DXC Technology Co - Quarter Report: 2017 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ____________
Commission File No.: 001-38033
![]() | DXC TECHNOLOGY COMPANY | |
(Exact name of Registrant as specified in its charter) |
Nevada | 61-1800317 |
(State of incorporation or organization) | (I.R.S. Employer Identification No.) |
1775 Tysons Boulevard | |
Tysons, Virginia | 22102 |
(Address of principal executive offices) | (zip code) |
Registrant's telephone number, including area code: (703) 245-9675 |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one).
Large Accelerated Filer x Accelerated Filer o
Non-accelerated Filer o (do not check if a smaller reporting company) Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
285,687,865 shares of common stock, par value $0.01 per share, were outstanding as of January 22, 2018.
TABLE OF CONTENTS
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PART I
ITEM 1. FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements
Page | |
1
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions, except per-share amounts) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||
Revenues | $ | 6,186 | $ | 1,917 | $ | 18,262 | $ | 5,718 | ||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | 4,521 | 1,347 | 13,621 | 4,131 | ||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 475 | 333 | 1,557 | 931 | ||||||||||||
Depreciation and amortization | 481 | 161 | 1,379 | 494 | ||||||||||||
Restructuring costs | 213 | 3 | 595 | 85 | ||||||||||||
Interest expense | 77 | 33 | 231 | 87 | ||||||||||||
Interest income | (27 | ) | (8 | ) | (59 | ) | (26 | ) | ||||||||
Other expense (income), net | 8 | (2 | ) | (72 | ) | 3 | ||||||||||
Total costs and expenses | 5,748 | 1,867 | 17,252 | 5,705 | ||||||||||||
Income before income taxes | 438 | 50 | 1,010 | 13 | ||||||||||||
Income tax (benefit) expense | (341 | ) | 13 | (207 | ) | (25 | ) | |||||||||
Net income | 779 | 37 | 1,217 | 38 | ||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 3 | 6 | 26 | 13 | ||||||||||||
Net income attributable to DXC common stockholders | $ | 776 | $ | 31 | $ | 1,191 | $ | 25 | ||||||||
Income per common share: | ||||||||||||||||
Basic | $ | 2.72 | $ | 0.22 | $ | 4.18 | $ | 0.18 | ||||||||
Diluted | $ | 2.68 | $ | 0.21 | $ | 4.11 | $ | 0.17 | ||||||||
Cash dividend per common share | $ | 0.18 | $ | 0.14 | $ | 0.54 | $ | 0.42 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||||
Net income | $ | 779 | $ | 37 | $ | 1,217 | $ | 38 | ||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||
Foreign currency translation adjustments, net of tax (1) | (47 | ) | (174 | ) | 62 | (180 | ) | |||||||||||
Cash flow hedges adjustments, net of tax (2) | 5 | 6 | — | 15 | ||||||||||||||
Pension and other post-retirement benefit plans, net of tax: | ||||||||||||||||||
Amortization of prior service cost, net of tax (3) | (3 | ) | (3 | ) | (10 | ) | (10 | ) | ||||||||||
Pension and other post-retirement benefit plans, net of tax | (3 | ) | (3 | ) | (10 | ) | (10 | ) | ||||||||||
Other comprehensive income (loss), net of taxes | (45 | ) | (171 | ) | 52 | (175 | ) | |||||||||||
Comprehensive income (loss) | 734 | (134 | ) | 1,269 | (137 | ) | ||||||||||||
Less: comprehensive income attributable to non-controlling interest | 6 | 6 | 34 | 13 | ||||||||||||||
Comprehensive income (loss) attributable to DXC common stockholders | $ | 728 | $ | (140 | ) | $ | 1,235 | $ | (150 | ) |
(1) | Tax expense related to foreign currency translation adjustments was $14 and $77, respectively, for the three and nine months ended December 31, 2017, and $0 and $1 for the three and nine months ended December 30, 2016, respectively. |
(2) | Tax expense related to cash flow hedge adjustments was $3 and $0, respectively, for the three and nine months ended December 31, 2017. |
(3) | Tax benefit related to amortization of prior service costs was $2 and $3, respectively, for the three and nine months ended December 31, 2017, and $2 and $5 for the three and nine months ended December 30, 2016. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
As of | ||||||||
(in millions, except per-share and share amounts) | December 31, 2017 | March 31, 2017 (1) | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,926 | $ | 1,263 | ||||
Receivables, net of allowance for doubtful accounts of $39 and $26 | 5,611 | 1,643 | ||||||
Prepaid expenses | 540 | 223 | ||||||
Other current assets | 444 | 118 | ||||||
Total current assets | 9,521 | 3,247 | ||||||
Intangible assets, net of accumulated amortization of $3,005 and $2,293 | 7,927 | 1,794 | ||||||
Goodwill | 9,320 | 1,855 | ||||||
Deferred income taxes, net | 458 | 381 | ||||||
Property and equipment, net of accumulated depreciation of $3,659 and $2,816 | 3,812 | 903 | ||||||
Other assets | 2,544 | 483 | ||||||
Total Assets | $ | 33,582 | $ | 8,663 | ||||
LIABILITIES and EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt and current maturities of long-term debt | 2,173 | 738 | ||||||
Accounts payable | 1,510 | 410 | ||||||
Accrued payroll and related costs | 813 | 248 | ||||||
Accrued expenses and other current liabilities | 3,403 | 998 | ||||||
Deferred revenue and advance contract payments | 1,524 | 518 | ||||||
Income taxes payable | 215 | 38 | ||||||
Total current liabilities | 9,638 | 2,950 | ||||||
Long-term debt, net of current maturities | 6,367 | 2,225 | ||||||
Non-current deferred revenue | 856 | 286 | ||||||
Non-current income tax liabilities and deferred tax liabilities | 1,523 | 423 | ||||||
Other long-term liabilities | 1,996 | 613 | ||||||
Total Liabilities | 20,380 | 6,497 | ||||||
Commitments and contingencies | ||||||||
DXC stockholders’ equity: | ||||||||
Preferred stock, par value $.01 per share, authorized 1,000,000 shares, none issued as of December 31, 2017 and March 31, 2017 | — | — | ||||||
Common stock, par value $.01 per share, authorized 750,000,000 shares, issued 286,553,833 as of December 31, 2017 and 141,298,797 as of March 31, 2017 | 3 | 1 | ||||||
Additional paid-in capital | 12,201 | 2,219 | ||||||
Retained earnings (accumulated deficit) | 834 | (170 | ) | |||||
Accumulated other comprehensive loss | (118 | ) | (162 | ) | ||||
Treasury stock, at cost, 1,000,856 and 0 shares as of December 31, 2017 and March 31, 2017 | (83 | ) | — | |||||
Total DXC stockholders’ equity | 12,837 | 1,888 | ||||||
Non-controlling interest in subsidiaries | 365 | 278 | ||||||
Total Equity | 13,202 | 2,166 | ||||||
Total Liabilities and Equity | $ | 33,582 | $ | 8,663 |
(1) | Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended | ||||||||
(in millions) | December 31, 2017 | December 30, 2016 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,217 | $ | 38 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,387 | 503 | ||||||
Share-based compensation | 76 | 56 | ||||||
(Gain) on dispositions | — | (1 | ) | |||||
Unrealized foreign currency exchange losses | 44 | 20 | ||||||
Other non-cash charges, net | 23 | 16 | ||||||
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | ||||||||
Increase in assets | 167 | 296 | ||||||
Decrease in liabilities | (372 | ) | (123 | ) | ||||
Net cash provided by operating activities | 2,542 | 805 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (175 | ) | (199 | ) | ||||
Payments for outsourcing contract costs | (259 | ) | (59 | ) | ||||
Software purchased and developed | (157 | ) | (124 | ) | ||||
Cash acquired through Merger | 974 | — | ||||||
Payments for acquisitions, net of cash acquired | (193 | ) | (434 | ) | ||||
Proceeds from sale of assets | 29 | 26 | ||||||
Other investing activities, net | (6 | ) | (35 | ) | ||||
Net cash provided by (used in) investing activities | 213 | (825 | ) | |||||
Cash flows from financing activities: | ||||||||
Borrowings of commercial paper | 1,822 | 1,667 | ||||||
Repayments of commercial paper | (1,706 | ) | (1,562 | ) | ||||
Borrowings under lines of credit | — | 920 | ||||||
Repayment of borrowings under lines of credit | (335 | ) | (773 | ) | ||||
Borrowings on long-term debt, net of discount | 621 | 157 | ||||||
Principal payments on long-term debt | (2,023 | ) | (282 | ) | ||||
Proceeds from bond issuance | 647 | — | ||||||
Proceeds from stock options and other common stock transactions | 107 | 47 | ||||||
Taxes paid related to net share settlements of share-based compensation awards | (75 | ) | (12 | ) | ||||
Repurchase of common stock | (66 | ) | — | |||||
Dividend payments | (123 | ) | (59 | ) | ||||
Other financing activities, net | (5 | ) | (31 | ) | ||||
Net cash (used in) provided by financing activities | (1,136 | ) | 72 | |||||
Effect of exchange rate changes on cash and cash equivalents | 44 | (119 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 1,663 | (67 | ) | |||||
Cash and cash equivalents at beginning of year | 1,263 | 1,178 | ||||||
Cash and cash equivalents at end of period | $ | 2,926 | $ | 1,111 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive (Loss) Income | Treasury Stock (3) | Total DXC Equity | Non- Controlling Interest | Total Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
Reported 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 | 55 | 9,905 | |||||||||||||||||||||
Net Income | 1,191 | 1,191 | 26 | 1,217 | |||||||||||||||||||||||
Other comprehensive income | 44 | 44 | 8 | 52 | |||||||||||||||||||||||
Share-based compensation expense | 74 | 74 | 74 | ||||||||||||||||||||||||
Acquisition of treasury stock | (83 | ) | (83 | ) | (83 | ) | |||||||||||||||||||||
Share repurchase program | (842 | ) | (36 | ) | (30 | ) | (66 | ) | (66 | ) | |||||||||||||||||
Stock option exercises and other common stock transactions | 4,356 | 96 | 96 | 96 | |||||||||||||||||||||||
Dividends declared | (157 | ) | (157 | ) | (157 | ) | |||||||||||||||||||||
Non-controlling interest distributions and other | — | (2 | ) | (2 | ) | ||||||||||||||||||||||
Balance at December 31, 2017 | 286,554 | $ | 3 | $ | 12,201 | $ | 834 | $ | (118 | ) | $ | (83 | ) | $ | 12,837 | $ | 365 | $ | 13,202 | ||||||||
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total DXC Equity | Non- Controlling Interest | Total Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
Reported balance at April 1, 2016 | 148,747 | $ | 149 | $ | 2,439 | $ | 33 | $ | (111 | ) | $ | (485 | ) | $ | 2,025 | $ | 7 | $ | 2,032 | ||||||||
Recapitalization adjustment(1) | — | (147 | ) | 147 | — | — | — | — | — | — | |||||||||||||||||
Recast balance at April 1, 2016 | 148,747 | $ | 2 | $ | 2,586 | $ | 33 | $ | (111 | ) | $ | (485 | ) | $ | 2,025 | $ | 7 | $ | 2,032 | ||||||||
Net Income | 25 | 25 | 13 | 38 | |||||||||||||||||||||||
Other comprehensive loss | (175 | ) | (175 | ) | (175 | ) | |||||||||||||||||||||
Share-based compensation expense | 54 | 54 | 54 | ||||||||||||||||||||||||
Acquisition of treasury stock | (11 | ) | (11 | ) | (11 | ) | |||||||||||||||||||||
Stock option exercises and other common stock transactions | 2,855 | 49 | 49 | 49 | |||||||||||||||||||||||
Dividends declared | (59 | ) | (59 | ) | (59 | ) | |||||||||||||||||||||
Non-controlling interest distributions and other | — | (13 | ) | (13 | ) | ||||||||||||||||||||||
Non-controlling interest from acquisition | — | 281 | 281 | ||||||||||||||||||||||||
Divestiture of NPS | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||||||||
Balance at December 30, 2016 | 151,602 | $ | 2 | $ | 2,689 | $ | (3 | ) | $ | (286 | ) | $ | (496 | ) | $ | 1,906 | $ | 288 | $ | 2,194 |
(1) | Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC. |
(2) | See Note 3 - "Acquisitions" |
(3) | 1,000,856 treasury shares as of December 31, 2017 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Summary of Significant Accounting Policies
Business
DXC Technology Company (“DXC” or the "Company") is the world's leading independent, end-to-end IT services company. DXC’s mission is to enable superior returns on its clients' technology investments through best-in-class vertical industry solutions, domain expertise, strategic partnerships with key technology leaders and global scale. The Company helps lead its clients through their digital transformations to meet new business demands and customer expectations in a market of escalating complexity, interconnectivity, mobility, and opportunity. DXC strives to be a trusted IT partner to its clients by addressing their requirements and providing next-generation IT services that include applications modernization, cloud infrastructure, cyber security, and big data solutions.
On October 11, 2017, the Company announced that it had entered into an Agreement and Plan of Merger with Ultra SC Inc., Ultra First VMS Inc., Ultra Second VMS LLC, Ultra KMS Inc., Vencore Holding Corp. (“Vencore”), KGS Holding Corp (“KeyPoint”), The SI Organization Holdings LLC and KGS Holding LLC (the “Ultra Merger Agreement”). The Ultra Merger Agreement provides that the Company will spin off its U.S. public sector business and combine it with Vencore and KeyPoint to form a separate, independent publicly traded company to serve U.S. public sector clients. The formation of the new company is subject to regulatory and other approvals.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements (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 condensed consolidated balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the condensed consolidated statements of operations, and comprehensive income attributable to non-controlling interests are presented separately in the condensed consolidated statements of comprehensive income (loss). All intercompany transactions and balances have been eliminated.
As previously disclosed, effective April 1, 2017, Computer Sciences Corporation ("CSC") completed its previously announced combination with the Enterprise Services business of Hewlett Packard Enterprise Company ("HPES"), which resulted in CSC becoming a wholly owned subsidiary of DXC (the "Merger"). See Note 3 - "Acquisitions" for further information. DXC common stock began regular-way trading under the symbol "DXC" on the New York Stock Exchange on April 3, 2017. Because CSC was deemed the accounting acquirer in this combination for accounting purposes under GAAP (defined below), CSC is considered DXC's predecessor and the historical financial statements of CSC prior to April 1, 2017, are reflected in this Quarterly Report on Form 10-Q as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017 do not include the financial results of HPES, and therefore, are not directly comparable. Additionally, "prepaid expenses" and "other current assets" previously aggregated within "prepaid expenses and other current assets" have been separately disclosed, and prior year amounts have been reclassified to conform to the current year presentation.
CSC used to report its results based on a fiscal year convention that comprises four thirteen-week quarters. However, effective April 1, 2017, DXC's fiscal year was modified to end on March 31 of each year with each quarter ending on the last calendar day.
7
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports and accounting principles generally accepted in the United States ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in CSC's Annual Report on Form 10-K for the fiscal year ended March 31, 2017 ("fiscal 2017"), included in DXC's Annual Report on Form ARS for fiscal 2017. In the opinion of management, the accompanying financial statements of DXC contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.
Note 2 - Recent Accounting Pronouncements
The following Accounting Standards Updates ("ASU") were recently issued but have not yet been adopted by DXC:
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815).” This amendment was issued to improve the financial reporting of hedge relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain improvements to simplify the application of hedge accounting. ASU 2017-12 will be effective for DXC in fiscal 2020 and early adoption is permitted. The ASU must be adopted by applying the standard to existing hedge instruments at the adoption date. DXC is currently evaluating the effect the adoption of ASU 2017-12 will have on its consolidated financial statements and notes thereto.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This amendment is intended to increase transparency and comparability among organizations by recognizing virtually all lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 will be effective for DXC in fiscal 2020 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition and provides for certain practical expedients. DXC is currently evaluating the effect the adoption of ASU 2016-02 will have on its existing accounting policies and the consolidated financial statements in future reporting periods, but expects there will be an increase in assets and liabilities on its balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be significant. Refer to Note 18 - "Commitments and Contingencies" for information about its operating lease obligations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which, along with amendments issued in 2015 and 2016, will replace most existing revenue recognition guidance under U.S. GAAP and eliminate industry specific guidance. The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which DXC expects to be entitled in exchange for those goods or services. The guidance also addresses the timing of recognition of certain costs incurred to obtain or fulfill a customer contract. Further, it requires the disclosure of sufficient information to enable readers of DXC’s financial statements to understand the nature, amount, timing and uncertainty of revenues, and cash flows arising from customer contracts, and information regarding significant judgments and changes in judgments made.
ASU 2014-09 provides two methods of adoption: full retrospective and modified retrospective. Under the full retrospective method, the standard would be applied to all periods presented with previously disclosed periods restated under the new guidance. Under the modified retrospective method, prior periods would not be restated but rather a cumulative catch-up adjustment would be recorded on the adoption date. The Company will adopt this standard in the first quarter of Fiscal 2019 and expects to adopt using the modified retrospective method.
DXC has performed an initial assessment of the impact of the standard and continues to assess the impact that the guidance will have on accounting policies, processes, systems and internal controls. The Company is currently in the process of implementing the new standard. Based on the implementation efforts to-date, including the assessment of contracts acquired through the combination with HPES, the Company expects the primary accounting impacts to include the following:
• | The Company’s IT and business process outsourcing arrangements comprise a series of distinct services, for which revenue is expected to be recognized as the services are provided in a manner that is generally consistent with current practices. |
8
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
• | The Company has certain arrangements involving the sale of proprietary software and related services for which vendor-specific objective evidence of fair value may not exist, resulting in the deferral of revenues. Under the new standard, estimates of standalone selling price will be necessary for all software performance obligations, which may result in the acceleration of revenues. |
• | The Company currently does not capitalize commission costs, which will be required in certain cases under the new standard and amortized over the period that services or goods are transferred to the customer. However, the Company is currently assessing the impact of the standard on commission plans of the combined company. |
As the quantitative impact of adopting the standard may be significantly impacted by arrangements contracted before the adoption date, the Company has not yet reached a conclusion about whether the accounting impact of the new standard will be material to its consolidated financial statements. However, the Company expects continuing significant implementation efforts to accumulate and report additional disclosures required by the standard.
Other recently issued ASUs effective after December 31, 2017 are not expected to have a material effect on DXC's consolidated financial statements.
Note 3 - Acquisitions
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 (the “Merger”). At the time of the Merger, Everett was renamed DXC, and as a result of the 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 consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer, CSC did not issue any consideration in the Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the 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 Merger.
All share and per share information has been restated to reflect the effects of the 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.
In connection with the Merger, the Company entered into a number of agreements with HPE including the following:
• | Information Technology Services Agreement - The Company and HPE have entered into an Agreement pursuant to which the Company will provide information technology services to HPE. This agreement terminates on the fifth anniversary of its effective date, unless earlier terminated by the parties in accordance with its terms. |
9
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
• | Preferred Vendor Agreements - The Company and HPE have entered into Preferred Vendor Agreements, pursuant to which HPE and Micro Focus International, the acquirer of HPE's software business, will: (1) make available to DXC for purchase hardware products sold by HPE and technology services provided by HPE and (2) make available to DXC for purchase and license software products sold or licensed by HPE and Micro Focus, and technology (including SaaS), support, professional and other services provided by HPE and Micro Focus. |
• | Certain other additional agreements were entered into, including a Separation and Distribution Agreement, as amended (the "Separation Agreement"), an employee matters agreement, a tax matters agreement, a transition services agreement, an intellectual property matters agreement, and certain real estate related agreements. |
Subsequent to the Merger, HPE settled certain obligations as required under the Separation Agreement. In accordance with the provisions of the agreement, a calculation was performed to make certain adjustments required to complete the separation and standup of legacy HPES and achieve accurate cut off for intercompany transactions with its former parent. The aggregate adjustment to settle the obligations was $203 million.
In May 2016, CSC, HPE and DXC (f/k/a Everett Spinco, Inc.) entered into an agreement and plan of merger, as amended (the “Merger Agreement”), and HPE and DXC entered into a Separation Agreement, in each case relating to the combination of HPES and CSC. At the time the Merger Agreement and the Separation Agreement were executed, HPES was a party to several thousand leases with Hewlett-Packard Financial Services that were classified as capital leases. Under the terms of the Separation Agreement the balance of long-term capital leases for which HPES would be liable at the time of the spin-off was not to exceed $250 million. The Separation Agreement provided HPE an opportunity to modify the terms of the long-term leases to reduce the balance classified as capital leases. Between late May 2016 and the end of March 2017, Hewlett-Packard Financial Services entered into lease amendments that purported to modify most of the leases between HPES and Hewlett-Packard Financial Services in a manner that would cause those leases to be classified as operating leases.
After the closing of the Merger, the Company began assessing the terms of the leases (including the amendments described above). During the Company’s second fiscal quarter, the Company concluded that the long-term capital leases that were amended by Hewlett-Packard Financial Services did not satisfy the requirements for classification as operating leases and as a result should be classified as capital leases as of the closing of the spin-off. Accordingly, as part of the process of determining fair value of these leases as of April 1, 2017, the Company recorded a lease liability of $977 million, fixed assets under capital leases of $594 million, and a $383 million increase to goodwill.
The Company is addressing this matter with HPE in a manner consistent with the terms of the Separation Agreement, with any disagreement being treated in a confidential manner under the Separation Agreement, including dispute resolution through executive escalation, mediation and binding arbitration.
