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DXC Technology Co - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES
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 September 30, 2018
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
downloada05.jpg
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

Large Accelerated Filer     x                Accelerated Filer o

Non-accelerated Filer o

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

280,113,621 shares of common stock, par value $0.01 per share, were outstanding on October 31, 2018.


TABLE OF CONTENTS

Item
 
 
Page
 
 
 
 
 
 
 
1.
 
2.
 
3.
 
4.
 
 
 
 
 
 
 
 
 
 
 
 
1.
 
1A.
 
2.
 
3.
 
4.
 
5.
 
6.
 




PART I

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Financial Statements
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 




1

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
 
Three Months Ended
 
Six Months Ended
(in millions, except per-share amounts)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Revenues
 
$
5,013

 
$
5,453

 
$
10,295

 
$
10,689

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
3,518

 
3,870

 
7,385

 
8,179

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
569

 
644

 
1,009

 
1,037

Depreciation and amortization
 
484

 
482

 
955

 
824

Restructuring costs
 
157

 
188

 
342

 
375

Interest expense
 
83

 
73

 
168

 
147

Interest income
 
(33
)
 
(16
)
 
(65
)
 
(32
)
Other income, net
 
(97
)
 
(72
)
 
(191
)
 
(216
)
Total costs and expenses
 
4,681

 
5,169

 
9,603

 
10,314

 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
332

 
284

 
692

 
375

Income tax expense
 
73

 
79

 
202

 
62

Income from continuing operations
 
259

 
205

 
490

 
313

Income from discontinued operations, net of taxes
 
—

 
60

 
35

 
125

Net income
 
259

 
265

 
525

 
438

Less: net (loss) income attributable to non-controlling interest, net of tax
 
(3
)
 
9

 
4

 
23

Net income attributable to DXC common stockholders
 
$
262

 
$
256

 
$
521

 
$
415

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.93

 
$
0.69

 
$
1.72

 
$
1.02

Discontinued operations
 
—

 
0.21

 
0.12

 
0.44

 
 
$
0.93

 
$
0.90

 
$
1.84

 
$
1.46

Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.92

 
$
0.67

 
$
1.69

 
$
1.00

Discontinued operations
 
—

 
0.21

 
0.12

 
0.43

 
 
$
0.92

 
$
0.88

 
$
1.81

 
$
1.43

 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.19

 
$
0.18

 
$
0.38

 
$
0.36



The accompanying notes are an integral part of these condensed consolidated financial statements.





2


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 
 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
259

 
$
265

 
$
525

 
$
438

Other comprehensive (loss) income, net of taxes:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax (1)
 
(66
)
 
(45
)
 
(408
)
 
109

 
Cash flow hedges adjustments, net of tax (2)
 
2

 
(2
)
 
(30
)
 
(5
)
 
Available-for-sale securities, net of tax
 
—

 
—

 
(1
)
 
—

 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost, net of tax (3)
 
(5
)
 
(3
)
 
(6
)
 
(7
)
 
Pension and other post-retirement benefit plans, net of tax
 
(5
)
 
(3
)
 
(6
)
 
(7
)
Other comprehensive (loss) income, net of taxes
 
(69
)
 
(50
)
 
(445
)
 
97

Comprehensive income
 
190

 
215

 
80

 
535

 
Less: comprehensive (loss) income attributable to non-controlling interest
 
(2
)
 
36

 
(1
)
 
28

Comprehensive income attributable to DXC common stockholders
 
$
192

 
$
179

 
$
81

 
$
507

        

(1) Tax expense related to foreign currency translation adjustments was $5 and $2 for the three and six months ended September 30, 2017, respectively.
(2) Tax benefit related to cash flow hedge adjustments was $17 and $10 for the three and six months ended September 30, 2018, respectively, and $3 and $3 for the three and six months ended September 30, 2017, respectively.
(3) Tax benefit related to amortization of prior service costs was $1 and $1 for the three and six months ended September 30, 2018, respectively, and $2 and $2 for the three and six months ended September 30, 2017, respectively.



The accompanying notes are an integral part of these condensed consolidated financial statements.



3

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
As of
(in millions, except per-share and share amounts)
 
September 30, 2018
 
March 31, 2018
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,780

 
$
2,593

Receivables and contract assets, net of allowance for doubtful accounts of $62 and $40
 
4,928

 
5,481

Prepaid expenses
 
630

 
496

Other current assets
 
477

 
469

Assets of discontinued operations
 
—

 
581

Total current assets
 
8,815

 
9,620

 
 
 
 
 
Intangible assets, net of accumulated amortization of $3,788 and $3,369
 
6,602

 
7,179

Goodwill
 
7,417

 
7,619

Deferred income taxes, net
 
326

 
373

Property and equipment, net of accumulated depreciation of $3,615 and $3,686
 
3,281

 
3,363

Other assets
 
2,441

 
2,404

Assets of discontinued operations - non-current
 
—

 
3,363

Total Assets
 
$
28,882

 
$
33,921

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
1,618

 
$
1,918

Accounts payable
 
1,358

 
1,513

Accrued payroll and related costs
 
734

 
744

Accrued expenses and other current liabilities
 
3,268

 
3,120

Deferred revenue and advance contract payments
 
1,442

 
1,641

Income taxes payable
 
94

 
127

Liabilities of discontinued operations
 
—

 
789

Total current liabilities
 
8,514

 
9,852

 
 
 
 
 
Long-term debt, net of current maturities
 
5,409

 
6,092

Non-current deferred revenue
 
301

 
795

Non-current income tax liabilities and deferred tax liabilities
 
1,219

 
1,166

Other long-term liabilities
 
1,602

 
1,723

Liabilities of discontinued operations - long-term
 
—

 
456

Total Liabilities
 
17,045

 
20,084

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $.01 per share, authorized 1,000,000 shares, none issued as of September 30, 2018 and March 31, 2018
 
—

 
—

Common stock, par value $.01 per share, authorized 750,000,000 shares, issued 282,519,184 as of September 30, 2018 and 286,393,147 as of March 31, 2018
 
3

 
3

Additional paid-in capital
 
11,848

 
12,210

Retained earnings
 
136

 
1,301

Accumulated other comprehensive (loss) income
 
(382
)
 
58

Treasury stock, at cost, 1,241,024 and 1,016,947 shares as of September 30, 2018 and March 31, 2018
 
(105
)
 
(85
)
Total DXC stockholders’ equity
 
11,500

 
13,487

Non-controlling interest in subsidiaries
 
337

 
350

Total Equity
 
11,837

 
13,837

Total Liabilities and Equity
 
$
28,882

 
$
33,921


The accompanying notes are an integral part of these condensed consolidated financial statements.

