided by investing activities was $(60) million during fiscal 2020 was $(2,137) million2022 as compared to $69$4,665 million during fiscal 2019.2021. The increasedecrease of $2,206$4,725 million was primarily due to an increase in cash paid for acquisitions of $1,632 million, a decrease in business dispositions of $4,414 million, the absence of proceeds from acquisitions and cash collections related to deferred purchase price receivablereceivables of $413$184 million and $159 million in fiscal 2021, and a decrease in proceeds from sale of assets of $284 million, and net short-term investing of $37 million. The increase is partially offset by a decrease in payments for transition and transformation costs of $113 million and cash paid for business dispositions of $65 million in fiscal 2019.
Financing cash flow
Net cash provided by (used in) financing activities during fiscal 2020 was $657 million, as compared to $(1,663) million during fiscal 2019. The $2,320 million increase was primarily due to borrowings under lines of credit in fiscal 2020 of $1.5 billion, additional borrowings on long-term debt of $552 million, a decrease in payments on long-term debt of $1,586 million, and lower repurchases of common stock and advance payment for accelerated share repurchase of $608$64 million. This was partially offset by proceeds from short-term investing of $24 million in fiscal 2022.
Financing cash flow
Net cash used in financing activities during fiscal 2022 was $(1,818) million as compared to $(5,476) million during fiscal 2021. The $3,658 million decrease in cash used was primarily due to decreased net repayments on long-term debt of $2,624 million and net draws on commercial paper of $529 million. In addition, net repayments totaling $1,500 million were made during fiscal 2021 on lines of credit that were not drawn against during fiscal 2022 and dividends of $53 million were paid in fiscal 2021, but not paid during fiscal 2022. This was partially offset by share repurchases of $628 million in fiscal 2022, an increase in repaymentspayments for debt extinguishment costs of commercial paper of $44$303 million, an increase in payments on capital leases and borrowings for the USPS spinasset financing of $60 million, and an increase in payments for other financing activities, net, of $58 million, primarily due to an $85 million repayment of liability resulting from a financing transaction of $1,114 millionentered in fiscal 2019, and proceeds from bond issuance of $753 million in fiscal 2019.
Capital Resources
2017.
See Note 22 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."
Debt Financing
The following table summarizes our total debt:
|
| | | | | | | | |
| | As of |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Short-term debt and current maturities of long-term debt | | $ | 1,276 |
| | $ | 1,942 |
|
Long-term debt, net of current maturities | | 8,672 |
| | 5,470 |
|
Total debt | | $ | 9,948 |
| | $ | 7,412 |
|
| | | | | | | | | | | | | | |
| | As of |
(in millions) | | March 31, 2022 | | March 31, 2021 |
Short-term debt and current maturities of long-term debt | | $ | 900 | | | $ | 1,167 | |
Long-term debt, net of current maturities | | 4,065 | | | 4,345 | |
Total debt | | $ | 4,965 | | | $ | 5,512 | |
The $2.5$0.5 billion increasedecrease in total debt during fiscal 20202022 was primarily attributed to the $1.5 billion borrowingretirement of all the remaining $319 million of the 4.45% senior notes due fiscal 2023 using the proceeds from the credit facility agreementsale of our HPS Business, and the newrepurchase of the $33 million of the 4.125% senior notes due fiscal 2026. More than $550 million of net finance lease liabilities and borrowings for assets acquired under long-term financing were also repaid using the proceeds from the divestitures of other businesses and existing cash on hand. The decrease was partially offset by the issuance of Euro and U.S. Dollar Senior Notes of which proceeds were used to repay term loan credit agreement in anloans and senior notes as discussed below.
Euro Senior Notes Issuance
During the second quarter of fiscal 2022, we issued (i) €750 million aggregate principal amount of $2.2 billion, consistingour 0.450% senior notes due fiscal 2028 and (ii) €600 million aggregate principal amount of three tranches: (i) $500 million maturing onour 0.950% senior notes due fiscal 2025; (ii) €750 million maturing on fiscal 2022; and (iii) €750 million maturing on fiscal 2023.2032 (collectively, the “Euro Notes”). The proceeds from the newEuro Notes were applied principally to the repayment in full of the €400 million aggregate principal amount of outstanding borrowings under our Euro-denominated term loan credit agreement was used to financefacility, the Luxoft Acquisition. Additionally, we repaidrepayment of our U.S. dollar-denominated 4.25% senior notes due fiscal 2025 and the $500 millionrepayment of our Sterling-denominated 2.75% senior notes due fiscal 2025.
U.S. Dollar Senior Notes due 2020 and $500 million Senior Notes due 2021 during fiscal 2020. See Note Issuance
13 - "Debt" for more information.
During the second quarter of fiscal 2022, we issued (i) $700 million aggregate principal amount of our 1.80% senior notes due fiscal 2027, and (ii) $650 million aggregate principal amount of our 2.375% senior notes due fiscal 2029 (collectively, the “USD Notes”). The proceeds from the USD Notes were used for the repayment of our remaining 4.125% senior notes due fiscal 2026, our 4.75% senior notes due fiscal 2028 and our 7.45% senior notes due fiscal 2030.
We were in compliance with all financial covenants associated with our borrowings as of March 31, 20202022 and March 31, 2019.2021.
The debt maturity chart below summarizes the future maturities of long-term debt principal for fiscal years subsequent to March 31, 2020 and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities. See Note 13 - "Debt" for more information.
The following table summarizes our capitalization ratios:
|
| | | | | | | | |
| | As of |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Total debt | | $ | 9,948 |
| | $ | 7,412 |
|
Cash and cash equivalents | | 3,679 |
| | 2,899 |
|
Net debt(1) | | $ | 6,269 |
| | $ | 4,513 |
|
| | | | |
Total debt | | $ | 9,948 |
| | $ | 7,412 |
|
Equity | | 5,129 |
| | 11,725 |
|
Total capitalization | | $ | 15,077 |
| | $ | 19,137 |
|
| | | | |
Debt-to-total capitalization | | 66.0 | % | | 38.7 | % |
Net debt-to-total capitalization(1) | | 41.6 | % | | 23.6 | % |
(1) Net debt and Net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone.
Net debt-to-total capitalization as of March 31, 2020 increased as compared to March 31, 2019, primarily due to the increase in total debt attributed to the Luxoft Acquisition, borrowing from the credit facility agreement, the decrease in cash and cash equivalents used to pay down Senior Notes, and the decrease in equity resulting from goodwill impairment charges reported during fiscal 2020.
As of March 31, 2020,2022, our credit ratings were as follows:
|
| | | | | | | | | | | | | | | | | | | |
Rating Agency | | Long Term Ratings | | Short Term Ratings | | Outlook |
Fitch | | BBB+BBB | | F-2 | | NegativeStable |
Moody's | | Baa2 | | P-2 | | NegativeStable |
S&P | | BBBBBB- | | - | | NegativeStable |
For information on the risksrisks of ratings downgrades, see Part I, Item 1A - Risk Factors "Oursubsection titled, "Failure to maintain our credit rating and ability to manage working capital, refinance and raise additional capital for future needs, could adversely affect our liquidity, capital position, borrowing cost, and access to capital markets."
See Note
22 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below.
Liquidity
We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our normal operating requirements for the next 12 months. We expect to continue using cash generated by operations as a primary source of liquidity; however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to raise capital through debt financing, including the issuance of capital market debt instruments such as commercial paper term loans, and bonds. In addition, we currently utilize and will further utilize accounts receivable sales facilities, and our cross currencycross-currency cash pool for liquidity needs. However, thereThere 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, 2022 |
Cash and cash equivalents | | $ | 2,672 | |
Available borrowings under our revolving credit facility | | 3,000 | |
| | |
Total liquidity | | $ | 5,672 | |
|
| | | | |
| | As of |
(in millions) | | March 31, 2020 |
Cash and cash equivalents | | $ | 3,679 |
|
Available borrowings under our revolving credit facility | | 2,500 |
|
Total liquidity | | $ | 6,179 |
|
During March 2020 as the evolving global COVID-19 pandemic crisis resulted in increasing government actionsNovember 2021 we amended our revolving credit facility 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 billionamong other things, decrease available borrowings from its Revolving Credit Facility due 2025 in order to increase cash on hand and eliminate the reliance on commercial paper markets along with the suspension of the Company’s Euro and USD commercial paper program until the Company deems such capital markets stabilized and reliable. As a result, the Company’s commercial paper outstanding was reduced to $542 million as of March 31, 2020, and another $318 million is scheduled to mature during the quarter ending June 30, 2020, which the Company currently expects to fund such maturing Euro commercial paper from its cash on hand. While central bank actions have improved liquidity in commercial paper markets overall, there is no assurance that the Company, at its commercial program ratings of P2/F2, will have reliable access in the future or if accessible, at reasonable costs.
On April 6, 2020 subsequent to the fiscal period end, 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 pandemic crisis and to mitigate the uncertainties caused by volatile capital markets, changing governmental policies, and evolving impact on world economies.
Subsequent to the end of the fiscal period, the Company issued $1.0 billion in principal amount of Senior Notes in the form of $500 million principal amount of 4.0% Senior Notes due 2023 and $500 million principal amount of 4.125% Senior Notes due 2025. All the net proceeds from the Notes offerings were applied towards the early prepayment of the Company’s term loan facilities, including prepayment of €500 million of Euro Term Loan due fiscal 2022, £150 million of GBP Term Loan due fiscal 2022, A$300 million of AUD Term Loan due fiscal 2022, and $100 million of USD Term Loan due fiscal 2025.
On May 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 ending March 31, 2022 (with the first quarterly measurement date as of June 30, 2021). The net effect of such adjustment to the Leverage Ratio definition in the Company’s credit and term loan facilities is to allow the Company the flexibility to maintain elevated cash balances going forward both during current circumstances and thereafter, without constraining the Company’s strategy of maintaining strong access to liquidity during the COVID pandemic crisis. The Company’s credit and term loan facilities that were modified include: $4.0 billion Revolving Credit Facilities due fiscal year 2025 (including a $70 million sub-tranche due fiscal 2024), €250 million Euro Term Loan due fiscal year 2022 (a substantial portion was extended to mature in fiscal year 2023 pursuant to the Euro Term Loan Extension, see below), €750 million Euro Term Loan due fiscal year 2023 (a substantial portion was extended to mature in fiscal year 2024 pursuant to the Euro Term Loan Extension, see below), £300 million in GBP Term Loan due fiscal year 2022, A$500 million in AUD Term Loan due fiscal year 2022, and approximately $382 million in outstanding USD Term Loan due fiscal year 2025.$3.0 billion.
On May 15, 2020, the Company initiated elective extension amendments in accordance with the terms of the aggregate €1.0 billion principal amount of Euro Term Loans outstanding. Accordingly, €216.7 million out of €250 million Euro Term Loan due fiscal year 2022 agreed to extend maturity 12-months to mature fiscal year 2023, and €700 million out of total €750 million Euro Term Loan due fiscal year 2023 agreed to extend maturity 12-months to mature fiscal year 2024. Margin would increase during the 12-month extension terms to Euribor + 125bps and Euribor + 175bps respectively, for the Euro Term Loans originally due fiscal years 2022 and 2023, which would be an increase from the current applicable margin of Euribor + 65bps, and Euribor + 80 bps, respectively. There is no change to current margin or terms through the original maturity term of the Euro Term Loans.
The debt maturity chart below summarizes the future maturities of long-term debt principal taking into effect borrowings and prepayments as mentioned above, for fiscal years subsequent to May 15, 2020, and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities.
Share Repurchases
During fiscal 2018, our Board of DirectorsDirectors authorized the repurchase of up to $2.0 billion of our common stock and during fiscal 2019, we announced that our Board of Directors had approved an incremental $2.0 billion share repurchase. On February 2, 2022, we announced our intention to repurchase authorization. An expirationincrementally up to $1.0 billion of our outstanding shares of common stock in the open market. This program became effective on April 3, 2017 with no end date has not been established for this repurchase plan.established. During fiscal 2020,2022, we repurchased 15,933,65118,818,934 shares of our common stock at an aggregate cost of $736$634 million. See See Note 1516 - "Stockholders' Equity""Stockholders' Equity" for more information.
Dividends
During fiscal 2020, our Board of Directors declared aggregate cash dividends to our stockholders of $0.84 per share, or approximately $219 million. To enhancemaintain our financial flexibility under current uncertain market conditions, we have electedcontinued to suspend payment of a quarterly dividend. This decision will be reevaluated by the Board of DXC Technology as market conditions stabilize.dividends for fiscal 2022.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to arrangements that include guarantees, the receivables securitizationsales 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 the Company's balance sheets. See Note 56 - "Receivables" and Note 2223 - "Commitments and Contingencies" for additional information regarding these off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations as of March 31, 2020,2022, were as follows:
| | (in millions) | | Less than 1 year | | 2-3 years | | 4-5 years | | More than 5 years | | Total | (in millions) | | Less than 1 year | | 2-3 years | | 4-5 years | | More than 5 years | | Total |
Debt(1) | | $ | 290 |
| | $ | 3,698 |
| | $ | 2,870 |
| | $ | 1,458 |
| | $ | 8,316 |
| Debt(1) | | $ | 249 | | | $ | 159 | | | $ | 1,428 | | | $ | 2,152 | | | $ | 3,988 | |
Capitalized lease liabilities | | 444 |
| | 510 |
| | 92 |
| | — |
| | 1,046 |
| |
Finance lease liabilities(2) | | Finance lease liabilities(2) | | 300 | | | 303 | | | 69 | | | — | | | 672 | |
Operating Leases(2) | | 508 |
| | 645 |
| | 325 |
| | 221 |
| | 1,699 |
| Operating Leases(2) | | 415 | | | 533 | | | 203 | | | 155 | | | 1,306 | |
Purchase Obligations(3) | | 1,911 |
| | 1,180 |
| | 286 |
| | — |
| | 3,377 |
| Purchase Obligations(3) | | 828 | | | 642 | | | 253 | | | — | | | 1,723 | |
U.S. Tax Reform - Transition Tax(4) | | 24 |
| | 46 |
| | 102 |
| | 73 |
| | 245 |
| U.S. Tax Reform - Transition Tax(4) | | 23 | | | 99 | | | 71 | | | — | | | 193 | |
| Interest and preferred dividend payments(5) | | 253 |
| | 441 |
| | 325 |
| | 159 |
| | 1,178 |
| Interest and preferred dividend payments(5) | | 62 | | | 104 | | | 83 | | | 59 | | | 308 | |
Total(6) | | $ | 3,430 |
| | $ | 6,520 |
| | $ | 4,000 |
| | $ | 1,911 |
| | $ | 15,861 |
| Total(6) | | $ | 1,877 | | | $ | 1,840 | | | $ | 2,107 | | | $ | 2,366 | | | $ | 8,190 | |
(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.expected undiscounted cash payments. See Note 67 - "Leases""Leases" for more information.
(3) Includes long-term purchase agreements with certain software, hardware, telecommunication and other service providers and excludeexcludes agreements that are cancelablecancellable 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 $288$276 million, of which $290$284 million was recorded as income tax liability and $2$8 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 twofour payments. See Note 1213 - "Income Taxes" for additional information about the transition tax. See Note 12 - "Income Taxes" for additional information abouttax and the estimated liability related to unrecognized tax benefits which has been omitted from this table.
(5) Amounts represent scheduled interest payments on long-term debt and scheduled dividend payments associated with the mandatorily redeemable preferred stock of a consolidated subsidiary excluding contingent dividends associated with the participation and variable appreciation premium features. Also included are scheduled interest payments of $246 million on new borrowings from our credit facility agreement subsequent to period end. See Note 23 - "Subsequent Events" for more information.
(6) See Note 1413 - "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.
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 committeeAudit Committee of our boardBoard of directors.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 Multiplemultiple performance obligations
Many of our contracts requirerequire us to provide a range of services or performance obligations to our customers, which may include a combination of services, products or both.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 contractpost-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.
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 in the 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 the U.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 with certainty what our ETR will be in the future because there is uncertainty regarding these factors. 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.
The majority of our global unremitted foreign earnings hashave been taxed in the U.S. through the transition tax and global intangible low tax income tax in connection with 2017or would be exempt from U.S. tax reform.upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The Company was not permanently reinvestedfollowing foreign earnings are considered indefinitely reinvested: approximately $495 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and our accumulated earnings in all jurisdictions with the exception of India as of March 31, 2019. As a result of the issuance of new U.S. Treasury regulations in the first quarter of fiscal 2020, the Company changed its permanent reinvestment assertion in the first quarter of fiscal 2020 with respect to certain foreign corporations, reducing the amount that will ultimately be repatriated to the U.S. by approximately $492 million. However, as of March 31, 2020, the Company anticipates that future earnings in India will not be indefinitely reinvested. This change resulted from the Company's determination that it is now efficient to repatriate earnings in India as a result of the enactment of India Finance Act, 2020 on March 27, 2020 and change in cash needs resulting from the economic consequences of the COVID-19 pandemic. We expect a significant2021. A portion of the cash held by our foreign subsidiaries will no longer be subject to U.S. federal income tax upon repatriation to the U.S., however, a portion of this cashthese indefinitely reinvested earnings may still be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position based on its strategic objectives and future 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 results of financial operations. We recorded a valuation allowance against deferred tax assets of approximately $2.2$2.1 billion as of March 31, 20202022 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.factors such as when inputs or estimates used in determining valuation allowances significantly change or upon the receipt of new information.
Recent enactmentWe 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 CARESbenefit 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.
The Finance Act or changes2021 in the U.K. took effect after Royal Assent was received in June 2021. The Finance Act 2021 included increases in the corporation tax laws resulting fromand diverted profits tax rates beginning on April 1, 2023, establishes a new temporary 130% super deduction for first year capital allowances and temporarily extends the Organization for Economic Co-operationcarry-back of trading losses. The increase in the U.K. corporate tax rate and Development’s multi-jurisdictional plan of action to address “base erosion and profit shifting” could impact our effective tax rate. Thesuper deduction have been factored into the calculation of our income tax liabilities involves uncertainties in the application of complex changing tax regulations. The Company is currently evaluating the impact of the CARES Act. The CARES Act makes a technical correction to the 2017 U.S. tax reform to provide a 15-year recovery period for qualified improvement property ("QIP"). This correction makes QIP eligible for bonus depreciation and is effective as if enacted as part of the 2017 U.S. tax reform. Accordingly, the Company has applied bonus depreciation on certain QIP. CARES also includes provisions relating to refundable payroll tax credits, the ability to utilize and carryback certain net operating losses, alternative minimum tax refunds, and modifications to rules regarding the deductibility of net interest expense.provision.
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 observable inputs are 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, 2022 | | March 31, 2021 | | | | | | | | |
Discount rates | | 2.0 | % | | 2.4 | % | | | | | | | | |
Expected long-term rates of return on assets | | 4.4 | % | | 5.6 | % | | | | | | | | |
|
| | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Discount rates | | 2.4 | % | | 2.5 | % | | 2.5 | % |
Expected long-term rates of return on assets | | 5.8 | % | | 5.3 | % | | 4.9 | % |
The assumption for the expected long-term rate of return on plan assets is impacted by the expected asset mix of the plan; judgments regarding the correlation between historical excess returns and future excess returns and expected investment expenses. The discount rate assumption is based on current market rates for high-quality, fixed income debt instruments with maturities similar to the expected duration of the benefit payment period. The following table provides the impact changes in the weighted-average assumptions would have had on our net periodic pension benefits and settlement and contractual termination charges for fiscal 2020:2022:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Change | | Approximate Change in Net Periodic Pension Expense | | Approximate Change in Settlement, Contractual Termination, and Mark-to-Market Charges |
Expected long-term return on plan assets | | 0.5% | | $ | (66) | | | $ | 63 | |
Expected long-term return on plan assets | | (0.5)% | | $ | 66 | | | $ | (63) | |
| | | | | | |
Discount rate | | 0.5% | | $ | 35 | | | $ | (838) | |
Discount rate | | (0.5)% | | $ | (41) | | | $ | 1,029 | |
|
| | | | | | | | | | |
(in millions) | | Change | | Approximate Change in Net Periodic Pension Expense | | Approximate Change in Settlement, Contractual Termination, and Mark-to-Market Charges |
Expected long-term return on plan assets | | 0.5% | | $ | (55 | ) | | $ | 54 |
|
Expected long-term return on plan assets | | (0.5)% | | $ | 55 |
| | $ | (54 | ) |
| | | | | | |
Discount rate | | 0.5% | | $ | 25 |
| | $ | (793 | ) |
Discount rate | | (0.5)% | | $ | (29 | ) | | $ | 994 |
|
Valuation of Assets
We review long-lived ("assets, intangible assets, and goodwill")goodwill for impairment in accordance with our accounting policy disclosed in Note 1 - Summary"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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational company, we are exposed to certain market risks such as changes in foreign currency exchange rates and interest rates. Changes in foreign currency exchange rates can impact our foreign currency denominated monetary assets and liabilities and forecasted transactions in foreign currency, whereas changes in benchmark interest rates can impact interest expense associated with our floating interest rate debt and the fair value of our fixed interest rate debt. A variety of practices are employed to manage these risks, including operating and financing activities and the use of derivative instruments. We do not use derivatives for trading or speculative purposes.