Under the acquisition method of accounting, total consideration exchanged was:
(in millions) | Amount | |||
Preliminary fair value of purchase consideration received by HPE stockholders(1) | $ | 9,782 | ||
Preliminary fair value of HPES options assumed by CSC(2) | 68 | |||
Total estimated 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 HPE, HPES and CSC agreed would be converted to DXC stock-based awards. |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Due to the complexity of the Merger, the Company recorded the assets acquired and liabilities assumed at their preliminary fair values. The Company's preliminary estimates of the fair values of the assets acquired and the liabilities assumed, as well as the fair value of non-controlling interest, are based on the information that was available as of the Merger date, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger date. The cumulative impact of any subsequent changes resulting from the facts and circumstances that existed as of the Merger date will be adjusted in the reporting period in which the adjustment amount is determined. The preliminary estimated purchase price is allocated as follows:
(in millions) | Estimated Fair Value | |||
Cash and cash equivalents | $ | 974 | ||
Accounts receivable(1) | 4,092 | |||
Other current assets | 535 | |||
Total current assets | 5,601 | |||
Property and equipment | 2,799 | |||
Intangible assets | 6,169 | |||
Other assets | 1,614 | |||
Total assets acquired | 16,183 | |||
Accounts payable, accrued payroll, accrued expenses, and other current liabilities | (4,496 | ) | ||
Deferred revenue | (1,267 | ) | ||
Long-term debt, net of current maturities | (4,817 | ) | ||
Long-term deferred tax liabilities and income tax payable | (1,570 | ) | ||
Other liabilities | (1,336 | ) | ||
Total liabilities assumed | (13,486 | ) | ||
Net identifiable assets acquired | 2,697 | |||
Add: Fair value of non-controlling interests | (55 | ) | ||
Goodwill | 7,208 | |||
Total estimated consideration transferred | $ | 9,850 |
(1) | Includes aggregate adjustments received from HPE, in accordance with the provisions of the Separation Agreement, of $203 million. |
As of December 31, 2017, DXC has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to: receivables; property and equipment; deferred income taxes, net; deferred revenue and advanced contract payments; deferred costs; intangible assets; accounts payable and accrued liabilities; lease obligations; loss contracts; non-controlling interest; and goodwill.
As of the period ended December 31, 2017, the Company made a number of refinements to the April 1, 2017 preliminary purchase price allocation as reported June 30, 2017. These refinements were primarily driven by the Company recording valuation adjustments to certain preliminary estimates of fair values which resulted in a decrease in net assets of $450 million. Total assets increased by $1.2 billion, primarily driven by a $127 million increase of accounts receivable; $317 million increase in property and equipment primarily arising from the recognition of $594 million of fixed assets under capital lease, offset by a $277 million reduction in the preliminary fair value of assets related to data centers and land; and a $1.1 billion increase in intangible assets, primarily driven by a $1.3 billion increase in the preliminary fair value assessment for customer relationships. Liabilities increased by $1.7 billion primarily driven by an increase in capital lease obligations of $1.0 billion, a $343 million adjustment to deferred revenue primarily related to a valuation adjustment for outsourcing and other customer contracts taking into account continuing performance obligation, an increase of $106 million of debt, and an increase in long-term tax related liabilities of $200 million.
In accordance with ASU 2015-16, "Business Combinations (Topic 805)," Simplifying the Accounting for Measurement-period Adjustments, during the three months ended December 31, 2017, the Company continued to refine its fair value assessment of assets acquired and liabilities assumed. As a result, a $16 million increase in income before income
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
taxes related to six months ended September 30, 2017 was recognized in the condensed consolidated statement of operations for the three months ended December 31, 2017. The change in income before income taxes was primarily attributed to a decrease of $9 million of interest expense related to capital leases and a decrease of $7 million in cost of services.
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the Merger date. The goodwill recognized with the 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 cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. During the three months ended December 31, 2017, the Company refined its preliminary allocation of goodwill by reportable segment, resulting in an allocation to the Company's reportable segments of $2.7 billion to the Global Business Services ("GBS") segment, $2.5 billion to the Global Infrastructure Services ("GIS") segment and $2.0 billion to the United States Public Sector ("USPS") segment. A portion of the total goodwill is expected to be deductible for tax purposes. See Note 9 - "Goodwill."
Current Assets and Liabilities
For the preliminary fair value estimates reported in the three months ended December 31, 2017, 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 an estimate for the fair value of those items as of the Merger date.
Property and Equipment
The acquired property and equipment are summarized in the following table:
(in millions) | Amount | |||
Land, buildings, and leasehold improvements | $ | 1,500 | ||
Computers and related equipment | 1,122 | |||
Furniture and other equipment | 45 | |||
Construction in progress | 132 | |||
Total | $ | 2,799 |
The Company estimated the value of acquired property and equipment using predominately the market method and in certain specific cases, the cost method.
Identified Intangible Assets
The acquired identifiable intangible assets are summarized in the following table:
(in millions) | Amount | Estimated Useful Lives (Years) | ||||
Customer relationships | $ | 5,200 | 10-13 | |||
Developed technology | 141 | 2-7 | ||||
Third-party purchased software | 508 | 2-7 | ||||
Deferred contract costs | 320 | n/a | ||||
Total | $ | 6,169 |
The Company estimated the value of customer relationships and developed technology using the multi-period excess earnings and relief from royalty methods, respectively. Deferred contract costs were fair valued taking into account continuing performance obligation.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Restructuring Liabilities
The Company acquired approximately $328 million of restructuring liabilities incurred under HPES' restructuring plans, which are expected to be paid out through 2029. Approximately $256 million relates to workforce reductions and $72 million relates mainly to facilities costs.
Long-Term Debt
Assumed indebtedness included senior notes in the principal amount of $1.5 billion issued in 2017 and $0.3 billion issued in 1999 for total principal amount of $1.8 billion; a term loan with three tranches all borrowed on March 31, 2017 in an aggregate principal equivalent of $2.0 billion; as well as capitalized lease liabilities and other debt. Subsequent to the initial preliminary purchase price allocation as reported June 30, 2017, there was a fair value assessment of the senior notes and term loans as of the Merger date, which resulted in a purchase accounting adjustment that increased debt by $94 million, including $12 million to eliminate historical deferred debt issuance costs, premium, and discounts. Converted capital leases were recorded on the balance sheet at preliminary fair value as of April 1, 2017 resulting in a total capital lease obligation of $1.6 billion. Additionally, the Company completed its fair value assessment of certain debt and accrued interest with a carrying value of $87 million as of the Merger date, which resulted in a purchase accounting adjustment that increased debt by $12 million. The Company will continue to assess the fair value of assumed debt, including capital leases, during the measurement period.
Deferred Tax Liabilities
The Company preliminarily 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.
Defined Benefit Pension Plans
Certain eligible employees, retirees and other former employees of HPES participated in certain U.S. and international defined benefit pension plans offered by HPE. The plans whose participants were exclusively HPES employees were acquired, while the plans whose participants included both HPES employees and HPE employees were replicated to allow separation of HPES and HPE employees. The resulting separate plans containing only HPES were acquired.
HPES pension obligations depend on various assumptions. The Company's actuaries remeasured all of the acquired HPES plan obligations as of March 31, 2017. The following table summarizes the balance sheet impact of the pension plans assumed from HPES as a result of the Merger.
(in millions) | Amount | |||
Other assets | $ | 558 | ||
Accrued expenses and other current liabilities | (13 | ) | ||
Other long-term liabilities | (547 | ) | ||
Net amount recorded | $ | (2 | ) |
The following table summarizes the projected benefit obligation, fair value of the plan assets and the funded status assumed from HPES as a result of the Merger.
(in millions) | Amount | |||
Projected benefit obligation | $ | (7,413 | ) | |
Fair value of plan assets | 7,411 | |||
Funded status | $ | (2 | ) |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The following table summarizes the plan asset allocations by asset category for HPES pension plans assumed by the Company as a result of the Merger.
Equity securities | 22 | % | |
Debt securities(1) | 72 | % | |
Alternatives | 5 | % | |
Cash and other | 1 | % | |
Total | 100 | % |
(1) Includes liability-driven investments
The following table summarizes the estimated future benefit payments due to the pension and benefit plans assumed from HPES as a result of the Merger.
(in millions) | Amount | |||
Employer contributions: | ||||
2018 | $ | 39 | ||
Benefit payments: | ||||
2018 | $ | 225 | ||
2019 | $ | 151 | ||
2020 | $ | 163 | ||
2021 | $ | 224 | ||
2022 | $ | 180 | ||
2023 through 2027 | $ | 1,132 |
Unaudited and Pro Forma Results of Operations
The Company's condensed consolidated statements of operations includes the following revenues and net income attributable to HPES since the Merger date:
(in millions) | Three Months Ended December 31, 2017 | Nine Months Ended December 31, 2017 | ||||||
Revenues | $ | 4,374 | $ | 12,942 | ||||
Net income | $ | 422 | $ | 1,199 |
The following table provides unaudited pro forma results of operations for the Company for the three and nine months ended December 31, 2016, as if the Merger had been consummated on April 2, 2016, the first day of DXC's fiscal year ended March 31, 2017. These unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. In addition, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed during the measurement period. Accordingly, the Company presents these unaudited pro forma results for informational purposes only, and they are not necessarily indicative of what the actual results of operations of DXC would have been if the Merger had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and nine months ended December 31, 2016 and of HPES for the three and nine months ended October 31, 2016.
(in millions, except per-share amounts) | Three Months Ended December 30, 2016(1) | Nine Months Ended December 30, 2016(1) | ||||||
Revenues | $ | 6,585 | $ | 19,358 | ||||
Net loss | (166 | ) | (570 | ) | ||||
Loss attributable to the Company | (174 | ) | (587 | ) | ||||
Loss per common share: | ||||||||
Basic | $ | (0.61 | ) | $ | (2.07 | ) | ||
Diluted | $ | (0.61 | ) | $ | (2.07 | ) |
(1) | The unaudited pro forma information is based on legacy CSC results for the three and nine months ended December 31, 2016 and legacy HPES results for the three and nine months ended October 31, 2016. |
The unaudited pro forma information above is based on events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma statement of operations, expected to have a continuing impact on the consolidated results of operations of the combined company. Nonrecurring transaction costs associated with the Merger of $26 million for the nine months ended December 31, 2017 are not included in the unaudited pro forma information above.
Subsequent to the Merger, the Company adjusted the preliminary purchase price allocation, which would have decreased pro forma combined net loss and loss per common share by $96 million and $0.34, respectively, for the three months ended December 30, 2016, and $292 million and $1.03, respectively, for the nine months ended December 30, 2016. The decrease in pro forma combined net loss and loss per common share was primarily attributed to the acquisition-related fair value adjustments discussed above.
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 Company’s purchase price allocation for the Tribridge acquisition is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The preliminary purchase price was allocated to assets acquired and liabilities assumed based upon current 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 amortizable lives associated with the intangible assets acquired includes customer relationships which have a 12-year estimated useful life.
Fiscal 2017 Acquisitions
Xchanging Acquisition
On May 5, 2016, DXC acquired Xchanging plc ("Xchanging"), a provider of technology-enabled business solutions to organizations in global insurance and financial services, healthcare, manufacturing, real estate, and the public sector in a step acquisition. Xchanging was listed on the London Stock Exchange under the symbol “XCH.” Total cash consideration paid to and on behalf of the Xchanging shareholders of $693 million (or $492 million net of cash
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
acquired) was funded from existing cash balances and borrowings under DXC's credit facility. Transaction costs associated with the acquisition of $17 million were included within Selling, general, and administrative expenses. The acquisition expanded CSC's market coverage in the global insurance industry and enabled the Company to offer access to a broader, partner-enriched portfolio of services including property and casualty insurance and wealth management business processing services.
The Xchanging purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair value at date of acquisition as follows: $396 million to current assets, $99 million to non-current assets, $582 million to intangible assets other than goodwill, $267 million to current liabilities, $516 million to long-term liabilities, $680 million to goodwill, and $281 million to non-controlling interest. The amortizable lives associated with the intangible assets acquired includes developed technology, customer relationships and trade names, which have estimated useful lives of 7 to 8 years, 15 years and 3 to 5 years, respectively. The goodwill arising from the acquisition was allocated to the GBS and GIS segments and is not deductible for tax purposes.
Note 4 - Earnings per Share
Basic EPS are computed using the weighted average number of shares of common stock 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:
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions, except per-share amounts) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||
Net income attributable to DXC common shareholders: | $ | 776 | $ | 31 | $ | 1,191 | $ | 25 | ||||||||
Common share information: | ||||||||||||||||
Weighted average common shares outstanding for basic EPS | 285.38 | 140.88 | 284.70 | 140.13 | ||||||||||||
Dilutive effect of stock options and equity awards | 4.39 | 3.93 | 4.83 | 3.67 | ||||||||||||
Weighted average common shares outstanding for diluted EPS | 289.77 | 144.81 | 289.53 | 143.80 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 2.72 | $ | 0.22 | $ | 4.18 | $ | 0.18 | ||||||||
Diluted | $ | 2.68 | $ | 0.21 | $ | 4.11 | $ | 0.17 |
Certain stock options and RSUs were excluded from the computation of dilutive EPS because inclusion of these amounts would have had an anti-dilutive effect. The number of options and shares excluded were as follows:
Three Months Ended | Nine Months Ended | |||||||||||
December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | |||||||||
Stock Options | — | 1,956,698 | 24,850 | 1,621,950 | ||||||||
RSUs | 10,552 | 1,470 | 21,030 | 1,611 |
Note 5 - Sale of Receivables
Receivables Securitization Facility
On December 21, 2016, CSC established a $250 million accounts receivable securitization facility (the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers") for the sale of commercial account receivables in the United States. Under the Receivables Facility, CSC and certain of its subsidiaries (collectively, the "Sellers") sell billed and unbilled accounts receivable to CSC Receivables, LLC ("CSC Receivables"), a wholly owned bankruptcy-remote entity. CSC Receivables in turn sells such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. Sales of receivables by CSC Receivables occur continuously and are settled on a monthly basis. The proceeds from the sale of these receivables comprise a combination of cash and a deferred purchase price receivable ("DPP"). The DPP is realized by the Company upon the ultimate collection of the underlying receivables
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
sold to the Purchasers. 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 December 31, 2017, the total availability under the Receivables Facility was approximately $177 million. The Receivables Facility terminates on September 14, 2018, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Company uses the proceeds from receivables sales under the Receivables Facility for general corporate purposes.
The Company has no retained interests in the transferred receivables, other than collection and administrative services and its right to the DPP. The DPP is included in receivables at fair value on the condensed consolidated balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature, and as a result no gain or loss on sale of receivables was recorded. In exchange for the sale of accounts receivable during the nine months ended December 31, 2017, the Company received cash of $201 million and recorded a DPP. The DPP, which fluctuates over time based on the total amount of eligible receivables generated during the normal course of business, was $249 million as of December 31, 2017. Additionally, as of December 31, 2017, the Company recorded a $24 million liability within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility exceeded the maximum funding limit.
The Company's risk of loss following the transfer of accounts receivable under the 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 Receivables Facility.
Certain obligations of Sellers under the Receivables Facility and CSC, as initial servicer, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the Purchasers. However, the performance guaranty does not cover CSC Receivables’ obligations to pay yield, fees or invested amounts to the administrative agent or any of the Purchasers.
The following table is a reconciliation of the beginning and ending balances of the DPP:
As of and for the | ||||||||
(in millions) | Three Months Ended December 31, 2017 | Nine Months Ended December 31, 2017 | ||||||
Beginning balance | $ | 272 | $ | 252 | ||||
Transfers of receivables | 562 | 1,716 | ||||||
Collections | (593 | ) | (1,717 | ) | ||||
Fair value adjustment | 8 | (2 | ) | |||||
Ending balance | $ | 249 | $ | 249 |
Receivables Sales Facility
On July 14, 2017, Enterprise Services LLC, a wholly-owned subsidiary of the Company ("Enterprise"), entered into a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with certain financial institutions (the "Financial Institutions"). The Purchase Agreement established a federal government obligor receivables purchase facility (the “Facility”). Concurrently, the Company entered into a guaranty made in favor of the Financial Institutions, that guarantees the obligations of the sellers and servicers of receivables under the Purchase Agreement. The guaranty does not cover any credit losses under the receivables. In connection with the previously announced spin-off of the Company's USPS business, the Company entered into certain amendments to the guaranty whereby the Company can request to terminate its guaranty at the time of the separation of the USPS business. In accordance with the terms of the Purchase Agreement, on January 23, 2018, the Purchase Agreement was amended to increase the facility limit from $200 million to $300 million in funding based on the availability of eligible receivables and the satisfaction of certain conditions.
Under the Facility, the Company sells eligible federal government obligor receivables, including both billed and certain unbilled receivables. The Company has no retained interests in the transferred receivables other than collection and
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
administrative functions for the Financial Institutions for a servicing fee. The Facility has a one-year term but may be extended. The Company uses the proceeds from receivables sales under the Facility for general corporate purposes.
The Company accounts for these receivable transfers as sales and derecognizes the sold receivables from its condensed consolidated balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature. The Company estimated that its servicing fee was at fair value and therefore, no servicing asset or liability related to these services was recognized as of December 31, 2017.
During the three and nine months ended December 31, 2017, the Company sold $0.7 billion and $1.2 billion of billed and unbilled receivables, respectively. Collections corresponding to these receivables sales were $0.6 billion and $1.0 billion during the three and nine months ended December 31, 2017, respectively. As of December 31, 2017, there was $27 million of cash collected by the Company, but not remitted to the Financial Institutions, which represents restricted cash and is included within other current assets on the condensed consolidated balance sheets. The operating cash flow effect, net of collections and fees from sales was $176 million.
Note 6 - Fair Value
Fair Value Measurements on a Recurring Basis
The following table presents the Company’s assets and liabilities, excluding pension assets, see Note 12 - "Pension and Other Benefit Plans" and derivative assets and liabilities, see Note 7 - "Derivative Instruments", that are measured at fair value on a recurring basis. There were no transfers between any of the levels during the periods presented.
Fair Value Hierarchy | ||||||||||||||||
(in millions) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | As of December 31, 2017 | |||||||||||||||
Money market funds and money market deposit accounts(1) | $ | 217 | $ | 217 | $ | — | $ | — | ||||||||
Time deposits(1) | 35 | 35 | — | — | ||||||||||||
Foreign bonds | 52 | — | 52 | — | ||||||||||||
Other debt securities | 7 | — | — | 7 | ||||||||||||
Deferred purchase price receivable | 249 | — | — | 249 | ||||||||||||
Total assets | $ | 560 | $ | 252 | $ | 52 | $ | 256 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 8 | $ | — | $ | — | $ | 8 | ||||||||
Total liabilities | $ | 8 | $ | — | $ | — | $ | 8 |
(1) Cost basis approximated fair value due to the short period of time to maturity.
As of March 31, 2017 | ||||||||||||||||
Assets: | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Money market funds and money market deposit accounts | $ | 406 | $ | 406 | $ | — | $ | — | ||||||||
Deferred purchase price receivable | 252 | — | — | 252 | ||||||||||||
Total assets | $ | 658 | $ | 406 | $ | — | $ | 252 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 7 | $ | — | $ | — | $ | 7 | ||||||||
Total liabilities | $ | 7 | $ | — | $ | — | $ | 7 |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The fair value of money market funds, money market deposit accounts, and time deposits, reported as cash and cash equivalents, are based on quoted market prices. The fair value of foreign government bonds is based on actual market prices and included in Other long-term assets. Fair value of the DPP, included in Receivables, net, 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, presented in Other liabilities, is based on contractually defined targets of financial performance and other considerations.
Other Fair Value Disclosures
The carrying amounts of the Company’s other 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. If measured at fair value, these financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
The Company estimates the fair value of its long-term debt primarily using an expected present value technique, which is based on observable market inputs, using interest rates currently available to the Company for instruments with similar terms and remaining maturities. The estimated fair value of the Company's long-term debt, excluding capital leases, was $5.9 billion as of December 31, 2017, as compared with carrying value of $5.7 billion. If measured at fair value, long-term debt, excluding capital lease would be classified in Level 2 of 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 an impairment charge is recognized. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the three and nine months ended December 31, 2017 and December 30, 2016.
The Company is subject to counterparty risk in connection with its derivative instruments, see Note 7 - "Derivative Instruments". With respect to its foreign currency derivatives, as of December 31, 2017 there were five counterparties with concentration of credit risk. Based on gross fair value of these foreign currency derivative instruments, the maximum amount of loss that the Company could incur is approximately $22 million.
Note 7 - 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 forward contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not use derivative instruments for trading or any speculative purpose.
Derivatives Designated for Hedge Accounting
Cash flow hedges
The Company uses interest rate swap agreements designated as cash flow hedges to mitigate its exposure to interest rate risk associated with the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted the debt into fixed interest rate debt. As of December 31, 2017, the Company had interest rate swap agreements with a total notional amount of $625 million.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
For the three and nine months ended December 31, 2017, the Company performed both retrospective and prospective hedge effectiveness analyses for the interest rate swaps designated as cash flow hedges. The Company applied the long-haul method outlined in ASC 815 “Derivatives and Hedging", to assess retrospective and prospective effectiveness of the interest rate swaps. A quantitative effectiveness analysis assessment of the hedging relationship was performed using regression analysis. As of December 31, 2017, the Company has determined that the hedging relationship was highly effective.
The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee denominated intercompany obligations and forecasted transactions. The notional amount of foreign currency forward contracts designated as cash flow hedges as of December 31, 2017 was $686 million, and the related forecasted transactions extend through February 2020.
For the three and nine months ended December 31, 2017 and December 30, 2016, 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; therefore, there is no ineffectiveness to be recorded and all changes in the hedging instruments’ fair value are recorded in accumulated other comprehensive income (loss) ("AOCI") and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three and nine months ended December 31, 2017 and December 30, 2016, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of December 31, 2017, $24 million of the existing amount of gain related to the cash flow hedge reported in AOCI is expected to be reclassified into earnings within the next 12 months.
For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in AOCI in the condensed consolidated balance sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in the condensed statements of operations. 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.
The pre-tax impact of gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive income and net income was not material for three and nine months ended December 31, 2017 and December 30, 2016.
Derivatives not Designated for Hedge Accounting
The derivative instruments not designated as hedges for purposes of hedge accounting include total return swaps and certain short-term foreign currency forward and option 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.
Total return swaps
The Company manages the exposure to market volatility of the notional investments underlying its deferred compensation obligations by using total return swaps derivative contracts ("TRS"). The TRS are reset monthly and are marked-to-market on the last day of each fiscal month. Gain (loss) on TRS was not material for the three and nine months ended December 31, 2017 and December 30, 2016.