4

DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
525

 
$
438

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,002

 
904

Share-based compensation
 
41

 
58

Gain on dispositions
 
(65
)
 
—

Unrealized foreign currency exchange (gains) losses
 
(12
)
 
4

Other non-cash charges, net
 
(18
)
 
15

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
(Increase) decrease in assets
 
(447
)
 
45

(Decrease) increase in liabilities
 
(141
)
 
46

Net cash provided by operating activities
 
885

 
1,510

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(133
)
 
(123
)
Payments for transition and transformation contract costs
 
(183
)
 
(176
)
Software purchased and developed
 
(125
)
 
(86
)
Cash acquired through Merger
 
—

 
974

Payments for acquisitions, net of cash acquired
 
(43
)
 
(152
)
Business dispositions
 
(65
)
 
—

Deferred purchase price receivable
 
409

 
33

Proceeds from sale of assets
 
57

 
20

Other investing activities, net
 
(1
)
 
6

Net cash (used in) provided by investing activities
 
(84
)
 
496

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings of commercial paper
 
1,158

 
1,182

Repayments of commercial paper
 
(1,158
)
 
(1,067
)
Repayment of borrowings under lines of credit
 
—

 
(335
)
Borrowings on long-term debt, net of discount
 
483

 
615

Principal payments on long-term debt
 
(2,036
)
 
(1,109
)
Payments on capital leases and borrowings for asset financing
 
(475
)
 
(443
)
Borrowings for USPS spin transaction
 
1,114

 
—

Proceeds from bond issuance
 
753

 
647

Proceeds from stock options and other common stock transactions
 
36

 
92

Taxes paid related to net share settlements of share-based compensation awards
 
(20
)
 
(66
)
Repurchase of common stock
 
(447
)
 
(66
)
Dividend payments
 
(105
)
 
(72
)
Other financing activities, net
 
11

 
1

Net cash used in financing activities
 
(686
)
 
(621
)
Effect of exchange rate changes on cash and cash equivalents
 
(64
)
 
49

Net increase in cash and cash equivalents
 
51

 
1,434

Cash and cash equivalents at beginning of year
 
2,729

 
1,268

Cash and cash equivalents at end of period
 
$
2,780

 
$
2,702

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)
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock (2)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Balance at March 31, 2018
286,393

 
$
3

$
12,210

$
1,301

$
58

$
(85
)
$
13,487

$
350

$
13,837

Cumulative effect of adopting the new revenue standard


 




114





114



114

Net Income
 
 
 
 
521

 
 
521

4

525

Other comprehensive loss
 
 
 
 
 
(440
)
 
(440
)
(5
)
(445
)
Share-based compensation expense
 
 
 
40

 
 
 
40

 
40

Acquisition of treasury stock
 
 
 
 
 
 
(20
)
(20
)
 
(20
)
Share repurchase program
(5,228
)
 


(251
)
(200
)
 
 
(451
)
 
(451
)
Stock option exercises and other common stock transactions
1,354

 


26

 
 

26

 
26

Dividends declared
 
 
 
 
(109
)
 
 
(109
)
 
(109
)
Non-controlling interest distributions and other
 
 
 
 


 
 
—

(12
)
(12
)
Divestiture of USPS
 
 
 
(177
)
(1,491
)


 
(1,668
)


(1,668
)
Balance at September 30, 2018
282,519

 
$
3

$
11,848

$
136

$
(382
)
$
(105
)
$
11,500

$
337

$
11,837

 
 
 
 
 
 
 
 
 
 
 
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
(Accumulated Deficit) Retained Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
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(1)
141,741

 
2

9,848

 
 
 
9,850

61

9,911

Net income
 
 
 
 
415

 
 
415

23

438

Other comprehensive income
 
 
 
 
 
92

 
92

5

97

Share-based compensation expense
 
 
 
57

 
 
 
57

 
57

Acquisition of treasury stock
 
 
 
 
 
 
(61
)
(61
)
 
(61
)
Share repurchase program
(842
)
 


(36
)
(30
)
 
 
(66
)
 
(66
)
Stock option exercises and other common stock transactions
3,745

 


70

 
 
 
70

 
70

Dividends declared
 
 
 
 
(105
)
 
 
(105
)
 
(105
)
Balance at September 30, 2017
285,943

 
$
3

$
12,158

$
110

$
(70
)
$
(61
)
$
12,140

$
367

$
12,507


(1) See Note 3 - "Acquisitions"
(2) 1,241,024 treasury shares as of September 30, 2018



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 a world leading independent, end-to-end IT services company, serving nearly 6,000 private and public-sector clients from a diverse array of industries across 70 countries. The company's technology independence, global talent and extensive partner network deliver transformative digital offerings and solutions that help clients harness the power of innovation to thrive on change.

Basis of Presentation

In order to make this report easier to read, DXC refers throughout to (i) the interim unaudited Condensed Consolidated Financial Statements as the “financial statements,” (ii) the Condensed Consolidated Statements of Operations as the “statements of operations,” (iii) the Condensed Consolidated Statement of Comprehensive Income as the "statements of comprehensive income," (iv) the Condensed Consolidated Balance Sheets as the “balance sheets,” and (v) the Condensed Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references throughout to numbered “Notes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.