Presented below is a description of our risks together with a sensitivity analysis of each of these risks based on selected changes in market rates. The foreign currency model incorporates the impact of diversification from holding multiple currencies and the correlation of revenues, costs and any related short-term contract financing in the same currency. In order to determine the impact of changes in interest rates on our future results of operations and cash flows, we calculated the increase or decrease in the index underlying these rates. We estimate the fair value of our long-term debt primarily using an expected present value technique using interest rates offered to us for instruments with similar terms and remaining maturities. These analyses reflect management's view of changes that are reasonably possible to occur over a one-year period.
Foreign Currency Risk
We are exposed to both favorable and unfavorable movements in foreign currency exchange rates. In the ordinary course of business, we enter into contracts denominated in foreign currencies. Exposure to fluctuations in foreign currency exchange rates arising from these contracts is analyzed during the contract bidding process. We generally manage these contracts by incurring costs in the same currency in which revenues are received and any related short-term contract financing requirements are met by borrowing in the same currency. Thus, by generally matching revenues, costs and borrowings to the same currency, we are able to mitigate a portion of the foreign currency risk to earnings. However, due to our increased use of offshore labor centers, we have become more exposed to fluctuations in foreign currency exchange rates. We experienced significant foreign currency fluctuations during fiscal 20202022 due primarily to the volatility of the Euro, British Pound, Canadian Dollar, and Australian dollar, British pound and EuroDollar in relation to the U.S. dollar. Significant foreign currency fluctuations during fiscal 20192021 was due primarily to the volatility of the Australian dollar, British poundPound and Euro in relation to the U.S. dollar.
We have policies and procedures to manage exposure to fluctuations in foreign currency by using short-term foreign currency forward contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. For accounting purposes, these foreign currency forward contracts are not designated as hedges and changes in their fair value areare reported in current period earnings within other expense (income) expense,, net in the statements of operations. We also use foreign currency forward contracts to reduce foreign currency exchange rate risk related to certain Indian rupee denominated intercompany obligations and forecasted transactions. For accounting purposes, these foreign currency forward contracts are designated as cash flow hedges with critical terms that match the hedged items. Therefore, the changes in fair value of these forward contracts are recorded in accumulated other comprehensive income, net of taxes in the statements of comprehensive income and subsequently classified into net income in the period during which the hedged transactions are recognized in net income.
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than U.S. dollar, see Note 1921 - "Segment and Geographic Information"."Revenue." During fiscal 2020,2022, approximately 63%71% of our revenues were generated outside of the United States. For the year ended March 31, 2020,2022, a hypothetical 10% changeincrease (decrease) in the value of the U.S. dollar against all currencies would have changeddecreased (increased) revenues by approximately 6.3%7.1%, or $1.2$1.1 billion. The majority of this fluctuation would be offset by expenses incurred in local currency; and as a result, there would not be a material change to our income from continuing operations before taxes. As such, in the view of management, the resulting impact would not be material to our results of operations or cash flows.
Interest Rate Risk
As of March 31, 2020,2022, we had outstanding debt with varying maturities for an aggregate carrying amount of $9.9$5.0 billion, of which $5.2$0.4 billion was floating interest rate debt. Most of our floating interest rate debt is based upon varying terms of adjusted LIBOR rates; consequently, changes in LIBOR result in the most volatility to our interest expense. As of March 31, 2020,2022, an assumed 10% unfavorable change in interest rates would not be material to our consolidated results of operations or cash flows. A change in interest rates related to our long-term debt would not have a material impact on our financial statementsbalance sheet as we do not record our debt at fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
| | | | | |
| |
| |
| |
| Page |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Note 4–Assets Held For Sale | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
DXC Technology Company
Tysons,Ashburn, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DXC Technology Company and subsidiaries (the "Company") as of March 31, 20202022 and 2019,2021, the related consolidated statements of operations, comprehensive income (loss) income,, cash flows, and changes in equity, for each of the three years in the period ended March 31, 2020,2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2020,2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2020,2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 1, 2020,May 25, 2022, expressed an adverseunqualified opinion on the Company's internal control over financial reporting because of a material weakness.reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - GBS and GIS reporting units -Revenue Recognition — Refer to NoteNotes 1 and Note 1121 to the financial statements
Critical Audit Matter descriptionDescription
The Company’s evaluation of goodwill for impairment involves the determination of reporting units and comparisonCertain of the fair valueCompany’s contracts with customers involve multiple performance obligations and may contain embedded leases, which are assessed for classification and are typically recognized either as sales type leases or as operating leases. When the Company enters into such arrangements, the contract’s transaction price is allocated to the contract performance obligations and the lease component based upon the relative standalone selling price. These conclusions could impact the timing of each reporting unit to its carrying value. The Company identified two reporting units, Global Business Services ("GBS") and Global Infrastructure Services ("GIS"). The identification of reporting units involves consideration of componentsrevenue recognition.
Additionally, the Company’s contracts with customers may be modified over the course of the operating segments and whethercontract term which may change the scope, price, or not there is discrete financial information available that is regularly reviewed by management. Additionally, the Company considers whether or not it is reasonable to aggregate anyboth, of the identified components that have similar economic characteristics. The Company estimatesexisting contract. Contract modifications are reviewed to determine whether they should be accounted for as part of the fair value of its reporting units using a combinationoriginal contract, the termination of an income approach, utilizingexisting contract and the creation of a discounted cash flow analysis, andnew contract, or as a market approach, using market multiples. The estimationseparate contract. If the contract modification is part of the fair value usingexisting contract, a cumulative adjustment to revenue is recorded. If the discounted cash flow model requires managementcontract modification represents the termination of the existing contract and the creation of a new contract, the modified transaction price is allocated to make significant estimatesthe prospective performance obligations and assumptionsany embedded lease components. If a contract modification modifies an embedded lease component and the modification is not accounted for as a separate contract, the classification of the lease is reassessed.
Given these factors related to forecastscomplex new contracts with customers and modifications of future revenue growth rates, operating margins, and discount rates. GBS and GIS’s revenue growth rates and operating margins are sensitive to changes in customer demand. The determination of the fair value using the market approach requires management to make significant judgments related to performance-metric market multiples applied to the reporting unit’s prior and expected operating performance.
The Company performed their annual impairment test as of July 1, 2019, and, due to a subsequent sustained declinesuch contracts in the Company’s stock pricecurrent fiscal year, the related audit effort in evaluating complex revenue arrangements was significant and market capitalization, updated impairment tests were completed during the second and fourth quarters of fiscal 2020. The Company concluded that the carrying values of GBS and GIS reporting units exceeded their fair values and, therefore, an impairment was recognized in the amount of $3,789 million and $3,005 million, respectively, during fiscal 2020. As of March 31, 2020, after recording the impairments, goodwill for the GBS and GIS reporting units was $2,017 million and $0, respectively.
We identified the Company’s determination of reporting units and evaluation of goodwill impairment for the GBS and GIS reporting units asrequired a critical audit matter because of the significant judgments made by management to identify and aggregate reporting units and estimate the fair value of each reporting unit. A high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the identification of reporting units; revenue growth rates and operating margins; the selection of reporting unit performance-metric market multiples and discount rates; and the reconciliation of the reporting units estimated fair value to the Company’s market capitalization.judgment.
How the Critical AccountingAudit Matter Was Addressed in the Audit
Our audit procedures related to the determination of reporting units,Company’s revenue growth rates, selection of reporting unit performance-metric market multiplesrecognition for complex new and discount rates, and reconciliation of market capitalization for the GBS and GIS reporting unitsmodified revenue arrangements included the following, among others:following:
•We tested the effectiveness of controls over management’s determination of reporting units and goodwill impairment evaluation, including those over the determination of the fair value of GBS and GIS, such asinternal controls related to management’sthe review of revenue forecasts, selectionrecognition conclusions for new and modified contracts.
•We analyzed the population of material revenue arrangements that were new or modified during the discount rates, selection of performance-metric market multiples,year and market capitalization reconciliation.performed the following procedures on the arrangements that were determined to be complex:
We–Obtained and read the customer contract and evaluated management’s identification of reporting units, including considerationperformance obligations and embedded lease components, if applicable.
–If applicable, evaluated management’s conclusions regarding lease classification.
–Evaluated management’s determination of componentsstandalone selling price for the identified performance obligations and lease components.
–Recalculated the transaction price and tested the allocation of its operating segments,transaction price to each performance obligation and lease component.
–Evaluated the availabilitypattern of discrete financial informationdelivery and revenue recognition timing for each that is regularly reviewed by management,performance obligation and the suitability of aggregation of components.lease component.
We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, including management’s forecasting accuracy, (2) internal communications to management and the Board of Directors, (3) forecasted information included in Company press releases as well as in analyst and industry reports of the Company and companies in its peer group, and (4) analyzing and comparing forecasts to the Company’s revenue backlog and sales pipeline.
We evaluated the impact of changes in management’s forecasts on each of the impairment test dates during the fiscal year ended March 31, 2020.
With the assistance of our fair value specialists, we evaluated the reasonableness of:
| |
– | Discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management. |
| |
– | Performance-metric multiples, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its peer group. |
| |
– | Reconciliation and comparison of the fair value of the GBS and GIS reporting units to the Company’s market capitalization. |
/s/ DELOITTEDeloitte & TOUCHETouche LLP
McLean, Virginia
June 1, 2020 May 25, 2022
We have served as the Company's auditor since at least 1965; however, an earlier year could not be reliably determined.
DXC TECHNOLOGY COMPANY
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | As of |
(in millions, except per share and share amounts) | | March 31, 2022 | | March 31, 2021 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 2,672 | | | $ | 2,968 | |
Receivables and contract assets, net of allowance for doubtful accounts of $55 and $91 | | 3,854 | | | 4,156 | |
Prepaid expenses | | 617 | | | 567 | |
Other current assets | | 268 | | | 357 | |
Assets held for sale | | 35 | | | 160 | |
Total current assets | | 7,446 | | | 8,208 | |
Intangible assets, net of accumulated amortization of $5,124 and $4,422 | | 3,378 | | | 4,043 | |
Operating right-of-use assets, net | | 1,133 | | | 1,366 | |
Goodwill | | 617 | | | 641 | |
Deferred income taxes, net | | 221 | | | 289 | |
Property and equipment, net of accumulated depreciation of $3,998 and $4,121 | | 2,412 | | | 2,946 | |
Other assets | | 4,850 | | | 4,192 | |
Assets held for sale - non-current | | 82 | | | 353 | |
Total Assets | | $ | 20,139 | | | $ | 22,038 | |
LIABILITIES and EQUITY | | | | |
Current liabilities: | | | | |
Short-term debt and current maturities of long-term debt | | $ | 900 | | | $ | 1,167 | |
Accounts payable | | 840 | | | 914 | |
Accrued payroll and related costs | | 570 | | | 698 | |
Current operating lease liabilities | | 388 | | | 418 | |
Accrued expenses and other current liabilities | | 2,882 | | | 3,358 | |
Deferred revenue and advance contract payments | | 1,053 | | | 1,079 | |
Income taxes payable | | 197 | | | 398 | |
Liabilities related to assets held for sale | | 23 | | | 118 | |
Total current liabilities | | 6,853 | | | 8,150 | |
Long-term debt, net of current maturities | | 4,065 | | | 4,345 | |
Non-current deferred revenue | | 862 | | | 622 | |
Non-current operating lease liabilities | | 815 | | | 1,038 | |
Non-current pension obligations | | 590 | | | 793 | |
Non-current income tax liabilities and deferred tax liabilities | | 994 | | | 854 | |
Other long-term liabilities | | 546 | | | 908 | |
Liabilities related to assets held for sale - non-current | | 39 | | | 20 | |
Total Liabilities | | 14,764 | | | 16,730 | |
Commitments and contingencies | | 0 | | 0 |
DXC stockholders’ equity: | | | | |
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued as of March 31, 2022 and March 31, 2021 | | — | | | — | |
Common stock, par value $0.01 per share; authorized 750,000,000 shares; issued 240,508,348 as of March 31, 2022 and 257,052,533 as of March 31, 2021 | | 3 | | | 3 | |
Additional paid-in capital | | 10,057 | | | 10,761 | |
Accumulated deficit | | (4,450) | | | (5,331) | |
Accumulated other comprehensive loss | | (385) | | | (302) | |
Treasury stock, at cost, 2,878,079 and 2,458,027 shares as of March 31, 2022 and March 31, 2021 | | (173) | | | (158) | |
Total DXC stockholders’ equity | | 5,052 | | | 4,973 | |
Non-controlling interest in subsidiaries | | 323 | | | 335 | |
Total Equity | | 5,375 | | | 5,308 | |
Total Liabilities and Equity | | $ | 20,139 | | | $ | 22,038 | |
|
| | | | | | | | |
| | As of |
(in millions, except per share and share amounts) | | March 31, 2020 | | March 31, 2019 |
ASSETS | | | |
|
Current assets: | | | | |
Cash and cash equivalents | | $ | 3,679 |
| | $ | 2,899 |
|
Receivables and contract assets, net of allowance for doubtful accounts of $74 and $60 | | 4,392 |
| | 5,181 |
|
Prepaid expenses | | 646 |
| | 627 |
|
Other current assets | | 270 |
| | 359 |
|
Total current assets | | 8,987 |
| | 9,066 |
|
| | | | |
Intangible assets, net of accumulated amortization of $4,347 and $3,399 | | 5,731 |
| | 5,939 |
|
Operating right-of-use assets, net | | 1,428 |
| | — |
|
Goodwill | | 2,017 |
| | 7,606 |
|
Deferred income taxes, net | | 265 |
| | 355 |
|
Property and equipment, net of accumulated depreciation of $3,818 and $3,958 | | 3,547 |
| | 3,179 |
|
Other assets | | 4,031 |
| | 3,429 |
|
Total Assets | | $ | 26,006 |
| | $ | 29,574 |
|
| | | | |
LIABILITIES and EQUITY | | | | |
Current liabilities: | | | | |
Short-term debt and current maturities of long-term debt | | $ | 1,276 |
| | $ | 1,942 |
|
Accounts payable | | 1,598 |
| | 1,666 |
|
Accrued payroll and related costs | | 630 |
| | 652 |
|
Current operating lease liabilities | | 482 |
| | — |
|
Accrued expenses and other current liabilities | | 2,801 |
| | 3,355 |
|
Deferred revenue and advance contract payments | | 1,021 |
| | 1,630 |
|
Income taxes payable | | 87 |
| | 208 |
|
Total current liabilities | | 7,895 |
| | 9,453 |
|
| | | | |
Long-term debt, net of current maturities | | 8,672 |
| | 5,470 |
|
Non-current deferred revenue | | 735 |
| | 256 |
|
Non-current operating lease liabilities | | 1,063 |
| | — |
|
Non-current pension obligations | | 761 |
| | 790 |
|
Non-current income tax liabilities and deferred tax liabilities | | 1,157 |
| | 1,184 |
|
Other long-term liabilities | | 594 |
| | 696 |
|
Total Liabilities | | 20,877 |
| | 17,849 |
|
| | | | |
Commitments and contingencies | |
|
| |
|
|
| | | | |
DXC stockholders’ equity: | | | | |
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued as of March 31, 2020 and March 31, 2019 | | — |
| | — |
|
Common stock, par value $0.01 per share; authorized 750,000,000 shares; issued 255,674,040 as of March 31, 2020 and 270,213,891 as of March 31, 2019 | | 3 |
| | 3 |
|
Additional paid-in capital | | 10,714 |
| | 11,301 |
|
(Accumulated deficit) retained earnings | | (5,177 | ) | | 478 |
|
Accumulated other comprehensive loss | | (603 | ) | | (244 | ) |
Treasury stock, at cost, 2,148,708 and 1,788,658 shares as of March 31, 2020 and March 31, 2019 | | (152 | ) | | (136 | ) |
Total DXC stockholders’ equity | | 4,785 |
| | 11,402 |
|
Non-controlling interest in subsidiaries | | 344 |
| | 323 |
|
Total Equity | | 5,129 |
| | 11,725 |
|
Total Liabilities and Equity | | $ | 26,006 |
| | $ | 29,574 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions, except per-share amounts) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
| | | | | | |
Revenues | | $ | 19,577 |
| | $ | 20,753 |
| | $ | 21,733 |
|
| | | | | | |
Costs of services (excludes depreciation and amortization and restructuring costs) | | 14,901 |
| | 14,946 |
| | 16,317 |
|
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 2,050 |
| | 1,959 |
| | 1,890 |
|
Depreciation and amortization | | 1,942 |
| | 1,968 |
| | 1,795 |
|
Goodwill impairment losses | | 6,794 |
| | — |
| | — |
|
Restructuring costs | | 252 |
| | 465 |
| | 789 |
|
Interest expense | | 383 |
| | 334 |
| | 320 |
|
Interest income | | (165 | ) | | (128 | ) | | (89 | ) |
Gain on arbitration award | | (632 | ) | | — |
| | — |
|
Other income, net | | (720 | ) | | (306 | ) | | (593 | ) |
Total costs and expenses | | 24,805 |
| | 19,238 |
| | 20,429 |
|
| | | | | | |
(Loss) income from continuing operations, before taxes | | (5,228 | ) | | 1,515 |
| | 1,304 |
|
Income tax expense (benefit) | | 130 |
| | 288 |
| | (242 | ) |
(Loss) income from continuing operations | | (5,358 | ) | | 1,227 |
| | 1,546 |
|
Income from discontinued operations, net of taxes | | — |
| | 35 |
| | 236 |
|
Net (loss) income | | (5,358 | ) | | 1,262 |
| | 1,782 |
|
Less: net income attributable to non-controlling interest, net of tax | | 11 |
| | 5 |
| | 31 |
|
Net (loss) income attributable to DXC common stockholders | | $ | (5,369 | ) | | $ | 1,257 |
| | $ | 1,751 |
|
| | | | | | |
(Loss) Income per common share | | | | | | |
Basic: | | | | | | |
Continuing operations | | $ | (20.76 | ) | | $ | 4.40 |
| | $ | 5.32 |
|
Discontinued operations | | — |
| | 0.13 |
| | 0.83 |
|
| | $ | (20.76 | ) | | $ | 4.53 |
| | $ | 6.15 |
|
Diluted: | | | | | | |
Continuing operations | | $ | (20.76 | ) | | $ | 4.35 |
| | $ | 5.23 |
|
Discontinued operations | | — |
| | 0.12 |
| | 0.81 |
|
| | $ | (20.76 | ) | | $ | 4.47 |
| | $ | 6.04 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions, except per-share amounts) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
| | | | | | |
Revenues | | $ | 16,265 | | | $ | 17,729 | | | $ | 19,577 | |
| | | | | | |
Costs of services (excludes depreciation and amortization and restructuring costs) | | 12,683 | | | 14,086 | | | 14,901 | |
Selling, general and administrative (excludes depreciation and amortization and restructuring costs) | | 1,408 | | | 2,066 | | | 2,050 | |
Depreciation and amortization | | 1,717 | | | 1,970 | | | 1,942 | |
Goodwill impairment losses | | — | | | — | | | 6,794 | |
Restructuring costs | | 318 | | | 551 | | | 252 | |
Interest expense | | 204 | | | 361 | | | 383 | |
Interest income | | (65) | | | (98) | | | (165) | |
Debt extinguishment costs | | 311 | | | 41 | | | — | |
Gain on disposition of businesses | | (371) | | | (2,004) | | | — | |
Gain on arbitration award | | — | | | — | | | (632) | |
Other (income) expense, net | | (1,081) | | | 102 | | | (720) | |
Total costs and expenses | | 15,124 | | | 17,075 | | | 24,805 | |
| | | | | | |
Income (loss) before income taxes | | 1,141 | | | 654 | | | (5,228) | |
Income tax expense | | 405 | | | 800 | | | 130 | |
Net income (loss) | | 736 | | | (146) | | | (5,358) | |
Less: net income attributable to non-controlling interest, net of tax | | 18 | | | 3 | | | 11 | |
Net income (loss) attributable to DXC common stockholders | | $ | 718 | | | $ | (149) | | | $ | (5,369) | |
| | | | | | |
Income (loss) per common share: | | | | | | |
Basic | | $ | 2.87 | | | $ | (0.59) | | | $ | (20.76) | |
Diluted | | $ | 2.81 | | | $ | (0.59) | | | $ | (20.76) | |
The accompanying notes are an integral part of these consolidated financial statements.
DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
|
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
| | | | | | | | |
Net (loss) income | | $ | (5,358 | ) | | $ | 1,262 |
| | $ | 1,782 |
|
Other comprehensive (loss) income, net of taxes: | | | | | | |
| Foreign currency translation adjustments, net of tax (1) | | (323 | ) | | (259 | ) | | 197 |
|
| Cash flow hedges adjustments, net of tax (2) | | (17 | ) | | (12 | ) | | (11 | ) |
| Available-for-sale securities, net of tax (3) | | — |
| | — |
| | 9 |
|
| Pension and other post-retirement benefit plans, net of tax: | | | | | | |
| | Prior service cost, net of tax (4) | | — |
| | (21 | ) | | 38 |
|
| | Amortization of transition obligation, net of tax (5) | | — |
| | — |
| | 1 |
|
| | Amortization of prior service cost, net of tax (6) | | (8 | ) | | (13 | ) | | (14 | ) |
| Pension and other post-retirement benefit plans, net of tax | | (8 | ) | | (34 | ) | | 25 |
|
Other comprehensive (loss) income, net of taxes | | (348 | ) | | (305 | ) | | 220 |
|
Comprehensive (loss) income | | (5,706 | ) | | 957 |
| | 2,002 |
|
| | Less: comprehensive income attributable to non-controlling interest | | 22 |
| | 2 |
| | 31 |
|
Comprehensive (loss) income attributable to DXC common stockholders | | $ | (5,728 | ) | | $ | 955 |
| | $ | 1,971 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
| | | | | | | | |
Net income (loss) | | $ | 736 | | | $ | (146) | | | $ | (5,358) | |
| | | | | | | | |
Other comprehensive income (loss), net of taxes: | | | | | | |
| Foreign currency translation adjustments, net of tax (1) | | (86) | | | 300 | | | (323) | |
| Cash flow hedges adjustments, net of tax (2) | | 11 | | | 19 | | | (17) | |
| Available-for-sale securities, net of tax (3) | | — | | | (9) | | | — | |
| Pension and other post-retirement benefit plans, net of tax: | | | | | | |
| | Prior service cost, net of tax (4) | | 9 | | | 7 | | | — | |
| | | | | | | | |
| | Amortization of prior service cost, net of tax (5) | | (6) | | | (13) | | | (8) | |
| | | | | | | | |
| Pension and other post-retirement benefit plans, net of tax | | 3 | | | (6) | | | (8) | |
Other comprehensive income (loss), net of taxes | | (72) | | | 304 | | | (348) | |
| | | | | | |
Comprehensive income (loss) | | 664 | | | 158 | | | (5,706) | |
| | Less: comprehensive income attributable to non-controlling interest | | 29 | | | 6 | | | 22 | |
Comprehensive income (loss) attributable to DXC common stockholders | | $ | 635 | | | $ | 152 | | | $ | (5,728) | |
(1) Tax expense (benefit) expense related to foreign currency translation adjustments was $(2), $(1)5, $(27), and $75$(2) for the fiscal years ended March 31, 2020,2022, March 31, 2019,2021, and March 31, 2018,2020, respectively.
(2) Tax benefitexpense (benefit) related to cash flow hedge adjustments was $5, $3,$2, $6, and $3$(5) for the fiscal years ended March 31, 2020,2022, March 31, 2019,2021, and March 31, 2018,2020, respectively.
(3) Tax expensebenefit related to available-for-sale securities was $0, $0,$1, and $2$0 for the fiscal years ended March 31, 2020,2022, March 31, 2019,2021, and March 31, 2018,2020, respectively.
(4) Tax (benefit) expense related to prior service costs was $0, $(5),$2, $2, and $8$0 for the fiscal years ended March 31, 2020,2022, March 31, 2019,2021, and March 31, 2018,2020, respectively.
(5)There was 0 tax benefit related to transition obligation.
(6) Tax benefit related to amortization of prior service costs was $1, $2, $4, and $4$1 for the fiscal years ended March 31, 2020,2022, March 31, 2019,2021, and March 31, 2018,2020, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 736 | | | $ | (146) | | | $ | (5,358) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 1,742 | | | 1,988 | | | 1,960 | |
Goodwill impairment losses | | — | | | — | | | 6,794 | |
Operating right-of-use expense | | 484 | | | 616 | | | 698 | |
Pension & other post-employment benefits, actuarial & settlement (gains) losses | | (684) | | | 519 | | | (244) | |
Share-based compensation | | 101 | | | 56 | | | 68 | |
Deferred taxes | | 255 | | | (403) | | | (56) | |
(Gain) loss on dispositions | | (421) | | | (1,983) | | | 1 | |
Provision for losses on accounts receivable | | 5 | | | 53 | | | 3 | |
Unrealized foreign currency exchange (gains) losses | | (12) | | | (36) | | | 24 | |
Impairment losses and contract write-offs | | 51 | | | 275 | | | 30 | |
Debt extinguishment costs | | 311 | | | 41 | | | — | |
Amortization of debt issuance costs and discount (premium) | | — | | | 3 | | | (4) | |
Cash surrender value in excess of premiums paid | | (24) | | | (3) | | | (12) | |
Other non-cash charges, net | | 15 | | | 1 | | | — | |
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | | | | | | |
Decrease in receivables | | 228 | | | 257 | | | 269 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Increase in prepaid expenses and other current assets | | (48) | | | (299) | | | (229) | |
Decrease in accounts payable and accruals | | (714) | | | (527) | | | (565) | |
(Decrease) increase in income taxes payable and income tax liability | | (315) | | | 434 | | | (197) | |
Decrease in operating lease liability | | (484) | | | (616) | | | (698) | |
Increase (decrease) in advance contract payments and deferred revenue | | 270 | | | (66) | | | (146) | |
Other operating activities, net | | 5 | | | (40) | | | 12 | |
Net cash provided by operating activities | | 1,501 | | | 124 | | | 2,350 | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Purchases of property and equipment | | (254) | | | (261) | | | (350) | |
Payments for transition and transformation contract costs | | (209) | | | (261) | | | (281) | |
| | | | | | |
Software purchased and developed | | (295) | | | (254) | | | (235) | |
| | | | | | |
Proceeds (payments) for acquisitions, net of cash acquired | | — | | | 184 | | | (1,997) | |
Business dispositions | | 533 | | | 4,947 | | | — | |
Cash collections related to deferred purchase price receivable | | — | | | 159 | | | 671 | |
Proceeds from sale of assets | | 100 | | | 164 | | | 73 | |
Short-term investing | | — | | | — | | | (75) | |
| | | | | | |
Proceeds from short-term investing | | 24 | | | — | | | 38 | |
Other investing activities, net | | 41 | | | (13) | | | 19 | |
Net cash (used in) provided by investing activities | | (60) | | | 4,665 | | | (2,137) | |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Borrowings of commercial paper | | 1,068 | | | 1,486 | | | 4,939 | |
Repayments of commercial paper | | (905) | | | (1,852) | | | (5,076) | |
Borrowings under lines of credit | | — | | | 2,500 | | | 1,500 | |
Repayment of borrowings under lines of credit | | — | | | (4,000) | | | — | |
Borrowings on long-term debt | | 19 | | | — | | | 2,198 | |
Principal payments on long-term debt | | (2,872) | | | (3,552) | | | (1,039) | |
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 (1) |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (5,358 | ) | | $ | 1,262 |
| | $ | 1,782 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 1,960 |
| | 2,023 |
| | 2,014 |
|
Goodwill impairment losses | | 6,794 |
| | — |
| | — |
|
Operating right-of-use expense | | 698 |
| | — |
| | — |
|
Pension & other post-employment benefits, actuarial & settlement (gains) losses | | (244 | ) | | 143 |
| | (220 | ) |
Share-based compensation | | 68 |
| | 74 |
| | 93 |
|
Deferred taxes | | (56 | ) | | 97 |
| | (842 | ) |
Loss (gain) on dispositions | | 1 |
| | (163 | ) | | 4 |
|
Provision for losses on accounts receivable | | 3 |
| | (10 | ) | | 45 |
|
Unrealized foreign currency exchange losses | | 24 |
| | 30 |
| | 22 |
|
Impairment losses and contract write-offs | | 30 |
| | — |
| | 41 |
|
Amortization of debt issuance costs and (premium) discount | | (4 | ) | | (10 | ) | | (4 | ) |
Cash surrender value in excess of premiums paid | | (12 | ) | | (11 | ) | | (11 | ) |
Other non-cash charges, net | | — |
| | 11 |
| | 4 |
|
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | | | | | | |
Decrease (increase) in receivables | | 269 |
| | (947 | ) | | (464 | ) |
Increase in prepaid expenses and other current assets | | (229 | ) | | (632 | ) | | (196 | ) |
Decrease in accounts payable and accruals | | (565 | ) | | (52 | ) | | (96 | ) |
(Decrease) increase in income taxes payable and income tax liability | | (197 | ) | | (107 | ) | | 303 |
|
Decrease in operating lease liability | | (698 | ) | | — |
| | — |
|
(Decrease) increase in advance contract payments and deferred revenue | | (146 | ) | | (74 | ) | | 130 |
|
Other operating activities, net | | 12 |
| | 149 |
| | (38 | ) |
Net cash provided by operating activities | | 2,350 |
| | 1,783 |
| | 2,567 |
|
| | | | | | |
Cash flows from investing activities: | | | | | | |
Purchases of property and equipment | | (350 | ) | | (297 | ) | | (224 | ) |
Payments for transition and transformation contract costs | | (281 | ) | | (394 | ) | | (328 | ) |
Software purchased and developed | | (235 | ) | | (261 | ) | | (211 | ) |
Cash acquired through HPES Merger | | — |
| | — |
| | 938 |
|
Payments for acquisitions, net of cash acquired | | (1,997 | ) | | (365 | ) | | (203 | ) |
Business dispositions | | — |
| | (65 | ) | | — |
|
Cash collections related to deferred purchase price receivable | | 671 |
| | 1,084 |
| | 685 |
|
Proceeds from sale of assets | | 73 |
| | 357 |
| | 58 |
|
Short-term investing | | (75 | ) | | — |
| | — |
|
Proceeds from short-term investing | | 38 |
| | — |
| | — |
|
Other investing activities, net | | 19 |
| | 10 |
| | 4 |
|
Net cash (used in) provided by investing activities | | (2,137 | ) | | 69 |
| | 719 |
|
| | | | | | |
Cash flows from financing activities: | | | | | | |
Borrowings of commercial paper | | 4,939 |
| | 2,747 |
| | 2,413 |
|
Repayments of commercial paper | | (5,076 | ) | | (2,840 | ) | | (2,297 | ) |
Borrowings under lines of credit | | 1,500 |
| | — |
| | — |
|
Repayment of borrowings under lines of credit | | — |
| | — |
| | (737 | ) |
|
| | | | | | | | | | | | |
Borrowings on long-term debt, net of discount | | 2,198 |
| | 1,646 |
| | 621 |
|
Principal payments on long-term debt | | (1,039 | ) | | (2,625 | ) | | (1,547 | ) |
Payments on finance leases and borrowings for asset financing | | (865 | ) | | (944 | ) | | (1,060 | ) |
Borrowings for USPS spin transaction | | — |
| | 1,114 |
| | — |
|
Proceeds from bond issuance | | — |
| | 753 |
| | 989 |
|
Proceeds from stock options and other common stock transactions | | 11 |
| | 47 |
| | 138 |
|
Taxes paid related to net share settlements of share-based compensation awards | | (16 | ) | | (54 | ) | | (76 | ) |
Repurchase of common stock and advance payment for accelerated share repurchase | | (736 | ) | | (1,344 | ) | | (132 | ) |
Dividend payments | | (214 | ) | | (210 | ) | | (174 | ) |
Other financing activities, net | | (45 | ) | | 47 |
| | (28 | ) |
Net cash provided by (used in) financing activities | | 657 |
| | (1,663 | ) | | (1,890 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (90 | ) | | (19 | ) | | 65 |
|
Net increase in cash and cash equivalents | | 780 |
| | 170 |
| | 1,461 |
|
Cash and cash equivalents at beginning of year | | 2,899 |
| | 2,729 |
| | 1,268 |
|
Cash and cash equivalents at end of year | | $ | 3,679 |
| | $ | 2,899 |
| | $ | 2,729 |
|
| | | | | | | | | | | | | | | | | | | | |
Payments on finance leases and borrowings for asset financing | | (990) | | | (930) | | | (865) | |
| | | | | | |
Proceeds from bond issuance | | 2,918 | | | 993 | | | — | |
| | | | | | |
Proceeds from stock options and other common stock transactions | | 13 | | | 1 | | | 11 | |
Taxes paid related to net share settlements of share-based compensation awards | | (18) | | | (7) | | | (16) | |
| | | | | | |
Repurchase of common stock and advance payment for accelerated share repurchase | | (628) | | | — | | | (736) | |
Dividend payments | | — | | | (53) | | | (214) | |
| | | | | | |
Payments for debt extinguishment costs | | (344) | | | (41) | | | — | |
Other financing activities, net | | (79) | | | (21) | | | (45) | |
Net cash (used in) provided by financing activities | | (1,818) | | | (5,476) | | | 657 | |
Effect of exchange rate changes on cash and cash equivalents | | 29 | | | 39 | | | (90) | |
Net (decrease) increase in cash and cash equivalents including cash classified within current assets held for sale | | (348) | | | (648) | | | 780 | |
Cash classified within current assets held for sale | | 52 | | | (63) | | | — | |
Net (decrease) increase in cash and cash equivalents | | (296) | | | (711) | | | 780 | |
Cash and cash equivalents at beginning of year | | 2,968 | | | 3,679 | | | 2,899 | |
Cash and cash equivalents at end of year | | $ | 2,672 | | | $ | 2,968 | | | $ | 3,679 | |
(1) As a result of the USPS Separation, the Consolidated Statements of Operations, Consolidated Balance Sheets, and related financial information reflect USPS's operations and assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the Consolidated Statement of Cash flows for the fiscal year ended March 31, 2018 and through the separation date of May 31, 2018 in the Consolidated Statement of Cash Flows for the fiscal year ended March 31, 2019.
The accompanying notes are an integral part of these consolidated financial statements.
DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2017 | 151,932 |
| | $ | 152 |
| $ | 2,565 |
| $ | (170 | ) | $ | (162 | ) | $ | (497 | ) | $ | 1,888 |
| $ | 278 |
| $ | 2,166 |
|
Recapitalization adjustment(1) | (10,633 | ) | | (151 | ) | (346 | ) |
|
| 497 |
| — |
| — |
| — |
|
Recast balance at March 31, 2017 | 141,299 |
| | $ | 1 |
| $ | 2,219 |
| $ | (170 | ) | $ | (162 | ) | $ | — |
| $ | 1,888 |
| $ | 278 |
| $ | 2,166 |
|
Business acquired in purchase, net of issuance costs(2) | 141,741 |
| | 2 |
| 9,848 |
|
|
|
| 9,850 |
| 50 |
| 9,900 |
|
Net income |
| |
|
| 1,751 |
|
|
| 1,751 |
| 31 |
| 1,782 |
|
Other comprehensive income |
| |
|
|
| 220 |
|
| 220 |
|
| 220 |
|
Share-based compensation expense |
| |
| 92 |
|
|
|
| 92 |
|
| 92 |
|
Acquisition of treasury stock |
| |
|
|
|
| (85 | ) | (85 | ) |
| (85 | ) |
Share repurchase program | (1,538 | ) | |
| (66 | ) | (71 | ) |
|
| (137 | ) |
| (137 | ) |
Stock option exercises and other common stock transactions | 4,891 |
| |
| 117 |
|
|
|
| 117 |
|
| 117 |
|
Dividends declared ($0.72 per share) |
| |
|
| (209 | ) |
|
| (209 | ) |
| (209 | ) |
Non-controlling interest distributions and other |
| |
|
|
|
|
| — |
| (9 | ) | (9 | ) |
Balance at March 31, 2018 | 286,393 |
| | $ | 3 |
| $ | 12,210 |
| $ | 1,301 |
| $ | 58 |
| $ | (85 | ) | $ | 13,487 |
| $ | 350 |
| $ | 13,837 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock(1) | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2019 | 270,214 | | | $ | 3 | | $ | 11,301 | | $ | 478 | | $ | (244) | | $ | (136) | | $ | 11,402 | | $ | 323 | | $ | 11,725 | |
Net loss | | | | | (5,369) | | | | (5,369) | | 11 | | (5,358) | |
Other comprehensive loss | | | | | | (359) | | | (359) | | 11 | | (348) | |
Share-based compensation expense | | | | 70 | | | | | 70 | | | 70 | |
Acquisition of treasury stock | | | | | | | (16) | | (16) | | | (16) | |
Share repurchase program | (15,934) | | | | (669) | | (67) | | | | (736) | | | (736) | |
Stock option exercises and other common stock transactions | 1,394 | | | | 12 | | | | | 12 | | | 12 | |
Dividends declared ($0.84 per share) | | | | | (219) | | | | (219) | | | (219) | |
Non-controlling interest distributions and other | | | | | | | | — | | (1) | | (1) | |
Balance at March 31, 2020 | 255,674 | | | $ | 3 | | $ | 10,714 | | $ | (5,177) | | $ | (603) | | $ | (152) | | $ | 4,785 | | $ | 344 | | $ | 5,129 | |
(1)2,148,708 treasury shares as of March 31, 2020
| |
(1)
| Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.
|
| |
(2)
| See Note 2 - "Acquisitions"
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock(1) | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2018 | 286,393 |
| | $ | 3 |
| $ | 12,210 |
| $ | 1,301 |
| $ | 58 |
| $ | (85 | ) | $ | 13,487 |
| $ | 350 |
| $ | 13,837 |
|
Cumulative effect of adopting the new revenue standard |
| |
|
| 114 |
|
|
| 114 |
|
| 114 |
|
Net income |
| |
|
| 1,257 |
|
|
| 1,257 |
| 5 |
| 1,262 |
|
Other comprehensive loss |
| |
|
|
| (302 | ) |
| (302 | ) | (3 | ) | (305 | ) |
Share-based compensation expense |
| |
| 74 |
|
|
|
| 74 |
|
| 74 |
|
Acquisition of treasury stock |
| |
|
|
|
| (51 | ) | (51 | ) |
| (51 | ) |
Share repurchase program | (19,343 | ) | |
| (845 | ) | (494 | ) |
|
| (1,339 | ) |
| (1,339 | ) |
Stock option exercises and other common stock transactions | 3,164 |
| |
| 37 |
|
|
|
| 37 |
|
| 37 |
|
Dividends declared ($0.76 per share) |
| |
|
| (209 | ) |
|
| (209 | ) |
| (209 | ) |
Non-controlling interest distributions and other |
| |
|
|
|
|
| — |
| (29 | ) | (29 | ) |
Divestiture of USPS |
| |
| (175 | ) | (1,491 | ) |
|
| (1,666 | ) |
| (1,666 | ) |
Balance at March 31, 2019 | 270,214 |
| | $ | 3 |
| $ | 11,301 |
| $ | 478 |
| $ | (244 | ) | $ | (136 | ) | $ | 11,402 |
| $ | 323 |
| $ | 11,725 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock(1) | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2020 | 255,674 | | | $ | 3 | | $ | 10,714 | | $ | (5,177) | | $ | (603) | | $ | (152) | | $ | 4,785 | | $ | 344 | | $ | 5,129 | |
Cumulative effect of adopting ASU 2016-13 | | | | | (4) | | | | (4) | | | (4) | |
Net loss | | | | | (149) | | | | (149) | | 3 | | (146) | |
Other comprehensive income | | | | | | 301 | | | 301 | | 3 | | 304 | |
Share-based compensation expense | | | | 46 | | | | | 46 | | | 46 | |
Acquisition of treasury stock | | | | | | | (6) | | (6) | | | (6) | |
| | | | | | | | | | |
Stock option exercises and other common stock transactions | 1,379 | | | | 1 | | | | | 1 | | | 1 | |
Non-controlling interest distributions and other | | | | | (1) | | | | (1) | | (15) | | (16) | |
Balance at March 31, 2021 | 257,053 | | | $ | 3 | | $ | 10,761 | | $ | (5,331) | | $ | (302) | | $ | (158) | | $ | 4,973 | | $ | 335 | | $ | 5,308 | |
| |
(1)
| 1,788,658 treasury shares as of March 31, 2019 |
(1)2,458,027 treasury shares as of March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock (1) | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2021 | 257,053 | | | $ | 3 | | $ | 10,761 | | $ | (5,331) | | $ | (302) | | $ | (158) | | $ | 4,973 | | $ | 335 | | $ | 5,308 | |
Net income | | | | | 718 | | | | 718 | | 18 | | 736 | |
Other comprehensive income | | | | | | (83) | | — | | (83) | | 11 | | (72) | |
Share-based compensation expense | | | | 80 | | | | | 80 | | | 80 | |
Acquisition of treasury stock | | | | | | | (15) | | (15) | | | (15) | |
Share repurchase program | (18,819) | | | | (796) | | 162 | | | | (634) | | | (634) | |
Stock option exercises and other common stock transactions | 2,274 | | | | 12 | | | | | 12 | | | 12 | |
Non-controlling interest distributions and other | | | | | 1 | | | | 1 | | (41) | | (40) | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance at March 31, 2022 | 240,508 | | | $ | 3 | | $ | 10,057 | | $ | (4,450) | | $ | (385) | | $ | (173) | | $ | 5,052 | | $ | 323 | | $ | 5,375 | |
(1)2,878,079 treasury shares as of March 31, 2022
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock (1) | Total DXC Equity | Non- Controlling Interest | Total Equity |
Shares | | Amount |
Balance at March 31, 2019 | 270,214 |
| | $ | 3 |
| $ | 11,301 |
| $ | 478 |
| $ | (244 | ) | $ | (136 | ) | $ | 11,402 |
| $ | 323 |
| $ | 11,725 |
|
Net loss |
| |
|
| (5,369 | ) |
|
| (5,369 | ) | 11 |
| (5,358 | ) |
Other comprehensive loss |
| |
|
|
| (359 | ) |
| (359 | ) | 11 |
| (348 | ) |
Share-based compensation expense |
| |
| 70 |
|
|
|
| 70 |
|
| 70 |
|
Acquisition of treasury stock |
| |
|
|
|
| (16 | ) | (16 | ) |
| (16 | ) |
Share repurchase program | (15,934 | ) | |
| (669 | ) | (67 | ) |
|
| (736 | ) |
| (736 | ) |
Stock option exercises and other common stock transactions | 1,394 |
| |
| 12 |
|
|
|
| 12 |
|
| 12 |
|
Dividends declared ($0.84 per share) |
| |
|
| (219 | ) |
|
| (219 | ) |
| (219 | ) |
Non-controlling interest distributions and other |
| |
|
|
|
|
| — |
| (1 | ) | (1 | ) |
Balance at March 31, 2020 | 255,674 |
| | $ | 3 |
| $ | 10,714 |
| $ | (5,177 | ) | $ | (603 | ) | $ | (152 | ) | $ | 4,785 |
| $ | 344 |
| $ | 5,129 |
|
| |
(1)
| 2,148,708 treasury shares as of March 31, 2020 |
The accompanying notes are an integral part of these consolidated financial statements.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business
DXC Technology Company ("DXC" or the "Company") 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 its enterprise technology stackEnterprise Technology Stack to deliver new levels of performance, competitiveness and customer experiences.experience.