Foreign currency forward contracts
The Company manages the exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to economically hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. The notional amount of the foreign currency forward contracts outstanding as of December 31, 2017 was $2.4 billion. (Loss) gain on foreign currency forward contracts not designated for hedge accounting, recognized within other income, net, were $(3) million and $(117) million during the three and nine months ended December 31, 2017, respectively, and $2 million and $(3) million during the three and nine months ended December 30, 2016, respectively.
20
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Fair Value of Derivative Instruments
All derivatives are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value:
Derivative Assets | ||||||||||
As of | ||||||||||
(in millions) | Balance Sheet Line Item | December 31, 2017 | March 31, 2017 | |||||||
Derivatives designated for hedge accounting: | ||||||||||
Interest rate swaps | Other assets | $ | 5 | $ | 5 | |||||
Foreign currency forward contracts | Other current assets | 27 | 27 | |||||||
Total fair value of derivatives designated for hedge accounting | $ | 32 | $ | 32 | ||||||
Derivatives not designated for hedge accounting: | ||||||||||
Foreign currency forward contracts | Other current assets | $ | 9 | $ | 15 | |||||
Total fair value of derivatives not designated for hedge accounting | $ | 9 | $ | 15 |
Derivative Liabilities | ||||||||||
As of | ||||||||||
(in millions) | Balance Sheet Line Item | December 31, 2017 | March 31, 2017 | |||||||
Derivatives designated for hedge accounting: | ||||||||||
Interest rate swaps | Other long-term liabilities | $ | — | $ | 1 | |||||
Foreign currency forward contracts | Accrued expenses and other current liabilities | — | — | |||||||
Total fair value of derivatives designated for hedge accounting: | $ | — | $ | 1 | ||||||
Derivatives not designated for hedge accounting: | ||||||||||
Foreign currency forward contracts | Accrued expenses and other current liabilities | $ | 13 | $ | 12 | |||||
Total fair value of derivatives not designated for hedge accounting | $ | 13 | $ | 12 |
Derivative instruments include foreign currency forward contracts and interest rate swap contracts. 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 as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs.
Other risks
The Company is exposed to the risk of losses in the event of non-performance by counterparties to its derivative contracts. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of counterparties. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is Company policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counterparties.
21
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 8 - Intangible Assets
As of December 31, 2017 | ||||||||||||
(in millions) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||
Software | $ | 3,231 | $ | 1,792 | $ | 1,439 | ||||||
Outsourcing contract costs | 1,436 | 612 | 824 | |||||||||
Customer related intangible assets | 6,151 | 583 | 5,568 | |||||||||
Other intangible assets | 114 | 18 | 96 | |||||||||
Total intangible assets | $ | 10,932 | $ | 3,005 | $ | 7,927 |
As of March 31, 2017 | ||||||||||||
(in millions) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||
Software | $ | 2,347 | $ | 1,554 | $ | 793 | ||||||
Outsourcing contract costs | 793 | 475 | 318 | |||||||||
Customer related intangible assets | 851 | 248 | 603 | |||||||||
Other intangible assets | 96 | 16 | 80 | |||||||||
Total intangible assets | $ | 4,087 | $ | 2,293 | $ | 1,794 |
Total intangible assets amortization was $279 million and $81 million for the three months ended December 31, 2017 and December 30, 2016, respectively, and included reductions of revenue for amortization of outsourcing contract cost premiums of $2 million and $2 million, respectively.
Total intangible assets amortization was $793 million and $243 million for the nine months ended December 31, 2017 and December 30, 2016, respectively, and included reductions of revenue for amortization of outsourcing contract cost premiums of $8 million and $8 million, respectively.
The increase in net and gross carrying value for the nine months ended December 31, 2017 were primarily due to the Merger. See Note 3 - "Acquisitions".
Estimated future amortization related to intangible assets as of December 31, 2017 is as follows:
Fiscal Year | (in millions) | |||
Remainder of 2018 | $ | 306 | ||
2019 | $ | 1,094 | ||
2020 | $ | 1,032 | ||
2021 | $ | 943 | ||
2022 | $ | 804 |
22
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 9 - Goodwill
The following table summarizes the changes in the carrying amount of Goodwill, by segment, as of December 31, 2017.
(in millions) | GBS | GIS | USPS | Total | ||||||||||||
Balance as of March 31, 2017, net | $ | 1,470 | $ | 385 | $ | — | $ | 1,855 | ||||||||
Additions | 2,800 | 2,532 | 1,984 | 7,316 | ||||||||||||
Foreign currency translation | 94 | 55 | — | 149 | ||||||||||||
Balance as of December 31, 2017, net | $ | 4,364 | $ | 2,972 | $ | 1,984 | $ | 9,320 |
The additions to goodwill during the nine months ended December 31, 2017 were primarily due to the Merger described in Note 3 - "Acquisitions." As a result of the Merger, the Company began to report the United States Public Sector ("USPS") segment, formerly a component of the HPES business, see Note 17 - "Segment Information" for additional information. The foreign currency translation amounts reflect the impact of currency movements on non-U.S. dollar-denominated goodwill balances.
Goodwill Impairment Analyses
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’s annual goodwill impairment analysis, which was performed qualitatively during the three months ended September 30, 2017, did not result in an impairment charge. This qualitative analysis, which is commonly referred to as step zero under ASC Topic 350, Goodwill and Other Intangible Assets, considered all relevant factors specific to the reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.
At the end of the third quarter of 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 December 31, 2017.
23
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 10 - Debt
The following is a summary of the Company's debt:
As of | ||||||||||||
(in millions) | Interest Rates | Fiscal Year Maturities | December 31, 2017 | March 31, 2017 | ||||||||
Short-term debt and current maturities of long-term debt | ||||||||||||
Euro-denominated commercial paper | (0.1) - 0.02%(1) | 2018 | $ | 841 | $ | 646 | ||||||
EUR term loan | 1.75%(2) | 2019 | 480 | — | ||||||||
Current maturities of long-term debt | Various | 2019 | 128 | 55 | ||||||||
Current maturities of capitalized lease liabilities | 1.1% - 6.7% | 2019 | 724 | 37 | ||||||||
Short-term debt and current maturities of long-term debt | $ | 2,173 | $ | 738 | ||||||||
Long-term debt, net of current maturities | ||||||||||||
GBP term loan | 1.0 - 1.2%(3) | 2019 | $ | 250 | $ | 233 | ||||||
USD term loan | 1.2% - 2.3%(4) | 2021 | — | 571 | ||||||||
AUD term loan | 2.9% - 3.0%(5) | 2022 | 215 | 76 | ||||||||
EUR term loan | 0.9%(6) | 2022 | 179 | — | ||||||||
USD term loan | 2.2% - 2.8%(7) | 2022 | 1,149 | — | ||||||||
$500 million Senior notes | 2.875% | 2020 | 503 | — | ||||||||
$650 million Senior notes | 2.3% - 2.4%(8) | 2021 | 646 | — | ||||||||
$274 million Senior notes | 4.45% | 2023 | 278 | — | ||||||||
$170 million Senior notes | 4.45% | 2023 | 174 | 453 | ||||||||
$500 million Senior notes | 4.25% | 2025 | 507 | — | ||||||||
$500 million Senior notes | 4.75% | 2028 | 509 | — | ||||||||
$300 million Senior notes | 7.45% | 2030 | 357 | — | ||||||||
Revolving credit facility | 1.4% - 1.6% | 2021 - 2023 | 388 | 678 | ||||||||
Lease credit facility | 2.0% - 2.6% | 2020 - 2023 | 51 | 60 | ||||||||
Capitalized lease liabilities | 1.1% - 6.7% | 2018 - 2022 | 1,518 | 104 | ||||||||
Borrowings for assets acquired under long-term financing | 2.3% -3.2% | 2018 - 2023 | 318 | 77 | ||||||||
Mandatorily redeemable preferred stock outstanding | 3.5% | 2023 | 61 | 61 | ||||||||
Other borrowings | 0.5% - 14.0% | 2018 - 2037 | 116 | 4 | ||||||||
Long-term debt | 7,219 | 2,317 | ||||||||||
Less: current maturities | 852 | 92 | ||||||||||
Long-term debt, net of current maturities | $ | 6,367 | $ | 2,225 |
(1) | Approximate weighted average interest rate |
(2) Three-month EURIBOR rate plus 1.75%
(3) Three-month LIBOR rate plus 0.65%
(4) At DXC's option, the USD term loan bears interest at a variable rate equal to the adjusted LIBOR for a one-, two-, three-, or six-month interest period, plus a margin between 0.75% and 1.50% based on a pricing grid consistent with the Company's outstanding revolving credit facility or the greater of the prime rate, the federal funds rate plus 0.50%, or the adjusted LIBOR for a one-month interest period plus 1.00%, in each case plus a margin of up to 0.50%, based on a pricing grid consistent with the revolving credit facility.
(5) Variable interest rate equal to the bank bill swap bid rate for a one-, two-, three- or six-month interest period plus 0.95% to 1.45% based on the published credit ratings of DXC.
(6) At DXC’s option, the EUR term loan bears interest at the Eurocurrency Rate for a one-, two-, three-, or six-month interest period, plus a margin of between 0.75% and 1.35%, based on published credit ratings of DXC.
24
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
(7) At DXC’s option, the USD term loan bears interest at the Eurocurrency Rate for a one-, two-, three-, or six-month interest period, plus a margin of between 1.00% and 1.75%, based on published credit ratings of DXC or the Base Rate plus a margin of between 0% and 0.75%, based on published credit ratings of DXC.
(8) Three-month LIBOR plus 0.95%
Senior Notes and Terms Loans
Interest on the Company's term loans is payable monthly or quarterly in arrears. The Company fully and unconditionally guaranteed term loans issued by its 100% owned subsidiaries. Interest on the Company's senior notes is payable semi-annually in arrears. Generally, the Company's notes are redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest.
On April 3, 2017, as a result of the Merger, financial covenants were amended and CSC was replaced with DXC as the borrower and guarantor to certain outstanding debt including short-term Euro-denominated commercial paper, senior notes and term loans. In connection with the Merger, DXC entered into an unsecured term loan agreement consisting of a $375 million U.S. dollar term loan maturing in 2020, a $1.3 billion U.S. dollar term loan maturing in 2022 and a Euro-equivalent of $315 million EUR term loan maturing in 2022. The $375 million U.S. term loan maturing in 2020 and portions of the term loans maturing in 2022 were repaid subsequent to the Merger. DXC assumed pre-existing indebtedness incurred by HPES including 7.45% senior notes due 2030 which were issued at a principal amount of $300 million.
During the nine months ended December 31, 2017, DXC completed an offering of senior notes in an aggregate principal amount of $1.5 billion consisting of 2.875% senior notes due 2020, 4.25% senior notes due 2025 and 4.75% senior notes due 2028.
Revolving Credit Facility
In connection with the Merger, the Company entered into several amendments to its revolving credit facility agreement pursuant to which DXC replaced CSC as the principal borrower and as the guarantor of borrowings by subsidiary borrowers. During the nine months ended December 31, 2017, DXC exercised its option to extend the maturity date and also increased commitments to $3.81 billion, $70 million of which matures in January 2021 and $3.74 billion matures in January 2023.
25
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 11 - Restructuring Costs
The Company recorded restructuring costs of $213 million and $3 million, net of reversals, for the three months ended December 31, 2017 and December 30, 2016, respectively. For the nine months ended December 31, 2017 and December 30, 2016, the Company recorded $595 million and $85 million, respectively. The costs recorded during the three and nine months ended December 31, 2017 were largely a result of the Fiscal 2018 Plan (defined below).
The composition of restructuring liabilities by financial statement line items is as follows:
As of | ||||
(in millions) | December 31, 2017 | |||
Accrued expenses and other current liabilities | $ | 343 | ||
Other long-term liabilities | 173 | |||
Total | $ | 516 |
Summary of Restructuring Plans
Fiscal 2018 Plan
On June 30, 2017, management approved a post-Merger restructuring plan to optimize the Company's operations in response to a continuing business contraction (the "Fiscal 2018 Plan"). The additional restructuring initiatives are intended to reduce the company's core structure and related operating costs, improve its competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and re-balancing the pyramid structure. Additionally, this plan included global facility restructuring, including a global data center restructuring program.
Fiscal 2017 Plan
In May 2016, the Company initiated a restructuring plan to realign the Company's cost structure and resources to take advantage of operational efficiencies following recent acquisitions. During the fourth quarter of Fiscal 2017, the Company expanded the plan to strengthen the Company's competitiveness and to optimize the workforce by increasing work performed in low-cost locations (the "Fiscal 2017 Plan"). Total costs incurred to date under the Fiscal 2017 Plan total $221 million, comprising $214 million in employee severance and $7 million of facilities costs.
Fiscal 2016 Plan
In September 2015, the Company initiated a restructuring plan to optimize utilization of facilities and right-size overhead organizations as a result of CSC's separation of its former NPS segment (the "Fiscal 2016 Plan"). No additional costs are expected to be expensed under this plan. Total costs incurred to date under the Fiscal 2016 Plan total $58 million, comprising $25 million in employee severance and $33 million of facilities costs.
Fiscal 2015 Plan
In June 2014, the Company initiated a restructuring plan to optimize the workforce in high cost markets, particularly in Europe, address the Company's labor pyramid and right shore its labor mix (the "Fiscal 2015 Plan"). No additional costs are expected to be expensed under this plan. Total costs incurred to date under the Fiscal 2015 Plan total $228 million, comprising $220 million in employee severance and $8 million of facilities costs.
Acquired Restructuring Liabilities
As a result of the Merger, DXC acquired restructuring liabilities under restructuring plans that were initiated for HPES under plans approved by the HPE Board of Directors.
26
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Restructuring Liability Reconciliations by Plan
Restructuring Liability as of March 31, 2017 | Acquired Balance as of April 1, 2017 | Costs Expensed, net of reversals(1) | Costs Not Affecting Restructuring Liability (2) | Cash Paid | Other(3) | Restructuring Liability as of December 31, 2017 | ||||||||||||||||||||||
Fiscal 2018 Plan | ||||||||||||||||||||||||||||
Workforce Reductions | $ | — | n/a | $ | 451 | $ | (13 | ) | $ | (228 | ) | $ | 6 | $ | 216 | |||||||||||||
Facilities Costs | — | n/a | 174 | (15 | ) | (70 | ) | 1 | 90 | |||||||||||||||||||
Total | $ | — | n/a | $ | 625 | $ | (28 | ) | $ | (298 | ) | $ | 7 | $ | 306 | |||||||||||||
Fiscal 2017 Plan | ||||||||||||||||||||||||||||
Workforce Reductions | $ | 155 | n/a | $ | (25 | ) | $ | (6 | ) | $ | (91 | ) | $ | 10 | $ | 43 | ||||||||||||
Facilities Costs | 6 | n/a | (2 | ) | — | (4 | ) | — | — | |||||||||||||||||||
Total | $ | 161 | n/a | $ | (27 | ) | $ | (6 | ) | $ | (95 | ) | $ | 10 | $ | 43 | ||||||||||||
Fiscal 2016 Plan | ||||||||||||||||||||||||||||
Workforce Reductions | $ | 8 | n/a | $ | (1 | ) | $ | — | $ | (3 | ) | $ | — | $ | 4 | |||||||||||||
Facilities Costs | 5 | n/a | — | — | (3 | ) | — | 2 | ||||||||||||||||||||
Total | $ | 13 | n/a | $ | (1 | ) | $ | — | $ | (6 | ) | $ | — | $ | 6 | |||||||||||||
Fiscal 2015 Plan | ||||||||||||||||||||||||||||
Workforce Reductions | $ | 3 | n/a | $ | — | $ | — | $ | (2 | ) | $ | — | $ | 1 | ||||||||||||||
Facilities Costs | — | n/a | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 3 | n/a | $ | — | $ | — | $ | (2 | ) | $ | — | $ | 1 | ||||||||||||||
Acquired Liabilities | ||||||||||||||||||||||||||||
Workforce Reductions | n/a | $ | 256 | $ | 1 | $ | (2 | ) | $ | (139 | ) | $ | 6 | $ | 122 | |||||||||||||
Facilities Costs | n/a | 72 | (3 | ) | (3 | ) | (29 | ) | 1 | 38 | ||||||||||||||||||
Total | n/a | $ | 328 | $ | (2 | ) | $ | (5 | ) | $ | (168 | ) | $ | 7 | $ | 160 |
(1) Costs expensed, net of reversals include $29 million, $2 million and $3 million of costs reversed from the Fiscal 2017 Plan, Fiscal 2016 Plan and Acquired liabilities, respectively.
(2) Pension benefit augmentations recorded as a pension liability and asset impairment.
(3) Foreign currency translation adjustments.
Note 12 - Pension and Other Benefit Plans
The Company offers a number of pension and other post-retirement benefit ("OPEB") plans, life insurance benefits, deferred compensation and defined contribution plans. Most of the Company's pension plans are not admitting new participants; therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates.
Defined Benefit Plans
The Company sponsors a number of defined benefit and post-retirement medical benefit plans for the benefit of eligible employees. The benefit obligations of the Company's U.S. pension, U.S. OPEB, and non-U.S. OPEB represent an insignificant portion of the Company's pension and other post-retirement benefits. As a result, the disclosures below include the Company's U.S. and non-U.S. pension plans on a global consolidated basis.
27
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The Company contributed $8 million and $40 million to the defined benefit pension and other post-retirement benefit plans during the three and nine months ended December 31, 2017. The Company expects to contribute an additional $31 million during the remainder of fiscal 2018, which does not include certain salary deferral programs and future potential termination benefits related to the Company's potential restructuring activities.
During the three months ended December 31, 2017, we adopted amendments to certain U.K. pension plans which necessitated an interim remeasurement of the plans assets and liabilities as of December 1, 2017. The remeasurement resulted in a net gain of $17 million, comprising a curtailment gain of $40 million and an actuarial loss $23 million. The net gain was recognized within costs of services and selling, general and administrative.
The components of net periodic pension expense (benefit) were:
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||
Service cost | $ | 30 | $ | 6 | $ | 96 | $ | 17 | ||||||||
Interest cost | 63 | 20 | 184 | 62 | ||||||||||||
Expected return on assets | (133 | ) | (40 | ) | (393 | ) | (123 | ) | ||||||||
Amortization of prior service costs | (5 | ) | (4 | ) | (13 | ) | (13 | ) | ||||||||
Contractual termination benefit | 10 | — | 21 | — | ||||||||||||
Curtailment gain | (40 | ) | — | (40 | ) | — | ||||||||||
Recognition of actuarial loss | 23 | — | 23 | — | ||||||||||||
Net periodic pension benefit | $ | (52 | ) | $ | (18 | ) | $ | (122 | ) | $ | (57 | ) |
The weighted-average rates used to determine net periodic pension cost for the three and nine months ended December 31, 2017 and December 30, 2016 were:
December 31, 2017 | December 30, 2016 | |||||
Discount or settlement rates | 2.4 | % | 3.1 | % | ||
Expected long-term rates of return on assets | 5.0 | % | 6.3 | % | ||
Rates of increase in compensation levels | 2.7 | % | 2.6 | % |
Deferred Compensation Plans
Effective as of the Merger, DXC assumed sponsorship of the Computer Sciences Corporation Deferred Compensation Plan, which was renamed the “DXC Technology Company Deferred Compensation Plan” (the “DXC DCP”) and adopted the Enterprise Services Executive Deferred Compensation Plan (the “ES DCP”). Both plans are non-qualified deferred compensation plans maintained for a select group of management, highly compensated employees and non-employee directors.
The DXC DCP covers eligible employees who participated in CSC’s Deferred Compensation Plan prior to the Merger. The ES DCP covers eligible employees who participated in the HPE Executive Deferred Compensation Plan prior to the Merger. Both plans allow participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under DXC’s tax-qualified 401(k) plan, the DXC Technology Matched Asset Plan. Neither plan provides for employer contributions. As of April 3, 2017, the ES DCP does not admit new participants.
28
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Certain management and highly compensated employees are eligible to defer all, or a portion of, their regular salary that exceeds the limitation set forth in Internal Revenue Section 401(a)(17) and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. The liability, which is included in Other long-term liabilities in the Company's condensed consolidated balance sheets, amounted to $74 million as of December 31, 2017 and $67 million as of March 31, 2017.
Note 13 - Income Taxes
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act"). The Act makes significant changes to the Internal Revenue Code of 1986 with varying effective dates. The Act reduces the maximum corporate income tax rate to 21% effective as of January 1, 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, broadens the tax base, generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, creates a new limitation on the deductibility of interest expense, limits the deductibility of certain executive compensation, and allows for immediate capital expensing of certain qualified property. It also requires companies to pay minimum taxes on foreign earnings and subjects certain payments from U.S. corporations to foreign related parties to additional taxes. As a fiscal year taxpayer, the Company will not be subject to many of the tax law provisions until fiscal year 2019; however, U.S. generally accepted accounting principles require companies to revalue their deferred tax assets and liabilities with resulting tax effects accounted for in the reporting period of enactment including retroactive effects. Section 15 of the Internal Revenue Code stipulates that the Company's fiscal year ending March 31, 2018, will have an estimated blended corporate U.S. federal income tax rate of 28.87%, which is based on the applicable tax rates before and after the Act and the number of days in the Company's federal tax year pro-rated for actual earnings through its October 31, 2017 tax year-end.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act.
Based on a preliminary assessment of the Act, the Company believes that the most significant impact on the Company’s consolidated financial statements are as follows:
Reduction of US federal corporate income tax rate: As discussed above, the Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain DTAs and DTLs, the Company has recorded a provisional deferred income tax discrete benefit of $320 million, resulting in a $320 million decrease in net deferred tax liabilities as of December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate tax rate, the amount will be impacted by changes in estimated deferred tax balances prior to and after December 22, 2017 for fiscal year March 31, 2018.
Deemed Repatriation Transition Tax: The deemed repatriation one-time transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company's foreign subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the transition tax and recorded a provisional discrete income tax expense and related liability of $386 million. However, the Company is continuing to gather additional information to compute the amount of the transition tax, including further analysis regarding the amount and composition of the Company’s and HPES’s historical foreign earnings and taxes.