The accompanying financial statements include the accounts of DXC, its consolidated subsidiaries, and those business entities in which DXC maintains a controlling interest. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Other investments are accounted for by the cost method. Non-controlling interests are presented as a separate component within equity in the balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the statements of operations and comprehensive income attributable to non-controlling interests are presented separately in the statements of comprehensive income. All intercompany transactions and balances have been eliminated. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation.

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 for the fiscal year ended March 31, 2018 ("fiscal 2018") included in Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2018.

Use of Estimates

The preparation of financial statements in conformity with GAAP, requires the Company's management to make estimates and assumptions that affect amounts reported in the financial statements. The Company bases its estimates on assumptions regarding historical experience, currently available information and anticipated developments that it believes are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. In the opinion of the Company's 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 shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019 ("fiscal 2019").


7
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Separation of USPS

On May 31, 2018, DXC completed the separation of its U.S. Public Sector business ("USPS") (the "Separation"), and combination with Vencore Holding Corp. ("Vencore") and KeyPoint Government Solutions ("Keypoint") (the "Mergers") to form Perspecta Inc. ("Perspecta"), an independent public company (collectively, the "USPS Separation and Mergers"). Under the terms of the separation agreements, on May 31, 2018, stockholders who held DXC common stock at the close of business on May 25, 2018 (the “Record Date”), received a distribution of one share of Perspecta common stock for every two shares of DXC common stock held as of the Record Date (the "Distribution"). See Note 4 - "Divestitures" for more information.

As a result of the Separation, the statements of operations, balance sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the statements of cash flows for all periods presented. In addition, USPS is no longer a reportable segment. DXC's reportable segments are Global Business Services ("GBS") and Global Infrastructure Services ("GIS").

Revenue Recognition

Effective April 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. Refer to Note 2 - “Recent Accounting Pronouncements” and Note 12 - “Revenue” for further discussion of the impact of adoption and other required disclosures. The Company’s accounting policy related to the new revenue standard is summarized below.

The Company's primary service offerings are information technology outsourcing, other professional services, or a combination thereof. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

DXC determines revenue recognition through the five-step model as follows:
•
Identification of the contract, or contracts, with a customer
•
Identification of the performance obligations in the contract
•
Determination of the transaction price
•
Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, the Company satisfies a performance obligation

DXC's IT outsourcing arrangements typically reflect a single performance obligation that comprises a series of distinct services which are substantially the same and provided over a period of time using the same measure of progress. Revenue derived from these arrangements is recognized over time based upon the level of services delivered in the distinct periods in which they are provided using an input method based on time increments. DXC's contracts often include upfront fees billed for activities to familiarize DXC with the client's operations, take control over their administration and operation, and adapt them to DXC's solutions. Upfront fees are generally recognized ratably over the contract period, which approximates the manner in which the services are provided. These activities typically do not qualify as performance obligations, and the related revenues are allocated to the relevant performance obligations and recognized ratably over time as the performance obligation is satisfied during the period in which DXC provides the related service, which is typically the life of the contract. Software transactions that include multiple performance obligations are described below.

For contracts with multiple performance obligations, DXC allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.

The transaction price of a contract is determined based on fixed and variable consideration. Variable consideration related to the Company’s IT outsourcing offerings often include volume-based pricing that are allocated to the distinct days of the services to which the variable consideration pertains. However, in certain cases, estimates of variable consideration,

8
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


including penalties, contingent milestone payments and rebates are necessary. The Company only includes estimates of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. These judgments involve consideration of historical and expected experience with the customer and other similar customers, and the facts and circumstances specific to the arrangement.

The Company generally provides its services under time and materials contracts, unit price contracts, fixed-price contracts, and software contracts for which revenue is recognized in the following manner:

Time and materials contracts. Revenue is recognized over time at agreed-upon billing rates when services are provided.

Unit-price contracts. Revenue is recognized over time based on unit metrics multiplied by the agreed upon contract unit price or when services are delivered.

Fixed-price contracts. For certain fixed-price contracts, revenue is recognized over time using a method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method (referred to as the percentage-of-completion cost-to-cost method). Under the percentage-of-completion cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion. A performance obligation's estimate at completion includes all direct costs such as materials, labor, subcontractor costs, overhead, and a ratable portion of general and administrative costs. If output or input measures are not available or cannot be reasonably estimated, revenue is deferred until progress can be measured and costs are not deferred unless they meet the criteria for capitalization. Under the percentage-of-completion cost-to-cost method, progress towards completion is measured based on either achievement of specified contract milestones, costs incurred as a proportion of estimated total costs, or other measures of progress when appropriate. Profit in a given period is reported at the estimated profit margin to be achieved on the overall contract.

Software contracts. Certain of DXC's arrangements involve the sale of DXC proprietary software, post contract customer support, and other software-related services. The standalone selling price generally is determined for each performance obligation using an adjusted market assessment approach based on the price charged where each deliverable is sold separately. In certain limited cases (typically for software licenses) when the historical selling price is highly variable, the residual approach is used. This approach allocates revenue to the performance obligation equal to the difference between the total transaction price and the observable standalone selling prices for the other performance obligations. Revenue from distinct software licenses is recognized at a point in time when the customer can first use the software license. If significant customization is required, software revenue is recognized as the related software customization services are performed in accordance with the percentage-of-completion method described above. Revenue for post contract customer support and other software services is recognized over time as those services are provided.

Practical Expedients and Exemptions

DXC does not adjust the promised amount of consideration for the effects of a significant financing component when the period between when DXC transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

In addition, the Company reports revenue net of any revenue-based taxes assessed by a governmental authority that are imposed on and concurrent with specific revenue-producing transactions, such as sales taxes and value-added taxes.

Contract Balances

The timing of revenue recognition, billings and cash collections results in accounts receivable (billed receivables, unbilled receivables and contract assets) and deferred revenue and advance contract payments (contract liabilities) on the Company's balance sheets. In arrangements that contain an element of customized software solutions, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g. monthly) or upon achievement of certain contractual milestones. Generally, billing occurs subsequent to revenue recognition, sometimes resulting in contract assets if the related billing is conditional upon more than just the passage of time. However, the Company sometimes receives advances or deposits from our customers, before revenue is recognized, which results in the generation of contract liabilities. Payment terms vary by type of product or service being

9
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


provided as well as by customer, although the term between invoicing and when payment is due is generally an insignificant period of time.