FDB Sale
During the third quarter of fiscal 2022, a subsidiary of DXC entered into a purchase agreement to sell (the "FDB Sale") its German financial services subsidiary ("FDB" or the "FDB Business") to the FNZ Group ("FNZ") for €300 million (approximately $335 million as of March 31, 2022), subject to certain adjustments. The closing of the transaction is subject to certain conditions, including receipt of certain regulatory consents. At March 31, 2022, FDB held approximately $572 million in cash which primarily related to customer deposit liabilities.
HPS Sale
On April 1, 2021, DXC completed the sale of its healthcare provider software business ("HPS" or the "HPS Business") to Dedalus Holding S.p.A. ("Dedalus"). The sale was accomplished by the cash purchase of all equity interests and assets attributable to the HPS Business for €468 million (approximately $551 million), subject to certain adjustments. See Note 3 - "Divestitures" for further information.
HHS Sale
On October 1, 2020, DXC completed the sale of its U.S. State and Local Health and Human Services business ("HHS" or the "HHS Business") to Veritas Capital Fund Management, L.L.C. ("Veritas Capital") to form Gainwell Technologies. The sale was accomplished by the cash purchase of all equity interests and assets attributable to the HHS Business together with future services to be provided by the Company for a total enterprise value of $5.0 billion, subject to net working capital adjustments and assumed liabilities. See Note 3 - "Divestitures" for further information.
Luxoft Acquisition
On June 14, 2019, DXC completed its acquisition of Luxoft Holding, Inc. ("Luxoft"), a global digital strategy and software engineering firm (the "Luxoft Acquisition"). The acquisition builds on DXC’s unique value proposition as an end-to-end, mainstream IT and digital services market leader and strengthens the Company’s ability to design and deploy transformative digital solutions for clientscustomers at scale. See Note 2 - "Acquisitions""Acquisitions" for further information.
Separation of USPS
On May 31, 2018, DXC completed the separation of its U.S. Public Sector business ("USPS") (the "Separation"), and combination of USPS with Vencore Holding Corp. ("Vencore") and KeyPoint Government Solutions ("Keypoint") (the "Mergers") to form Perspecta Inc. ("Perspecta"), an independent public company (collectively, the "USPS Separation and Mergers"). Under the terms of the separation agreements, on May 31, 2018, stockholders who held DXC common stock at the close of business on May 25, 2018 (the “Record Date”), received a distribution of one share of Perspecta common stock for every two shares of DXC common stock held as of the Record Date (the "Distribution"). See Note 3 - "Divestitures" for more information.
As a result of the Separation, the Consolidated Statements of Operations, Consolidated Balance Sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the Consolidated Statement of Cash flows for the fiscal year ended March 31, 2018 and through the separation date of May 31, 2018 in the Consolidated Statement of Cash Flows for the fiscal year ended March 31, 2019. In addition, USPS is no longer a reportable segment. DXC's reportable segments are Global Business Services ("GBS") and Global Infrastructure Services ("GIS").
Basis of Presentation
In order to make this report easier to read, DXC refers throughout to (i) the Consolidated Financial Statements as the “financial statements,” (ii) the Consolidated Statements of Operations as the “statements of operations,” (iii) the Consolidated Statement of Comprehensive Income (Loss) Income as the "statements of comprehensive income," (iv) the Consolidated Balance Sheets as the “balance sheets,” and (v) the Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references throughout to numbered “Notes” refer to the numbered Notes in these Notes to Consolidated Financial Statements, unless otherwise noted.Statements.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for annual reports and accounting principles generally accepted in the United States ("GAAP"). The financial statements include the accounts of DXC, its consolidated subsidiaries, and those business entities in which DXC maintains a controlling interest. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Other investments are accounted for by the cost method. Non-controlling interests are presented as a separate component within equity in the balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the statements of operations, and comprehensive income attributable to non-controlling interests are presented separately in the statements of comprehensive income. All intercompany transactions and balances have been eliminated. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation. DXC corrected an immaterial classification error related to the presentation of deferred revenue and advance contract payments and non-current deferred revenue that first occurred during fiscal 2018.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the financial statements, in accordance with GAAP, requires the Company's management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on assumptions regarding historical experience, currently available information, and anticipated developments that it believes are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. The severity, magnitude and duration, as well as the economic consequences of the ongoing COVID-19 pandemic,crisis, are uncertain, rapidly changing and difficult to predict. Therefore, accounting estimates and assumptions may change over time in response to the COVID-19 crisis and may change materially in future periods. Estimates are used for, but not limited to, contracts accounted for using the percentage-of-completion method, cash flows used in the evaluation of impairment of goodwill and other long-lived assets, reserves for uncertain tax positions, valuation allowances on deferred tax assets, loss accruals for litigation, and obligations related to our pension plans. In the opinion of the Company's management, the accompanying financial statements contain all adjustments necessary, including those of a normal recurring nature, to fairly present the financial statements.
Leases
Effective April 1, 2019, the Company adopted ASU 2016-02, "Leases Topic ASC 842"(ASC 842)" using the modified retrospective method. Refer to the Recently Adopted Accounting Pronouncements section of this Note and Note 67 - "Leases""Leases" for further discussion of the impact of adoption and other required disclosures. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether DXC obtains substantially all economic benefits from and has the ability to direct the use of the asset. Operating leases are included in operating right-of-use ("ROU") assets, net, current operating lease liabilities and non-current operating lease liabilities in DXC's balance sheets. Finance leases are included in property and equipment, net, short-term debt and current maturities of long-term debt and long-term debt, net of current maturities in DXC's balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating ROU assets and operating lease liabilities are recognized at commencement based on the present value of lease payments over the lease term.
As most of the Company's leases do not provide an implicit rate, DXC uses its incremental borrowing rate based on the information available at commencement to determine the present value of lease payments. The incremental borrowing rate is the rate of interest that DXC would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term. The rate is dependent on several factors, including the lease term, currency of the lease payments and the Company's credit ratings.
Operating ROU assets also includesinclude any lease payments made and excludesexclude lease incentives. The Company's lease terms may include options to extend or terminate the lease. Operating ROU assets and lease liabilities include these options when it is reasonably certain that they will be exercised. Lease arrangements generally do not contain any residual value guarantees or material restrictive covenants.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease expense is related to the Company's leased real estate for offices and primarily includes labor and operational costs. DXC subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not material for all periods presented. The Company combines lease and non-lease components under its lease agreements.
Revenue Recognition
Effective April 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. Refer to New Accounting Standards below and Note 20 - “Revenue” for further discussion of the impact of adoption and other required disclosures. The Company’s accounting policy related to the new revenue standard is summarized below.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's primary service offerings are information technology outsourcing, other professional services, or a combination thereof. Revenues are recognized when control of the promised goods or services is transferred to DXC's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
DXC determines revenue recognition through the five-step model as follows:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
DXC's IT outsourcing ("ITO") arrangements typically reflect a single performance obligation that comprises a series of distinct services which are substantially the same and provided over a period of time using the same measure of progress. Revenue derived from these arrangements is recognized over time based upon the level of services delivered in the distinct periods in which they are provided based on time increments. When other parties are involved in providing goods or services as part of our customer arrangements, DXC recognizes revenue on a gross basis as a principal when it controls goods or services before they are transferred to the customer. DXC's contracts often include upfront fees billed for activities to familiarize DXC with the client'scustomers' operations, take control over their administration and operation, and adapt them to DXC's solutions. Upfront fees are generally recognized ratably over the contract period, which approximates the manner in which the services are provided. These activities typically do not qualify as performance obligations, and the related revenues are allocated to the relevant performance obligations and recognized ratably over time as the performance obligation is satisfied during the period in which DXC provides the related service, which is typically the life of the contract. Software transactions that include multiple performance obligations are described below.
For contracts with multiple performance obligations, DXC allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.
DXC's ITO arrangements may also contain embedded leases for equipment used to fulfill services. A contract with a customer includes an embedded lease when DXC grants the customer a right to control the use of an identified asset for a period of time in exchange for consideration. Embedded leases with customers are typically recognized either as a sales type leaseleases in which Revenuerevenue and Costcost of Salessales is recognized upon lease commencement; or they may be recognized as operating leases in which revenue is recognized over the usage period. Where a contract contains an embedded lease, the contract’s transaction price is allocated to the contract performance obligations and the lease component based upon the relative standalone selling price.
The transaction price of a contract is determined based on fixed and variable consideration. Variable consideration related to the Company’s ITO offerings often includeincludes volume-based pricing that areis allocated to the distinct days of the services to which the variable consideration pertains. However, in certain cases, estimates of variable consideration, including penalties, contingent milestone payments and rebates are necessary. The Company only includes estimates of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. These judgments involve consideration of historical and expected experience with the customer and other similar customers, and the facts and circumstances specific to the arrangement.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generally provides its services under time and materials contracts, unit price contracts, fixed-price contracts, and software contracts for which revenue is recognized in the following manner:
Time and materials contracts. Revenue is recognized over time at agreed-upon billing rates when services are provided.
Unit-price contracts. Revenue is recognized over time based on unit metrics multiplied by the agreed upon contract unit price or when services are delivered.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed-price contracts. For certain fixed-price contracts, revenue is recognized over time using a method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method (referred to as the percentage-of-completion cost-to-cost method). Under the percentage-of-completion cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion. A performance obligation's estimate at completion includes all direct costs such as materials, labor, subcontractor costs, overhead, and a ratable portion of general and administrative costs. If output or input measures are not available or cannot be reasonably estimated, revenue is deferred until progress can be measured and costs are not deferred unless they meet the criteria for capitalization. Under the percentage-of-completion cost-to-cost method, progress towards completion is measured based on either achievement of specified contract milestones, costs incurred as a proportion of estimated total costs, or other measures of progress when appropriate. Profit in a given period is reported at the estimated profit margin to be achieved on the overall contract.
Software contracts. Certain of DXC's arrangements 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. Revenue from distinct software licenses is recognized at a point in time when the customer can first use the software license. If significant customization is required, software revenue is recognized as the related software customization services are performed in accordance with the percentage-of-completion method described above. Revenue for post contract customer support and other software services is recognized over time as those services are provided.provided.
Modifications. Contracts with our customers may be modified over the course of the contract term and may change the scope, price or both of the 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. Contract modifications are a separate contract when the modification provides additional goods and services that are distinct and the transaction price is at the standalone selling price. If the contract modification is part of the existing contract, a cumulative adjustment to revenue is recorded. If the contract modification represents the termination of the existing contract and the creation of a new contract, the modified transaction price is allocated to the prospective performance obligations and any embedded lease components. If a contract modification modifies an embedded lease component and the modification is not accounted for as a separate contract, the classification of the lease is reassessed.
Practical Expedients and Exemptions
DXC does not adjust the promised amount of consideration for the effects of a significant financing component when the period between when DXC transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. In addition, the Company reports revenue net of any revenue-based taxes assessed by a governmental authority that are imposed on and concurrent with specific revenue-producing transactions, such as sales taxes and value-added taxes.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract Balances
The timing of revenue recognition, billings and cash collections results in accounts receivable (billed receivables, unbilled receivables and contract assets) and deferred revenue and advance contract payments (contract liabilities) on the Company's balance sheets. In arrangements that contain an element of customized software solutions, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g. monthly) or upon achievement of certain contractual milestones. Generally, billing occurs subsequent to revenue recognition, sometimes resulting in contract assets if the related billing is conditional upon more than just the passage of time. However, the Company sometimes receives advances or deposits from customers, before revenue is recognized, which results in the generation of contract liabilities. Payment terms vary by type of product or service being provided as well as by customer, although the term between invoicing and when payment is due is generally an insignificant period of time.
Costs to Obtain a Contract
Certain sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The majority of sales commissions are paid based on the achievement of quota-based targets. These costs are deferred and amortized on a straight-line basis over an average period of benefit determined to be five years. The Company determined the period of benefit considering the length of its customer contracts, its technology, and other factors. The period of benefit approximates the average stated contract terms, excluding expected future renewals because sales commissions are paid upon contract renewal in a manner commensurate with the initial commissions. Some commission payments are not capitalized because they are expensed during the fiscal year as the related revenue is recognized. Capitalized sales commissions costs are classified within other assets and amortized in selling, general and administrative expenses.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Costs to Fulfill a Contract
Certain contract setup costs incurred upon initiation or renewal of an outsourcing contract that generate or enhance resources to be used in satisfying future performance obligations are capitalized when they are deemed recoverable. Judgment is applied to assess whether contract setup costs are capitalizable. Costs that generate or enhance resources often pertain to activities that enhance the capabilities of the services, improve customer experience, and establish a more effective and efficient IT environment. The Company recognizes these transition and transformation contract costs as other assets, which are amortized over the respective contract life.
Pension and Other Benefit Plans
The Company accounts for its pension, other post-retirement benefit ("OPEB"), defined contribution and deferred compensation plans using the guidance of ASC 710 "Compensation -– General" and ASC 715 "Compensation -– Retirement Benefits".Benefits." The Company recognizes actuarial gains and losses and changes in fair value of plan assets in earnings at the time of plan remeasurement as a component of net periodic benefit expense. Typically plan remeasurement occurs annually during the fourth quarter of each fiscal year. The remaining components of pension and OPEB expense, primarily current period service and interest costs and expected return on plan assets, are recorded on a quarterly basis.
Inherent in the application of the actuarial methods are key assumptions, including, but not limited to, discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases, and medical cost trend rates. Company management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on the prevailing market prices or estimated fair value of investments when quoted prices are not available.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Software Development Costs
After establishing technological feasibility, and until such time as the software products are available for general release to customers, the Company capitalizes costs incurred to develop commercial software products to be sold, leased or otherwise marketed. Costs incurred to establish technological feasibility are charged to expense as incurred. Enhancements to software products are capitalized where such enhancements extend the life or significantly expand the marketability of the products. Amortization of capitalized software development costs is determined separately for each software product. Annual amortization expense is calculated based on the greater of the ratio of current gross revenues for each product to the total of current and anticipated future gross revenues for the product or the straight-line amortization method over the estimated useful life of the product.
Unamortized capitalized software costs associated with commercial software products are periodically evaluated for impairment on a product-by-product basis by comparing the unamortized balance to the product’s net realizable value. The net realizable value is the estimated future gross revenues from that product reduced by the related estimated future costs. When the unamortized balance exceeds the net realizable value, the unamortized balance is written down to the net realizable value and an impairment charge is recorded.
The Company capitalizes costs incurred to develop internal-use computer software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred in connection with development of upgrades or enhancements that result in additional functionality are also capitalized. Capitalized costs associated with internal-use software are amortized on a straight-line basis over the estimated useful life of the software. Purchased software is capitalized and amortized over the estimated useful life of the software. Internal-use software assets are evaluated for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation
Share-based awards are accounted for under the fair value method. The Company provides different forms of share-based compensation to its employees and non-employee directors. This generally includes stock options and restricted stock units ("RSUs"), including performance-based restricted stock units ("PSUs"). The fair value of the awards is determined on the grant date, based on the Company's closing stock price. For awards settled in shares, the Company recognizes compensation expense based on the grant-date fair value net of estimated forfeitures over the vesting period. For awards settled in cash,cash, the Company recognizes compensation expense based on the fair value at each reporting date net of estimated forfeitures.
The Company uses the Black-Scholes-Mertona Monte Carlo simulation model to compute the estimated fair value of options granted.PSUs with a market condition. This model includes assumptions regarding expected term, risk-free interest rates, expected volatility and dividend yields, which are periodically evaluated. The expected term is calculated based onevaluated each time the Company’s historical experience with respect to its stock plan activity andCompany issues an estimate of when vested and unexercised option shares will be exercised. The expected term of options is based on job tier classifications, which have different historical exercise behavior.award. The risk-free interest rate is based onequals the zero-coupon interest rate of U.S. government issued treasury STRIPS with a period commensurate with the expected termyield, as of the options.
Expected volatility is basedValuation Date on a blended approach, which uses a two-thirds weighting for historical volatility and one-third weighting for implied volatility. The Company’s historical volatility calculation is based on employee class and historical closing prices of the Company's peer group, in order to better align this factor with the expected terms of the stock options. DXC’s implied stock price volatility is derived from the price of exchange traded options on DXC’s stock with the longest remaining contractual term. Implied volatility is a prospective, forward looking measure representing market participants’ expectations of DXC's future stock price volatility.semi-annual zero-coupon U.S. Treasury rates. The dividend yield assumption is based on the respective fiscal year dividend payouts. Forfeitures are estimatedExpected volatility is based on a historical experience.approach, therefore the expected volatility assumption is based on the performance period of the award.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations
Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's statements of operations. For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as income or expense. Acquisition-related expenses and post-acquisition integration costs are recognized separately from the business combination and are expensed as incurred.
Goodwill Impairment Analysis
Effective July 1, 2019, the Company adopted ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" using the prospective method. Refer to the Recently Adopted Accounting Pronouncements section of this Note and Note 11 - "Goodwill" for further discussion of impact of adoption and other required disclosures.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company tests goodwill for impairment on an annual basis as of the first day of the second fiscal quarter and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has defined its reporting units as its reportable segments. A significant amount of judgment is involved in determining whether an event indicating impairment has occurred between annual testing dates. Such indicators include: a significant decline in the Company's stock price, a significant decline in
expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the disposal of a significant component of a reporting unit and the testing for recoverability of a significant asset group within a reporting unit.
The Company initially assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment considers all relevant factors specific to the reporting units, including macroeconomic conditions;conditions, industry and market considerations;considerations, overall financial performance, and relevant entity-specific events.
If the Company determines that it is not more likely that the carrying amount for a reporting unit is less than its fair value, then subsequent quantitative goodwill impairment testing is not required. If the Company determines that it is more likely than not that the carrying amount for a reporting unit is greater than its fair value, then it proceeds with a subsequent quantitative goodwill impairment test.
The Company has the option to bypass the initial qualitative assessment stage and proceed directly to the quantitative goodwill impairment test. The quantitative goodwill impairment test compares each reporting unit’s fair value to its carrying value. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if a reporting unit’s fair value is less than its carrying value, then an impairment charge is recorded in the amount of the excess.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When the Company performs the quantitative goodwill impairment test for a reporting unit, it estimates the fair value of the reporting unit using both the income approach and the market approach. The income approach uses a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to present value using a discount rate. Cash flow projections are based on management's estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate is based on the specific risk characteristics of each reporting unit, the weighted-average cost of capital and its underlying forecasts. The market approach estimates fair value by applying performance-metric multiples to the reporting unit's prior and expected operating performance. The multiples are derived from comparable publicly traded companies that have operating and investment characteristics similar to those of the reporting unit. If the fair value of the reporting unit derived using one approach is significantly different from the fair value estimate using the other approach, the Company reevaluates its assumptions used in the two models. Assumptions are modified as considered appropriate under the circumstances until the two models yield similar and reasonable results. The fair values determined by the market approach and income approach, as described above, are weighted to determine the fair value for each reporting unit. The weighting ascribed to the market approach fair value assigned to each reporting unit is influenced by two primary factors: 1)(1) the number of comparable publicly traded companies used in the market approach, and 2)(2) the similarity of the operating and investment characteristics of the reporting units to the comparable publicly traded companies used in the market approach.
If DXC performs a quantitative goodwill impairment test for all of its reporting units in conjunction with its annual goodwill testing, it also compares the sum of all of its reporting units’ fair values to the Company's market capitalization (per-share stock price multiplied by the number of shares outstanding) and calculates an implied control premium representing the excess of the sum of the reporting units’ fair values over the market capitalization. The Company evaluates the reasonableness of the control premium by comparing it to control premiums derived from recent comparable business combinations. If the implied control premium is not supported by market data, the Company reconciles its fair value estimates of the reporting units to a market capitalization supported by relevant market data. As a result, when DXC’s stock price and thus market capitalization is low relative to the sum of the estimated fair value of its reporting units, this reconciliation can result in reductions to the estimated fair values for the reporting units.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
The Company applies fair value accounting for its financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The objective of a fair value measurement is to estimate the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal market for that asset or liability, or in the absence of the principal market, the most advantageous market.
Assets and liabilities subject to fair value measurement disclosures are required to be classified according to a three-level fair value hierarchy with respect to the inputs used to determine fair value. The level in which an asset or liability is disclosed within the fair value hierarchy is based on the lowest level input that is significant to the related fair value measurement in its entirety. The levels of input are defined as follows:
|
| | | | |
Level 1: | Quoted prices unadjusted for identical assets or liabilities in an active market. |
Level 2: | Quoted prices for similar assets or liabilities in an active market, quoted prices for identical similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
Level 3: | Unobservable inputs that reflect the entity's own assumptions which market participants would use in pricing the asset or liability. |
Receivables
The Company records receivables at their face amounts less an allowance for doubtful accounts. Receivables consist of amounts billed and currently due from customers, amounts earned but unbilled (including contracts measured under the percentage-of-completion cost-to-cost method of accounting), amounts retained by the customer until the completion of a specified contract, negotiation of contract modification and claims. Unbilled recoverable amounts under contracts in progress generally become billable upon the passage of time, the achievement of project milestones, or upon acceptance by the customer.