The Company's accounting for the following elements of the Act is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Capital expensing: The Company has not yet completed all of the computations necessary or completed an inventory of its 2018 expenditures that qualify for immediate expensing to determine a reasonable estimate. The income tax effects for this change in law require further analysis due to the volume of data required to complete the calculations.
Executive compensation: As a result of changes made by the Act, starting with compensation paid in fiscal 2019, Section 162(m) will limit us from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers for any fiscal year. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million fiscal year deduction limit if paid to a covered executive. The Company has not yet completed an analysis of the binding contract requirement on the various compensation plans to determine the impact of the law change.
Global intangible low taxed income (GILTI): The Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder for taxable years of foreign corporations beginning after December 31, 2017. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be as well as a final determination of a tax year-end for the Company. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and business, the Company is not yet able to reasonably estimate the effect of this provision of the Act in the current reporting period. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made an accounting policy decision.
Due to anticipated future guidance to be issued by the Internal Revenue Service, interpretation of the changes in tax law and analysis of the information required to complete the calculations, the amounts recorded as a result of the Act in the period are provisional and subject to material changes. The Company will continue to analyze the Act’s impact on its consolidated financial statements and adjust the provisional amounts recorded as our analysis is completed, no later than December 2018.
The Company's income tax (benefit) expense was $(341) million and $13 million for the three months ended December 31, 2017 and December 30, 2016, respectively, and $(207) million and $(25) million for the nine months ended December 31, 2017 and December 30, 2016, respectively. For the three and nine months ended December 31, 2017, the primary drivers of the effective tax rate ("ETR") were the remeasurement of deferred tax assets and liabilities as a result of the Act, the remeasurement of a deferred tax liability relating to the outside basis difference of HPES foreign subsidiaries, the accrual of a one-time transition tax on estimated unremitted foreign earnings and India dividend distribution tax (DDT) accrual on historic earnings and taxes. The primary drivers of the ETR for the three and nine months ended December 30, 2016 were the global mix of income, release of a valuation allowance in a non-U.S. jurisdiction and excess tax benefits related to employee share-based payment awards.
As a result of the Merger and changes in U.S. cash requirements, a deferred tax liability of $545 million was recorded for U.S. income taxes based on the estimated historical taxable earnings of the HPES foreign subsidiaries. In addition, the Company recorded an estimated liability of $50 million for India DDT tax based on estimated historical taxable earnings of the HPES India subsidiary. These liabilities were recorded as part of acquisition accounting.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
As a result of the Act, the Company has changed its permanently reinvested assertion on the remaining CSC foreign subsidiaries and will no longer consider current and accumulated earnings for all non-U.S. subsidiaries permanently reinvested, except for current year Indian earnings. The deferred tax liability of $575 million has been released and the Company's estimated liability for India DDT was increased by $30 million to $80 million to include estimated historical taxable earnings for CSC Indian subsidiaries. For those investments from which the Company was able to make a reasonable estimate of the tax effects of its change in assertion, the Company has recorded a provisional estimate for withholding taxes, state taxes, and India DDT of $115 million. For those investments from which the Company was not able to make a reasonable estimate, it has not recorded any deferred taxes. The Company will record the tax effects of any change in its prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable, in the period that it is first able to make a reasonable estimate, no later than December 2018.
In connection with the Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-Merger tax liabilities including adjustments made by tax authorities to HPES U.S. 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-Merger periods. Pursuant to the tax matters agreement, the Company recorded a net payable of $24 million due to $111 million of tax indemnification receivable related to uncertain tax positions net of related deferred tax benefits, $72 million of tax indemnification receivable related to other tax payables and $207 million of tax indemnification payable related to other tax receivables.
As part of the acquisition of HPES, DXC acquired uncertain tax liabilities including interest and penalties of $115 million for prior year income taxes, which are indemnified by HPE. There were no other material changes to uncertain tax positions during the three and nine months ended December 31, 2017.
The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2016. With respect to CSC's fiscal 2008 through 2010 federal tax returns, the Company previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to some but not all of these adjustments. The Company has agreed to extend the statute of limitations associated with this audit through September 30, 2018. In addition, during the first quarter of fiscal 2018, the Company received a Revenue Agent’s Report with proposed adjustments to CSC's fiscal 2011 through 2013 federal returns. The Company has filed a protest of certain of these adjustments to the IRS Office of Appeals. The IRS is also examining CSC's fiscal 2014 through 2016 federal income tax returns. The Company has not received any adjustments for this cycle. The Company continues to believe that its tax positions are more-likely-than-not sustainable and that the Company will ultimately prevail.
In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more-likely-than-not standard if such positions are not upheld. Conversely, the Company could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes the outcomes that are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of $14 million to $20 million, excluding interest, penalties, and tax carry-forwards.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 14 - Stockholders' Equity
Description of Capital Stock
The Company has authorized share capital consisting of 750,000,000 shares of common stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.
Each share of common stock is equal in all respects to every other share of common stock of the Company. Each share of common stock is entitled to one vote per share at each annual or special meeting of stockholders for the election of directors and upon any other matter coming before such meeting. Subject to all the rights of the preferred stock, dividends may be paid to holders of common stock as and when declared by the Board of Directors.
The Company's charter requires that preferred stock must be all of one class but may be issued from time to time in one or more series, each of such series to have such full or limited voting powers, if any, and such designations, preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions as provided in a resolution adopted by the Board of Directors. Each share of preferred stock will rank on a parity with each other share of preferred stock, regardless of series, with respect to the payment of dividends at the respectively designated rates and with respect to the distribution of capital assets according to the amounts to which the shares of the respective series are entitled.
Share repurchases
On April 3, 2017, DXC announced the establishment of a share repurchase program approved by the Board of Directors with an initial authorization of $2.0 billion for future repurchases of outstanding shares of DXC common stock. An expiration date has not been established for this repurchase plan.
The shares repurchased are retired immediately and included in the category of authorized but unissued shares. The excess of purchase price over par value of the common shares is allocated between additional paid-in capital and retained earnings. The details of shares repurchased are shown below:
Fiscal Period | Number of Shares Repurchased | Average Price per Share | Amount (in millions) | ||||||||
1st Quarter 2018 | 250,000 | $ | 77.39 | $ | 19 | ||||||
2nd Quarter 2018 | 591,505 | 78.20 | 47 | ||||||||
3rd Quarter 2018 | — | — | — | ||||||||
Total | 841,505 | $ | 77.96 | $ | 66 |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Accumulated other comprehensive income (loss)
The following table shows the changes in accumulated other comprehensive income (loss), net of taxes:
(in millions) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Pension and Other Post-retirement Benefit Plans | Accumulated Other Comprehensive (Loss) Income | ||||||||||||
Balance at March 31, 2017 | $ | (458 | ) | $ | 20 | $ | 276 | $ | (162 | ) | ||||||
Current-period other comprehensive income | 62 | — | — | 62 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income | (8 | ) | — | (10 | ) | (18 | ) | |||||||||
Balance at December 31, 2017 | $ | (404 | ) | $ | 20 | $ | 266 | $ | (118 | ) |
(in millions) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Pension and Other Post-retirement Benefit Plans | Accumulated Other Comprehensive Loss | ||||||||||||
Balance at April 1, 2016 | $ | (399 | ) | $ | (1 | ) | $ | 289 | $ | (111 | ) | |||||
Current-period other comprehensive (loss) income | (180 | ) | 15 | — | (165 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | — | (10 | ) | (10 | ) | ||||||||||
Balance at December 30, 2016 | $ | (579 | ) | $ | 14 | $ | 279 | $ | (286 | ) |
Note 15 - Stock Incentive Plans
Equity Plans
As a result of the Merger, all outstanding CSC awards of stock options, stock appreciation rights, restricted stock units ("CSC RSUs"), including performance-based restricted stock units, relating to CSC common stock granted under the 2011 Omnibus Incentive Plan, the 2007 Employee Incentive Plan and the 2010 Non-Employee Director Incentive Plan (the “CSC Equity Incentive Plans”) held by CSC employees and non-employee directors were converted into an adjusted award relating to DXC common shares subject to the same terms and conditions after the Merger as the terms and conditions applicable to such awards prior to the Merger.
Under the terms of the CSC Equity Incentive Plans and the individual award agreements, all unvested equity incentive awards, including all stock options and CSC RSUs held by all participants under the plans, including its named executive officers and directors, are subject to accelerated vesting in whole or in part upon the occurrence of a change in control or upon the participant’s termination of employment on or after the occurrence of a change in control under certain circumstances ("CIC events"). As a result of CIC events triggered by the Merger, approximately $3.6 million unvested awards became vested on April 1, 2017 and $26 million of incremental stock compensation expense was recognized. CSC options granted in fiscal 2017 vested 33% upon the Merger; the remaining 67% were converted into DXC RSUs based on the accounting value of the options. These RSUs will vest on the second and third anniversaries of the original option grant date. For equity incentive awards granted by HPE under HPE equity incentive plans to HPES prior to the Merger, outstanding options (vested and unvested) and unvested RSU awards were converted upon the Merger into
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
economically equivalent DXC option and RSU awards, with terms and conditions substantially the same as the terms of such awards prior to the Merger.
In March 2017, prior to the Merger, the board of directors and shareholders of HPES approved DXC’s 2017 Omnibus Incentive Plan (the “DXC Employee Equity Plan”), DXC’s 2017 Non-Employee Director Incentive Plan (the “DXC Director Equity Plan”) and DXC’s 2017 Share Purchase Plan (“DXC Share Purchase Plan”). The terms of the DXC Employee Equity Plan and DXC Director Equity Plans are substantially similar to the terms of the CSC Equity Incentive Plans. The former allows DXC to grant stock options (including incentive stock options), stock appreciation rights (“SARs”), restricted stock, RSUs (including PSUs), and cash awards intended to qualify for the performance-based compensation exemption to the $1 million deduction limit under Section 162(m) of the Internal Revenue Code (collectively the "Awards"). Awards are typically subject to vesting over the 3-year period following the grant date. Vested stock options are generally exercisable for a term of 10 years from the grant date. All of DXC’s employees are eligible for awards under the plan. The Company issues authorized but previously unissued shares upon the granting of stock options and the settlement of RSUs and PSUs.
The Compensation Committee of the Board of Directors (the "Board") has broad authority to grant awards and otherwise administer the DXC Employee Equity Plan. The plan became effective March 30, 2017 and will continue in effect for a period of 10 years thereafter, unless earlier terminated by the Board. The Board has the authority to amend the plan in such respects as it deems desirable, subject to approval of DXC’s stockholders for material modifications.
RSUs represent the right to receive one share of DXC common stock upon a future settlement date, subject to vesting and other terms and conditions of the award, plus any dividend equivalents accrued during the award period. In general, if the employee’s status as a full-time employee is terminated prior to the vesting of the RSU grant in full, then the RSU grant is automatically canceled on the termination date and any unvested shares and dividend equivalents are forfeited. Certain executives were awarded service-based "career share" RSUs for which the shares are settled over the 10 anniversaries following the executive's separation from service as a full-time employee, provided the executive complies with certain non-competition covenants during that period.
The Company also grants PSUs, which generally vest over a period of 3 years. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified financial performance criteria over a three-year period. If the specified performance criteria are met, awards are settled for shares of DXC common stock and dividend equivalents upon the filing with the SEC of the Annual Report on Form 10-K for the last fiscal year of the performance period. PSU awards include the potential for up to 25% of the shares granted to be earned after the first and second fiscal years if certain of the Company's performance targets are met early, subject to vesting based on the participant's continued employment through the end of the three-year performance period.
The terms of the DXC Director Equity Plan allow DXC to grant RSU awards to non-employee directors of DXC. Such RSU awards vest in full at the earlier of (i) the first anniversary of the grant date or (ii) the next annual meeting date, and are automatically redeemed for DXC common stock and dividend equivalents either at that time or, if an RSU deferral election form is submitted, upon the date or event elected by the director. Distributions made upon a director’s separation from the Board may occur in either a lump sum or in annual installments over periods of 5, 10, or 15 years, per the director’s election. In addition, RSUs vest in full upon a change in control of DXC.
The DXC Share Purchase Plan allows DXC’s employees located in the United Kingdom to purchase shares of DXC’s common stock at the fair market value of such shares on the applicable purchase date. There were no shares purchased under this plan during the three and nine months ended December 31, 2017.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The Board has reserved for issuance shares of DXC common stock, par value $0.01 per share, under each of the plans as detailed below:
As of December 31, 2017 | |||||
Reserved for issuance | Available for future grants | ||||
DXC Employee Equity Plan | 34,200,000 | 22,403,601 | |||
DXC Director Equity Plan | 230,000 | 121,334 | |||
DXC Share Purchase Plan | 250,000 | 250,000 | |||
Total | 34,680,000 | 22,774,935 |
Stock Options
Number of Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (in millions) | ||||||||||
Outstanding as of March 31, 2017 | 4,767,396 | $ | 38.70 | 8.01 | $ | 145 | |||||||
HPE options converted to DXC options at Merger | 2,654,872 | $ | 46.56 | ||||||||||
CSC Options converted to RSUs due to Merger | (1,521,519 | ) | $ | 51.00 | |||||||||
Exercised | (2,390,929 | ) | $ | 40.07 | $ | 104 | |||||||
Canceled/Forfeited | (2,629 | ) | $ | 57.08 | |||||||||
Expired | (46,578 | ) | $ | 42.40 | |||||||||
Outstanding as of December 31, 2017 | 3,460,613 | $ | 38.31 | 5.58 | $ | 196 | |||||||
Vested and expected to vest in the future as of December 31, 2017 | 3,455,538 | $ | 38.28 | 5.58 | $ | 196 | |||||||
Exercisable as of December 31, 2017 | 3,419,060 | $ | 38.02 | 5.57 | $ | 194 |
Restricted Stock Units
Employee Equity Plan | Director Equity Plan | ||||||||||||
Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
Outstanding as of March 31, 2017 | 3,710,985 | $ | 34.86 | 85,766 | $ | 34.19 | |||||||
Granted | 1,566,361 | $ | 79.11 | 22,900 | $ | 84.40 | |||||||
HPE RSUs converted to DXC RSUs due to Merger | 95,683 | $ | 69.33 | — | $ | — | |||||||
Options converted to RSUs due to Merger | 609,416 | $ | 32.58 | — | $ | — | |||||||
Settled | (1,926,043 | ) | $ | 35.89 | (39,980 | ) | $ | 45.25 | |||||
Canceled/Forfeited | (172,881 | ) | $ | 54.65 | — | $ | — | ||||||
Outstanding as of December 31, 2017 | 3,883,521 | $ | 51.80 | 68,686 | $ | 44.50 |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Share-Based Compensation
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||
Total share-based compensation cost | $ | 19 | $ | 21 | $ | 76 | $ | 56 | ||||||||
Related income tax benefit | $ | 5 | $ | 7 | $ | 24 | $ | 18 | ||||||||
Total intrinsic value of options exercised | $ | 30 | $ | 6 | $ | 104 | $ | 60 | ||||||||
Tax benefits from exercised stock options and awards | $ | 9 | $ | 4 | $ | 62 | $ | 30 |
As of December 31, 2017, total unrecognized compensation expense related to unvested DXC stock options and unvested DXC RSUs, net of expected forfeitures was $1 million and $136 million, respectively. The unrecognized compensation expense for unvested RSUs is expected to be recognized over a weighted-average period of 2.02 years.
Note 16 - Cash Flows
Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
Nine Months Ended | ||||||||
(in millions) | December 31, 2017 | December 30, 2016 | ||||||
Cash paid for: | ||||||||
Interest | $ | 188 | $ | 70 | ||||
Taxes on income, net of refunds | $ | 235 | $ | 43 | ||||
Non-cash activities: | ||||||||
Investing: | ||||||||
Capital expenditures in accounts payable and accrued expenses | $ | 4 | $ | 33 | ||||
Capital expenditures through capital lease obligations | $ | 510 | $ | 34 | ||||
Assets acquired under long-term financing | $ | 284 | $ | 75 | ||||
Financing: | ||||||||
Dividends declared but not yet paid | $ | 52 | $ | 20 | ||||
Stock issued for the acquisition of HPES | $ | 9,850 | $ | — |
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 17 - Segment Information
DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industry and geographic region. As a result, and in accordance with accounting standards, operating segments are organized by the type of services provided. DXC's chief operating decision maker ("CODM"), the chief executive officer, obtains, reviews, and manages the Company’s financial performance based on these segments. The CODM uses these results, in part, to evaluate the performance of, and allocate resources to, each of the segments.
As a result of the Merger, the HPES legacy reportable segments were combined with GBS and GIS, and the HPES U.S. public sector business, USPS, is now a separate operating segment. DXC's operating segments are the same as its reportable segments: GBS, GIS, and USPS. In addition, DXC management changed its primary segment performance measure to segment profit from the previously used consolidated segment operating income. Prior periods presented have been restated to reflect this change. The accounting policies of the reportable segments are the same as those described in Note 1 - “Summary of Significant Accounting Policies.”
Global Business Services
GBS provides innovative technology solutions including Enterprise and Cloud Applications, Consulting Application Services, and Analytics. GBS also includes our Industry-aligned IP and Business Process Services. These offerings address key business challenges and accelerate digital transformations tailored to each customer’s industry and specific objectives. GBS strives to help clients understand and take advantage of IT modernization and virtualization across the IT portfolio (hardware, software, networking, storage, and computing assets).
Enterprise and Cloud Applications provide industry, business process, systems integration, technical delivery experience, and innovation to deliver value across our clients' enterprise application portfolios. The Company's Consulting professionals act as a trusted source for clients in creating bold digital strategies, designing innovative digital experiences, managing complex digital integration, and delivering safe and secure digital operations that help the Company's clients disrupt their industry, without disrupting their business operations. DXC's Application Services offerings utilize the Company's IP and world-class partner ecosystem to modernize and transform its clients' applications landscape, develop and manage their portfolio and roadmap, and execute with precision. In Analytics, DXC offers a complete portfolio of services to rapidly provide insights and drive impactful business outcomes. DXC's Partner Network allows clients to leverage investment while building the analytic solutions of tomorrow. DXC’s industry-aligned IP is centered on the insurance, banking, healthcare, and travel and transportation industries.
Activities are primarily related to vertical alignment of software solutions and process-based IP that power mission-critical transaction engines. DXC's Business Process Services combine business process expertise and intellectual property with the resources of a global Tier I IT services company, leveraging intelligent automation and innovative solutions to reduce manual effort and the associated cost.
Key competitive differentiators for GBS include global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Evolving business demands such as globalization, fast-developing economies, government regulation and growing concerns around risk, security, and compliance drive demand for these offerings.
Global Infrastructure Services
GIS provides Cloud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions to commercial clients globally. This includes DXC’s next-generation cloud offerings, including Infrastructure as a Service ("IaaS"), private cloud solutions, and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. Further, DXC's industry-leading security solutions help clients predict attacks, proactively respond to threats, ensure compliance, and protect data, applications, infrastructure and endpoints. To provide clients with differentiated offerings, GIS maintains a Partner Network to make investments in developing unique offerings and go-to-market strategies. This collaboration helps the Company independently determine the best technology, develop road maps, and enhance opportunities to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions that best address client needs.
United States Public Sector
USPS delivers technology services and business solutions to all levels of government in the United States. USPS helps clients to address their key objectives of: (1) transforming and modernizing through innovation, (2) enhancing security and privacy, (3) improving efficiency and effectiveness, (4) reducing and optimizing costs, and (5) becoming more agile, flexible, and resilient. USPS aims to be a transformation partner that can maximize technology’s potential to create the solutions that matter most to its government clients. USPS supports hundreds of accounts at the federal, state, and local government levels. Commensurate with DXC's strategy of leading the next generation of IT services, USPS is leveraging the Company’s commercial best practices and next-generation offerings to help civilian government agencies address their business issues and provide better and more secure access to citizen services while reducing costs for community & social service, environmental management, education, transportation, and general government & revenue collection.
Segment Measures
The following table summarizes operating results regularly provided to the CODM by reportable segment and a reconciliation to the financial statements:
(in millions) | GBS | GIS | USPS | Total Reportable Segments | All Other | Totals | ||||||||||||||||||
Three Months Ended December 31, 2017 | ||||||||||||||||||||||||
Revenues | $ | 2,315 | $ | 3,145 | $ | 726 | $ | 6,186 | $ | — | $ | 6,186 | ||||||||||||
Segment profit | $ | 431 | $ | 463 | $ | 110 | $ | 1,004 | $ | (77 | ) | $ | 927 | |||||||||||
Depreciation and amortization(1) | $ | 16 | $ | 269 | $ | 20 | $ | 305 | $ | 27 | $ | 332 | ||||||||||||
Three Months Ended December 30, 2016 | ||||||||||||||||||||||||
Revenues | $ | 1,046 | $ | 871 | $ | — | $ | 1,917 | $ | — | $ | 1,917 | ||||||||||||
Segment profit | $ | 134 | $ | 84 | $ | — | $ | 218 | $ | (42 | ) | $ | 176 | |||||||||||
Depreciation and amortization(1) | $ | 25 | $ | 100 | $ | — | $ | 125 | $ | 16 | $ | 141 |
(in millions) | GBS | GIS | USPS | Total Reportable Segments | All Other | Totals | ||||||||||||||||||
Nine Months Ended December 31, 2017 | ||||||||||||||||||||||||
Revenues | $ | 6,893 | $ | 9,256 | $ | 2,113 | $ | 18,262 | $ | — | $ | 18,262 | ||||||||||||
Segment profit | $ | 1,093 | $ | 1,222 | $ | 296 | $ | 2,611 | $ | (129 | ) | $ | 2,482 | |||||||||||
Depreciation and amortization(1) | $ | 67 | $ | 743 | $ | 55 | $ | 865 | $ | 76 | $ | 941 | ||||||||||||
Nine Months Ended December 30, 2016 | ||||||||||||||||||||||||
Revenues | $ | 3,130 | $ | 2,588 | $ | — | $ | 5,718 | $ | — | $ | 5,718 | ||||||||||||
Segment profit | $ | 349 | $ | 201 | $ | — | $ | 550 | $ | (148 | ) | $ | 402 | |||||||||||
Depreciation and amortization(1) | $ | 81 | $ | 309 | $ | — | $ | 390 | $ | 48 | $ | 438 |
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $149 million and $20 million for the three months ended December 31, 2017 and December 30, 2016, respectively, and $438 million and $56 million for the nine months ended December 31, 2017 and December 30, 2016, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Reconciliation of Reportable Segment Profit to Consolidated Total
The Company's management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenues less segment cost of services, selling, general and administrative, and depreciation and amortization (excluding amortization of acquired intangible assets). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, pension and OPEB actuarial and settlement gains and losses, restructuring costs, transaction and integration-related costs and amortization of acquired intangible assets.