Costs to Obtain a Contract

Certain sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The majority of sales commissions are paid based on the achievement of quota-based targets. These costs are deferred and amortized on a straight-line basis over an average period of benefit determined to be five years. The Company determined the period of benefit considering the length of its customer contracts, its technology and other factors. The period of benefit approximates the average stated contract terms, excluding expected future renewals, because sales commissions are paid upon contract renewal in a manner commensurate with the initial commissions. Some commission payments are not capitalized because they are expensed during the fiscal year as the related revenue is recognized. Capitalized sales commissions costs are classified within other assets and amortized in selling, general and administrative expenses.

Costs to Fulfill a Contract

Certain contract setup costs incurred upon initiation or renewal of an outsourcing contract that generate or enhance resources to be used in satisfying future performance obligations are capitalized when they are deemed recoverable. Judgment is applied to assess whether contract setup costs are capitalizable. Costs that generate or enhance resources often pertain to activities that enhance the capabilities of the services, improve customer experience and establish a more effective and efficient IT environment. The Company recognizes these transition and transformation contract costs as intangible assets, which are amortized over the respective contract life.

Note 2 - Recent Accounting Pronouncements

Effective April 1, 2018, DXC adopted the following Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board:
Date Issued and ASU
Date Adopted and Method
Description
Impact
May 2014


ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)"


April 1, 2018 Modified-retrospective
The core principle of this update, and the subsequent amendments, 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 revenue and cash flows arising from customer contracts, and information regarding significant judgments and changes in judgments made. This update 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 adopted this standard using the modified retrospective method. The Company has applied the standard to only those contracts that were not completed at the adoption date. The adoption resulted in the following impacts.

The Company recorded a net increase to opening retained earnings, net of income taxes, of approximately $114 million as of April 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of certain sales commissions of approximately $158 million offset by a reduction in income tax assets and liabilities of approximately $40 million. In addition, the Company has recorded a reduction in contract liabilities of approximately $381 million and other current assets and other assets of $385 million, primarily related to the net down of certain long-term contract asset and contract liability balances and the change in timing of revenue and costs recognized related to our software contracts.
                                                                    Refer to Note 12 - “Revenue” for further discussion of the impact of adoption and other required disclosures.
 


10
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


March 2017

ASU 2017-07 “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"
April 1, 2018 Retrospective
This update is intended to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost in an entity's financial statements by requiring the service cost component be disaggregated from other components of net benefit costs and presented in the same line item or items as other compensation costs for the employees. Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. This update must be applied retrospectively.
DXC reclassified non-service cost components of net periodic pension (income) expense from "costs of services" and "selling, general and administrative" to "other income, net" in the statements of operations for the three and six months ended September 30, 2017. The aggregate service cost component of net periodic pension income remaining in "costs of services" and "selling, general and administrative" is $34 million and $66 million, for the three and six months ended September 30, 2017, respectively.

August 2016

ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"
April 1, 2018 Retrospective
This update addressed eight cash flow classification issues that have created diversity in practice, providing definitive guidance on classification of certain cash receipts and payments. This update must be adopted retrospectively for all periods presented but may be applied prospectively if retrospective application would be impracticable
ASU 2016-15 requires the company to classify cash receipts related to its beneficial interests in securitization transactions, which is the deferred purchase price (the “DPP”) recorded in connection with the Company's Receivables Securitization Facility, within investing activities in its statements of cash flows. The Company adopted ASU 2016-15 effective April 1, 2018, and retrospectively adjusted prior fiscal periods, using each month’s transactional activity as the unit of account in determining the portions of transferred trade receivables as operating activities and investing activities. The Company is evaluating whether a change is necessary in the unit of account used in determining the portions of transferred trade receivables pertaining to operating activities and investing activities to approximate each day’s transactional activity. The Company is unable to estimate the impact of such change for the current period and may revise its presentation of cash receipts related to the DPP in its next Quarterly Report and reflect the change on a retrospective basis to all periods presented, if practicable. See Note 6 - "Sale of Receivables" for more information about the Receivables Securitization Facility.

November 2016

ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force")
April 1, 2018 Retrospective
This update requires that amounts described as restricted cash or restricted cash equivalents must be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update must be applied retrospectively.

DXC reclassified restricted cash to beginning-of-period and end-of-period cash and cash equivalents on the statement of cash flows.

See Note 21 - "Reconciliation of Previously Reported Amounts to Recast Financial Statements" for the financial statement impact of the adoption of these ASU's.

11
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The following ASUs were recently issued but have not yet been adopted by DXC:
Date Issued and ASU
DXC Effective Date
Description
Impact
February 2016

ASU 2016-02 "Leases (Topic 842)"


Fiscal 2020
This update 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. Early adoption of this update is permitted. This update must be adopted using a modified retrospective transition at the beginning of the earliest period presented or at the adoption date recognizing a cumulative adjustment to the opening balance of retained earnings in the period of adoption and provides for certain practical expedients.
DXC is currently evaluating the effect the adoption of this standard will have on its existing accounting policies and the financial statements in future reporting periods. The Company expects there will be a material increase in assets and liabilities on its balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities for lease obligations that are currently classified as operating leases. The Company is in the process of implementing changes to its systems, processes and controls, including the implementation of a lease accounting software solution to comply with the new standard.
DXC expects to adopt certain transition expedients permitted under Topic 842, as follows:


DXC expects to adopt this standard on a modified retrospective basis beginning on the adoption date, with comparative period disclosures following ASC 840 requirements. DXC does not expect to reassess lease determination, lease classification or indirect cost capitalization for leases that commenced prior to the adoption date. DXC does not expect to recognize on the balance sheet leases that both (a) have a ‘lease term’ of 12 months or less and (b) do not contain a ‘reasonably certain’ purchase option.
                                                                
 

Other recently issued ASUs effective after September 30, 2018 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, Computer Sciences Corporation ("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 "HPES Merger"). The combination was accomplished through a series of transactions that included the transfer by HPE of its Enterprise Services business, HPES, to Everett, and spin-off by HPE of Everett on March 31, 2017, and the merger of Merger Sub with and into CSC on April 1, 2017. At the time of the HPES Merger, Everett was renamed DXC, and as a result of the HPES Merger, CSC became a direct wholly owned subsidiary of DXC. DXC common stock began regular-way trading on the New York Stock Exchange on April 3, 2017. The strategic combination of the two complementary businesses was to create a versatile global technology services business, well positioned to innovate, compete and serve clients in a rapidly changing marketplace.