Allowances for uncollectible billed trade receivables are estimated based on a combination of write-off history, aging analysis, and any known collectability issues. Unbilled amounts under contracts in progress that are recoverable do not have an allowance for credit losses. Adjustments to unbilled amounts under contracts in progress related to credit quality, should they occur, would be recorded as a reduction of revenues.issues, and certain forward-looking information.
DXC uses receivables securitization facilities or receivables sales facilities in the normal course of business as part of managing its cash flows. The Company accounts for receivables sold under these facilities as a sale of financial assets pursuant to ASC 860 “Transfers and Servicing” and derecognizes these receivables, as well as the related allowances, from its balance sheets. Generally, the fair value of the sold receivables approximates the book value due to the short-term nature and, as a result, no gain or loss on sale of receivables is recorded. Under the receivables securitization facility, the deferred purchase price (the "DPP") receivable is recorded at fair value, which is determined by calculating the expected amount of cash to be received based on unobservable inputs consisting of the face amount of the receivables adjusted for anticipated credit losses.
The Company reflects cash flows related to its beneficial interests in securitization transactions, which is the deferred purchase price (the “DPP”)DPP recorded in connection with the Company's Receivables Securitization Facility within investing activities in its statements of cash flows.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment, which includes assets under capital leases, are stated at cost less accumulated depreciation. Depreciation is computed predominantly on a straight-line basis over the estimated useful lives of the assets or the remaining lease term, whichever is shorter.term. The estimated useful lives of DXC's property and equipment are as follows:
|
| | | | |
Buildings | Up to 40 years |
Computers and related equipment | 4 to 7 years |
Furniture and other equipment | 3 to 15 years |
Leasehold improvements | Shorter of lease term or useful life up to 20 years |
| |
In accordance with its policy, the Company reviews the estimated useful lives of its property and equipment on an ongoing basis. As a result, effective fiscal year 2020, the Company changed its estimate of the useful lives of its computers and related equipment from an average of four to five years to an average of four to seven years, , which better reflects the estimated periods during which these assets will remain in service. This change resulted in a $225 million decrease to depreciation expense for the fiscal year ended March 31, 2020.
Intangible Assets
The Company's estimated useful lives for finite-lived intangibles are shown in the table below:
|
| | | | |
Software | 2 to 10 years |
| |
| |
Customer related intangibles | Expected customer service life |
Acquired contract related intangibles | Contract life and first contract renewal, where applicable |
Software is amortized using predominately the straight-line method. Acquired contract related and customer related intangible assets are amortized in proportion to the estimated undiscounted cash flows projected over the estimated life of the asset or on a straight-line basis if such cash flows cannot be reliably estimated.
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
Long-lived assets such as property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount of such assets to the estimated future net cash flows. If estimated future net cash flows are less than the carrying amount of such assets, an expense is recorded in the amount required to reduce the carrying amount of such assets to fair value. Fair value is determined based on a discounted cash flow approach or, when available and appropriate, comparable market values. Long-lived assets to be disposed of are reported at the lower of their carrying amount or their fair value less costs to sell.
Income Taxes
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, using statutory tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the results of operations in the period that includes the related enactment date.
A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision during the period in which the change occurred. In determining whether a valuation allowance is warranted, the Company considers 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 results of financial operations. The Company recognizes uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination. Uncertain tax positions are measured based on the probabilities that the uncertain tax position will be realized upon final settlement.
All tax-related cash flows resulting from excess tax benefits related to the settlement of share-based awards are classified as cash flows from operating activities and cash paid by directly withholding shares for tax withholding purposes is classified as a financing activity in the statements of cash flows.
Cash and Cash Equivalents
The Company considers investments with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of time deposits, money market funds and money market deposit accounts with a number of institutions that have high credit ratings.
Foreign Currency
The local currency of the Company's foreign affiliates is generally their functional currency. Accordingly, the assets and liabilities of the foreign affiliates are translated from their respective functional currency to U.S. dollars using fiscal year-end exchange rates, income and expense accounts are translated at the average rates in effect during the fiscal year and equity accounts are translated at historical rates. The resulting translation adjustment is reported in the statements of comprehensive income and recorded as part of accumulated other comprehensive income ("AOCI").income.
Derivative Instruments
The Company designates certain derivative instruments as hedges for purposes of hedge accounting, as defined under ASC 815 “Derivatives and Hedging.” For such derivative instruments, the Company documents its risk management objectives and strategy for undertaking hedging transactions, as well as all relationships between hedging and hedged risks. The Company's derivative instruments designated for hedge accounting include interest rate swaps and foreign currency forward and option contracts. Changes in the fair value measurements of these derivative instruments are reflected as adjustments to other comprehensive income and subsequently reclassified into earnings in the period during which the hedged transactions occurred. Any ineffectiveness or excluded portion of a designated hedge is recognized in earnings.
The Company also has entered into certain net investment hedges. Changes in the fair value of net investment hedges are recorded in the currency translation adjustment section of other comprehensive income and subsequently reclassified into earnings in the period the hedged item affects earnings. The Company excludes forward points from the effectiveness assessment of its net investment hedges. Changes in fair value of the excluded component are recognized in earnings.
The derivative instruments not designated as hedges for purposes of hedge accounting include total return swaps and certain short-term foreign currency forward contracts. These instruments are recorded at their respective fair values and the change in their value is reported in current period earnings. The Company does not use derivative instruments for trading or speculative purpose. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item. All cash flows associated with the Company's derivative instruments are classified as operating activities in the statements of cash flows.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements
During fiscal 2020,2022, DXC adopted the following Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board:
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | |
Date Issued and ASU | Date Adopted and Method | Description | Impact |
February 2016
December 2019
ASU 2016-02 "Leases2019-12, “Income Taxes (Topic 842)" 740): Simplifying the Accounting for Income Taxes” | April 1, 2019 Modified retrospective 2021 Multiple Methods | This update is intended to increase transparencysimplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and comparability among organizationssimplify GAAP for other areas of Topic 740 by recognizing virtually all lease assetsclarifying and lease liabilitiesamending existing guidance. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the balance sheetapplicable guidance, and disclosing key information about lease arrangements. This update must be adopted usingall amendments for which there is no transition guidance specified are applied on a modified retrospective transition at the beginning of the earliest period presented or at the adoption date recognizing a cumulative adjustment to the opening balance of retained earnings in the period of adoption and provides for certain practical expedients.prospective basis.
| The Company adopteddetermined that this standard had no material impact to its condensed consolidated financial statements following adoption.
|
July 2021
ASU 2021-05, “Leases (Topic 842): Lessors–Certain Leases with Variable Lease Payments”
| Second quarter of fiscal 2022 Prospective | The amendments in this update utilizing the simplified transition method allowing the Company tomodify lease classification requirements for lessors, providing that lease contracts with variable lease payments that do not restate comparative periods and apply Topic 842 beginningdepend on April 1, 2019. During adoption, the Company implemented changes in its systems, including the implementation of new lease accounting software, internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance with, the new guidance. The adoption resulted in following impacts.
The Company recorded increases of $1.7 billion in assets and $1.8 billion in liabilities as of April 1, 2019, due to the recording of operating ROU assets and operating lease liabilities for lease obligations that were historicallya reference index or a rate should be classified as operating leases. The Company's cumulative adjustment toleases if they would have been classified as a sales-type or direct financing lease and resulted in the opening balancerecognition of retained earnings was not material. Additionally, the update did nota selling loss at lease commencement.
| Upon adoption, on a prospective basis, customer leases with variable payments that would have a material impact on the statements of operations or statements of cash flows.
DXC elected the practical expedient package permitted under Topic 842, which among other things, permits the Company not to reassess historical conclusions related to contracts that contain leases,resulted in an upfront loss when meeting sales type lease classification and initial direct costs forare classified as operating leases that commencedupon commencement or modification. Associated revenues, cost of services, or depreciation are subsequently recognized over their related lease terms or useful life. Before adopting this standard, leases with similar variable payments were classified as sales-type leases. These similar leases resulted in the recognition of upfront losses upon commencement or modification prior to the adoption, date. DXC appliedeven when the lessee component election, allowing the Company to account for lease and non-lease components as a single lease component. In addition, DXC made an accounting policy election to not capitalize leases with an initial term of 12 months or less that do not contain a ‘reasonably certain’ purchase option.
Refer to Note 6 - "Leases" for additional information.
|
February 2018
ASU 2018-02 - "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income"
| April 1, 2019
Retrospective
| This update provides an option to reclassify stranded tax effects within accumulated other comprehensive income ("AOCI") to retained earnings in each period in which the effect (or portion thereof)overall economics of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. | The Company adopted this update and opted to not elect to reclassify any stranded tax effects within AOCI to retained earnings, and as such, the adoption of ASU 2018-02 did not have an effect on its condensed consolidated financial statements. In accordance with its accounting policy, the Company uses the portfolio approach and will release income tax effects from AOCI once the reason the tax effectslease arrangements were established cease to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated). |
January 2017
ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the test for Goodwill Impairment"
| July 1, 2019
Prospective
| This update is intended to simplify goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment loss based on that difference. The impairment loss will be limited to the amount of goodwill allocated to that reporting unit. Previously, if the fair value of a reporting unit was lower than its carrying amount (Step 1), an entity was required to calculate any impairment loss by comparing the implied fair value of goodwill with its carrying amount (Step 2). Additionally, under the new standard, companies that have reporting units with zero or negative carrying amounts will no longer be required to perform the qualitative assessment to determine whether to perform Step 2 of the goodwill impairment test. As a result, reporting units with zero or negative carrying amounts will generally be expected to pass the simplified impairment test; however, additional disclosure will be required of those companies.
| DXC early adopted this guidance on a prospective basis as of July 1, 2019. As a result of adopting this ASU, the Company no longer performs Step 2 while completing its goodwill impairment testing, beginning with its annual goodwill impairment testing performed during the second quarter of fiscal 2020.
DXC's impairment testing resulted in non-cash impairment charges of $6,794 million, consisting of $3,789 million and $3,005 million in its GBS and GIS reporting units, respectively. See Note 11 - "Goodwill" for additional information.
profitable. |
78
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements:Pronouncements
The following ASUs were recently issued but have not yet been adopted by DXC:
|
| | | |
Date Issued and ASU | DXC Effective Date | Description | Impact |
June 2016
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
| Fiscal 2021 | This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update must be adopted using a prospective transition approach for debt securities for which an other-than-temporary impairment has been recognized before the effective date. | DXC has evaluated its trade receivables and financial arrangements and determined that the adoption of ASU 2016-13 will be immaterial to the consolidated financial statements. |
August 2018
ASU 2018-15,
"Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"
| Fiscal 2021
| This update helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively. | DXC has evaluated the impact of adopting ASU 2018-15 and determined that the adoption will be immaterial to the consolidated financial statements.
|
August 2018
ASU 2018-13 – "Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement"
| Fiscal 2021 | This update is to improve the effectiveness of fair value measurement disclosures. The amendments in this ASU modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. | DXC is currently evaluating to determine what updates may be required and disclosed. |
Other recentlyRecently issued ASUs effective after March 31, 20202022 are not expected to have a material effect on DXC's consolidated financial statements.
Note 2 - Acquisitions
Note 2 - Acquisitions
Fiscal 2021 Acquisitions
AXA Bank Germany Acquisition
On January 1, 2021, DXC completed its acquisition of AXA Bank Germany ("AXA Bank"), a German retail bank, from AXA Group for the total consideration of $101 million. In connection with its acquisition of AXA Bank, DXC received cash of $294 million which includes customer deposit liabilities totaling $197 million. DXC recorded goodwill associated with the acquisition of AXA Bank totaling $2 million. The AXA bank has been consolidated within FDB and will be part of the FDB sale previously disclosed.
Fiscal 2020 Acquisitions
Luxoft Acquisition
On June 14, 2019, DXC completed the acquisition of Luxoft, a digital service provider whose offerings encompass strategic consulting, custom software development services, and digital solution engineering for total consideration of $2.0 billion. The acquisition will combinecombined Luxoft’s digital engineering capabilities with DXC’s expertise in IT modernization and integration. The purchase agreement (“Merger Agreement”) was entered into by DXC and Luxoft on January 6, 2019 and the transaction was closed on June 14, 2019.
The transaction between DXC and Luxoft is an acquisition, with DXC as the acquirer and Luxoft as the acquiree, based on the fact that DXC acquired 100% of the equity interests and voting rights in Luxoft, and that DXC is the entity that transferred the cash consideration.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price allocation was finalized during the fourth quarter of fiscal 2020. The Company's allocation of the purchase price to the assets acquired and liabilities assumed as of the Luxoft acquisition date is as follows:
| | | | | | | | |
(in millions) | | Fair Value |
Cash and cash equivalents | | $ | 113 | |
Accounts receivable | | 233 | |
Other current assets | | 15 | |
Total current assets | | 361 | |
Property and equipment | | 31 | |
Intangible assets | | 577 | |
Other assets | | 99 | |
Total assets acquired | | 1,068 | |
Accounts payable, accrued payroll, accrued expenses, and other current liabilities | | (121) | |
Deferred revenue | | (8) | |
Long-term deferred tax liabilities and income tax payable | | (106) | |
Other liabilities | | (72) | |
Total liabilities assumed | | (307) | |
Net identifiable assets acquired | | 761 | |
| | |
Goodwill | | 1,262 | |
Total consideration transferred | | $ | 2,023 | |
|
| | | | |
(in millions) | | Fair Value |
Cash and cash equivalents | | $ | 113 |
|
Accounts receivable | | 233 |
|
Other current assets | | 15 |
|
Total current assets | | 361 |
|
Property and equipment | | 31 |
|
Intangible assets | | 577 |
|
Other assets | | 99 |
|
Total assets acquired | | 1,068 |
|
Accounts payable, accrued payroll, accrued expenses, and other current liabilities | | (121 | ) |
Deferred revenue | | (8 | ) |
Long-term deferred tax liabilities and income tax payable | | (106 | ) |
Other liabilities | | (72 | ) |
Total liabilities assumed | | (307 | ) |
Net identifiable assets acquired | | 761 |
|
Goodwill | | 1,262 |
|
Total consideration transferred | | $ | 2,023 |
|
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. The goodwill recognized with the acquisition was attributable to the synergies expected to be achieved by combining the businesses of DXC and Luxoft, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The total goodwill arising from the acquisition was allocated to GBS and is not deductible for tax purposes. See Note 11 - "Goodwill."
As of the period March 31, 2020, the Company made a number of refinements to the June 14, 2019 purchase price allocation. These refinements were primarily driven by the Company recording valuation adjustments that increased customer related intangibles by $6 million and historical deferred tax adjustments including $22 million uncertain tax positions which resulted in a decrease in net identifiable assets of $17 million.
Current assets and liabilities
The Company valued current assets and liabilities using existing carrying values as an estimate of the approximate fair value of those items at the acquisition date except for certain contract receivables for which the Company determined fair value based on a cost plus margin approach.
Property and equipment
The acquired property and equipment are summarized in the following table:
|
| | | | |
(in millions) | | Amount |
Land, buildings, and leasehold improvements | | $ | 8 |
|
Computers and related equipment | | 12 |
|
Furniture and other equipment | | 11 |
|
Total | | $ | 31 |
|
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The companyCompany valued acquired property and equipment using predominately the direct capitalization method of the income approach and the cost approach. For all other categories of property and equipment, based on the nature of the assets,in certain specific cases, the Company determined that the net book value represents the fair value.
Identified intangible assets
The acquired identifiable intangible assets are summarized in the following table:
|
| | | | | | |
(in millions) | | Amount | | Estimated Useful Lives (Years) |
Customer related intangibles | | $ | 417 |
| | 10 |
Trade names | | 143 |
| | 20 |
Developed technology | | 6 |
| | 3 |
Third-party purchased software | | 11 |
| | 3 |
Total | | $ | 577 |
| |
|
Developed technology and third-party purchased software are included in the software category and trade names are included in the other intangible assets category in Note 10 -"Intangible Assets".
The Company valued customer relationships using the multi-period excess earnings method under the income approach and valued trade names and developed technology using a relief from royalty method under the income approach. The Company determined that the net book value of the purchased software represents the fair value.
Deferred tax liabilitiesBelow are the estimated useful lives of the acquired intangibles:
| | | | | | | | | | | | |
| | | | Estimated Useful Lives (Years) |
Customer related intangibles | | | | 10 |
Trade names | | | | 20 |
Developed technology | | | | 3 |
| | | | |
Third-party purchased software | | | | 3 |
| | | | |
The Company valued deferred tax liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.
Results of Operations
The Company's statement of operations includes the following revenues and net income
attributable to Luxoft since the acquisition date:
|
| | | | |
(in millions) | | Twelve Months Ended March 31, 2020(1) |
Revenues | | $ | 695 |
|
Net income (loss) | | $ | (25 | ) |
| | | | | | | | |
(in millions) | | Twelve Months Ended March 31, 2020(1) |
Revenues | | $ | 695 | |
Net income (loss) | | $ | (25) | |
| | |
| | |
(1) Results for the fiscal year ended March 31, 2020 reflect operations subsequent to the acquisition date of June 14, 2019, not the full twelve months of fiscal 2020.
Note 3 - Divestitures
Fiscal 2019 Acquisitions2022 Divestitures
Molina Medicaid Solutions AcquisitionHPS Sale
On April 1, 2021, DXC completed the sale of its HPS Business to Dedalus for €468 million (approximately $551 million), which includes €10 million (approximately $12 million) related to future services to be provided by the Company. The sale proceeds were used to repay the remainder of two series of 4.45% senior notes due fiscal 2023 for $154 million and $165 million. The HPS Sale resulted in a pre-tax gain on sale of $331 million, net of closing costs.
The following is a summary of the assets and liabilities distributed as part of the HPS Sale on April 1, 2021:
| | | | | | | | |
(in millions) | | As of April 1, 2021 |
Assets: | | |
Cash and cash equivalents | | $ | 34 | |
Accounts receivable, net | | 63 | |
Prepaid expenses | | 7 | |
| | |
Total current assets | | 104 | |
Intangible assets, net | | 101 | |
Operating right-of-use assets, net | | 3 | |
Goodwill | | 81 | |
Deferred income taxes, net | | 74 | |
Property and equipment, net | | 4 | |
Other assets | | 15 | |
Total non-current assets | | 278 | |
Total assets | | $ | 382 | |
| | |
Liabilities: | | |
Accounts payable | | $ | 4 | |
Accrued payroll and related costs | | 7 | |
Current operating lease liabilities | | 1 | |
Accrued expenses and other current liabilities | | 20 | |
Deferred revenue and advance contract payments | | 45 | |
Total current liabilities | | 77 | |
Non-current deferred revenue | | 10 | |
Long-term operating lease liabilities | | 2 | |
Other long-term liabilities | | 3 | |
Total long-term liabilities | | 15 | |
Total liabilities | | $ | 92 | |
| | |
During fiscal 2022, the Company sold some insignificant businesses that resulted in a gain of $53 million. This was partially offset by $13 million in sales price adjustments related to prior year dispositions, which resulted from changes in estimated net working capital.
Fiscal 2021 Divestitures
HHS Sale
On October 1, 2018,2020, DXC completed the sale of its acquisitionHHS Business to Veritas Capital. The sale was accomplished by the cash purchase of Molina Medicaid Solutions ("MMS"),all equity interests and assets attributable to the HHS Business for a Medicaid Management Information Systems business, from Molina Healthcare, Inc. for the total considerationenterprise value of $233 million. The combination of MMS with DXC expands DXC’s ability$5.0 billion (including $85 million related to providefuture services to state agencies inbe provided by the administrationCompany). As part of Medicaid programs, includingthe sale of the HHS business, processing, information technology development and administrative services.
DXC TECHNOLOGY COMPANY$272 million of repurchased receivables, previously sold under the Milano Receivables Facility ("Milano Facility") (see Note 6 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price for the MMS was allocated to assets acquired and liabilities assumed based upon the current determination of fair values at the date of acquisition as follows: $87 million to current assets, $112 million to intangible assets other than goodwill, $11 million to other assets, $51 million to current liabilities, $18 million to other liabilities and $92 million to goodwill. The goodwill is associated with the Company's GBS segment and is tax deductible. The intangible assets acquired include customer relationships and developed technology which have a 13-year weighted average estimated useful life.
Other Acquisitions
In addition"Receivables" to the MMS acquisition, DXC completed 7 acquisitions to complement the Company's Microsoft Dynamicsfinancial statements), $12 million of prepaid maintenance, and ServiceNow offerings and to provide opportunities for future growth. The acquired businesses are included in the results for the GBS segment. The purchase consideration$48 million of $228 million included cash of $187 million and contingent consideration with an estimated fair value of $41 million. The purchase price was allocated to assets acquired and liabilities assumed based upon determination of fair values at the dates of acquisition as follows: $73 million to current assets, $71 million to intangible assets other than goodwill, $10 million to other non-current assets, $63 million to current liabilities and $137 million to goodwill. The goodwill is associated with the Company's GBS segment some of which is tax deductible.