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | ||||||||||||
Profit | ||||||||||||||||
Total profit for reportable segments | $ | 1,004 | $ | 218 | $ | 2,611 | $ | 550 | ||||||||
All other loss | (77 | ) | (42 | ) | (129 | ) | (148 | ) | ||||||||
Interest income | 27 | 8 | 59 | 26 | ||||||||||||
Interest expense | (77 | ) | (33 | ) | (231 | ) | (87 | ) | ||||||||
Restructuring costs | (213 | ) | (3 | ) | (595 | ) | (85 | ) | ||||||||
Pension and OPEB actuarial and settlement gains | 17 | — | 17 | — | ||||||||||||
Amortization of acquired intangible assets | (149 | ) | (20 | ) | (438 | ) | (56 | ) | ||||||||
Transaction and integration-related costs | (94 | ) | (78 | ) | (284 | ) | (187 | ) | ||||||||
Income before income taxes | $ | 438 | $ | 50 | $ | 1,010 | $ | 13 |
Management does not use total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment and therefore, total assets by segment is not disclosed.
Note 18 - Commitments and Contingencies
Commitments
The Company has operating leases for the use of certain real estate and equipment. Substantially all operating leases are non-cancelable or cancelable only through payment of penalties. Lease payments are typically based upon the period of the lease but may include payments for insurance, maintenance, and property taxes. There are no purchase options on operating leases at favorable terms. Most real estate leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in utilities and property taxes.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Minimum fixed rentals required for the next five years and thereafter under operating leases in effect at December 31, 2017, were as follows:
Fiscal year | ||||||||
(in millions) | Real Estate | Equipment | ||||||
Remainder of 2018 | $ | 110 | $ | 86 | ||||
2019 | 359 | 297 | ||||||
2020 | 264 | 211 | ||||||
2021 | 206 | 68 | ||||||
2022 | 155 | 8 | ||||||
Thereafter | 719 | 1 | ||||||
Minimum fixed rentals | 1,813 | 671 | ||||||
Less: Sublease rental income | (187 | ) | — | |||||
Totals | $ | 1,626 | $ | 671 |
The Company signed long-term purchase agreements with certain software, hardware, telecommunication, and other service providers to obtain favorable pricing and terms for services, and products that are necessary for the operations of business activities. Under the terms of these agreements, the Company is contractually committed to purchase specified minimums over periods ranging from 1 to 6 years. If the Company does not meet the specified minimums, the
Company would have an obligation to pay the service provider all, or a portion, of the shortfall. Minimum purchase commitments as of December 31, 2017 were as follows:
Fiscal year | Minimum Purchase Commitment | |||
(in millions) | ||||
Remainder of 2018 | $ | 664 | ||
2019 | 2,201 | |||
2020 | 2,095 | |||
Thereafter | 1,222 | |||
Total | $ | 6,182 |
(1) A significant portion of the minimum purchase commitments in fiscal 2018, 2019 and 2020 relate to the amounts committed under the HPE preferred vendor agreements.
In the normal course of business, the Company may provide certain clients with financial performance guarantees and at times performance letters of credit or surety bonds. In general, the Company would only be liable for the amounts of these guarantees in the event that non-performance by the Company permits termination of the related contract by the Company’s client. The Company believes it is in compliance with its performance obligations under all service contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on its condensed consolidated results of operations or financial position.
The Company also uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations on these policies. The following table summarizes the expiration of the Company’s financial guarantees and stand-by letters of credit outstanding as of December 31, 2017:
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
(in millions) | Fiscal 2018 | Fiscal 2019 | Fiscal 2020 and Thereafter | Totals | ||||||||||||
Surety bonds | $ | 48 | $ | 152 | $ | 157 | $ | 357 | ||||||||
Performance letters of credit | 140 | 85 | 338 | 563 | ||||||||||||
Stand-by letters of credit | 8 | 15 | 32 | 55 | ||||||||||||
Totals | $ | 196 | $ | 252 | $ | 527 | $ | 975 |
The Company generally indemnifies licensees of its proprietary software products against claims brought by third parties alleging infringement of their intellectual property rights, including rights in patents (with or without geographic limitations), copyrights, trademarks, and trade secrets. DXC’s indemnification of its licensees relates to costs arising from court awards, negotiated settlements, and the related legal and internal costs of those licensees. The Company maintains the right, at its own cost, to modify or replace software in order to eliminate any infringement. The Company has not incurred any significant costs related to licensee software indemnification.
Contingencies
Vincent Forcier v. Computer Sciences Corporation and The City of New York: On October 27, 2014, the United States Attorney’s Office for the Southern District of New York and the Attorney General for the State of New York filed complaints-in-intervention on behalf of the United States and the State of New York, respectively, against CSC and The City of New York. This action arose out of a qui tam complaint originally filed under seal in 2012 by Vincent Forcier, a former employee of CSC. The complaints allege that from 2008 to 2012 New York City and CSC, in its role as fiscal agent for New York City’s Early Intervention Program ("EIP"), a federal program that provides services for infants and toddlers with manifest or potential developmental delays, violated the federal and state False Claims Acts and various common law standards by allegedly orchestrating a billing fraud against Medicaid through the misapplication of default billing codes and the failure to exhaust private insurance coverage before submitting claims to Medicaid. The New York Attorney General’s complaint also alleges that New York City and CSC failed to reimburse Medicaid in certain instances where insurance had paid a portion of the claim. The lawsuits seek treble statutory damages, other civil penalties and attorneys’ fees and costs.
On January 26, 2015, CSC and the City of New York moved to dismiss Forcier’s amended qui tam complaint as well as the federal and state complaints-in-intervention. In June 2016, the Court dismissed Forcier’s amended complaint in its entirety. With regard to the complaints-in-intervention, the Court dismissed the federal claims alleging misuse of default diagnosis codes when the provider had entered an invalid code, and the state claims alleging failure to reimburse Medicaid when claims were subsequently paid by private insurance. The Court denied the motions to dismiss with respect to the federal and state claims relating to (i) submission of insurance claims with a code signifying that the patient’s policy ID was unknown, and (ii) submission of claims to Medicaid after the statutory deadline for payment by private insurance had passed, and state common law claims. In accordance with the ruling, the United States and the State of New York each filed amended complaints-in-intervention on September 6, 2016. In addition to reasserting the claims upheld by the Court, the amended complaints assert new claims alleging that the compensation provisions of CSC’s contract with New York City rendered it ineligible to serve as a billing agent under state law.
On November 9, 2016, CSC filed motions to dismiss the amended complaints in their entirety. On August 10, 2017, the Court granted in part and denied in part the motions to dismiss, allowing the remaining causes of action to proceed. On January 9, 2018, the Company answered the complaints, and asserted a counterclaim against the State of New York on a theory of contribution and indemnification. On January 30, 2018, the State of New York filed a motion to dismiss the Company’s counterclaim. The Parties participated in a non-binding mediation on November 29, 2017, and settlement discussions are continuing. Commencement of discovery will be deferred by the parties pending settlement negotiations. The Company believes that these claims are without merit and intends to continue to defend itself vigorously.
Washington, DC Navy Yard Litigation: In December 2013, a wrongful death action was filed in U.S. District Court for the Middle District of Florida against HP Enterprise Services, LLC, now known as Enterprise Services, LLC (“ES”) and others in connection with the September 2013 Washington, DC Navy Yard shooting that resulted in the deaths of 12 individuals. The perpetrator was an employee of The Experts, ES’s now terminated subcontractor on ES’s IT services contract with the U.S. Navy (a contract served by USPS). A total of 15 lawsuits arising out of the shooting have been filed. All have
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
been consolidated in the U.S. District Court for the District of Columbia. ES filed motions to dismiss, which the Court has granted in part and denied in part. Discovery is proceeding.
Strauch Fair Labor Standards Act Collective Action: On July 1, 2014, plaintiffs Joseph Strauch, Timothy Colby, Charles Turner, and Vernon Carre filed an action in the U.S. District Court for the District of Connecticut on behalf of themselves and a putative nationwide collective of CSC system administrators, alleging CSC’s failure to properly classify these employees as non-exempt under the federal Fair Labor Standards Act ("FLSA"). Plaintiffs allege similar state-law Rule 23 class claims pursuant to Connecticut and California statutes, including the Connecticut Minimum Wage Act, the California Unfair Competition Law, California Labor Code, California Wage Order No. 4-2001 and the California Private Attorneys General Act. Plaintiffs claim double overtime damages, liquidated damages, pre- and post-judgment interest, civil penalties, and other state-specific remedies.
In 2015 the Court entered an order granting conditional certification under the FLSA of the collective of over 4,000 system administrators, and notice of the right to participate in the FLSA collective action was mailed to the system administrators. Approximately 1,000 system administrators, prior to the announced deadline, filed consents with the Court to participate in the FLSA collective.
On June 30, 2017, the Court granted Rule 23 certification of a Connecticut state-law class and a California state-law class consisting of professional system administrators and associate professional system administrators. Senior professional system administrators were found not to qualify for Rule 23 certification under the state-law claims. On July 14, 2017, the Company petitioned the Second Circuit Court of Appeals for permission to file an appeal of the Rule 23 decision. That petition was denied on November 21, 2017.
As a result of the Court's findings in its Rule 23 certification order, the parties entered into a stipulation to decertify the senior professional system administrators from the FLSA collective. On August 2, 2017, the Court approved the stipulation, and the FLSA collective action is currently made up of approximately 700 individuals who held the title of associate professional or professional system administrator.
A jury trial commenced on December 11, 2017. On December 20, 2017, the jury returned a verdict in favor of plaintiffs, finding that the Company had misclassified the class of employees as exempt under federal and state laws, and finding that it had done so willfully. The Court will determine damages and address post-trial motions in further proceedings. The Company disagrees with the verdict and intends to continue to defend itself vigorously, including by appealing the verdict and the final judgment of the Court.
Computer Sciences Corporation v. Eric Pulier, et al.: On May 12, 2015, CSC and its wholly owned subsidiary, ServiceMesh Inc. ("SMI"), filed a civil complaint in the Court of Chancery of the State of Delaware against Eric Pulier, the former CEO of SMI, which had been acquired by CSC on November 15, 2013. Following the acquisition, Mr. Pulier signed a retention agreement with SMI pursuant to which he received a grant of restricted stock units of CSC and agreed to be bound by CSC’s rules and policies, including CSC’s Code of Business Conduct. Mr. Pulier resigned from SMI on April 22, 2015 amid allegations that he had engaged in fraudulent transactions with two employees of the Commonwealth Bank of Australia Ltd. (“CBA”). The original complaint against Mr. Pulier asserted claims for fraud, breach of contract and breach of fiduciary duty. In an amended complaint, CSC named TechAdvisors, LLC and Shareholder Representative Services LLC ("SRS") as additional defendants. In ruling on a motion to dismiss filed by Mr. Pulier, the Court dismissed CSC’s claim for breach of the implied covenant of good faith, but allowed substantially all of the remaining claims to proceed. Mr. Pulier asserted counter-claims for breach of contract, fraud, negligent representation, rescission, and violations of the California Blue Sky securities law. With the exception of the claim for breach of his retention agreement, the Court dismissed in whole or in part each of Mr. Pulier’s counterclaims.
On December 17, 2015, CSC entered into a settlement agreement with the majority of the former equityholders of SMI, as well as with SRS acting in its capacity as the agent and attorney-in-fact for the settling equityholders. Pursuant to the settlement agreement, CSC received $16.5 million, which amount was equal to the settling equityholders’ pro rata share of the funds remaining in escrow from the transaction, which was recorded as an offset to selling, general and administrative costs in CSC’s Consolidated Statements of Operations for the fiscal year ended March 31, 2016. On February 20, 2017, CSC, SRS and the former equityholders of SMI who remain named defendants entered into a partial settlement agreement by which CSC received payment of some of the funds remaining in escrow.
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Discovery was proceeding when on July 20, 2017, the Court granted a motion by the United States for a 90-day stay of discovery pending the completion of a criminal investigation. On September 27, 2017, a grand jury empaneled by the United States District Court for the Central District of California returned an indictment against Pulier, charging him with conspiracy, securities and wire fraud, obstruction of justice, and other violations of federal law (United States v. Eric Pulier, CR 17-599-AB). The Government sought an extension of the stay which the Delaware Court granted on November 3, 2017. The civil action is now stayed pending resolution of the criminal case.
Law enforcement officials in Australia have brought bribery-related charges against the two former CBA employees. One of these has since pled guilty, and in 2016 received a sentence of imprisonment. In 2016, the United States Attorney’s Office for the Central District of California announced similar criminal charges against this same CBA employee for securities fraud and wire fraud. CSC is cooperating with and assisting the Australian and U.S. authorities in their investigations.
On February 17, 2016, Mr. Pulier filed a complaint in Delaware Chancery Court against CSC and its subsidiary - CSC Agility Platform, Inc., formerly known as SMI - seeking advancement of his legal fees and costs. On May 12, 2016, the Court ruled that CSC Agility Platform - as the successor to SMI - is liable for advancing 80% of Mr. Pulier’s fees and costs in the underlying civil action. Mr. Pulier has also filed a complaint for advancement of the legal fees and costs incurred in connection with his defense of criminal investigations by the U.S. Government and other entities. On March 30, 2017, Mr. Pulier filed a motion for judgment on the pleadings in this fee advancement matter. Mr. Pulier's motion for judgment on the pleadings and other advancement-related issues were argued before the Court on August 2, 2017, and, on August 7, 2017, the Court ruled substantially in Mr. Pulier's favor. On January 30, 2018, the Court reduced the Company’s advancement obligation to only 80% of the criminal defense fees and costs sought by Mr. Pulier. In undertakings previously provided to SMI, Mr. Pulier agreed to repay all amounts advanced to him if it should ultimately be determined that he is not entitled to indemnification.
Cisco Systems Inc. and Cisco Systems Capital Corporation v. Hewlett-Packard Co.: On August 24, 2015, Cisco Systems, Inc. (“Cisco”) and Cisco Systems Capital Corporation (“Cisco Capital”) filed an action against Hewlett Packard Co., now known as HP Inc. ("HP") in California Superior Court, Santa Clara County, for declaratory judgment and breach of contract in connection with a contract to utilize Cisco products and services, and to finance the services through Cisco Capital. HP terminated the contract, and the parties dispute the calculation of the proper cancellation credit. On December 18, 2015, Cisco filed an amended complaint that abandoned the claim for breach of contract set forth in the original complaint, and asserted a single cause of action for declaratory relief concerning the proper calculation of the cancellation credit. On January 19, 2016, HP answered the complaint and filed a counterclaim for breach of contract and declaratory judgment. Discovery is completed, and the trial, originally scheduled for March of this year, is now scheduled to begin on June 11, 2018. A court-ordered mediation took place on August 30, 2017, and a second mediation has been scheduled for February 13, 2018. DXC is the party in interest in this matter pursuant to the Separation and Distribution Agreement between the then Hewlett-Packard Co. and HPE and the subsequent Separation and Distribution Agreement between HPE and DXC.
Kemper Corporate Services, Inc. v. Computer Sciences Corporation: In October 2015, Kemper Corporate Services, Inc. (“Kemper”) filed a demand for arbitration against CSC with the American Arbitration Association (“AAA”), alleging that CSC breached the terms of a 2009 Master Software License and Services Agreement and related Work Orders (the “Agreement”) by failing to complete a software translation and implementation plan by certain contractual deadlines. Kemper claimed breach of contract, seeking approximately $100 million in damages measured in part by the amount of the fees paid under the contract, as well as pre-judgment interest, and in the alternative claimed rescission of the Agreement. CSC answered the demand for arbitration denying Kemper’s claims and asserting a counterclaim for unpaid invoices for services rendered by CSC.
A single arbitrator conducted an evidentiary hearing on the merits of the claims and counterclaims in April 2017. Oral argument took place on August 28, 2017. On October 2, 2017, the arbitrator issued a partial final award, finding for Kemper on its breach of contract theory, awarding Kemper $84.2 million in compensatory damages plus prejudgment interest, denying Kemper’s claim for rescission as moot, and denying CSC’s counterclaim. Kemper moved on October 10, 2017, in federal district court in Texas to confirm the award. On November 16, 2017, the arbitrator issued a Final Award which reiterated his findings of fact and law, calculated the amount of prejudgment interest, and awarded Kemper its costs
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DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
of arbitration including reasonable attorneys’ fees and expenses. On December 6, 2017, the Company filed a motion to vacate the award in federal district court in New York. A week later, the New York court stayed the action in deference to the Texas court’s decision as to which venue was more appropriate to address the vacatur arguments. On January 12, 2018, the Company appeared in the Texas action seeking a stay of the confirmation proceedings or a transfer of venue to New York. The venue motion will be fully briefed by February 23, 2018.
The Company disagrees with the decision of the arbitrator and intends to continue to defend itself vigorously. The Company is also pursuing coverage for the full scope of the award, interest, and legal fees and expenses, under the Company's applicable insurance policies.
Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise: This purported class and collective action was filed on August 18, 2016 in the U.S. District Court for the Northern District of California, against HP and HPE alleging violations of the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code. Former business units of HPE now owned by the Company will be proportionately liable for any recovery by plaintiffs in this matter. Plaintiffs filed an amended complaint on December 19, 2016. Plaintiffs seek to certify a nationwide class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a work force reduction (“WFR”) plan on or after December 9, 2014 (deferral states) and April 8, 2015 (non-deferral states), and who were 40 years of age or older at the time of termination. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On January 30, 2017, defendants filed a partial motion to dismiss and a motion to compel arbitration of claims by opt-in plaintiffs who signed releases as part of their WFR packages. On September 20, 2017, the Court denied the partial motion to dismiss without prejudice, but granted defendants’ motions to compel arbitration. Accordingly, the Court has stayed the entire action pending arbitration, and administratively closed the case. Plaintiffs have filed a motion for reconsideration as well as a notice of appeal to the Ninth Circuit (which has been denied as premature). The reconsideration motion, and others pending before the District Court relating to class arbitration, are fully briefed and will be adjudicated without oral argument.
Voluntary Disclosure of Certain Possible Sanctions Law Violations: On February 2, 2017, CSC submitted an initial notification of voluntary disclosure to the U.S. Department of Treasury, 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 U.K. The Company’s related internal investigation is continuing, and the Company has undertaken to cooperate with and provide a full report of its findings to OFAC when completed.
In addition to the matters noted above, the Company is currently subject in the normal course of business to various claims and contingencies arising from, among other things, disputes with customers, vendors, employees, contract counterparties and other parties, as well as securities matters, environmental matters, matters concerning the licensing and use of intellectual property, and inquiries and investigations by regulatory authorities and government agencies. Some of these disputes involve or may involve litigation. The consolidated financial statements reflect the treatment of claims and contingencies based on management's view of the expected outcome. DXC consults with outside legal counsel on issues related to litigation and regulatory compliance and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Although the outcome of these and other matters cannot be predicted with certainty, and the impact of the final resolution of these and other matters on the Company’s results of operations in a particular subsequent reporting period could be material and adverse, management does not believe based on information currently available to the Company, that the resolution of any of the matters currently pending against the Company will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due. Unless otherwise noted, the Company is unable to determine at this time a reasonable estimate of a possible loss or range of losses associated with the foregoing disclosed contingent matters.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
All statements and assumptions contained in this Quarterly Report on Form 10-Q and in the documents incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements.” Forward-looking statements often include words such as “anticipates,” “believes,” “estimates,” “expects,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target,” and “will” and words and terms of similar substance in discussions of future operating or financial performance. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved.
Forward-looking statements include, among other things, statements with respect to our financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to:
• | the integration of CSC's and HPES's businesses, operations, and culture and the ability to operate as effectively and efficiently as expected, and the combined company's ability to successfully manage and integrate acquisitions generally; |
• | the ability to realize the synergies and benefits expected to result from the Merger within the anticipated time frame or in the anticipated amounts; |
• | other risks related to the Merger including anticipated tax treatment, unforeseen liabilities, and future capital expenditures; |
• | changes in governmental regulations or the adoption of new laws or regulations that may make it more difficult or expensive to operate our business; |
• | changes in senior management, the loss of key employees or the ability to retain and hire key personnel and maintain relationships with key business partners; |
• | business interruptions in connection with our technology systems; |
• | the competitive pressures faced by our business; |
• | the effects of macroeconomic and geopolitical trends and events; |
• | the need to manage third-party suppliers and the effective distribution and delivery of our products and services; |
• | the protection of our intellectual property assets, including intellectual property licensed from third parties; |
• | the risks associated with international operations; |
• | the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; |
• | the execution and performance of contracts by us and our suppliers, customers, clients and partners; |
• | the resolution of pending investigations, claims and disputes; |
• | risks relating to the respective abilities of the parties to the USPS Separation and Mergers (defined below) to satisfy the conditions to, and to otherwise consummate, the USPS Separation and Mergers and to achieve the expected results therefrom; and |
• | the other factors described in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q and DXC's Quarterly Reports on Form 10-Q for the quarters ended June 30, 2017 and September 30, 2017. |
No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 DXC's results of operations and cash flows for the three and nine months ended December 31, 2017. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes. The use of "we," "our" and "us" refers to DXC and its consolidated subsidiaries.