The transaction involving HPES and CSC was a reverse merger acquisition, in which DXC was considered the legal acquirer of the business and CSC was 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 HPES Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the HPES Merger. DXC issued a total of 141,298,797 shares of DXC common stock to CSC stockholders, representing approximately 49.9% of the outstanding shares of DXC common stock immediately following the HPES Merger.


12
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Under the acquisition method of accounting, total consideration exchanged was:
(in millions)
 
Amount
Fair value of purchase consideration received by HPE stockholders(1) 
 
$
9,782

Fair value of HPES options assumed by CSC(2)
 
68

Total consideration transferred
 
$
9,850

        

(1) 
Represents the fair value of consideration received by HPE stockholders to give them 50.1% ownership in the combined company. The fair value of the purchase consideration transferred was based on a total of 141,865,656 shares of DXC common stock distributed to HPE stockholders as of the close of business on the record date (141,741,712 after the effect of 123,944 cancelled shares) at CSC's closing price of $69.01 per share on March 31, 2017.
(2) 
Represents the fair value of certain stock-based awards of HPES employees that were unexercised on March 31, 2017, which were converted to DXC stock-based awards.

The purchase price allocation for the HPES Merger was finalized during the fourth quarter of fiscal 2018. The Company's allocation of the purchase price to the assets acquired and liabilities assumed as of the HPES Merger date is as follows:
(in millions)
 
Fair Value
Cash and cash equivalents
 
$
938

Accounts receivable(1)
 
4,102

Other current assets
 
530

Total current assets
 
5,570

Property and equipment
 
2,581

Intangible assets
 
6,384

Other assets
 
1,571

Total assets acquired
 
16,106

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(4,605
)
Deferred revenue
 
(1,315
)
Long-term debt, net of current maturities
 
(4,806
)
Long-term deferred tax liabilities and income tax payable
 
(1,550
)
Other liabilities
 
(1,322
)
Total liabilities assumed
 
(13,598
)
Net identifiable assets acquired
 
2,508

Add: Fair value of non-controlling interests
 
(50
)
Goodwill
 
7,392

Total estimated consideration transferred
 
$
9,850

        

(1) Includes aggregate adjustments of $203 million received from HPE in accordance with the provisions of the Separation Agreement.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the HPES Merger date. The goodwill recognized with the HPES Merger was attributable to the synergies expected to be achieved by combining the businesses of CSC and HPES, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The goodwill arising from the HPES Merger was allocated to the Company's reportable segments as $2.8 billion to the GBS segment, $2.6 billion to the GIS segment and $2.0 billion to the USPS segment. The goodwill is not deductible for tax purposes. 

Subsequent to the HPES Merger, the Company divested USPS which was acquired in the HPES Merger. See Note 4 - "Divestitures" for additional information about the divestiture of USPS.




13
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Tribridge Acquisition

On July 1, 2017, DXC acquired all of the outstanding capital stock of Tribridge Holdings LLC, an independent integrator of Microsoft Dynamics 365, for total consideration of $152 million. The acquisition includes the Tribridge affiliate company, Concerto Cloud Services LLC. The combination of Tribridge with DXC expands DXC’s Microsoft Dynamics 365 global systems integration business.

The purchase price is allocated to assets acquired and liabilities assumed based upon determination of fair values at the date of acquisition as follows: $32 million to current assets, $4 million to property and equipment, $62 million to intangible assets other than goodwill, $24 million to current liabilities and $78 million to goodwill. The goodwill is primarily associated with the Company's GBS segment and is tax deductible. The amortizable lives associated with the intangible assets acquired includes customer relationships which have a 12-year estimated useful life.

Note 4 - Divestitures

Separation of USPS

On May 31, 2018, DXC completed the USPS Separation and Mergers to form Perspecta, an independent public company.

Implementation of the Separation and DXC's post-Separation relationship with Perspecta is governed by several agreements, including the following:

•
a Separation and Distribution Agreement;
•
an Employee Matters Agreement;
•
a Tax Matters Agreement;
•
an Intellectual Property Matters Agreement;
•
a Transition Services Agreement;
•
a Real Estate Matters Agreement; and,
•
a Non-US Agency Agreement.

These agreements provide for the allocation of assets, employees, liabilities and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between DXC and Perspecta attributable to periods prior to, at and after the Separation. In addition, DXC and Perspecta have service and commercial contracts that generally extend through fiscal 2023.

Pursuant to the Separation and Distribution Agreement, immediately prior to the Separation Perspecta made a net cash payment of $984 million to DXC, which reflects transaction consideration of $1,050 million less $66 million in principal amount of debt that was outstanding at a subsidiary of Perspecta. Perspecta financed the payment through borrowings under a new senior secured term loan facility.

J. Michael Lawrie serves as DXC's Chairman and Chief Executive Officer and Paul N. Saleh serves as DXC's Chief Financial Officer. Effective as of the Separation, Mr. Lawrie also serves as Chairman of Perspecta and Mr. Saleh also serves as a Director of Perspecta. Due to Mr. Lawrie's and Mr. Saleh's leadership positions at DXC and Perspecta, Perspecta is considered a related party under ASC 850 "Related Party Disclosures" for periods subsequent to the Separation. Transactions with Perspecta were immaterial to the Company's financial statements for the three and six months ended September 30, 2018 and balances due to and from Perspecta were immaterial to the Company's balance sheet as of September 30, 2018.