Fiscal 2018 Acquisitions
HPES Merger
On April 1, 2017, CSC, Hewlett Packard Enterprise Company (“HPE”), Everett SpinCo, Inc. (“Everett”), and New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett (“Merger Sub”), completed the strategic combination of CSC with the Enterprise Services business of HPE to form DXC. The combination was accomplished through a series of transactions that included the transfer by HPE of its Enterprise Services business, HPES, to Everett, and spin-off by HPE of Everett on March 31, 2017, and the merger of Merger Sub with and into CSC on April 1, 2017. At the time of the HPES Merger, Everett was renamed DXC, and as a result of the HPES Merger, CSC became a direct wholly owned subsidiary of DXC. DXC common stock began regular-way trading on the New York Stock Exchange on April 3, 2017. The strategic combination of the two complementary businesses was to create a versatile global technology services business, well positioned to innovate, compete and serve clients in a rapidly changing marketplace.
The transaction involving HPES and CSC is a reverse merger acquisition, in which DXC is considered the legal acquirer of the business and CSC is considered the accounting acquirer. While purchase considerationsoftware licenses were transferred in a business combination is typically measured by reference to the fair value of equity issued or otherHHS Business. DXC made payment for these assets transferred by the accounting acquirer, CSC did not issue any consideration in the HPES Merger. CSC stockholders received 1 share of DXC common stock for every one share of CSC common stock held immediately prior to the HPES Merger. DXC issued a total of 141,298,797 shares of DXC common stock to CSC stockholders, representing approximately 49.9% of the outstanding shares of DXC common stock immediately following the HPES Merger.
The reverse merger is deemed a capital transaction and the net assets of CSC (the accounting acquirer) are carried forward to DXC (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of CSC, which are recorded at historical cost. The equity of the Company is the historical equity of CSC, retroactively restated to reflect the number of shares issued by DXC in the transaction.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the acquisition method of accounting, total consideration exchanged was:
|
| | | | |
(in millions) | | Amount |
Fair value of purchase consideration received by HPE stockholders(1) | | $ | 9,782 |
|
Fair value of HPES options assumed by CSC(2) | | 68 |
|
Total consideration transferred | | $ | 9,850 |
|
| |
(1)
| Represents the fair value of consideration received by HPE stockholders to give them 50.1% ownership in the combined company. The fair value of the purchase consideration transferred was based on a total of 141,865,656 shares of DXC common stock distributed to HPE stockholders as of the close of business on the record date (141,741,712 after the effect of 123,944 cancelled shares) at CSC's closing price of $69.01 per share on March 31, 2017. |
| |
(2)
| Represents the fair value of certain stock-based awards of HPES employees that were unexercised on March 31, 2017, which were converted to DXC stock-based awards. |
The purchase price allocation for the HPES Merger was finalized during the fourththird quarter of fiscal 2018.2021. The Company's allocationrepurchase of receivables and payment on prepaid maintenance are reported as operating cash outflows, and the payment for software license is considered an investing cash outflow. The HHS Sale resulted in a pre-tax gain on sale of $2,014 million, net of closing costs. The sale price is subject to adjustment based on changes in actual closing net working capital. Final potential working capital adjustments are pending. Approximately $3.5 billion of the purchase pricesale proceeds were used to the assets acquired and liabilities assumed as of the HPES Merger date is as follows:
|
| | | | |
(in millions) | | Fair Value |
Cash and cash equivalents | | $ | 938 |
|
Accounts receivable(1) | | 4,102 |
|
Other current assets | | 530 |
|
Total current assets | | 5,570 |
|
Property and equipment | | 2,581 |
|
Intangible assets(2) | | 6,016 |
|
Other assets(2) | | 1,939 |
|
Total assets acquired | | 16,106 |
|
Accounts payable, accrued payroll, accrued expenses, and other current liabilities | | (4,605 | ) |
Deferred revenue | | (1,315 | ) |
Long-term debt, net of current maturities | | (4,806 | ) |
Long-term deferred tax liabilities and income tax payable | | (1,550 | ) |
Other liabilities | | (1,322 | ) |
Total liabilities assumed | | (13,598 | ) |
Net identifiable assets acquired | | 2,508 |
|
Add: Fair value of non-controlling interests | | (50 | ) |
Goodwill | | 7,392 |
|
Total consideration transferred | | $ | 9,850 |
|
| |
(1)
| Includes aggregate adjustments of $203 million received from HPE in accordance with the provisions of the Separation Agreement. |
| |
(2)
| Previously reported amounts were adjusted to reflect the reclassification of transition and transformation contract costs from intangible assets to other assets to conform to the current year presentation. |
prepay debt.
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the HPES Merger date. The goodwill recognized
DXC's post-divestiture relationship with the HPES Merger was attributable to the synergies expected to be achieved by combining the businesses of CSC and HPES, expected future contracts and the acquired workforce. The goodwill arising from the HPES Merger was allocated to the Company's reportable segments as $2.8 billion to the GBS segment, $2.6 billion to the GIS segment and $2.0 billion to the USPS segment. The goodwill is not deductible for tax purposes. See Note 11 - "Goodwill."
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company valued current assets and liabilities, with the exception of the current portion of deferred revenue and capital leases, using existing carrying values as the fair value of those items as of the HPES Merger date. The Company valued acquired property and equipment using predominately the market method, and in certain specific cases, the cost method. The Company valued deferred tax assets and liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed. The Company valued intangible assets predominately using the multi-period excess earnings method. Intangible assets include customer relationships which have useful lives of 10-13 years and third-party purchased software which have useful lives of 2-7 years.
Subsequent to the HPES Merger, the Company divested USPS which was acquired in the HPES Merger. See Note 3 - "Divestitures" for additional information about the divestiture of USPS.
Tribridge Acquisition
On July 1, 2017, DXC acquired all of the outstanding capital stock of Tribridge Holdings LLC, an independent integrator of Microsoft Dynamics 365, for total consideration of $152 million. The acquisition includes the Tribridge affiliate company, Concerto Cloud Services LLC. The combination of Tribridge with DXC expands DXC’s Microsoft Dynamics 365 global systems integration business.
The purchase price is allocated to assets acquired and liabilities assumed based upon determination of fair values at the date of acquisition as follows: $32 million to current assets, $4 million to property and equipment, $62 million to intangible assets other than goodwill, $24 million to current liabilities and $78 million to goodwill. The goodwill is primarily associated with the Company's GBS segment and is tax deductible. The intangible assets acquired include customer relationships which have a 12-year estimated useful life.
Note 3 - Divestitures
Fiscal 2019 Separation of USPS
During fiscal 2019, the Company completed the USPS Separation and Mergers to form Perspecta, an independent public company.
Implementation of the Separation and DXC's post-Separation relationship with PerspectaHHS Business is governed by several agreements, including the following:
•a Separation and Distribution Agreement;
•an Employee Matters Agreement;
•a Tax Matters Agreement;
•an Intellectual Property Matters Agreement;
•a Transition Services Agreement;
•a Real Estate Matters Agreement;
•an IT ServicesPurchase Agreement, and,
•a Non-US Agency Agreement.
These agreements providewhich provides for the allocation of assets, employees, liabilities and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between DXC and Perspectathe HHS Business attributable to periods prior to, at and after the Separation.divestment. In addition, DXC and Perspectathe HHS Business have service and commercial contracts that generally extend through fiscal 2023. Results
The divestment of the HHS Business, reported as part of the GBS segment, did not meet the requirements for the twelve months ended March 31, 2020 include $39 million of revenuepresentation as discontinued operations as it did not represent a strategic shift that would have a major effect on DXC's operations and financial results and was included in income from continuing operations before taxes associated with the IT services agreement.
Pursuant to the Separation and Distribution Agreement, immediately prior to the Separation, Perspecta made a net cash payment of $984 million to DXC, which reflects transaction consideration of $1,050 million less $66 million in principal amount of debt that was outstanding at a subsidiary of Perspecta. Perspecta financed the payment through borrowings under a new senior secured term loan facility.
its divestment.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS82
DXC's Chief Financial Officer, Paul N. Saleh, served as a Director of Perspecta until his term ended on August 13, 2019. Due to Mr. Saleh's leadership position at DXC and former leadership position at Perspecta, Perspecta is considered a related party under ASC 850 "Related Party Disclosures" for fiscal 2020. Transactions with Perspecta were immaterial to the Company's financial statements for the fiscal year ended March 31, 2020 and balances due to and from Perspecta were immaterial to the Company's balance sheet as of March 31, 2020.
The following is a summary of the assets and liabilities distributed as part of the Separation of USPSHHS Sale on May 31, 2018:October 1, 2020:
|
| | | | |
(in millions) | | As of May 31, 2018 |
Assets: | | |
Cash and cash equivalents | | $ | 95 |
|
Receivables, net | | 458 |
|
Prepaid expenses | | 82 |
|
Other current assets | | 35 |
|
Total current assets of discontinued operations | | 670 |
|
Intangible assets, net(1) | | 870 |
|
Goodwill | | 2,029 |
|
Property and equipment, net | | 294 |
|
Other assets(1) | | 169 |
|
Total non-current assets of discontinued operations | | 3,362 |
|
Total assets | | $ | 4,032 |
|
| | |
Liabilities: | | |
Short-term debt and current maturities of long-term debt | | $ | 161 |
|
Accounts payable | | 165 |
|
Accrued payroll and related costs | | 17 |
|
Accrued expenses and other current liabilities | | 358 |
|
Deferred revenue and advance contract payments | | 53 |
|
Income tax payable | | 18 |
|
Total current liabilities of discontinued operations | | 772 |
|
Long-term debt, net of current maturities | | 1,320 |
|
Non-current deferred revenue | | 5 |
|
Non-current income tax liabilities and deferred tax liabilities | | 196 |
|
Other long-term liabilities | | 71 |
|
Total long-term liabilities of discontinued operations | | 1,592 |
|
Total liabilities | | $ | 2,364 |
|
| | | | | | | | |
(1)(in millions)
| Previously reported amounts were adjusted to reflect the reclassification | As of transitionOctober 1, 2020 |
Assets: | | |
Cash and transformationcash equivalents | | $ | 8 | |
Accounts receivable, net | | 295 | |
Prepaid expenses | | 39 | |
Other current assets | | 2 | |
Total current assets | | 344 | |
Intangible assets, net | | 1,308 | |
Operating right-of-use assets, net | | 74 | |
Goodwill | | 1,354 | |
Property and equipment, net | | 46 | |
Other assets | | 54 | |
Total non-current assets | | 2,836 | |
Total assets | | $ | 3,180 | |
| | |
Liabilities: | | |
Accounts payable | | $ | 79 | |
Accrued payroll and related costs | | 13 | |
Current operating lease liabilities | | 27 | |
Accrued expenses and other current liabilities | | 36 | |
Deferred revenue and advance contract costs from intangible assets to other assets to conform to thepayments | | 20 | |
Total current year presentation.liabilities | | 175 | |
Non-current deferred revenue | | 32 | |
Long-term operating lease liabilities | | 48 | |
Other long term liabilities | | 2 | |
Total long-term liabilities | | 82 | |
Total liabilities | | $ | 257 | |
During fiscal 2021, the Company sold some insignificant businesses that resulted in a loss of $10 million.
Note 4 - Assets Held for Sale
Fiscal 2022
As of March 31, 2022, the Company had entered into definitive agreements to sell insignificant businesses, which are classified as held for sale.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 2021
The following is a summary
As of March 31, 2021, the disposition of the operating resultsHPS Business met the requirements for presentation as assets held for sale under GAAP. In addition, as of USPS which have been reflected within income from discontinued operations, net of tax:
|
| | | | | | | |
(in millions) | Fiscal Year Ended March 31, 2019 (1) | | Fiscal Year Ended March 31, 2018 |
Revenue | $ | 431 |
| | $ | 2,823 |
|
| | | |
Costs of services | 311 |
| | 2,104 |
|
Selling, general and administrative | 50 |
| | 152 |
|
Depreciation and amortization | 33 |
| | 169 |
|
Restructuring costs | 1 |
| | 14 |
|
Interest expense | 8 |
| | 15 |
|
Other (income) expense, net | (25 | ) | | 2 |
|
Total costs and expenses | 378 |
| | 2,456 |
|
Total income from discontinued operations, before income taxes | 53 |
| | 367 |
|
Income tax expense | 18 |
| | 131 |
|
Total income from discontinued operations | $ | 35 |
| | $ | 236 |
|
(1) Results for the fiscal year ended March 31, 2019 reflect operations through2021, the Separation date of May 31, 2018, not the full twelve-month periodCompany had entered into definitive agreements to sell insignificant businesses, which were also classified as shownheld for the prior period.sale.
There was 0 gain or loss on disposition recognizedAssets held for sale are reported at carrying value, which is less than fair value. Assets held for sale and related liabilities as a result of the Separation.
The following selected financial information of USPS is included in the statements of cash flows:
|
| | | | | | | |
(in millions) | Fiscal Year Ended March 31, 2019 (1) | | Fiscal Year Ended March 31, 2018 |
Depreciation | $ | 16 |
| | $ | 70 |
|
Amortization | $ | 17 |
| | $ | 99 |
|
Capital expenditures | $ | — |
| | $ | (18 | ) |
Significant operating non-cash items: | | | |
Gain on dispositions | $ | 24 |
| | $ | — |
|
(1) Results for the fiscal year ended March 31, 2019 reflect operations through the Separation date of May 31, 2018, not the full twelve-month period2021 were as shown for the prior period.follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | HPS Business | | Other | | Total |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 28 | | | $ | 35 | | | $ | 63 | |
Accounts receivable, net | | 64 | | | 17 | | | 81 | |
Prepaid expenses | | 6 | | | 5 | | | 11 | |
Other current assets | | — | | | 5 | | | 5 | |
Total current assets held for sale | | 98 | | | 62 | | | 160 | |
Intangible assets, net | | 101 | | | 16 | | | 117 | |
Operating right-of-use assets, net | | 5 | | | 18 | | | 23 | |
Goodwill | | 80 | | | 9 | | | 89 | |
Deferred income taxes, net | | 43 | | | — | | | 43 | |
Property and equipment, net | | 4 | | | 52 | | | 56 | |
Other assets | | 16 | | | 9 | | | 25 | |
Total non-current assets held for sale | | 249 | | | 104 | | | 353 | |
Total assets held for sale | | $ | 347 | | | $ | 166 | | | $ | 513 | |
| | | | | | |
Liabilities: | | | | | | |
Accounts payable | | $ | 4 | | | $ | 8 | | | $ | 12 | |
Accrued payroll and related costs | | 7 | | | 2 | | | 9 | |
Current operating lease liabilities | | 2 | | | 17 | | | 19 | |
Accrued expenses and other current liabilities | | 13 | | | 13 | | | 26 | |
Deferred revenue and advance contract payments | | 46 | | | 6 | | | 52 | |
Total current liabilities related to assets held for sale | | 72 | | | 46 | | | 118 | |
Non-current deferred revenue | | 10 | | | — | | | 10 | |
Long-term operating lease liabilities | | 3 | | | 1 | | | 4 | |
Income tax liabilities and deferred tax liabilities | | 1 | | | — | | | 1 | |
Other long term liabilities | | 3 | | | 2 | | | 5 | |
Total long-term liabilities related to assets held for sale | | 17 | | | 3 | | | 20 | |
Total liabilities related to assets held for sale | | $ | 89 | | | $ | 49 | | | $ | 138 | |
84
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 45 - Earnings (Loss) Per Share
Basic EPS are computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflect the incremental shares issuable upon the assumed exercise of stock options and equity awards. The following table reflects the calculation of basic and diluted EPS:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions, except per-share amounts) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Net income (loss) attributable to DXC common shareholders: | | $ | 718 | | | $ | (149) | | | $ | (5,369) | |
| | | | | | |
Common share information: | | | | | | |
Weighted average common shares outstanding for basic EPS | | 250.02 | | | 254.14 | | | 258.57 | |
Dilutive effect of stock options and equity awards | | 5.19 | | | — | | | — | |
Weighted average common shares outstanding for diluted EPS | | 255.21 | | | 254.14 | | | 258.57 | |
| | | | | | |
Earnings per Share: | | | | | | |
Basic | | $ | 2.87 | | | $ | (0.59) | | | $ | (20.76) | |
Diluted | | $ | 2.81 | | | $ | (0.59) | | | $ | (20.76) | |
|
| | | | | | | | | | | | |
|
| Fiscal Years Ended |
(in millions, except per-share amounts) |
| March 31, 2020 |
| March 31, 2019 |
| March 31, 2018 |
| | | | | | |
Net (loss) income attributable to DXC common shareholders: | | | | | | |
From continuing operations | | $ | (5,369 | ) | | $ | 1,222 |
| | $ | 1,515 |
|
From discontinued operations | | — |
| | 35 |
| | 236 |
|
| | $ | (5,369 | ) | | $ | 1,257 |
| | $ | 1,751 |
|
Common share information: | | | | | | |
Weighted average common shares outstanding for basic EPS | | 258.57 |
| | 277.54 |
| | 284.93 |
|
Dilutive effect of stock options and equity awards | | — |
| | 3.89 |
| | 4.84 |
|
Weighted average common shares outstanding for diluted EPS | | 258.57 |
| | 281.43 |
| | 289.77 |
|
| | | | | | |
EPS: | | | | | | |
Basic | | | | | | |
Continuing operations | | $ | (20.76 | ) | | $ | 4.40 |
| | $ | 5.32 |
|
Discontinued operations | | — |
| | 0.13 |
| | 0.83 |
|
Total | | $ | (20.76 | ) | | $ | 4.53 |
| | $ | 6.15 |
|
| | | | | | |
Diluted | | | | | | |
Continuing operations | | $ | (20.76 | ) | | $ | 4.35 |
| | $ | 5.23 |
|
Discontinued operations | | — |
| | 0.12 |
| | 0.81 |
|
Total | | $ | (20.76 | ) | | $ | 4.47 |
| | $ | 6.04 |
|
Certain share based equity awards were excluded from the computation of dilutive EPS because inclusion of these awards would have had an anti-dilutive effect. The following table reflects awards excluded:
| | | | Fiscal Years Ended | | Fiscal Years Ended |
| | March 31, 2020(1) | | March 31, 2019 | | March 31, 2018 | | March 31, 2022 | | March 31, 2021(1) | | March 31, 2020(1) |
Stock Options | | 1,075,901 |
| | — |
| | — |
| Stock Options | | 510,933 | | | 1,596,985 | | | 1,075,901 | |
RSUs | | 2,029,567 |
| | 46,051 |
| | 54,637 |
| RSUs | | 6,500 | | | 2,768,022 | | | 2,029,567 | |
PSUs | | 289,972 |
| | 25,086 |
| | 96,029 |
| PSUs | | 37,821 | | | 1,463,872 | | | 289,972 | |
(1) Due to the Company's net loss during fiscal 2021 and fiscal 2020, stock options, RSUs and PSUs were excluded from the computation of dilutive EPS because they would have had an anti-dilutive effect.
85
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Receivables
Note 5 - Receivables
Receivables, net of allowance for doubtful accounts consist of the following:
| | | | | | | | | | | | | | |
| | As of |
(in millions) | | March 31, 2022 | | March 31, 2021 |
Billed trade receivables | | $ | 1,755 | | | $ | 2,009 | |
Unbilled receivables | | 1,310 | | | 1,214 | |
Other receivables | | 789 | | | 933 | |
Total | | $ | 3,854 | | | $ | 4,156 | |
|
| | | | | | | | |
| | As of |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Billed trade receivables | | $ | 2,094 |
| | $ | 2,508 |
|
Unbilled receivables | | 1,419 |
| | 1,114 |
|
Other receivables | | 879 |
| | 1,559 |
|
Total | | $ | 4,392 |
| | $ | 5,181 |
|
The Company calculates expected credit losses for trade accounts receivable based on historical credit loss rates for each aging category as adjusted for the current market conditions and forecasts about future economic conditions. The following table summarizespresents the activity for the allowance for doubtful accounts:in allowances against trade accounts receivables:
| | | | | | | | | | | | | | | | |
| | As of and for Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | |
Beginning balance | | $ | 91 | | | $ | 74 | | | |
Impact of adoption of the Credit Loss Standard | | — | | | 4 | | | |
Provisions for losses on accounts receivable | | 5 | | | 53 | | | |
Other adjustments to allowance and write-offs | | (41) | | | (40) | | | |
Ending balance | | $ | 55 | | | $ | 91 | | | |
|
| | | | | | | | | | | | |
| | As of and for Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Beginning balance | | $ | 60 |
| | $ | 40 |
| | $ | 26 |
|
Additions charged to costs and expenses | | 23 |
| | 19 |
| | 45 |
|
Deductions(1) | | (4 | ) | | (4 | ) | | (37 | ) |
Other(2) | | (5 | ) | | 5 |
| | 6 |
|
Ending balance | | $ | 74 |
| | $ | 60 |
| | $ | 40 |
|
| |
(1)
| Represents write-offs and recoveries of prior year charges. |
| |
(2)
| Includes changes in foreign currency exchange rates. |
Receivables Facility
The Company has an accounts receivable sales facility (as amended, restated, supplemented or otherwise modified as of March 31, 2020,2022, the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers") for the sale of commercial accounts receivable in the United States. The Receivables Facility has a facility limit of $400 million as of March 31, 2022. Under the Receivables Facility, the Company and certain of itsthe Company subsidiaries (the "Sellers") sell accounts receivable to DXC Receivables LLC ("Receivables SPV"), a wholly-ownedwholly owned bankruptcy-remote entity, in a true sale. Receivables SPV subsequently sells certain of the receivables in their entirety to the Purchasers pursuant to a receivables purchase agreement. The financial obligations of Receivables SPV to the Purchasers under the Receivables Facility are limited to the assets it owns and non-recourse to the Company. Sales of receivables by Receivables SPV occur continuously and are settled on a monthly basis. During the second quarter of fiscal 2020, Receivables SPV amended the Receivables Facility (the "Amendment") to increase the investment limit from $600 million to $750 million and extend the termination date to August 19, 2020. Under the terms of the amended Receivables Facility, there are no longer deferred purchase prices ("DPP") for receivables as the entire purchase price is paid in cash when the receivables are sold to the Purchasers. Prior to the Amendment, DPP's were realized by Receivables SPV upon the ultimate collection of the underlying receivables sold to the Purchasers. Cash receipts on the DPP were classified as cash flows from investing activities. The DPP was $525 million before the Amendment was executed. Upon execution of the Amendment, the Purchasers extinguished the DPP and returned title to the applicable underlying receivables titles to Receivables SPV. The DPP extinguishment was classified as a non-cash investing activity, please refer to Note 17 - "Cash Flows."monthly.