The MD&A is organized into the following sections:
• | Background |
• | Segments and Services |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Off-Balance Sheet Arrangements |
• | Contractual Obligations |
• | Critical Accounting Policies and Estimates |
Background
DXC is the world's leading independent, end-to-end IT services company, helping clients harness the power of innovation to thrive on change. DXC was formed by the spin-off of HPES on March 31, 2017 and merger of CSC with a wholly owned subsidiary of DXC on April 1, 2017. As a result of the Merger, CSC became a wholly owned subsidiary of DXC. DXC's common stock began trading under the ticker symbol “DXC” on the New York Stock Exchange on April 3, 2017 and is part of Standard & Poor's (S&P) 500 Index.
Segments and Services
Our reportable segments are GBS, GIS, and USPS. Segment information is included in Note 17 - "Segment Information" to the financial statements. For a discussion of risks associated with our foreign operations, see Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.
Global Business Services
GBS provides innovative technology solutions including Enterprise and Cloud Applications, Consulting Application Services, and Analytics. GBS also includes our Industry-aligned IP and Business Process Services. These offerings address key business challenges and accelerate digital transformations tailored to each customer’s industry and specific objectives. GBS strives to help clients understand and take advantage of IT modernization and virtualization across the IT portfolio (hardware, software, networking, storage, and computing assets).
Enterprise and Cloud Applications provide industry, business process, systems integration, technical delivery experience, and innovation to deliver value across our clients' enterprise application portfolios. Our Consulting professionals act as a trusted source for our clients in creating bold digital strategies, designing innovative digital experiences, managing complex digital integration, and delivering safe and secure digital operations that help our clients disrupt their industry, without disrupting their business operations. DXC’s Application Services offerings utilize our IP and world-class partner ecosystem to modernize and transform our clients applications landscape, develop and manage their portfolio and roadmap, and execute with precision. In Analytics, DXC Technology offers a complete portfolio of services to rapidly provide insights and drive impactful business outcomes. Our Partner Network allows you to leverage investment while building the analytic solutions of tomorrow. DXC’s industry-aligned IP is centered on the insurance, banking, healthcare, and travel and transportation industries.
Activities are primarily related to vertical alignment of software solutions and process-based IP that power mission-critical transaction engines. And, our Business Process Services combine business process expertise and intellectual property with the resources of a global Tier I IT services company, leveraging intelligent automation and innovative solutions to
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reduce manual effort and the associated cost. Key competitive differentiators for GBS include global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Evolving business demands such as globalization, fast-developing economies, government regulation and growing concerns around risk, security, and compliance drive demand for these offerings.
Global Infrastructure Services
GIS provides Cloud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions to commercial clients globally. This includes DXC’s next-generation cloud offerings, including Infrastructure as a Service ("IaaS"), private cloud solutions, and Storage as a Service. GIS provides a portfolio of standard offerings that have predictable outcomes and measurable results while reducing business risk and operational costs for clients. Further, our industry-leading security solutions help clients predict attacks, proactively respond to threats, ensure compliance, and protect data, applications, infrastructure and endpoints. To provide clients with differentiated offerings, GIS maintains a Partner Network to make investments in developing unique offerings and go-to-market strategies. This collaboration helps us independently determine the best technology, develop road maps, and enhance opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions that best address client needs.
United States Public Sector
USPS delivers IT services and business solutions to all levels of government in the United States. USPS helps clients to address their key objectives of: (1) transforming and modernizing through innovation, (2) enhancing security and privacy, (3) improving efficiency and effectiveness, (4) reducing and optimizing costs, and (5) becoming more agile, flexible and resilient. USPS aims to be a transformation partner that can maximize technology’s potential to create the solutions that matter most to its government clients. USPS supports hundreds of accounts at the federal, state, and local government levels. Commensurate with DXC's strategy of leading the next generation of IT services, USPS is leveraging our commercial best practices and next-generation offerings to help civilian government agencies address their business issues and provide better and more secure access to citizen services while reducing costs for community & social service, environmental management, education, transportation, and general government & revenue collection.
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Results of Operations
On April 1, 2017, we completed the strategic combination of CSC with HPES to form DXC. See Note 1 - "Summary of Significant Accounting Policies" and Note 3 "Acquisitions". Because it was deemed the accounting acquirer, CSC is considered DXC's predecessor and the historical financial statements of CSC prior to the Merger are reflected in this Quarterly Report on Form 10-Q as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017, included elsewhere in this Quarterly Report on Form 10-Q do not include the financial results of HPES, and therefore, are not directly comparable.
The following table calculates the period over period changes in the unaudited condensed consolidated statements of operations:
Three Months Ended | ||||||||||||||
(In millions, except per-share amounts) | December 31, 2017 | December 30, 2016 | Change | Percentage Change (NC) | ||||||||||
Revenues | $ | 6,186 | $ | 1,917 | $ | 4,269 | — | |||||||
Total costs and expenses | 5,748 | 1,867 | 3,881 | — | ||||||||||
Income before income taxes | 438 | 50 | 388 | — | ||||||||||
Income tax (benefit) expense | (341 | ) | 13 | (354 | ) | — | ||||||||
Net income | $ | 779 | $ | 37 | $ | 742 | — | |||||||
Diluted earnings per share | $ | 2.68 | $ | 0.21 | $ | 2.47 | — |
(NC) - Not comparable
Nine Months Ended | ||||||||||||||
(In millions, except per-share amounts) | December 31, 2017 | December 30, 2016 | Change | Percentage Change (NC) | ||||||||||
Revenues | $ | 18,262 | $ | 5,718 | $ | 12,544 | — | |||||||
Total costs and expenses | 17,252 | 5,705 | 11,547 | — | ||||||||||
Income before income taxes | 1,010 | 13 | 997 | — | ||||||||||
Income tax benefit | (207 | ) | (25 | ) | (182 | ) | — | |||||||
Net income | $ | 1,217 | $ | 38 | $ | 1,179 | — | |||||||
Diluted earnings per share | $ | 4.11 | $ | 0.17 | $ | 3.94 | — |
(NC) - Not comparable
48
Revenues
The following discussion includes comparisons of our results of operations for the three and nine months ended December 31, 2017 to our pro forma results of operations for the three and nine months ended December 30, 2016. Our pro forma results of operations for the three and nine months ended December 30, 2016 are based upon the historical statements of operations of each of CSC and HPES, giving effect to the Merger as if it had been consummated on April 2, 2016. CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and nine months ended December 30, 2016 and of HPES for the three and nine months ended October 31, 2016.
See "Unaudited Pro Forma Condensed Combined Statement of Operations" below for additional information.
Three Months Ended | ||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | Change | Percentage Change (NC) | ||||||||||
GBS | $ | 2,315 | $ | 1,046 | $ | 1,269 | — | |||||||
GIS | 3,145 | 871 | 2,274 | — | ||||||||||
USPS | 726 | — | 726 | — | ||||||||||
Total Revenues | $ | 6,186 | $ | 1,917 | $ | 4,269 | — |
(NC) - Not comparable
Three Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | Pro Forma December 30, 2016 | Change | Percentage Change | |||||||||||
GBS | $ | 2,315 | $ | 2,432 | $ | (117 | ) | (4.8 | )% | ||||||
GIS | 3,145 | 3,327 | (182 | ) | (5.5 | )% | |||||||||
USPS | 726 | 826 | (100 | ) | (12.1 | )% | |||||||||
Total Revenues | $ | 6,186 | $ | 6,585 | $ | (399 | ) | (6.1 | )% |
Nine Months Ended | ||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | Change | Percentage Change (NC) | ||||||||||
GBS | $ | 6,893 | $ | 3,130 | $ | 3,763 | — | |||||||
GIS | 9,256 | 2,588 | 6,668 | — | ||||||||||
USPS | 2,113 | — | 2,113 | — | ||||||||||
Total Revenues | $ | 18,262 | $ | 5,718 | $ | 12,544 | — |
(NC) - Not comparable
49
Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | Pro Forma December 30, 2016 | Change | Percentage Change | |||||||||||
GBS | $ | 6,893 | $ | 7,245 | $ | (352 | ) | (4.9 | )% | ||||||
GIS | 9,256 | 9,906 | (650 | ) | (6.6 | )% | |||||||||
USPS | 2,113 | 2,207 | (94 | ) | (4.3 | )% | |||||||||
Total Revenues | $ | 18,262 | $ | 19,358 | $ | (1,096 | ) | (5.7 | )% |
As a global company over 56% of our revenues have been earned internationally. As a result, the changes in revenues denominated in currencies other than the U.S. dollar from period to period are impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. The table below summarizes our constant currency revenues for the three and nine months ended December 31, 2017 compared to the pro forma three and nine months ended December 30, 2016:
Three Months Ended | |||||||||||||||
(in millions) | December 31, 2017 at Constant Currency | December 30, 2016 Pro Forma | Increase (Decrease) at Constant Currency | Percentage Change | |||||||||||
GBS | $ | 2,266 | $ | 2,432 | $ | (166 | ) | (6.8 | )% | ||||||
GIS | 3,075 | 3,327 | (252 | ) | (7.6 | )% | |||||||||
USPS | 726 | 826 | (100 | ) | (12.1 | )% | |||||||||
Total | $ | 6,067 | $ | 6,585 | $ | (518 | ) | (7.9 | )% |
Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 at Constant Currency | December 30, 2016 Pro Forma | Increase (Decrease) at Constant Currency | Percentage Change | |||||||||||
GBS | $ | 6,859 | $ | 7,245 | $ | (386 | ) | (5.3 | )% | ||||||
GIS | 9,235 | 9,906 | (671 | ) | (6.8 | )% | |||||||||
USPS | 2,113 | 2,207 | (94 | ) | (4.3 | )% | |||||||||
Total | $ | 18,207 | $ | 19,358 | $ | (1,151 | ) | (5.9 | )% |
The revenue discussions below include references to revenues on a constant currency basis. 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 non-GAAP measure allows management to evaluate operating performance separately from movements in foreign exchange rates.
On a GAAP basis, total revenues were $6.2 billion and $18.3 billion during the three and nine months ended December 31, 2017, respectively, an increase of $4.3 billion and $12.5 billion as compared to the comparable periods of the prior fiscal year. The revenue growth is attributed to the Merger.
On a GAAP basis, our GIS segment revenues during the three and nine months ended December 31, 2017 were $3.1 billion and $9.3 billion, or 50.8% and 50.7% of total revenues, respectively. Our GIS segment includes our Cloud, Platforms and Infrastructure Technology Outsourcing, Workplace and Mobility and Security solutions businesses. Our GBS segment revenues were $2.3 billion and $6.9 billion, or 37.4% and 37.7% of total revenues, during the three and nine months ended December 31, 2017, respectively. Our GBS segment includes Enterprise and Cloud Applications, Consulting Application Services, Analytics, Industry-aligned IP and Business Process Services businesses. Our USPS
50
segment, which was created upon the consummation of the Merger contributed $0.7 billion and $2.1 billion of revenues, or 11.7% and 11.6% of total revenues during the three and nine months ended December 31, 2017, respectively. The USPS segment provides both infrastructure and other services similar to our GIS and GBS segments to all levels of government in the United States.
On a pro forma basis, constant currency revenues decreased $518 million, or 7.9%, during the three months ended December 31, 2017 as compared to the three months ended December 30, 2016. The constant currency revenues decrease for both our GIS and GBS segments was driven by contracts that concluded or were renewed at a lower rate. These decreases were partially offset by an increase in revenues from new business as well as the contributions from our recent acquisition of Tribridge, primarily within our GBS segment. The decrease in constant currency USPS segment revenues for the three months ended December 31, 2017, as compared to the same period of the prior fiscal year, was largely driven by a contract reset that resulted in a one-time revenue increase in the prior year period.
On a pro forma basis, constant currency revenues decreased $1,151 million, or 5.9%, during the nine months ended December 31, 2017 as compared to the nine months ended December 30, 2016. The constant currency revenues decrease for both our GIS and GBS segments was driven by contracts that concluded or were renewed at a lower rate. These decreases were partially offset by an increase in revenues from new business as well as the contributions from our recent acquisition of Tribridge, primarily within our GBS segment. The decrease in constant currency USPS segment revenues for the nine months ended December 31, 2017, as compared to the same period of the prior fiscal year, was largely driven by a contract reset that resulted in a one-time revenue increase in the prior year period.
For the three months ended December 31, 2017, GIS, GBS and USPS contract awards were $2.2 billion, $3.3 billion and $0.5 billion, respectively. For the nine months ended December 31, 2017, GIS, GBS and USPS contract awards were $8.8 billion, $8.1 billion and $1.4 billion, respectively.
51
Costs and Expenses
Our total costs and expenses are shown in the tables below:
Three Months Ended | |||||||||||||||||
Amount | Percentage of Revenues | Percentage of Revenue Change | |||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | |||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 4,521 | $ | 1,347 | 73.1 | % | 70.2 | % | 2.9 | % | |||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 475 | 333 | 7.7 | 17.4 | (9.7 | ) | |||||||||||
Depreciation and amortization | 481 | 161 | 7.8 | 8.4 | (0.6 | ) | |||||||||||
Restructuring costs | 213 | 3 | 3.4 | 0.2 | 3.2 | ||||||||||||
Interest expense | 77 | 33 | 1.2 | 1.7 | (0.5 | ) | |||||||||||
Interest income | (27 | ) | (8 | ) | (0.4 | ) | (0.4 | ) | — | ||||||||
Other expense (income), net | 8 | (2 | ) | 0.1 | (0.1 | ) | 0.2 | ||||||||||
Total costs and expenses | $ | 5,748 | $ | 1,867 | 92.9 | % | 97.4 | % | (4.5 | )% |
Nine Months Ended | |||||||||||||||||
Amount | Percentage of Revenues | Percentage of Revenue Change | |||||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | December 31, 2017 | December 30, 2016 | |||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 13,621 | $ | 4,131 | 74.5 | % | 72.2 | % | 2.3 | % | |||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 1,557 | 931 | 8.5 | 16.3 | (7.8 | ) | |||||||||||
Depreciation and amortization | 1,379 | 494 | 7.6 | 8.6 | (1.0 | ) | |||||||||||
Restructuring costs | 595 | 85 | 3.3 | 1.5 | 1.8 | ||||||||||||
Interest expense | 231 | 87 | 1.3 | 1.6 | (0.3 | ) | |||||||||||
Interest income | (59 | ) | (26 | ) | (0.3 | ) | (0.5 | ) | 0.2 | ||||||||
Other (income) expense, net | (72 | ) | 3 | (0.4 | ) | 0.1 | (0.5 | ) | |||||||||
Total costs and expenses | $ | 17,252 | $ | 5,705 | 94.5 | % | 99.8 | % | (5.3 | )% |
Costs of Services
Cost of services excluding depreciation and amortization and restructuring costs ("COS") was $4.5 billion and $13.6 billion for the three and nine months ended December 31, 2017, respectively. The $3.2 billion and $9.5 billion increase in COS, as compared to the same periods of the prior fiscal year, was driven by the Merger and was partially offset by reduction in costs associated with workforce and facilities optimization.
Selling, General, and Administrative
Selling, general, and administrative expense excluding depreciation and amortization and restructuring costs ("SG&A") was $475 million and $1,557 million for the three and nine months ended December 31, 2017, respectively. The $142 million and $626 million increase in SG&A, as compared to the same periods of the prior fiscal year, was driven primarily by the Merger. Additionally, integration and transaction-related costs of $94 million and $284 million were included in SG&A for the three and nine months ended December 31, 2017, respectively, as compared to $78 million and $187 million for the comparable periods of the prior fiscal year.
52
Depreciation and Amortization
Depreciation expense increased $122 million and amortization expense increased $198 million for the three months ended December 31, 2017, compared to the three months ended December 30, 2016. For the nine months ended December 31, 2017, depreciation expense increased $359 million and amortization expense increased $526 million, compared to the nine months ended December 30, 2016. The increase in depreciation and amortization expense ("D&A") was attributed to acquired property and equipment and intangible assets associated with the Merger.
Restructuring Costs
During the nine months ended December 31, 2017, management approved the Fiscal 2018 Plan to optimize operations in response to a continuing business contraction. The additional restructuring initiatives are intended to reduce our core structure and related operating costs, improve our competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and rebalancing the pyramid structure. Additionally, this plan includes global facility restructuring, including a global datacenter restructuring program.
During the three and nine months ended December 31, 2017, restructuring costs, net of reversals, were $213 million and $595 million, respectively, as compared with $3 million and $85 million during the comparable periods of the prior fiscal year. The year-over-year increase in restructuring costs was due to the implementation of the Fiscal 2018 Plan. Restructuring costs included pension benefit augmentations owed to certain employees under legal or contractual obligations. These augmentations will be paid as part of normal pension distributions over several years.
For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 11 - "Restructuring Costs" to the financial statements.
Interest Expense and Interest Income
Interest expense for the three and nine months ended December 31, 2017 increased $44 million and $144 million over the same periods of the prior fiscal year, respectively. The increase in interest expense for the nine months ended December 31, 2017 includes interest expense associated with $5.6 billion of acquired debt; see Note 3 - "Acquisitions"
Interest income for the three and nine months ended December 31, 2017 increased $19 million and $33 million over the same periods of the prior fiscal year, respectively. The year-over-year increase in interest income was due to higher cash balances during the three and nine months ended December 31, 2017 as compared to the prior year periods.
Other Expense (Income), Net
Other expense (income), net comprises movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses. The $10 million increase in other expense for the three months ended December 31, 2017 as compared to the three months ended December 30, 2016 was due to unfavorable movement in exchange rates between the U.S. dollar and the Euro. The $75 million increase in other income for the nine months ended December 31, 2017 over the comparable period of the prior fiscal year was primarily due to foreign currency gain related to a change in the functional currency of a European holding company.
53
Taxes
The Company's income tax (benefit) expense was $(341) million and $13 million for the three months ended December 31, 2017 and December 30, 2016, respectively, and $(207) million and $(25) million for the nine months ended December 31, 2017 and December 30, 2016, respectively. For the three and nine months ended December 31, 2017, the primary drivers of the effective tax rate ("ETR") were the remeasurement of deferred tax assets and liabilities as a result of the Act, the remeasurement of a deferred tax liability recorded on the outside basis difference of HPES foreign subsidiaries, the accrual of a one-time transition tax on estimated unremitted foreign earnings and India DDT accrual due to historic earnings and taxes. The primary drivers of the ETR for the three and nine months ended December 30, 2016 were the global mix of income, release of a valuation allowance in a non-U.S. jurisdiction and excess tax benefits related to employee share-based payment awards.
Our accounting for the impact on ETR and future earnings for the GILTI, executive compensation and cost recovery for expenditures that qualify for immediate expensing and other base broadening provisions of the Act is incomplete and we were not yet able to make reasonable estimates for the effects. Therefore, no provisional adjustments were recorded.
Except for the uncertain tax liabilities acquired as a result of the Merger, there were no material changes to uncertain tax positions during fiscal 2018. For further discussion of these uncertain tax positions, please refer to Note 13 - "Income Taxes."
Earnings per Share
Diluted EPS for the three and nine months ended December 31, 2017 increased $2.47 and $3.94, respectively, from the same periods a year ago. The increase for the three and nine months ended December 31, 2017 was due to increases of $0.7 billion and $1.2 billion, respectively, in net income attributable to DXC common stockholders, partially offset by an increase in weighted average common shares outstanding for diluted EPS attributable to capital restructuring associated with the Merger. The increase in Diluted EPS for the three months ended December 31, 2017, included an increase of $0.04 due to purchase price allocation adjustments related to six months ended September 30, 2017 that were recognized in the during the three months ended December 31, 2017; see Note 3 - "Acquisitions").
Unaudited Pro Forma Condensed Combined Statement of Operations
In an effort to provide investors with additional information, we are disclosing certain unaudited pro forma financial information of DXC for the three and nine months ended December 30, 2016 as supplemental information herein. The following unaudited pro forma condensed combined statement of operations of DXC (the “unaudited pro forma statement of operations”) is for the three and nine months ended December 30, 2016 after giving effect to the Merger. See Note 1 - "Summary of Significant Accounting Policies" and Note 3 - "Acquisitions" to the financial statements for additional information.
CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. Every fifth year included an additional week in the first quarter to prevent the fiscal year moving from an approximate end of March date. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three and nine months ended December 30, 2016 and of HPES for the three and nine months ended October 31, 2016.
The historical condensed combined statement of operations of HPES was “carved-out” from the combined statement of operations of HPE and reflects assumptions and allocations made by HPE. The condensed combined statement of operations of HPES included all revenues and costs directly attributable to HPES and an allocation of expenses related to certain HPE corporate functions. The results of operations in the HPES historical condensed combined statement of operations does not necessarily include all expenses that would have been incurred by HPES had it been a separate, stand-alone entity. Actual costs that may have been incurred if HPES had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, functions outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. Consequently, HPES’ historical condensed combined statement of operations does not necessarily reflect what HPES’ results of operations would have been had HPES operated as a stand-alone company during the period presented.
54
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 30, 2016
The unaudited pro forma statement of operations has been prepared using the acquisition method of accounting with CSC considered the accounting acquirer of HPES. This unaudited pro forma statement includes combining historical results, reflecting preliminary purchase accounting adjustments and aligning accounting policies for our consolidated results and reportable segments. The historical statements of operations have been adjusted in the unaudited pro forma statement of operations to give effect to pro forma events that were (i) directly attributable to the Merger, (ii) factually supportable, and (iii) which are expected to have a continuing impact on the consolidated results of operations of DXC. The pro forma results do not reflect the costs of integration activities or benefits that may result from realization of previously announced anticipated first-year synergies of approximately $1.0 billion. No assurances of the timing or the amount of cost synergies, or the costs necessary to achieve those cost synergies, can be provided.
The adjustments included in the unaudited pro forma statement of operations were based upon currently available information and assumptions that management of DXC believes to be reasonable. The unaudited pro forma statement of operations is for informational purposes only and is not intended to represent or to be indicative of the actual results of operations that the combined company would have reported had the Merger been completed on April 2, 2016, and should not be taken as being indicative of DXC’s future consolidated financial results. The unaudited pro forma statement of operations should be read in conjunction with Exhibit 99.2 of the previously filed Form 8-K/A that DXC filed with the SEC on June 14, 2017, including the accompanying notes.