14
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The following is a summary of the assets and liabilities distributed as part of the Separation of USPS on May 31, 2018:

 
 
As of
(in millions)
 
May 31, 2018
Assets:
 
 
Cash and cash equivalents
 
$
95

Receivables, net
 
458

Prepaid expenses
 
82

Other current assets
 
35

Total current assets of discontinued operations
 
670

Intangible assets, net
 
882

Goodwill
 
2,029

Property and equipment, net
 
294

Other assets
 
157

Total non-current assets of discontinued operations
 
3,362

Total assets
 
$
4,032

 
 
 
Liabilities:
 
 
Short-term debt and current maturities of long-term debt
 
$
161

Accounts payable
 
165

Accrued payroll and related costs
 
17

Accrued expenses and other current liabilities
 
358

Deferred revenue and advance contract payments
 
53

Income tax payable
 
18

Total current liabilities of discontinued operations
 
772

Long-term debt, net of current maturities
 
1,320

Non-current deferred revenue
 
5

Non-current income tax liabilities and deferred tax liabilities
 
196

Other long-term liabilities
 
71

Total long-term liabilities of discontinued operations
 
1,592

Total liabilities
 
$
2,364




15
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following is a summary of the assets and liabilities of USPS that have been classified as assets and liabilities of discontinued operations:

 
 
As of
(in millions)
 
March 31, 2018
Assets:
 
 
Cash and cash equivalents
 
$
68

Receivables, net
 
432

Prepaid expenses
 
75

Other current assets
 
6

Total current assets of discontinued operations
 
581

Intangible assets, net
 
912

Goodwill
 
2,033

Property and equipment, net
 
283

Other assets
 
135

Total non-current assets of discontinued operations
 
3,363

Total assets
 
$
3,944

 
 
 
Liabilities:
 
 
Short-term debt and current maturities of long-term debt
 
$
155

Accounts payable
 
195

Accrued payroll and related costs
 
22

Accrued expenses and other current liabilities
 
346

Deferred revenue and advance contract payments
 
53

Income tax payable
 
18

Total current liabilities of discontinued operations
 
789

Long-term debt, net of current maturities
 
214

Non-current deferred revenue
 
7

Non-current income tax liabilities and deferred tax liabilities
 
163

Other long-term liabilities
 
72

Total long-term liabilities of discontinued operations
 
456

Total liabilities
 
$
1,245




16
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following is a summary of the operating results of USPS which have been reflected within income from discontinued operations, net of tax:

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2018(1)
 
September 30, 2017
Revenue
 
$
710

 
$
431

 
$
1,387

 
 
 
 
 
 
 
Costs of services
 
509

 
311

 
1,045

Selling, general and administrative
 
34

 
50

 
57

Depreciation and amortization
 
55

 
33

 
74

Restructuring costs
 
4

 
1

 
7

Interest expense
 
5

 
8

 
7

Other income, net
 
—

 
(25
)
 
—

Total costs and expenses
 
607

 
378

 
1,190

Total income from discontinued operations, before income taxes
 
103

 
53

 
197

Income tax expense
 
43

 
18

 
72

Total income from discontinued operations
 
$
60

 
$
35

 
$
125

        

(1) Results for the six months ended September 30, 2018 reflect operations through the Separation date of May 31, 2018, not the full
six-month period as shown for prior periods.

There was no gain or loss on disposition recognized as a result of the Separation.

The following selected financial information of USPS is included in the statements of cash flows:
 
 
Six Months Ended
(in millions)
 
September 30, 2018(1)
 
September 30, 2017
Depreciation
 
$
16

 
$
39

Amortization
 
$
17

 
$
35

Capital expenditures
 
$
—

 
$
(5
)
Significant operating non-cash items:
 
 
 
 
Gain on dispositions
 
$
24

 
$
—

        

(1)Results for the six months ended September 30, 2018 reflect cash flows through the Separation date of May 31, 2018, not the full six-month
period as shown for prior periods.


17
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 5 - Earnings per Share

Basic EPS is computed using the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects 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
 
Six Months Ended
(in millions, except per-share amounts)

September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income attributable to DXC common shareholders:
 
 
 
 
 
 
 
 
From continuing operations
 
$
262

 
$
196

 
$
486

 
$
290

From discontinued operations
 
$
—

 
$
60

 
$
35

 
$
125

 
 
 
 
 
 
 
 
 
Common share information:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
281.37

 
284.87

 
282.89

 
284.35

Dilutive effect of stock options and equity awards
 
4.41

 
4.42

 
4.64

 
5.03

Weighted average common shares outstanding for diluted EPS
 
285.78

 
289.29

 
287.53

 
289.38

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.93

 
$
0.69

 
$
1.72

 
$
1.02

Discontinued operations
 
$
—

 
$
0.21

 
$
0.12

 
$
0.44

Total
 
$
0.93

 
$
0.90

 
$
1.84

 
$
1.46

 
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.92

 
$
0.67

 
$
1.69

 
$
1.00

Discontinued operations
 
$
—

 
$
0.21

 
$
0.12

 
$
0.43

Total
 
$
0.92

 
$
0.88

 
$
1.81

 
$
1.43


Certain share based equity awards were excluded from the computation of dilutive EPS because inclusion of these awards would have had an anti-dilutive effect. The number of awards excluded were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Stock Options
 
—

 
32,060

 
—

 
41,327

RSUs
 
1,419

 
20,718

 
713

 
36,387

PSUs
 
—

 
2,844

 
—

 
1,430


Note 6 - Sale of Receivables

Receivables Securitization Facility

The Company has a $600 million accounts receivable securitization facility (as amended or supplemented to date, the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers") for the sale of commercial accounts receivable in the United States. Under the Receivables Facility, the Company and certain of its subsidiaries (the "Sellers") sell billed and unbilled accounts receivable to DXC Receivables LLC ("DXC Receivables"), a wholly owned bankruptcy-remote entity. DXC Receivables in turn sells such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. Sales of receivables by DXC Receivables occur continuously and are