The amount available under the Receivables Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after deducting excess concentrations. As of March 31, 2020,2022, the total availability under the Receivables Facility was $750$400 million and the amount sold to the Purchasers was $750$400 million, which was derecognized from the Company's balance sheet. The Receivables Facility is scheduled to terminate on August 19, 2020,July 29, 2022, but provides for 1 or more optional one-year extensions, if agreed to by the Purchasers. The Company uses the proceeds from Receivables SPV's sale of receivables under the Receivables Facility for general corporate purposes.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, 0no gain or loss on sale of receivables was recorded.
While the Company guarantees certain non-financial performance obligations of the Sellers, the Purchasers bear customer credit risk associated with the receivables sold under the Receivables Facility and have recourse in the event of credit-related customer non-payment solely to the assets of the Receivables SPV.
The following table is a reconciliation
Milano Receivables Facility
On October 1, 2020, and in connection with the consummation of the beginning and ending balancessale of the DPP:HHS Business, and at the direction of the purchaser of the HHS Business, the Milano Facility was terminated. For more information, refer to Note 3 - "Divestitures."
|
| | | | | | | | |
| | As of and for the Fiscal Year Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Beginning balance | | $ | 574 |
| | $ | 233 |
|
Transfers of receivables | | 1,214 |
| | 5,435 |
|
Collections | | (1,265 | ) | | (4,393 | ) |
Change in funding availability | | 2 |
| | (246 | ) |
Facility amendments | | (525 | ) | | (457 | ) |
Fair value adjustment | | — |
| | 2 |
|
Ending balance | | $ | — |
| | $ | 574 |
|
German Receivables Facility
On October 1, 2019, DXCthe Company executed an accounts receivable securitization facility (as amended, restated, supplemented or otherwise modified as of March 31, 2020, the "DE(the “DE Receivables Facility"Facility”) with certain unaffiliated financial institutions (the "DE Purchasers"“DE Purchasers”) for the sale of commercial accounts receivable in Germany. The facility has an investment limitOn June 30, 2021, the Company terminated the agreement governing the DE Receivables Facility. In connection with the termination of €200 million (approximately $225 million as of March 31, 2020). the DE Receivables Facility, the Company repaid all outstanding obligations and fees thereunder.
Under the DE Receivables Facility, certain DXCof the Company’s subsidiaries locatedorganized in Germany (the "DE Sellers"“DE Sellers”) sell billed and unbilledsold accounts receivable to DXC ARFacility Designated Activity Company ("(“DE Receivables"Receivables SPV”), a trust ownedtrust-owned bankruptcy-remote entity, in a true sale. PursuantDE Receivables SPV subsequently sold certain of the receivables in their entirety to the DE Purchasers pursuant to a receivables purchase agreement, DE Receivables subsequently sells the receivables to the DE Purchasers in return for payments of capital.agreement. Sales of receivables by DE Receivables SPV occuroccurred continuously and were settled monthly. During the first quarter of fiscal 2021, DE Receivables SPV amended the DE Receivables Facility (the "Amendment"). Under the terms of the DE Receivables Facility, there was no longer any deferred purchase price (“DPP”) for receivables as the entire purchase price is paid in cash when the receivables are settled on a monthly basis. The proceeds fromsold to the sale of these receivables comprise a combination of cash and DPP. The DPP isDE Purchasers. Prior to the Amendment, DPPs were realized by the CompanyDE Receivables SPV upon the ultimate collection of the underlying receivables sold to the DE Purchasers. Cash receipts on the DPP areDPPs were classified as cash flows from investing activities.
The amount available underDPP balance was $102 million before the Amendment was executed. Upon execution of the Amendment, the DE Receivables Facility fluctuates over time based onPurchasers extinguished the total amount of eligibleDPP balance and returned title to the applicable underlying receivables generated during the normal course of business after deducting excess concentrations. As of March 31, 2020, the total availability under theto DE Receivables FacilitySPV. The DPP extinguishment was approximately $116 million and the drawn amount was $105 million. As of March 31, 2020, the Company recorded a $11 million receivable within receivables, net because the amount of cash proceeds received by the Company under the DE Receivables Facility was less than the total availability. The DE Receivables Facility is scheduled to terminate on September 30, 2020, but provides for 1 or more optional one-year extensions, if agreed to by the DE Purchasers. The Company uses the proceeds from DE Receivables SPV's sale of receivables under the DE Receivables Facility for general corporate purposes.
The fair value of the sold receivables approximated book value due to the short-term nature, andclassified as a result, no gain or loss on sale of receivables was recorded.non-cash investing activity. See Note 18 – “Cash Flows” for additional information.
The Company’s risk of loss following the transfer of accounts receivable under the DE Receivables Facility is limited to the DPP outstanding and any short-falls in collections for specified non-credit related reasons after sale. Payment of the DPP is not subject to significant risks other than delinquencies and credit losses on accounts receivable sold under the DE Receivables Facility.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain obligations of DE Sellers under the DE Receivables Facility and certain DXC subsidiaries located in Germany, as initial servicers, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the DE Purchasers. However, the performance guaranty does not cover DE Receivables SPV’s obligations to pay yield, fees or invested amounts to the administrative agent or any of the DE Purchasers.
The following table is a reconciliation of the beginning and ending balances of the DPP:
| | | | | | | | | | | | |
(in millions) | | | | Fiscal 2021 |
Beginning balance | | | | $ | 103 | |
Transfers of receivables | | | | 417 | |
Collections | | | | (420) | |
Change in funding availability | | | | 2 | |
Facility amendments | | | | (102) | |
Ending balance | | | | $ | — | |
|
| | | | |
(in millions) | | As of March 31, 2020 |
Beginning balance | | $ | — |
|
Transfers of receivables | | 996 |
|
Collections | | (879 | ) |
Change in funding availability | | (14 | ) |
Ending balance | | $ | 103 |
|
Federal Receivables Sales Facility
Since July 14, 2017, the Company has given a parent guaranty in connection with a federal receivables sales facility with certain financial institutions, under which certain subsidiaries of the Company previously sold eligible federal government obligor receivables, including billed and certain unbilled receivables. In connection with the Separation, the sellers and servicers of the receivables sold under the Federal Receivables Sales Facility were divested and, effective May 31, 2018, the parent guaranty was terminated.
The following table reflects activity of the Federal Receivables Sales Facility, prior to the Separation:
|
| | | | |
(in millions) | | As of the Fiscal Year Ended March 31, 2019(1) |
Transfers of receivables | | $ | 464 |
|
Collections | | $ | 521 |
|
Operating cash flow effect | | $ | (57 | ) |
Note 7 - Leases
(1) Results for the fiscal year ended March 31, 2019 reflect operations through the Separation date of May 31, 2018, not the full twelve month period.
Note 6 - Leases
The Company has operating and finance leases for data centers, corporate offices retail stores and certain equipment. Our leases have remaining lease terms of 1one to 1311 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1one to 3three years.
Operating Leases
The components of operating lease expense were as follows:
|
| | | | |
(in millions) | | Fiscal Years Ended March 31, 2020 |
Operating lease cost | | $ | 698 |
|
Short-term lease cost | | 49 |
|
Variable lease cost | | 46 |
|
Sublease income | | (45 | ) |
Total operating costs | | $ | 748 |
|
| | |
Finance lease cost: | | |
Amortization of right-of-use assets | | $ | 405 |
|
Interest on lease liabilities | | 65 |
|
Total finance lease cost | | $ | 470 |
|
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | For the Fiscal Year Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Operating lease cost | | $ | 484 | | | $ | 616 | | | $ | 698 | |
Short-term lease cost | | 40 | | | 53 | | | 49 | |
Variable lease cost | | 73 | | | 56 | | | 46 | |
Sublease income | | (32) | | | (40) | | | (45) | |
Total operating costs | | $ | 565 | | | $ | 685 | | | $ | 748 | |
Cash payments made fromfor variable lease costs and short-term leases are not included in the measurement of operating and finance lease liabilities, and as such, are excluded from the supplemental cash flow information stated below. In addition,
| | | | | | | | | | | | | | | | | | | | |
| | For the Fiscal Year Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Cash paid for amounts included in the measurement of operating lease liabilities – operating cash flows | | $ | 484 | | | $ | 616 | | | $ | 698 | |
ROU assets obtained in exchange for operating lease liabilities(1) | | $ | 279 | | | $ | 530 | | | $ | 411 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
(1) There were $1,085 million, $763 million, and $216 million in modifications and terminations in fiscal 2022, 2021, and 2020, respectively, and net of $87 million change in lease classification from operating to finance lease in fiscal 2020. See Note 18 – “Cash Flows” for the supplemental non-cashfurther information on operating and finance leases, please refer to Note 17 - "Cash Flows."non-cash activities affecting cash flows.
|
| | | | |
(in millions) | | Fiscal Years Ended March 31, 2020 |
Cash paid for amounts included in the measurement of: | | |
Operating cash flows from operating leases | | $ | 698 |
|
Operating cash flows from finance leases | | $ | 65 |
|
Financing cash flows from finance leases | | $ | 576 |
|
Supplemental Balance Sheet information related to leases was as follows:
|
| | | | | | |
| | | | As of |
(in millions) | | Balance Sheet Line Item | | March 31, 2020 |
Assets: | | | | |
ROU operating lease assets | | Operating right-of-use assets, net | | $ | 1,428 |
|
ROU finance lease assets | | Property and Equipment, net | | 1,220 |
|
Total | | | | $ | 2,648 |
|
| | | | |
Liabilities: | | | | |
Current | | | | |
Operating lease | | Current operating lease liabilities | | $ | 482 |
|
Finance lease | | Short-term debt and current maturities of long-term debt | | 444 |
|
Total | | | | $ | 926 |
|
| | | | |
Non-current | | | | |
Operating lease | | Non-current operating lease liabilities | | $ | 1,063 |
|
Finance lease | | Long-term debt, net of current maturities | | 602 |
|
Total | | | | $ | 1,665 |
|
The following table provides information on the weighted average remainingpresents operating lease balances:
| | | | | | | | | | | | | | | | | | | | |
| | | | As of |
(in millions) | | Balance Sheet Line Item | | March 31, 2022 | | March 31, 2021 |
ROU operating lease assets | | Operating right-of-use assets, net | | $ | 1,133 | | | $ | 1,366 | |
| | | | | | |
Operating lease liabilities | | Current operating lease liabilities | | $ | 388 | | | $ | 418 | |
Operating lease liabilities | | Non-current operating lease liabilities | | 815 | | | 1,038 | |
Total operating lease liabilities | | | | $ | 1,203 | | | $ | 1,456 | |
| | | | | | |
The weighted-average operating lease term was 4.4 years and weighted average4.9 years as of March 31, 2022 and March 31, 2021, respectively. The weighted-average operating lease discount rate for operatingwas 3.3% and finance leases:3.8% as of March 31, 2022 and March 31, 2021, respectively.
|
| | | |
Weighted average remaining lease term: | | Years |
Operating leases | | 4.8 |
|
Finance leases | | 2.7 |
|
| | |
Weighted average remaining discount rate: | | Rate |
Operating leases | | 4.0 | % |
Finance leases | | 6.4 | % |
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS88
The following maturity analysis presents expected undiscounted cash payments for operating and finance leases on an annual basis as of March 31, 2020:2022:
|
| | | | | | | | | | | | |
Fiscal year | | Operating Leases | | |
(in millions) | | Real Estate | | Equipment | | Finance Leases |
2021 | | $ | 429 |
| | $ | 79 |
| | $ | 464 |
|
2022 | | 330 |
| | 41 |
| | 339 |
|
2023 | | 255 |
| | 19 |
| | 195 |
|
2024 | | 189 |
| | 11 |
| | 81 |
|
2025 | | 121 |
| | 4 |
| | 16 |
|
Thereafter | | 211 |
| | 10 |
| | — |
|
Total lease payments | | 1,535 |
| | 164 |
| | 1,095 |
|
Less: imputed interest | | 145 |
| | 9 |
| | 49 |
|
Total payments | | $ | 1,390 |
| | $ | 155 |
| | $ | 1,046 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | |
(in millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Operating lease payments | | $ | 415 | | | $ | 308 | | | $ | 225 | | | $ | 133 | | | $ | 70 | | | $ | 155 | | | $ | 1,306 | |
Less: imputed interest | | | | | | | | | | | | | | (103) | |
Total operating lease liabilities | | | | | | | | | | | | | | $ | 1,203 | |
| | | | | | | | | | | | | | |
Prior
Finance Leases
The components of finance lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Fiscal Year Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Finance lease cost: | | | | | | |
Amortization of right-of-use assets | | $ | 346 | | | $ | 433 | | | $ | 405 | |
Interest on lease liabilities | | 27 | | | 45 | | | 65 | |
Total finance lease cost | | $ | 373 | | | $ | 478 | | | $ | 470 | |
The following table provides supplemental cash flow information related to fiscal 2020, required disclosure under ASC 840the Company’s finance leases:
| | | | | | | | | | | | | | | | | | | | |
| | For the Fiscal Year Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Interest paid for finance lease liabilities – Operating cash flows | | $ | 27 | | | $ | 45 | | | $ | 65 | |
Cash paid for amounts included in the measurement of finance lease obligations – financing cash flows | | 501 | | | 584 | | | 576 | |
Total cash paid in the measurement of finance lease obligations | | $ | 528 | | | $ | 629 | | | $ | 641 | |
| | | | | | |
Capital expenditures through finance lease obligations(1) | | $ | 233 | | | $ | 348 | | | $ | 605 | |
(1) See Note 18 – ”Cash Flows” for minimum fixed rentals under operating leases that have initial or remaining terms in excessfurther information on non-cash activities affecting cash flows.
The following table presents finance lease balances:
| | | | | | | | | | | | | | | | | | | | |
| | | | As of |
(in millions) | | Balance Sheet Line Item | | March 31, 2022 | | March 31, 2021 |
ROU finance lease assets | | Property and Equipment, net | | $ | 602 | | | $ | 834 | |
| | | | | | |
Finance lease | | Short-term debt and current maturities of long-term debt | | $ | 289 | | | $ | 398 | |
Finance lease | | Long-term debt, net of current maturities | | 354 | | | 496 | |
Total finance lease liabilities(1) | | | | $ | 643 | | | $ | 894 | |
| | | | | | |
(1) See Note 14 – “Debt” for further information on finance lease liabilities.
The weighted-average finance lease term was 2.8 years and 2.6 years as of one year at March 31, 2019,2022 and March 31, 2021, respectively. The weighted-average finance lease discount rate was 2.9% and 3.6% as follows:of March 31, 2022 and March 31, 2021, respectively.
|
| | | | | | | | |
Fiscal year | | Operating Leases |
(in millions) | | Real Estate | | Equipment |
2020 | | $ | 409 |
| | $ | 248 |
|
2021 | | 288 |
| | 119 |
|
2022 | | 203 |
| | 27 |
|
2023 | | 159 |
| | 4 |
|
2024 | | 124 |
| | 1 |
|
Thereafter | | 274 |
| | — |
|
Minimum fixed rentals | | 1,457 |
| | 399 |
|
Less: sublease rental income | | (149 | ) | | — |
|
Total rental payments | | $ | 1,308 |
| | $ | 399 |
|
Prior to fiscal 2020, required disclosure under ASC 840The following maturity analysis presents expected undiscounted cash payments for future minimum lease payments to be made under finance leases as of March 31, 2019, was as follows:2022:
|
| | | | |
Fiscal year | | |
(in millions) | | Finance Leases |
2020 | | $ | 509 |
|
2021 | | 310 |
|
2022 | | 212 |
|
2023 | | 128 |
|
2024 | | 36 |
|
Thereafter | | — |
|
Total minimum lease payments | | 1,195 |
|
Less: interest and executory costs | | (68 | ) |
Present value of net minimum lease payments | | $ | 1,127 |
|
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | |
(in millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Finance lease payments | | $ | 300 | | | $ | 195 | | | $ | 108 | | | $ | 50 | | | $ | 19 | | | $ | — | | | $ | 672 | |
Less: imputed interest | | | | | | | | | | | | | | (29) | |
Total finance lease liabilities | | | | | | | | | | | | | | $ | 643 | |
| | | | | | | | | | | | | | |
Note 78 - Fair Value
Fair Value Measurements on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis excluding pension assets and derivative assets and liabilities. See Note 1415 - "Pension and Other Benefit Plans" and Note 89 - "Derivative Instruments" for information about the fair value of our pensionthese excluded assets and derivative assets and liabilities, respectively.liabilities. There were no transfers between any of the levels during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy |
(in millions) | | As of March 31, 2022 |
Assets: | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Money market funds and money market deposit accounts | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | |
| | | | | | | | |
Time deposits(1) | | 51 | | | 51 | | | — | | | — | |
| | | | | | | | |
Other securities(2) | | 51 | | | — | | | 49 | | | 2 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 107 | | | $ | 56 | | | $ | 49 | | | $ | 2 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 8 | | | $ | — | | | $ | — | | | $ | 8 | |
| | | | | | | | |
Total liabilities | | $ | 8 | | | $ | — | | | $ | — | | | $ | 8 | |
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Hierarchy |
(in millions) | | As of March 31, 2020 |
Assets: | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Money market funds and money market deposit accounts | | $ | 156 |
| | $ | 156 |
| | $ | — |
| | $ | — |
|
Time deposits(1) | | 595 |
| | 595 |
| | — |
| | — |
|
Other debt securities(2) | | 51 |
| | — |
| | 48 |
| | 3 |
|
Deferred purchase price receivable | | 103 |
| | — |
| | — |
| | 103 |
|
Total assets | | $ | 905 |
| | $ | 751 |
| | $ | 48 |
| | $ | 106 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 46 |
| | $ | — |
| | $ | — |
| | $ | 46 |
|
Total liabilities | | $ | 46 |
|
| $ | — |
|
| $ | — |
|
| $ | 46 |
|
|
| | | | | | | | | | | | | | | | |
| | As of March 31, 2019 |
Assets: | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Money market funds and money market deposit accounts | | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | — |
|
Time deposits(1) | | 194 |
| | 194 |
| | — |
| | — |
|
Other debt securities(2) | | 53 |
| | — |
| | 49 |
| | 4 |
|
Deferred purchase price receivable | | 574 |
| | — |
| | — |
| | 574 |
|
Total assets | | $ | 827 |
| | $ | 200 |
| | $ | 49 |
| | $ | 578 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 41 |
| | $ | — |
| | $ | — |
| | $ | 41 |
|
Total Liabilities | | $ | 41 |
| | $ | — |
| | $ | — |
| | $ | 41 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | As of March 31, 2021 |
Assets: | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Money market funds and money market deposit accounts | | $ | 12 | | | $ | 12 | | | $ | — | | | $ | — | |
Time deposits(1) | | 78 | | | 78 | | | — | | | — | |
Other securities(2) | | 57 | | | — | | | 55 | | | 2 | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 147 | | | $ | 90 | | | $ | 55 | | | $ | 2 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 27 | | | $ | — | | | $ | — | | | $ | 27 | |
Total Liabilities | | $ | 27 | | | $ | — | | | $ | — | | | $ | 27 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Cost basis approximated fair value due to the short period of time to maturity.
(2) Other debt securities include available-for-sale equity security investments with Level 2 inputs that have a cost basis of $37$53 million and $38$57 million, and unrealized gainslosses of $11$4 million and $11$2 million, as of March 31, 20202022 and March 31, 2019, respectively.2021, respectively, included in other (income) expense, net in the Company’s statements of operations. During the third quarter of fiscal 2021, previously held investments were sold and the proceeds were used to purchase new investments.The gain of $17 million from the sale was included in other (income) expense, net.
The fair value of money market funds, and money market deposit accounts, U.S. Treasury bills with less than three months maturity and time deposits, included in cash and cash equivalents, are based on quoted market prices. The fair value of other debt securities, included in other long-term assets, is based on actual market prices. The fair value of the DPP, included in receivables, net of allowance for doubtful accounts, is determined by calculating the expected amount of cash to be received and is principally based on unobservable inputs consisting primarily of the face amount of the receivables adjusted for anticipated credit losses. The fair value of contingent consideration, included in other liabilities, is based on contractually defined targets of financial performance in connection with earn outs and other considerations.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Fair Value Disclosures
The carrying amounts of the Company’s financial instruments with short-term maturities, primarily accounts receivable, accounts payable, short-term debt, and financial liabilities included in other accrued liabilities are deemed to approximate their market values due to their short-term nature. If measured at fair value, these financial instruments would be classified inas Level 2 or Level 3 ofwithin the fair value hierarchy.