Subsequent to the Merger, we adjusted the preliminary purchase price allocation, which would have decreased pro forma combined net loss and loss per common share by $96 million and $0.34, respectively, for the three months ended December 30, 2016, and $292 million and $1.03, respectively, for the nine months ended December 30, 2016. The decrease in pro forma combined net loss and loss per common share was primarily attributed to the acquisition-related fair value adjustments described in Note 3 - "Acquisitions."
55
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 30, 2016
Historical | ||||||||||||||||||||
(in millions, except per-share amounts) | CSC for the Three Months Ended December 30, 2016 | HPES for the Three Months Ended October 31, 2016 | Reclassifications | Merger Adjustments | Pro Forma Combined | |||||||||||||||
Revenues | $ | 1,917 | $ | 4,668 | $ | — | $ | — | $ | 6,585 | ||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | 1,347 | 3,841 | (254 | ) | 81 | 5,015 | ||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 333 | 553 | (74 | ) | (123 | ) | 689 | |||||||||||||
Depreciation and amortization | 161 | 32 | 328 | — | 521 | |||||||||||||||
Restructuring costs | 3 | 211 | — | — | 214 | |||||||||||||||
Interest expense | 33 | — | 38 | (16 | ) | 55 | ||||||||||||||
Interest income | (8 | ) | — | (10 | ) | — | (18 | ) | ||||||||||||
Other expense, net | (2 | ) | — | — | — | (2 | ) | |||||||||||||
Total costs and expenses | 1,867 | 4,637 | 28 | (58 | ) | 6,474 | ||||||||||||||
Interest and other, net | — | (30 | ) | 30 | — | — | ||||||||||||||
Income before income taxes | 50 | 1 | 2 | 58 | 111 | |||||||||||||||
Income tax expense | 13 | 185 | — | 79 | 277 | |||||||||||||||
Net income (loss) | 37 | (184 | ) | 2 | (21 | ) | (166 | ) | ||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 6 | — | 2 | — | 8 | |||||||||||||||
Net loss attributable to DXC common stockholders | $ | 31 | $ | (184 | ) | $ | — | $ | (21 | ) | $ | (174 | ) | |||||||
Loss per common share: | ||||||||||||||||||||
Basic | $ | 0.22 | $ | (0.61 | ) | |||||||||||||||
Diluted | $ | 0.21 | $ | (0.61 | ) | |||||||||||||||
Weighted-average common shares: | ||||||||||||||||||||
Basic | 140.88 | 283.16 | ||||||||||||||||||
Diluted | 144.81 | 283.16 |
56
DXC TECHNOLOGY COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 30, 2016
Historical | ||||||||||||||||||||
(in millions, except per-share amounts) | CSC for the Nine Months Ended December 30, 2016 | HPES for the Nine Months Ended October 31, 2016 | Reclassifications | Merger Adjustments | Pro Forma Combined | |||||||||||||||
Revenues | $ | 5,718 | $ | 13,640 | $ | — | $ | — | $ | 19,358 | ||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | 4,131 | 11,563 | (805 | ) | 404 | 15,293 | ||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 931 | 1,558 | (238 | ) | (192 | ) | 2,059 | |||||||||||||
Depreciation and amortization | 494 | 231 | 1,056 | (164 | ) | 1,617 | ||||||||||||||
Restructuring costs | 85 | 561 | — | — | 646 | |||||||||||||||
Transaction costs | — | 13 | (13 | ) | — | — | ||||||||||||||
Interest expense | 87 | — | 137 | 8 | 232 | |||||||||||||||
Interest income | (26 | ) | — | (33 | ) | — | (59 | ) | ||||||||||||
Other expense, net | 3 | — | 9 | — | 12 | |||||||||||||||
Total costs and expenses | 5,705 | 13,926 | 113 | 56 | 19,800 | |||||||||||||||
Interest and other, net | — | (117 | ) | 117 | — | — | ||||||||||||||
Income (loss) before income taxes | 13 | (403 | ) | 4 | (56 | ) | (442 | ) | ||||||||||||
Income tax (benefit) expense | (25 | ) | 92 | — | 61 | 128 | ||||||||||||||
Net income (loss) | 38 | (495 | ) | 4 | (117 | ) | (570 | ) | ||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 13 | — | 4 | — | 17 | |||||||||||||||
Net loss attributable to DXC common stockholders | $ | 25 | $ | (495 | ) | $ | — | $ | (117 | ) | $ | (587 | ) | |||||||
Loss per common share: | ||||||||||||||||||||
Basic | $ | 0.18 | $ | (2.07 | ) | |||||||||||||||
Diluted | $ | 0.17 | $ | (2.07 | ) | |||||||||||||||
Weighted-average common shares: | ||||||||||||||||||||
Basic | 140.13 | 283.16 | ||||||||||||||||||
Diluted | 143.80 | 283.16 |
57
Non-GAAP Financial Measures
We present non-GAAP financial measures of performance which are derived from the unaudited condensed consolidated statements of operations and unaudited pro forma statement of operations of DXC. These non-GAAP financial measures include earnings before interest and taxes ("EBIT"), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income and non-GAAP EPS.
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 or pro forma basis. These non-GAAP financial measures exclude certain items from GAAP results that DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures provide investors supplemental information about the financial performance of DXC exclusive of the impacts of corporate wide strategic decisions. DXC management believes that adjusting for these items provides investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period. DXC management believes the non-GAAP measures provided are also considered important measures by financial analysts covering DXC as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS.
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 or on a pro forma basis. Additionally, other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes between companies.
Non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:
Three Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | Pro Forma December 30, 2016 | Change | Percentage Change | |||||||||||
Income before income taxes | $ | 438 | $ | 111 | $ | 327 | 294.6 | % | |||||||
Non-GAAP income before income taxes | $ | 877 | $ | 589 | $ | 288 | 48.9 | % | |||||||
Net income (loss) | $ | 779 | $ | (166 | ) | $ | 945 | (569.3 | )% | ||||||
Adjusted EBIT | $ | 927 | $ | 626 | $ | 301 | 48.1 | % |
Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | Pro Forma December 30, 2016 | Change | Percentage Change | |||||||||||
Income (loss) before income taxes | $ | 1,010 | $ | (442 | ) | $ | 1,452 | (328.5 | )% | ||||||
Non-GAAP income before income taxes | $ | 2,310 | $ | 1,143 | $ | 1,167 | 102.1 | % | |||||||
Net income (loss) | $ | 1,217 | $ | (570 | ) | $ | 1,787 | (313.5 | )% | ||||||
Adjusted EBIT | $ | 2,482 | $ | 1,316 | $ | 1,166 | 88.6 | % |
58
Reconciliation of Non-GAAP Financial Measures
Our non-GAAP adjustments include:
• | Restructuring - reflects costs, net of reversals, related to workforce optimization and real estate charges |
• | Transaction and integration-related costs - reflects costs related to integration planning, financing, and advisory fees associated with the Merger and other acquisitions. |
• | Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business combinations. |
• | Pension and OPEB actuarial and settlement gains and losses - reflects pension and OPEB actuarial and settlement gains and losses. |
• | Certain overhead costs - reflects certain fiscal 2017 HPE costs allocated to HPES that are expected to be largely eliminated on a prospective basis. |
• | Tax adjustment - reflects the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017 for fiscal 2018 periods and the application of an approximate 27.5% pro forma tax rate for fiscal 2017 periods, which is the midpoint of prospective targeted effective tax rate range of 25% to 30% and effectively excludes the impact of discrete tax adjustments for those periods. |
A reconciliation of reported results to non-GAAP results is as follows:
Three Months Ended December 31, 2017 | ||||||||||||||||||||||||||||
(in millions, except per-share amounts) | As Reported | Restructuring Costs | Pension and OPEB Actuarial and Settlement Gains | Transaction and Integration-related Costs | Amortization of Acquired Intangible Assets | Tax adjustment | Non-GAAP Results | |||||||||||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 4,521 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4,521 | ||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 475 | — | 17 | (94 | ) | — | — | 398 | ||||||||||||||||||||
Income before income taxes | 438 | 213 | (17 | ) | 94 | 149 | — | 877 | ||||||||||||||||||||
Income tax (benefit) expense | (341 | ) | 52 | (3 | ) | 26 | 45 | 473 | 252 | |||||||||||||||||||
Net income | 779 | 161 | (14 | ) | 68 | 104 | (473 | ) | 625 | |||||||||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 3 | — | — | — | — | — | 3 | |||||||||||||||||||||
Net income attributable to DXC common stockholders | $ | 776 | $ | 161 | $ | (14 | ) | $ | 68 | $ | 104 | $ | (473 | ) | $ | 622 | ||||||||||||
Effective Tax Rate | (77.9 | )% | 28.7 | % | ||||||||||||||||||||||||
Basic EPS | $ | 2.72 | $ | 0.56 | $ | (0.05 | ) | $ | 0.24 | $ | 0.36 | $ | (1.66 | ) | $ | 2.18 | ||||||||||||
Diluted EPS | $ | 2.68 | $ | 0.56 | $ | (0.05 | ) | $ | 0.23 | $ | 0.36 | $ | (1.63 | ) | $ | 2.15 | ||||||||||||
Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||
Basic EPS | 285.38 | 285.38 | 285.38 | 285.38 | 285.38 | 285.38 | 285.38 | |||||||||||||||||||||
Diluted EPS | 289.77 | 289.77 | 289.77 | 289.77 | 289.77 | 289.77 | 289.77 |
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Nine Months Ended December 31, 2017 | ||||||||||||||||||||||||||||
(in millions, except per-share amounts) | As Reported | Restructuring Costs | Pension and OPEB Actuarial and Settlement Gains | Transaction and Integration-related Costs | Amortization of Acquired Intangible Assets | Tax adjustment | Non-GAAP Results | |||||||||||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 13,621 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 13,621 | ||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 1,557 | — | 17 | (284 | ) | — | — | 1,290 | ||||||||||||||||||||
Income before income taxes | 1,010 | 595 | (17 | ) | 284 | 438 | — | 2,310 | ||||||||||||||||||||
Income tax (benefit) expense | (207 | ) | 143 | (3 | ) | 90 | 148 | 473 | 644 | |||||||||||||||||||
Net income | 1,217 | 452 | (14 | ) | 194 | 290 | (473 | ) | 1,666 | |||||||||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 26 | — | — | — | — | — | 26 | |||||||||||||||||||||
Net income attributable to DXC common stockholders | $ | 1,191 | $ | 452 | $ | (14 | ) | $ | 194 | $ | 290 | $ | (473 | ) | $ | 1,640 | ||||||||||||
Effective Tax Rate | (20.5 | )% | 27.9 | % | ||||||||||||||||||||||||
Basic EPS | $ | 4.18 | $ | 1.59 | $ | (0.05 | ) | $ | 0.68 | $ | 1.02 | $ | (1.66 | ) | $ | 5.76 | ||||||||||||
Diluted EPS | $ | 4.11 | $ | 1.56 | $ | (0.05 | ) | $ | 0.67 | $ | 1.00 | $ | (1.63 | ) | $ | 5.66 | ||||||||||||
Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||
Basic EPS | 284.70 | 284.70 | 284.70 | 284.70 | 284.70 | 284.70 | 284.70 | |||||||||||||||||||||
Diluted EPS | 289.53 | 289.53 | 289.53 | 289.53 | 289.53 | 289.53 | 289.53 |
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A reconciliation of pro forma combined results to pro forma non-GAAP results for the three and nine months ended December 30, 2016 is as follows:
Three Months Ended December 30, 2016 | ||||||||||||||||||||||||||||
(in millions, except per-share amounts) | Pro Forma Combined | Restructuring Costs | Transaction and Integration-related Costs | Amortization of Acquired Intangibles | Certain Overhead Costs | Tax Adjustment | Pro Forma Non-GAAP Results | |||||||||||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 5,015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5,015 | ||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 689 | — | (126 | ) | — | (19 | ) | — | $ | 544 | ||||||||||||||||||
Income, before income taxes | 111 | 214 | 126 | 119 | 19 | — | 589 | |||||||||||||||||||||
Income tax expense (benefit) | 277 | — | — | — | — | (112 | ) | 165 | ||||||||||||||||||||
Net (loss) income | (166 | ) | 214 | 126 | 119 | 19 | 112 | 424 | ||||||||||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 8 | — | — | — | — | 8 | ||||||||||||||||||||||
Net (loss) income attributable to DXC common stockholders | $ | (174 | ) | $ | 214 | $ | 126 | $ | 119 | $ | 19 | $ | 112 | $ | 416 | |||||||||||||
Effective Tax Rate | 249.5 | % | 28.0 | % | ||||||||||||||||||||||||
Basic EPS | $ | (0.61 | ) | $ | 0.76 | $ | 0.44 | $ | 0.42 | $ | 0.07 | $ | 0.40 | $ | 1.47 | |||||||||||||
Diluted EPS | $ | (0.61 | ) | $ | 0.75 | $ | 0.44 | $ | 0.41 | $ | 0.07 | $ | 0.39 | $ | 1.45 | |||||||||||||
Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||
Basic EPS | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | |||||||||||||||||||||
Diluted EPS | 283.16 | 287.09 | 287.09 | 287.09 | 287.09 | 287.09 | 287.09 |
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Nine Months Ended December 30, 2016 | ||||||||||||||||||||||||||||||||
(in millions, except per-share amounts) | Pro Forma Combined | Restructuring Costs | Transaction and Integration-related Costs | Amortization of Acquired Intangibles | Pension and OPEB Actuarial and Settlement Losses | Certain Overhead Costs | Tax Adjustment | Pro Forma Non-GAAP Results | ||||||||||||||||||||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | $ | 15,293 | $ | — | $ | — | $ | — | $ | (150 | ) | $ | — | $ | — | $ | 15,143 | |||||||||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | 2,059 | — | (282 | ) | — | (48 | ) | (107 | ) | — | $ | 1,622 | ||||||||||||||||||||
(Loss) income, before income taxes | (442 | ) | 646 | 282 | 352 | 198 | 107 | — | 1,143 | |||||||||||||||||||||||
Income tax expense | 128 | — | — | — | — | — | 190 | 318 | ||||||||||||||||||||||||
Net (loss) income | (570 | ) | 646 | 282 | 352 | 198 | 107 | (190 | ) | 825 | ||||||||||||||||||||||
Less: net income attributable to non-controlling interest, net of tax | 17 | — | — | — | — | — | 17 | |||||||||||||||||||||||||
Net (loss) income attributable to DXC common stockholders | $ | (587 | ) | $ | 646 | $ | 282 | $ | 352 | $ | 198 | $ | 107 | $ | (190 | ) | $ | 808 | ||||||||||||||
Effective Tax Rate | (29.0 | )% | 27.8 | % | ||||||||||||||||||||||||||||
Basic EPS | $ | (2.07 | ) | $ | 2.28 | $ | 1.00 | $ | 1.24 | $ | 0.70 | $ | 0.38 | $ | (0.67 | ) | $ | 2.85 | ||||||||||||||
Diluted EPS | $ | (2.07 | ) | $ | 2.25 | $ | 0.98 | $ | 1.23 | $ | 0.69 | $ | 0.37 | $ | (0.66 | ) | $ | 2.82 | ||||||||||||||
Weighted average common shares outstanding for: | ||||||||||||||||||||||||||||||||
Basic EPS | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | 283.16 | ||||||||||||||||||||||||
Diluted EPS | 283.16 | 286.83 | 286.83 | 286.83 | 286.83 | 286.83 | 286.83 | 286.83 |
Reconciliation of adjusted EBIT and pro forma adjusted EBIT to net income (loss) and pro forma net income (loss):
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions) | December 31, 2017 | Pro Forma December 30, 2016 | December 31, 2017 | Pro Forma December 30, 2016 | ||||||||||||
Net income (loss) | $ | 779 | $ | (166 | ) | $ | 1,217 | $ | (570 | ) | ||||||
Income tax (benefit) expense | (341 | ) | 277 | (207 | ) | 128 | ||||||||||
Interest income | (27 | ) | (18 | ) | (59 | ) | (59 | ) | ||||||||
Interest expense | 77 | 55 | 231 | 232 | ||||||||||||
EBIT | 488 | 148 | 1,182 | (269 | ) | |||||||||||
Restructuring | 213 | 214 | 595 | 646 | ||||||||||||
Transaction and integration-related costs | 94 | 126 | 284 | 282 | ||||||||||||
Amortization of intangible assets | 149 | 119 | 438 | 352 | ||||||||||||
Pension and OPEB actuarial and settlement (gains) losses | (17 | ) | — | (17 | ) | 198 | ||||||||||
Certain overhead costs | — | 19 | — | 107 | ||||||||||||
Adjusted EBIT | $ | 927 | $ | 626 | $ | 2,482 | $ | 1,316 |
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Liquidity and Capital Resources
Cash and Cash Equivalents and Cash Flows
As of December 31, 2017, our cash and cash equivalents were $2.9 billion, of which $1.5 billion was held outside of the U.S. A substantial portion of funds can be returned to the U.S. from funds advanced previously to finance our foreign acquisition initiatives. As a result of the Act and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries, we expect a significant portion of the cash and cash equivalents held by our foreign subsidiaries will no longer be subject to U.S. income tax consequences upon a subsequent repatriation to the United States. However, a portion of this cash may still be subject to foreign 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. Based on a preliminary analysis, we have recorded a provisional estimate for foreign withholding taxes, state taxes, and India DDT of $115 million as described in Note 13 - "Income Taxes".
Cash and cash equivalents ("cash") increased $1.7 billion during the first nine months of fiscal 2018 to $2.9 billion, primarily due to the Merger. The following table summarizes our cash flow activity:
Nine Months Ended | ||||||||||||
(in millions) | December 31, 2017 | December 30, 2016 | Change | |||||||||
Net cash provided by operating activities | $ | 2,542 | $ | 805 | $ | 1,737 | ||||||
Net cash (used in) provided by investing activities | 213 | (825 | ) | 1,038 | ||||||||
Net cash (used in) provided by financing activities | (1,136 | ) | 72 | (1,208 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 44 | (119 | ) | 163 | ||||||||
Net increase (decrease) in cash and cash equivalents | $ | 1,663 | $ | (67 | ) | $ | 1,730 | |||||
Cash and cash equivalents at beginning-of-year | 1,263 | 1,178 | ||||||||||
Cash and cash equivalents at the end-of-period | $ | 2,926 | $ | 1,111 |
Net cash provided by operating activities during the nine months ended December 31, 2017 was $2,542 million as compared to $805 million during the comparable period of the prior fiscal year. The increase of $1,737 million was predominately due to an increase in net income of $1,179 million and additional depreciation expense of $884 million. The cash provided by operating activities during the first nine months of fiscal 2018 was offset by a decrease in working capital movements of $378 million and an increase in unrealized foreign currency exchange loss of $24 million, comprised of a $44 million loss in fiscal 2018 compared to a $20 million loss in fiscal 2017.
Net cash provided by investing activities during the nine months ended December 31, 2017 was $213 million as compared to net cash used by investing activities of $825 million during the comparable period of the prior fiscal year. The increase of $1,038 million was predominately due to net cash provided by acquisitions of $781 million, compared to cash paid for acquisitions of $434 million in the comparable period of the prior fiscal year. The increase in cash provided by acquisitions is offset by additional cash payments for outsourcing contract costs of $200 million.
Net cash used in financing activities during the nine months ended December 31, 2017 was $1,136 million as compared to net cash provided by financing activities of $72 million during the comparable period of the prior fiscal year. The decrease in cash from financing activities of $1,208 million was primarily due to a decrease in credit facility draws, net of repayments of $482 million, additional payments on capitalized lease obligations of $613 million and additional payments on long-term debt obligations of $1,128 million. These cash outflows were offset by draws on long-term debt of $464 million and cash proceeds from bond issuance of $647 million.
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Capital Resources
See Note 18 - "Commitments and Contingencies" to the financial statements for discussion of general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."
As of | ||||||||
(in millions) | December 31, 2017 | March 31, 2017 | ||||||
Short-term debt and current maturities of long-term debt | $ | 2,173 | $ | 738 | ||||
Long-term debt, net of current maturities | 6,367 | 2,225 | ||||||
Total debt | $ | 8,540 | $ | 2,963 |
The $5.6 billion increase in total debt during the nine months ended December 31, 2017 was attributed primarily to debt assumed in connection with the Merger.
During the nine months ended December 31, 2017, we increased commitments under our revolving credit facility to approximately $3.8 billion from $3.0 billion pre-Merger and completed a senior bond offering in an aggregate principal amount of $650 million due 2021, the proceeds of which were used to retire the outstanding USD term loan due 2021. During the nine months ended December 31, 2017, we entered into an unsecured €400 million term loan agreement maturing in 2018 and entered into amendments to its existing AUD term loan to increase total borrowings to AUD $275 million. The proceeds from these borrowings were used to make prepayments to term loans maturing in 2022 and repay drawn revolving credit facilities.
We were in compliance with all financial covenants associated with our borrowings as of December 31, 2017 and December 30, 2016. For more information on our debt, see Note 10 - "Debt" to the financial statements.
The following table summarizes our capitalization ratios:
As of | ||||||||
(in millions) | December 31, 2017 | March 31, 2017 | ||||||
Total debt | $ | 8,540 | $ | 2,963 | ||||
Cash and cash equivalents | 2,926 | 1,263 | ||||||
Net debt(1) | $ | 5,614 | $ | 1,700 | ||||
Total debt | $ | 8,540 | $ | 2,963 | ||||
Equity | 13,202 | 2,166 | ||||||
Total capitalization | $ | 21,742 | $ | 5,129 | ||||
Debt-to-total capitalization | 39 | % | 58 | % | ||||
Net debt-to-total capitalization(1) | 26 | % | 33 | % |
(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.
The decrease in net debt-to-total capitalization was primarily due to a $3.9 billion increase in net debt and a $11.0 billion increase in equity, which were primarily a result of the Merger.