18
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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 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 September 30, 2018, the total availability under the Receivables Facility was approximately $498 million and the drawn amount was $455 million. As of September 30, 2018, the Company recorded a $43 million receivable within receivables and contract assets, net because the amount of cash proceeds received by the Company under the Receivables were less than the total availability. The Receivables Facility terminates on August 21, 2019, 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 balance sheets and was $540 million and $233 million as of September 30, 2018 and March 31, 2018, respectively. On August 22, 2018, the Company amended the Receivables Facility to include additional Sellers and increase the facility limit from $250 million to $600 million. On September 24, 2018, the Company amended the Receivables Facility with the Purchasers and pursuant to this amendment, the Company repurchased certain of its subsidiaries receivables which resulted in a reduction in the DPP of $376 million which is presented as cash inflow from investing activities with a corresponding increase in trade receivables which is included as a cash outflow from operations.

The fair value of the sold receivables approximated book value due to the short-term nature, and as a result no gain or loss on sale of receivables was recorded.

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 DXC, 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 DXC 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 Three Months Ended
 
As of and for the Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Beginning balance
 
$
207

 
$
242

 
$
233

 
$
252

Transfers of receivables
 
2,122

 
606

 
2,651

 
1,154

Collections
 
(1,378
)
 
(579
)
 
(1,900
)
 
(1,124
)
Facility amendments
 
(442
)
 
—

 
(442
)
 
—

Fair value adjustment
 
31

 
3

 
(2
)
 
(10
)
Ending balance
 
$
540

 
$
272

 
$
540

 
$
272


Federal Receivables Sales Facility

Since July 14, 2017, the Company has given a parent guaranty in connection with a federal receivables sales facility with certain financial institutions, under which certain subsidiaries of the Company previously sold eligible federal government obligor receivables, including billed and certain unbilled receivables. In connection with the Separation, the sellers and servicers of the receivables sold under the Federal Receivables Sales Facility were divested and, effective May 31, 2018, the parent guaranty was terminated.


19
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following table reflects activity of the Federal Receivables Sales Facility, prior to the Separation:
(in millions)
 
For the
Six Months Ended
September 30, 2018(1)
Transfers of receivables
 
$
464

Collections
 
$
521

Operating cash flow effect
 
$
(57
)
        

(1) Results for the six months ended September 30, 2018 reflect operations through the Separation date of May 31, 2018, not the full six-month period.


Note 7 - Fair Value

Fair Value Measurements on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding pension assets and derivative assets and liabilities. See Note 8 - "Derivative Instruments" for information about the fair value of our derivative assets and liabilities. There were no transfers between any of the levels during the periods presented.
 
 
 
 
Fair Value Hierarchy
(in millions)
 
September 30, 2018
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
77

 
$
77

 
$
—

 
$
—

Time deposits(1)
 
89

 
89

 
—

 
—

Other debt securities (2)
 
54

 
—

 
49

 
5

Deferred purchase price receivable
 
540

 
—

 
—

 
540

Total assets
 
$
760

 
$
166

 
$
49

 
$
545



 
 
March 31, 2018
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
84

 
$
84

 
$
—

 
$
—

Time deposits (1)
 
114

 
114

 
—

 
—

Other debt securities (2)
 
59

 
—

 
53

 
6

Deferred purchase price receivable
 
233

 
—

 
—

 
233

Total assets
 
$
490

 
$
198

 
$
53

 
$
239

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
5

 
$
—

 
$
—

 
$
5

Total liabilities
 
$
5

 
$
—

 
$
—

 
$
5

        

(1) Cost basis approximated fair value due to the short period of time to maturity.
(2) Other debt securities include available-for-sale investments with Level 2 inputs that have a cost basis of $40 million and $42 million, and unrealized gains of $9 million and $11 million, as of September 30, 2018 and March 31, 2018, respectively.

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 or amounts payable on demand at the reporting date. The fair value of

20
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


other debt securities, included in other long-term assets, is based on actual market prices. 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 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 by using quoted prices obtained from third party providers such as Bloomberg, and by using an expected present value technique that is based on observable market inputs for instruments with similar terms currently available to the Company. The estimated fair value of the Company's long-term debt, excluding capitalized lease liabilities, was $5.0 billion and $6.0 billion as of September 30, 2018 and March 31, 2018, respectively, as compared with carrying value of $5.0 billion and $5.9 billion as of September 30, 2018 and March 31, 2018, respectively. If measured at fair value, long-term debt, excluding capitalized lease liabilities would be classified in Level 1 or 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 they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the fiscal periods covered by this report.

Note 8 - Derivative Instruments

In the normal course of business, the Company is exposed to interest rate and foreign exchange rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward and option contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. The Company does not use derivative instruments for trading or any speculative purpose.

Derivatives Designated for Hedge Accounting

Cash flow hedges

During the six months ended September 30, 2018, the Company terminated certain interest rate swap agreements which had aggregate notional values of $375 million and fair values of $5 million and derecognized the relative derivative asset. The hedge gain of $5 million will be recognized over the remaining original life of the swap against interest expense in the statements of operations. As of September 30, 2018, the Company had no interest rate swap agreements designated as cash flow hedges.

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 September 30, 2018 was $334 million, and the related forecasted transactions extend through February 2020.

For the three and six months ended September 30, 2018 and September 30, 2017, the Company performed an assessment at the inception of the cash flow hedge transactions and determined all critical terms of the hedging instruments and hedged items matched. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three and six months ended September 30, 2018 and September 30, 2017, the

21
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of September 30, 2018, $23 million of the existing amount of losses related to the cash flow hedge reported in AOCI is expected to be reclassified into earnings within the next 12 months.

The pre-tax loss on derivatives designated for hedge accounting recognized in other comprehensive loss was $15 million and $40 million for the three and six months ended September 30, 2018, respectively. The pre-tax loss on derivatives designated for hedge accounting recognized in income from continuing operations was $5 million for three and six months ended September 30, 2018.