The Company estimates the fair value of its long-term debt primarily by using quoted prices obtained from third partythird-party providers such as Bloomberg and by using an expected present value technique that is based on observable market inputs for instruments with similar terms currently available to the Company. The estimated fair value of the Company's long-term debt excluding capitalizedfinance lease liabilities was $8.2$3.7 billion and $5.6$4.7 billion as of March 31, 20202022 and March 31, 2019,2021, respectively as compared with the carrying value of $8.4$4.0 billion and $5.6$4.4 billion as of March 31, 20202022 and March 31, 2019,2021, respectively. If measured at fair value, long-term debt excluding capitalizedfinance lease liabilities would be classified inas Level 1 or Level 2 ofwithin the fair value hierarchy.
Non-financial assets such as goodwill, tangible assets, intangible assets, and other contract related long-lived assets are recorded at fair value in the period they are initially recognized,recognized; and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The fair value measurements in such instances would be classified inas Level 3 ofwithin the fair value hierarchy. Other than the goodwill impairment losses discussed in Note 1112 - "Goodwill,"Goodwill," there were no significant impairments recorded during the fiscal periods covered by this report.
Note 89 - Derivative Instruments
In the normal course of business, the Company is exposed to interest rate and foreign exchange rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. The Company does not use derivative instruments for trading or any speculative purpose.
Derivatives Designated for Hedge Accounting
Cash flow hedges
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee, Euro and British Pound-denominated intercompany obligations and forecasted transactions. The notional amounts of foreign currency forward contracts designated as cash flow hedges as of March 31, 20202022 and March 31, 20192021 was $455$727 million and $277$546 million, respectively. As of March 31, 2020,2022, the related forecasted transactions extend through September 2021.March 2024.
For the fiscal years ended March 31, 20202022 and March 31, 2019,2021, the Company performed an assessment at the inception of the cash flow hedge transactions and determined all critical terms of the hedging instruments and hedged items matched. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the fiscal years ended March 31, 20202022 and March 31, 2019,2021, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of March 31, 2020, $172022, $14 million of the existing amount of gain related to the cash flow hedge reported in AOCIaccumulated other comprehensive income is expected to be reclassified into earnings within the next 12 months.
Amounts recognized in other comprehensive income (loss) and income (loss) before income taxes
The Company haspre-tax gain on derivatives designated certain foreign currency forward contracts as net investment hedges to protect its investmentfor hedge accounting recognized in certain foreign operations against adverse changes in exchange rates between the EURother comprehensive income (loss) was $23 million and USD. These contracts were de-designated and settled$19 million during the fiscal year ended March 31, 2020,2022 and as of March 31, 2020, there were NaN outstanding. As of March 31, 2019, the notional amount of foreign currency forward contracts designated as net investment hedges was $1.7 billion.
2021, respectively. The pre-tax gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive lossincome (loss) before income taxes was $(18)$6 million and in loss from continuing operations was $2$(5) million during the fiscal year ended March 31, 2020.2022 and March 31, 2021, respectively.
Derivatives Not Designated For Hedge Accounting
The derivative instruments not designated as hedges for purposes of hedge accounting include certain short-term foreign currency forward contracts. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
Foreign currency forward contracts
The Company manages the exposure to fluctuations in foreign currencies by using foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and forecasted transactions. The notional amount of the foreign currency forward contracts outstanding as of March 31, 20202022 and March 31, 20192021 was $2.2$2.1 billion and $2.5$2.1 billion, respectively.
The following table presents the pretax amounts impacting income related to designated and non-designated foreign currency forward contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fiscal Years Ended |
(in millions) | | Statement of Operations Line Item | | | | | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
| | | | | | | | | | | | |
Foreign currency forward contracts | | Other (income) expense, net | | | | | | $ | 52 | | | $ | 51 | | | $ | (37) | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended |
(in millions) | | Statement of Operations Line Item | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Foreign currency forward contracts | | Other expense (income), net | | $ | (37 | ) | | $ | 16 |
| | $ | 118 |
|
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS92
Fair Value of Derivative Instruments
All derivative instruments are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables present the fair values of derivative instruments included in the balance sheets:
|
| | | | | | | | | | |
| | Derivative Assets |
| | | | As of |
(in millions) | | Balance Sheet Line Item | | March 31, 2020 | | March 31, 2019 |
| | | | | | |
Derivatives designated for hedge accounting: | | |
Foreign currency forward contracts (1) | | Other current assets | | — |
| | 38 |
|
Total fair value of derivatives designated for hedge accounting | | $ | — |
| | $ | 38 |
|
| | |
Derivatives not designated for hedge accounting: | | |
Foreign currency forward contracts | | Other current assets | | $ | 16 |
| | $ | 5 |
|
Total fair value of derivatives not designated for hedge accounting | | $ | 16 |
| | $ | 5 |
|
|
| | | | | | | | | | |
| | Derivative Liabilities |
| | | | As of |
(in millions) | | Balance Sheet Line Item | | March 31, 2020 | | March 31, 2019 |
| | | | | | |
Derivatives designated for hedge accounting: | | | | |
Foreign currency forward contracts(1) | | Accrued expenses and other current liabilities | | $ | 20 |
| | $ | 4 |
|
Total fair value of derivatives designated for hedge accounting: | | $ | 20 |
| | $ | 4 |
|
| | | | | |
Derivatives not designated for hedge accounting: | | | | |
Foreign currency forward contracts | | Accrued expenses and other current liabilities | | $ | 12 |
| | $ | 9 |
|
Total fair value of derivatives not designated for hedge accounting | | $ | 12 |
| | $ | 9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | |
| | | | As of | | | | |
(in millions) | | Balance Sheet Line Item | | March 31, 2022 | | March 31, 2021 | | | | | | |
Derivatives designated for hedge accounting: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency forward contracts | | Other current assets | | $ | 18 | | | $ | 9 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | |
Derivatives not designated for hedge accounting: | | | | | | | | | | |
Foreign currency forward contracts | | Other current assets | | $ | 9 | | | $ | 3 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
| |
(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | As of | (in millions) | | | | | | | | Balance Sheet Line Item | | March 31, 2022 | | March 31, 2021 | Derivatives designated for hedge accounting: | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | | | | | | | Accrued expenses and other current liabilities | | $ | — | | | $ | 5 | | | | | | | | | | | | | | | | Derivatives not designated for hedge accounting: | | | | | Foreign currency forward contracts | | | | | | | | Accrued expenses and other current liabilities | | $ | 15 | | | $ | 3 | | | | | | | | | | | | | | | | | | | |
| Foreign currency forward contracts designated for hedge accounting includes designated cash flow hedges and net investment hedges. |
The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates and is based on the period-end foreign currency exchange rates and forward points which are classified as Level 2 inputs.
Other Risks for Derivative Instruments
The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty's obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. With respect to its foreign currency derivatives, as of March 31, 2020,2022, there were 012 counterparties with concentration of credit risk.risk, and based on gross fair value, the maximum amount of loss that the Company could incur is $16 million.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company's policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements. The potential effect of such netting arrangements on the Company's balance sheets is not material for the periods presented.
Non-Derivative Financial Instruments Designated for Hedge Accounting
The Company applies hedge accounting for foreign currency-denominated debt used to manage foreign currency exposures on its net investments in certain non-U.S. operations. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged.
Net Investment Hedges
DXC seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations with foreign currency-denominated debt. For foreign currency denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation. Gains or losses on individual net investments in non-U.S. operations are reclassified to earnings from accumulated other comprehensive income (loss) income when such net investments are sold or substantially liquidated.
As of March 31, 2020,2022, DXC had $1.9$0.3 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries. For the fiscal year ended March 31, 2020,2022, the pre-tax impact of gain (loss) on foreign currency-denominated debt designated for hedge accounting recognized in other comprehensive income (loss) income was $53$17 million. As of March 31, 2019,2021, DXC did not have anyhad $0.8 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries.
Note 910 - Property and Equipment
Property and equipment consisted of the following:
| | | | | | | | | | | | | | |
| | As of |
(in millions) | | March 31, 2022 | | March 31, 2021 |
Property and equipment — gross: | | | | |
Land, buildings and leasehold improvements | | $ | 2,089 | | | $ | 2,228 | |
Computers and related equipment | | 4,117 | | | 4,596 | |
Furniture and other equipment | | 203 | | | 227 | |
Construction in progress | | 1 | | | 16 | |
| | 6,410 | | | 7,067 | |
Less: accumulated depreciation | | 3,998 | | | 4,121 | |
Property and equipment, net | | $ | 2,412 | | | $ | 2,946 | |
|
| | | | | | | | |
| | As of |
(in millions) | | March 31, 2020 | | March 31, 2019 |
Property and equipment — gross: | | | | |
Land, buildings and leasehold improvements | | $ | 2,233 |
| | $ | 2,180 |
|
Computers and related equipment | | 4,876 |
| | 4,719 |
|
Furniture and other equipment | | 226 |
| | 224 |
|
Construction in progress | | 30 |
| | 14 |
|
| | 7,365 |
| | 7,137 |
|
Less: accumulated depreciation | | 3,818 |
| | 3,958 |
|
Property and equipment, net | | $ | 3,547 |
| | $ | 3,179 |
|
Depreciation expense for fiscal 2022, 2021 and 2020 2019was $625 million, $754 million and 2018 was $643 million, $820 million and $709 million, respectively.
94
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1011 - Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 |
(in millions) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Software | | $ | 4,063 | | | $ | 3,039 | | | $ | 1,024 | |
| | | | | | |
Customer related intangible assets | | 4,148 | | | 1,995 | | | 2,153 | |
Other intangible assets | | 291 | | | 90 | | | 201 | |
Total intangible assets | | $ | 8,502 | | | $ | 5,124 | | | $ | 3,378 | |
|
| | | | | | | | | | | | |
| | As of March 31, 2020 |
(in millions) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Software | | $ | 4,048 |
| | $ | 2,614 |
| | $ | 1,434 |
|
Customer related intangible assets | | 5,795 |
| | 1,697 |
| | 4,098 |
|
Other intangible assets | | 235 |
| | 36 |
| | 199 |
|
Total intangible assets | | $ | 10,078 |
| | $ | 4,347 |
| | $ | 5,731 |
|
|
| | | | | | | | | | | | |
| | As of March 31, 2019 |
(in millions) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Software | | $ | 3,864 |
| | $ | 2,235 |
| | $ | 1,629 |
|
Customer related intangible assets | | 5,389 |
| | 1,139 |
| | 4,250 |
|
Other intangible assets | | 85 |
| | 25 |
| | 60 |
|
Total intangible assets | | $ | 9,338 |
| | $ | 3,399 |
| | $ | 5,939 |
|
| | | | | | | | | | | | | | | | | | | | |
| | |
| | As of March 31, 2021 |
(in millions) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Software | | $ | 4,014 | | | $ | 2,733 | | | $ | 1,281 | |
| | | | | | |
Customer related intangible assets | | 4,212 | | | 1,641 | | | 2,571 | |
Other intangible assets | | 239 | | | 48 | | | 191 | |
Total intangible assets | | $ | 8,465 | | | $ | 4,422 | | | $ | 4,043 | |
The components of amortization expense were as follows:
| | | | Fiscal Years Ended | | Fiscal Years Ended |
(in millions) | | March 31, 2020 |
| | March 31, 2019 |
| | March 31, 2018 |
| (in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Intangible asset amortization | | $ | 1,019 |
| | $ | 890 |
| | $ | 860 |
| Intangible asset amortization | | $ | 865 | | | $ | 952 | | | $ | 1,019 | |
Transition and transformation contract cost amortization(1) | | 280 |
| | 258 |
| | 226 |
| Transition and transformation contract cost amortization(1) | | 227 | | | 264 | | | 280 | |
Total amortization expense | | $ | 1,299 |
| | $ | 1,148 |
| | $ | 1,086 |
| Total amortization expense | | $ | 1,092 | | | $ | 1,216 | | | $ | 1,299 | |
| |
(1)(1)Transition and transformation contract costs are included within other assets on the balance sheet.
| Transition and transformation contract costs are included within other assets on the balance sheet. |
Estimated future amortization as of March 31, 20202022 is as follows:
| | | | | | | | |
Fiscal Year | | (in millions) |
2023 | | $ | 780 | |
2024 | | $ | 684 | |
2025 | | $ | 592 | |
2026 | | $ | 522 | |
2027 | | $ | 395 | |
Thereafter | | $ | 405 | |
|
| | | | |
Fiscal Year | | (in millions) |
|
2021 | | $ | 1,004 |
|
2022 | | $ | 915 |
|
2023 | | $ | 835 |
|
2024 | | $ | 750 |
|
2025 | | $ | 662 |
|
95
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1112 - Goodwill
The following tables summarize the changes in the carrying amounts of goodwill, by segment, for the fiscal years ended March 31, 20202022 and March 31, 2019,2021, respectively:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | GBS | | GIS | | Total |
| | | | | | |
| | | | | | |
Balance as of March 31, 2021, net | | $ | 641 | | | $ | — | | | $ | 641 | |
| | | | | | |
| | | | | | |
Divestitures | | (2) | | | — | | | (2) | |
Assets held for sale | | (6) | | | — | | | (6) | |
Foreign currency translation | | (16) | | | — | | | (16) | |
Balance as of March 31, 2022, net | | $ | 617 | | | $ | — | | | $ | 617 | |
| | | | | | |
Goodwill, gross | | 5,107 | | | 5,066 | | | 10,173 | |
Accumulated impairment losses | | (4,490) | | | (5,066) | | | (9,556) | |
Balance as of March 31, 2022, net | | $ | 617 | | | $ | — | | | $ | 617 | |
|
| | | | | | | | | | | | |
(in millions) | | GBS | | GIS | | Total |
Balance as of March 31, 2019, net | | 4,599 |
| | 3,007 |
| | 7,606 |
|
| | | | | | |
Acquisitions | | 1,288 |
| | 70 |
| | 1,358 |
|
Impairment Losses | | (3,789 | ) | | (3,005 | ) | | (6,794 | ) |
Foreign currency translation | | (81 | ) | | (72 | ) | | (153 | ) |
| | | | | | |
Goodwill, gross | | 6,507 |
| | 5,066 |
| | 11,573 |
|
Accumulated impairment losses | | (4,490 | ) | | (5,066 | ) | | (9,556 | ) |
Balance as of March 31, 2020, net | | $ | 2,017 |
| | $ | — |
| | $ | 2,017 |
|
|
| | | | | | | | | | | | |
(in millions) | | GBS | | GIS | | Total |
Balance as of March 31, 2018, net | | 4,531 |
| | 3,088 |
| | 7,619 |
|
| | | | | | |
Acquisitions | | 228 |
| | — |
| | 228 |
|
Divestitures | | (12 | ) | | — |
| | (12 | ) |
Foreign currency translation | | (148 | ) | | (81 | ) | | (229 | ) |
| | | | | | |
Goodwill, gross | | 5,300 |
| | 5,068 |
| | 10,368 |
|
Accumulated impairment losses | | (701 | ) | | (2,061 | ) | | (2,762 | ) |
Balance as of March 31, 2019, net | | $ | 4,599 |
| | $ | 3,007 |
| | $ | 7,606 |
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | GBS | | GIS | | Total |
| | | | | | |
| | | | | | |
Balance as of March 31, 2020, net | | $ | 2,017 | | | $ | — | | | $ | 2,017 | |
| | | | | | |
Acquisition related adjustments | | 15 | | | — | | | 15 | |
Divestitures | | (1,355) | | | — | | | (1,355) | |
Assets held for sale | | (90) | | | — | | | (90) | |
Foreign currency translation | | 54 | | | — | | | 54 | |
Balance as of March 31, 2021, net | | $ | 641 | | | $ | — | | | $ | 641 | |
| | | | | | |
Goodwill, gross | | 5,131 | | | 5,066 | | | 10,197 | |
Accumulated impairment losses | | (4,490) | | | (5,066) | | | (9,556) | |
Balance as of March 31, 2021, net | | $ | 641 | | | $ | — | | | $ | 641 | |
As a result of the USPS Separation on May 31, 2018, as more fully described in Note
3 - "Divestitures", USPS is no longer a reportable segment.
The fiscal 2020 and 20192021 additions to goodwill were duerelated to the acquisitions described in Note 2 - "Acquisitions", including goodwill of some insignificant acquisitions. and assets held for sale are described in Note 4 - "Assets Held for Sale." The foreign currency translation amount reflects the impact of currency movements on non-U.S. dollar-denominated goodwill balances.
Goodwill Impairment Analyses
Fiscal 2022
The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2021, did not result in an impairment charge. At the end of the fiscal 2022, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators, and, therefore, it was unnecessary to perform an interim goodwill impairment test as of March 31, 2022.
Fiscal 2021
The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2020, did not result in an impairment charge. At the end of the fiscal 2021, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators, and, therefore, it was unnecessary to perform an interim goodwill impairment test as of March 31, 2021.
Fiscal 2020
The Company performed its annual goodwill impairment assessment as of July 1, 2019. Subsequent to the measurement date, the Company experienced a decline in its stock price and market capitalization that represented an indicator of impairment as the observed declines were substantial and sustained. As a result, the Company performed quantitative goodwill impairment tests during the second and fourth quarters of fiscal 2020. Both quantitative goodwill impairment tests were performed for all of DXC's reporting units, consistent with its policy described in Note 1 - "Summary"Summary of Significant Accounting Policies.Policies.” As part of the reconciliation to the Company’s market capitalization, the Company concluded on both instances that the carrying values of its reporting units exceeded their estimated fair values and recognized total non-cash impairment charges of $6,794 million, consisting of $3,789 million and $3,005 million in its GBS and GIS segments, respectively. The goodwill impairment charges do not have an impact on the calculation of the Company's financial covenants under the Company's debt arrangements.
DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 2019
The Company’s annual goodwill impairment analysis, which was performed as of July 1, 2018, did not result in an impairment charge. At the end of fiscal 2019, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators and therefore, it was unnecessary to perform an interim goodwill impairment test as of March 31, 2019.
Fiscal 2018
The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2017, did not result in an impairment charge. At the end of the fiscal 2018, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators, and, therefore, it was unnecessary to perform an interim goodwill impairment test as of March 31, 2018.
Note 1213 - Income Taxes
The sources of income (loss) from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the United States, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Domestic entities | | $ | (566) | | | $ | 975 | | | $ | (2,928) | |
Entities outside the United States | | 1,707 | | | (321) | | | (2,300) | |
Total | | $ | 1,141 | | | $ | 654 | | | $ | (5,228) | |
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Domestic entities | | $ | (2,928 | ) | | $ | 511 |
| | $ | 454 |
|
Entities outside the United States | | (2,300 | ) | | 1,004 |
| | 850 |
|
Total | | $ | (5,228 | ) | | $ | 1,515 |
| | $ | 1,304 |
|
The income tax expense (benefit) on income (loss) from continuing operations is comprised of:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2022 | | March 31, 2021 | | March 31, 2020 |
Current: | | | | | | |
Federal | | $ | (118) | | | $ | 730 | | | $ | 3 | |
State | | (17) | | | 257 | | | 16 | |
Foreign | | 285 | | | 216 | | | 167 | |
| | 150 | | | 1,203 | | | 186 | |
Deferred: | | | | | | |
Federal | | 9 | | | (221) | | | (125) | |
State | | (9) | | | (51) | | | 17 | |
Foreign | | 255 | | | (131) | | | 52 | |
| | 255 | | | (403) | | | (56) | |
Total income tax expense | | $ | 405 | | | $ | 800 | | | $ | 130 | |
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(in millions) | | March 31, 2020 | | March 31, 2019 | | March 31, 2018 |
Current: | | | | | | |
Federal | | $ | 3 |
| | $ | (50 | ) | | $ | 392 |
|
State | | 16 |
| | 42 |
| | 16 |
|
Foreign | | 167 |
| | 218 |
| | 247 |
|
| | 186 |
| | 210 |
| | 655 |
|
Deferred: | | | | | | |
Federal | | (125 | ) | | 95 |
| | (899 | ) |
State | | 17 |
| | 23 |
| | (59 | ) |
Foreign | | 52 |
| | (40 | ) | | 61 |
|
| | (56 | ) | | 78 |
| | (897 | ) |
Total income tax expense (benefit) | | $ | 130 |
| | $ | 288 |
| | $ | (242 | ) |
In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-HPES Merger tax liabilities including adjustments made by tax authoritiesarising prior to the HPES U.S.Merger, and non-U.S. income tax returns. Likewise, DXC is liable to HPE for income tax receivables and refunds which it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a net receivable of $8$27 million due to $44 million of tax indemnification receivable related to uncertain tax positions, net of related deferred tax benefits, $87$72 million of tax indemnification receivable related to other tax payables and $123$129 million of tax indemnification payable related to other tax receivables.
The major elements contributing to the difference between the U.S. federal statutory tax rate and the effective tax rate ("ETR") for continuing operations is below. Due to the Company's fiscal year, the U.S. federal weighted statutory tax rate for the fiscal years ended March 31, 2020, March 31, 2019, and March 31, 2018 were of 21.0%, 21.0% and 31.5%, respectively.