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As of December 31, 2017, our credit ratings were as follows:
Rating Agency | Rating | Outlook | Short Term Ratings | |||
Fitch | BBB+ | Stable | F-2 | |||
Moody's | Baa2 | Stable | P-2 | |||
S&P | BBB | Negative | - |
Liquidity
We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet normal operating requirements for the next 12 months. We expect to continue to use cash generated by operations as a primary source of liquidity; however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to draw on our multi-currency revolving credit facility or raise capital through the issuance of capital market debt instruments such as commercial paper, term loans, and bonds. However, there can be no guarantee that we will be able to obtain debt financing on acceptable terms 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) | December 31, 2017 | |||
Cash and cash equivalents | $ | 2,926 | ||
Available borrowings under our revolving credit facility | 3,422 | |||
Available borrowings under our lease credit facility | 57 | |||
Total liquidity | $ | 6,405 |
Share Repurchases
During the first three months of fiscal 2018, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. This program became effective on April 3, 2017 and no end date was established. During the nine months ended December 31, 2017, we repurchased 841,505 shares of our common stock, at an aggregate cost of $66 million.
Dividends
During the first three months of fiscal 2018, we announced a dividend policy targeting $0.18 per share beginning with our declaration date in June 2017 for the first quarter of fiscal 2018, and $0.72 per share for full year fiscal 2018, subject to customary board review and approval prior to declaration. During the nine months ended December 31, 2017, we declared cash dividends to our stockholders of $0.54 per share, or approximately $157 million in the aggregate.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to arrangements that include guarantees, the receivables securitization facility, receivables sales arrangements and financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheets. There have been no material changes to our off-balance sheet arrangements reported under Part II, Item 7 of CSC's Annual Report on Form 10-K other than as disclosed below and in Note 5 - "Sale of Receivables" and Note 18 - "Commitments and Contingencies" to the financial statements in this Quarterly Report on Form 10-Q.
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Contractual Obligations
DXC's contractual obligations have materially changed since April 1, 2017, as a result of the Merger. Significant increases in debt included $1.8 billion in senior notes and $2.0 billion in term loans, see Note 10 - "Debt" for further information.
The increases in capital lease obligations, future minimum operating lease liabilities and purchase obligations primarily increased from March 31, 2017 to December 31, 2017 as a result of the Merger. The following table summarizes our contractual obligations as of December 31, 2017:
(in millions) | Less than 1 year | 2-3 years | 4-5 years | More than 5 years | Total | |||||||||||||||
Debt (1) | $ | 66 | $ | 1,070 | $ | 2,216 | $ | 2,240 | $ | 5,592 | ||||||||||
Capitalized lease liabilities | 196 | 1,064 | 239 | 19 | 1,518 | |||||||||||||||
Operating leases | 196 | 1,131 | 437 | 720 | 2,484 | |||||||||||||||
Purchase obligations(2) | 664 | 4,296 | 775 | 447 | 6,182 | |||||||||||||||
Interest and preferred dividend payments (3) | 40 | 369 | 294 | 402 | 1,105 | |||||||||||||||
Totals(4) | $ | 1,162 | $ | 7,930 | $ | 3,961 | $ | 3,828 | $ | 16,881 |
(1) Amounts represent scheduled principal cash payments of long-term debt and mandatory redemption of preferred stock of a consolidated subsidiary.
(2) Includes long-term purchase agreements with certain software, hardware, telecommunication and other service providers and exclude agreements that are cancelable without penalty. If we do not meet the specified service minimums, we may have an obligation to pay the service provider a portion of or the entire shortfall. Purchase obligations assumed from HPES will reflect a significant increase as a result of newly executed contracts.
(3) Amounts represent scheduled interest payments on long-term debt and scheduled dividend payments associated with the mandatorily redeemable preferred stock outstanding excluding contingent dividends associated with the participation and variable appreciation premium features.
(4) We have excluded the estimated future benefit payments under our Pension and OPEB plans and the estimated liability related to unrecognized tax benefits from this table because they have not materially changed since March 31, 2017 other than as a result of the Merger. For changes due to the Merger, see Note 3 - "Acquisitions".
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider the following policies to be critical because of their complexity and the high degree of judgment involved in implementing them: revenue recognition, income taxes, business combinations, defined benefit plans and valuation of assets. We have discussed the selection of our critical accounting policies and the effect of estimates with the audit committee of our board of directors.
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 are subject to specific accounting guidance that may require significant estimates, including contracts subject to percentage-of-completion accounting or which include multiple-element deliverables.
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Percentage-of-completion method
Certain software development projects and all long-term construction-type contracts require the use of estimates of completion in the application of the percentage-of-completion accounting method, whereby the determination of revenues and costs on a contract through its completion can require significant judgment and estimation. Under this method, and subject to the effects of changes in estimates, we recognize revenues using an estimated margin at completion as contract milestones or other input or output-based measures are achieved. This can result in costs being deferred as work in process until contractual billing milestones are achieved. Alternatively, this can result in revenues recognized in advance of billing milestones if output-based or input-based measures are achieved. Contracts that require estimates at completion using the percentage-of-completion method accounted for approximately 2.3% of our revenues.
The percentage-of-completion method requires estimates of revenues, costs and profits over the entire term of the contract, including estimates of resources and costs necessary to complete performance. The cost estimation process is based upon the professional knowledge and experience of our software and systems engineers, program managers, and financial professionals. We follow this method because reasonably dependable estimates of the revenues and costs applicable to various elements of a contract can be made; however, some estimates are particularly difficult for activities involving state-of-the-art technologies such as system development projects. Key factors that are considered in estimating the work to be completed and ultimate contract profitability include the availability and productivity of labor, the nature and complexity of the work to be performed, results of testing procedures and progress toward completion. Management regularly reviews project profitability and the underlying estimates. A significant change in an estimate on one or more contracts could have a material effect on our results of operations. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become evident.
We periodically negotiate modifications to the scope, schedule, and price of contracts accounted for on a percentage-of-completion basis. Accounting for such changes prior to formal contract modification requires evaluation of the characteristics and circumstances of the effort completed and assessment of probability of recovery. If recovery is deemed probable, we may, as appropriate, either defer the costs until the parties have agreed on the contract change or recognize the costs and related revenues as current period contract performance.
Multiple-element arrangements
Many of our contracts require us to provide a range of services or elements to our customers, which may include a combination of services, products or both. As a result, significant judgment may be required to determine the appropriate accounting, including whether the elements specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, when considered appropriate, how the total revenues should be allocated among the elements and the timing of revenue recognition for each element. If vendor specific objective evidence is not available, allocation of total contract consideration to each element requires estimating the fair value or selling price of each element based on third party evidence or management's best estimate of selling price for the deliverables when third party evidence ("TPE") is not available. TPE is established by considering our competitors' prices for comparable product and service offerings in the market in which we operate. When we conclude that comparable products or services are sold by competitors to similarly situated customers, we consult available information sources such as published list prices, quoted market prices, and industry reports to estimate TPE. We establish a best estimate of selling price consistent with our existing pricing practices involving a cost-plus-reasonable-margin methodology as well as comparison of the margins to those realized on recent contracts for similar products or services in that market. Once the total revenues have been allocated to the various contract elements, revenues for each element are recognized based on the relevant revenue recognition method for the services performed or elements delivered if the revenue recognition criteria have been met. 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.
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 adjustment of valuation allowances accordingly. In addition,
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our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. For example, we are currently undergoing an IRS audit for fiscal 2011 through 2016 U.S. Federal tax returns.
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 in Indian subsidiaries 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 what our ETR will be in the future because there is uncertainty regarding these factors.
As a result of the Merger and changes in U.S. cash requirements, a deferred tax liability of $545 million was recorded for U.S. income taxes based on the estimated historical taxable earnings of the HPES foreign subsidiaries. In addition, we recorded an estimated liability of $50 million for India DDT tax based on estimated historical taxable earnings of the HPES India subsidiary. These liabilities were recorded as part of acquisition accounting.
As a result of the Act, we have changed our permanently reinvested assertion on the remaining CSC foreign subsidiaries and will no longer consider current and accumulated earnings for all non-U.S. subsidiaries permanently reinvested, except for current year Indian earnings. The deferred tax liability of $575 million has been released and our estimated liability for India DDT was increased by $30 million to $80 million to include estimated historical taxable earnings for CSC Indian subsidiaries. For those investments from which we were able to make a reasonable estimate of the tax effects of our change in assertion, we have recorded a provisional estimate for withholding taxes, state taxes, and India DDT of $115 million. For those investments from which we were not able to make a reasonable estimate, we have not recorded any deferred taxes. We will record the tax effects of any change in our prior assertion with respect to these investments and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018.
Considerations impacting the recoverability of deferred tax assets include the period of expiration of the deferred tax asset and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the deferred tax asset relates. In determining whether the deferred tax assets are realizable, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies, and recent financial operations. We recorded a valuation allowance against deferred tax assets of approximately $1.1 billion as of March 31, 2017 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.
Changes in tax laws, such as the Act or changes in tax laws resulting from the Organization for Economic Co-operation and Development’s multi-jurisdictional plan of action to address “base erosion and profit shifting” could impact our effective tax rate. The calculation of our tax liabilities involves uncertainties in the application of complex changing tax regulations. As discussed in Note 13 - "Income Taxes", for example, the Act provides provisions that limit interest expense, provide for immediate expensing of qualified assets, further limits executive compensation deductions, generally eliminates Federal tax on foreign dividend distributions, subjects certain payments from U.S. corporations to foreign related parties to additional taxes, places restrictions or eliminates certain exclusions, deductions and credits and generally broadens the tax base. Further guidance for these provisions is forthcoming and the laws are subject to change in future periods.
The Finance Act of 2012 (the "2012 Finance Act") was signed into law in India on May 28, 2012. The 2012 Finance Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized and challenged in the Indian courts; however, there is no assurance that such a challenge will be successful. We have engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations involving Indian companies. The Indian tax authorities may seek to apply the provisions of the 2012 Finance Act to these prior transactions and seek to tax us directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. We believe that the 2012 Finance Act does not apply to these prior acquisitions and that we have strong defenses against any claims that might be raised by the Indian tax authorities.
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The U.K. Finance (No 2) Act 2017 was passed into law on 16 November 2017, enacting measures deferred from the Finance Act 2017-19. The legislation imposes, with effect from 1 April 2017, restrictions on the utilization of prior period losses against current period profits and limitations on interest deductions. We do not expect there to be a material impact on our consolidated financial statements as a result of this legislation.
Business Combinations
We account for the acquisition of a business using the acquisition method of accounting, which requires us to estimate the fair values of the assets acquired and liabilities assumed. This includes acquired intangible assets such as customer-related intangibles, the liabilities assumed, and contingent consideration, if any. Liabilities assumed may include litigation and other contingency reserves existing at the time of acquisition and require judgment in ascertaining the related fair values. Independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities. Such appraisals are based on significant estimates provided by us, such as forecasted revenues or profits utilized in determining the fair value of contract-related acquired intangible assets or liabilities. Significant changes in assumptions and estimates subsequent to completing the allocation of the purchase price to the assets and liabilities acquired, as well as differences in actual and estimated results, could result in material impacts to our financial results. Adjustments to the fair value of contingent consideration are recorded in earnings. Additional information related to the acquisition date fair value of acquired assets and liabilities obtained during the allocation period, not to exceed one year, may result in changes to the recorded values of acquired assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.
Defined Benefit Plans
The computation of our pension and other post-retirement benefit costs and obligations is dependent on various assumptions. Inherent in the application of the actuarial methods are key assumptions, including discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases, and medical cost trend rates. Our management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on observable inputs for similar assets or on significant unobservable inputs if not available.
Two of the most significant assumptions are the expected long-term rate of return on plan assets and the discount rate. 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.
Valuation of Assets
We review long-lived assets, intangible assets, and goodwill for impairment in accordance with our accounting policy disclosed in Note 1 of CSC's Annual Report on Form10-K for the period ending March 31, 2017. 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 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.
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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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational company, we are exposed to certain market risks such as changes in interest rates and foreign currency exchange rates. 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, whereas changes in foreign currency exchange rates can impact our foreign currency denominated monetary assets and liabilities and forecasted transactions in foreign currency. 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 tor trading or speculative purposes.
Presented below is a description of our risks together with a sensitivity analysis, performed annually, of each of these risks based on selected changes in market rates. 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. 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. These analyses reflect management's view of changes that are reasonably possible to occur over a one-year period. Our market risk exposures relative to interest rates and currency rates, as discussed below, have not changed materially as compared to prior fiscal year due to the Merger.
Interest Rate Risk
As of December 31, 2017, we had outstanding debt with varying maturities for an aggregate carrying amount of $8.5 billion, of which $4.2 billion was floating rate debt. Most of our variable 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. Pursuant to our interest rate and risk management strategy we had a series of interest rate swap agreements with a total notional amount of $625 million. These instruments hedged the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted $625 million of our floating interest rate debt into fixed interest rate debt. As of December 31, 2017, an assumed 10% unfavorable change in interest rates would not be material to our condensed consolidated results of operations or cash flows. A change in interest rates related to our long-term debt would not have had a material impact on our financial statements as we do not record our debt at fair value.
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 certain 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 the three and nine months ended December 31, 2017 due primarily to the volatility of the 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 are reported in current period earnings within Other (income) expense, net in the condensed consolidated 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
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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 condensed consolidated statements of comprehensive income and subsequently classified into Net income in the period during which the hedged transactions are recognized in Net income. During fiscal 2018, approximately 56% of our revenues were generated outside of the U.S. An unfavorable 10% change in the value of the U.S. dollar against all currencies would have changed revenues by approximately 6%, or $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 before income taxes. As such, in the view of management, the resulting impact would not be material to our condensed consolidated results of operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this report to ensure that information required to be disclosed by us in the SEC reports (i) is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that DXC's disclosure controls and procedures were effective as of the end of the period covered by this report and that our condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.
Changes in Internal Control Over Financial Reporting
As previously disclosed in Item 4 of our Quarterly Report on Form 10-Q for the three months ended September 30, 2017, we implemented a new consolidation and reporting system which consolidates the results of all our subsidiaries including the entities acquired in the Merger. The system implementation was completed during the three months ended December 31, 2017. We have modified, and will continue to monitor and evaluate, our internal controls relating to our consolidation and reporting processes. The changes in internal controls relating to our consolidation and reporting processes have not materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to evaluate and test control changes in order to certify in Management's Annual Report on Internal Control over Financial Reporting as of our fiscal year ending March 31, 2018 on the effectiveness, in all material respects, of our internal controls over financial reporting.
As previously disclosed in Item 4 of our Quarterly Report on Form 10-Q for the three-month period ended September 30, 2017, on April 1, 2017, we completed the strategic combination of CSC with HPES to form DXC, see Note 3 - "Acquisitions" for further information. DXC common stock began regular-way trading under the symbol "DXC" on the New York Stock Exchange on April 3, 2017. As part of our ongoing integration activities, we continue to evaluate our internal controls and procedures to the acquired business and to adjust and augment our company-wide controls and our integration controls to reflect the risks inherent in an acquisition of this magnitude. Otherwise, there were no changes in our internal control over financial reporting during the three and nine months ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 18 - "Commitments and Contingencies" to the financial statements under the caption “Contingencies” for information regarding legal proceedings in which we are involved.
Item 1A. | RISK FACTORS |
Our operations and financial results are subject to various risks and uncertainties, including the risks discussed in Part II, Item 1A-Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 and September 30, 2017, which could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. Past 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, the additional risks listed below, as well as other variables and should not be relied upon to project future period results.
Risks Related to Our Business
Recent 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. Many of these changes are 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 Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain impacts of the legislation. In addition, it is unclear 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, the reduction of the U.S. corporate income tax rate will require a write-down of our deferred income tax liabilities resulting in a material noncash benefit against earnings in the third quarter of fiscal year 2018, the period in which the tax legislation was enacted, which may be subject to further adjustment in subsequent periods throughout fiscal years 2018 and 2019 in accordance with recent interpretive guidance issued by the SEC, and the repatriation tax will result in a material amount of additional U.S. tax liability, the amount of which is reflected as tax expense in fiscal year 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 the legislation that we have not yet identified.
While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our securities.
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Risks Related to the Proposed USPS Separation and Mergers (defined below)
The proposed USPS Separation and Mergers are contingent upon the satisfaction of a number of conditions, and the USPS Separation and Mergers may not be consummated on the terms or timeline currently contemplated.
On October 11, 2017, our board of directors unanimously approved a plan to combine our USPS business with Vencore Holding Corporation (“Vencore”) and KGS Holding Corporation (“KeyPoint”) to form a separate, independent publicly traded company to serve U.S. public sector clients (the “USPS Separation and Mergers”).
As previously announced, aspects of the proposed USPS Separation and Mergers are expected to include: (1) the transfer by DXC of certain subsidiary entities holding our USPS business to Ultra SC Inc. (“Ultra SpinCo”) (the “USPS Reorganization”); (2) the receipt by DXC of $1.05 billion in consideration from Ultra SpinCo via a cash distribution and/or issuance of Ultra SpinCo debt securities (the “Distribution Consideration”) as part of the USPS Reorganization; (3) the distribution by DXC to its stockholders of all of the issued and outstanding shares of common stock, par value $0.01 per share, of Ultra SpinCo by way of a pro rata dividend (the “Distribution,” and together with the USPS Reorganization, the “USPS Separation”); and (4) the acquisition of Vencore and KeyPoint by Ultra SpinCo in exchange for Ultra SpinCo common shares and approximately $400 million of cash merger consideration (the “Mergers”). Upon consummation of the USPS Separation and Mergers, DXC shareholders are expected to own approximately 86 percent of the combined company’s common shares, and funds managed by Veritas Capital and its affiliates are expected to own approximately 14% of the combined company’s common shares.
The terms and conditions of the USPS Separation and Mergers are as set forth in an Agreement and Plan of Merger dated as of October 11, 2017 by and among DXC, Ultra SpinCo, Ultra First VMS Inc., Ultra Second VMS LLC, Ultra KMS Inc., Vencore, KeyPoint, The SI Organization Holdings LLC and KGS Holding LLC (the “Merger Agreement”) and, further to the Merger Agreement, other separation agreements to be entered into by and between DXC and Ultra SpinCo prior to completion of the USPS Separation and Mergers (the “Separation Agreements”).
The consummation of the Mergers is subject to certain conditions, including (i) the completion of the USPS Reorganization, the payment of the Distribution Consideration, and the completion of the Distribution, (ii) the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which was satisfied on December 22, 2017 (iii) the effectiveness of the registration statement to be filed with the Securities and Exchange Commission and the approval for listing on the New York Stock Exchange or the NASDAQ Global Market of the shares of Ultra SpinCo common stock to be issued in the Distribution, (iv) the accuracy of the parties’ representations and warranties and the performance of their respective covenants contained in the Merger Agreement, and (v) our receipt of an opinion of tax counsel to the effect that the USPS Separation should qualify as a tax-free transaction for U.S. federal income tax purposes. For these and other reasons, the USPS Separation and Mergers may not be completed on the terms or timeline contemplated, if at all.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None during the period covered by this report.
Use of Proceeds
Not applicable.
Issuer Purchases of Equity Securities
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The following table provides information on a monthly basis for the quarter ended December 31, 2017 with respect to the Company’s purchase of equity securities:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |||||
October 1, 2017 to October 31, 2017 | — | $— | — | $1,934,396,361 | |||||
November 1, 2017 to November 30, 2017 | — | $— | — | $1,934,396,361 | |||||
December 1, 2017 to December 31, 2017 | — | $— | — | $1,934,396,361 |
On April 3, 2017, DXC 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 DXC common stock. 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.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
On February 7, 2018, the Company completed its previously announced offer (the "Exchange Offer") to exchange any and all validly tendered and not validly withdrawn 7.45% Senior Notes due 2029 (the “Old Notes”) issued by Enterprise Services LLC, a wholly owned subsidiary of the Company, for new 7.45% Senior Notes due 2029 (the “New Notes”) of the Company.
Pursuant to the Exchange Offer, $233,633,000 aggregate principal amount of the Old Notes were validly tendered and accepted for exchange. In connection with the settlement of the Exchange Offer, on February 7, 2018, the Company issued $233,633,000 aggregate principal amount of New Notes in exchange for such validly tendered and accepted Old Notes.
The New Notes have been registered under the Securities Act of 1933, as amended (the “Act”), pursuant to a registration statement on Form S-4 (the “Registration Statement”). The Registration Statement was filed with the Securities and Exchange Commission on December 19, 2017, amended on January 8, 2018, and was declared effective on January 8, 2018. The Exchange Offer was made pursuant to the terms and conditions set forth in the Company’s prospectus, dated as of January 8, 2018, which forms a part of the Registration Statement.
The New Notes are governed by the terms of an indenture, dated as of March 27, 2017, between the Company and U.S. Bank National Association (the “Trustee”), as supplemented by the fifth supplemental indenture, dated as of February 7, 2018 (the “Supplemental Indenture”), between the Company and the Trustee. The foregoing summary of the Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the complete terms of the Supplemental Indenture, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 4.5 and is incorporated herein by reference.
ITEM 6. EXHIBITS
Exhibit Number | Description of Exhibit |
2.1 | |
2.2 | |
2.3 | |
2.4 | |
2.5 | |
2.6 | |
2.7 | |
2.8 | |
2.9 |
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2.10 | |
2.11 | |
2.12 | |
2.13 | |
2.14 | |
3.1 | |
3.2 | |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.7 | |
4.8 | |
4.9 | |
4.10 | |
4.11 | |
4.12 | |
31.1 | |
31.2 | |
32.1** | |
32.2** | |
101.INS | XBRL Instance |
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101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation |
101.LAB | XBRL Taxonomy Extension Labels |
101.PRE | XBRL Taxonomy Extension Presentation |
* Management contract or compensatory plan or agreement ** Furnished, not filed |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DXC TECHNOLOGY COMPANY | |||
Dated: | February 8, 2018 | By: | /s/ Neil A. Manna |
Name: | Neil A. Manna | ||
Title: | Senior Vice President, Corporate Controller Principal Accounting Officer |
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