Derivatives not Designated for Hedge Accounting

The derivative instruments not designated as hedges for purposes of hedge accounting include interest rate swap agreements and certain short-term foreign currency forward contracts. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

Interest rate swap agreements

During the three months ended September 30, 2018, the Company elected to de-designate its interest rate swap agreements. The Company derecognized the related derivative asset and recognized the amount in earnings. The notional amount of interest rate swap agreements outstanding as of September 30, 2018 was $241 million. Gains on interest rate swap agreements not designated for hedge accounting and the recognition of the derivative asset in earnings were not material for the three and six months ended September 30, 2018.

Foreign currency forward contracts

The Company manages the exposure to fluctuations in foreign currencies by using foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts, and forecasted transactions. The notional amount of the foreign currency forward contracts outstanding as of September 30, 2018 was $2.8 billion. Losses on foreign currency forward contracts not designated for hedge accounting, recognized within other income, net, were $11 million and $43 million during the three and six months ended September 30, 2018, respectively, and $77 million and $114 million during the three and six months ended September 30, 2017, respectively.

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 present the fair values of derivative instruments included in the balance sheets:
 
 
Derivative Assets
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2018
 
March 31, 2018
Derivatives designated for hedge accounting:
 
 
Interest rate swaps
 
Other assets
 
$
—

 
$
6

Foreign currency forward contracts
 
Other current assets
 
—

 
14

Total fair value of derivatives designated for hedge accounting
 
$
—

 
$
20

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
4

 
$
4

Total fair value of derivatives not designated for hedge accounting
 
$
4

 
$
4


22
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2018
 
March 31, 2018
Derivatives designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
27

 
$
3

Total fair value of derivatives designated for hedge accounting:
 
$
27

 
$
3

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
13

 
$
6

Total fair value of derivatives not designated for hedge accounting
 
$
13

 
$
6


The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates and is based on the period-end foreign currency exchange rates and forward points which are classified as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves which are classified as Level 2 inputs.

Other risks

The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty's obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. As of September 30, 2018, the maximum amount of loss that the Company could incur was not material. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company's policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements.

Note 9 - Intangible Assets
 
 
As of September 30, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,555

 
$
1,996

 
$
1,559

Transition and transformation contract costs
 
1,464

 
873

 
591

Customer related intangible assets
 
5,294

 
898

 
4,396

Other intangible assets
 
77

 
21

 
56

Total intangible assets
 
$
10,390

 
$
3,788

 
$
6,602

 
 
As of March 31, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,484

 
$
1,918

 
$
1,566

Transition and transformation contract costs
 
1,569

 
766

 
803

Customer related intangible assets
 
5,405

 
666

 
4,739

Other intangible assets
 
90

 
19

 
71

Total intangible assets
 
$
10,548

 
$
3,369

 
$
7,179


23
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Total intangible assets amortization was $296 million and $285 million for three months ended September 30, 2018 and September 30, 2017, respectively, and included amortization of contract cost premiums recorded as reductions of revenue of $9 million and $3 million, respectively.

Total intangible assets amortization was $583 million and $479 million for the six months ended September 30, 2018 and September 30, 2017, respectively, and included amortization of contract cost premiums recorded as reductions of revenue of $14 million and $6 million, respectively.

Estimated future amortization related to intangible assets as of September 30, 2018 is as follows:
Fiscal Year
 
(in millions)

Remainder of 2019
 
$
614

2020
 
$
1,079

2021
 
$
972

2022
 
$
813

2023
 
$
734


Note 10 - Goodwill

The following table summarizes the changes in the carrying amount of goodwill, by segment, as of September 30, 2018.
(in millions)
 
GBS
 
GIS
 
Total
Balance as of March 31, 2018, net
 
$
4,531

 
$
3,088

 
$
7,619

Acquisitions
 
42

 
—

 
42

Divestitures
 
(12
)
 
—

 
(12
)
Foreign currency translation
 
(151
)
 
(81
)
 
(232
)
Balance as of September 30, 2018, net
 
$
4,410

 
$
3,007

 
$
7,417


As a result of the Separation of USPS on May 31, 2018, USPS is no longer a reportable segment.

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. For the Company’s annual goodwill impairment assessment as of July 1, 2018 the Company chose to bypass the initial qualitative assessment and proceeded directly to the first step of the impairment test for all reporting units. Based on the results of the first step of the impairment test, the Company concluded that the fair value of each reporting unit exceeded its carrying value and therefore the second step of the goodwill impairment test was not required. 

As of September 30, 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 September 30, 2018.



24
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 11 - Debt

The following is a summary of the Company's debt:
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
September 30, 2018
 
March 31, 2018
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Euro-denominated commercial paper(1)
 
(0.1)% - 0.02%(2)
 
2019
 
$
813

 
$
863

Current maturities of long-term debt
 
Various
 
2019 - 2020
 
229

 
439

Current maturities of capitalized lease liabilities
 
1.0% - 12.0%
 
2019 - 2020
 
576

 
616

Short-term debt and current maturities of long-term debt
 
 
 
 
 
$
1,618

 
$
1,918

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
 
 
 
 
GBP term loan
 
1.3%(3)
 
2019
 
$
241

 
$
260

EUR term loan
 
0.65% - 1.75%(4)
 
2020
 
—

 
493

AUD term loan
 
2.9% - 3.2%(5)
 
2022
 
188

 
210

EUR term loan
 
0.9%(6)
 
2022
 
—

 
187

USD term loan
 
3.1% - 3.3%(7)
 
2022
 
—

 
899

$500 million Senior notes
 
2.875%
 
2020
 
501

 
502

$650 million Senior notes
 
2.96%(8)
 
2021
 
646

 
646

$274 million Senior notes
 
4.45%
 
2023
 
277

 
278

$171 million Senior notes
 
4.45%
 
2023
 
173

 
173

$500 million Senior notes
 
4.25%
 
2025
 
507

 
507

£250 million Senior notes
 
2.75%
 
2025
 
322

 
346

€650 million Senior notes
 
1.75%
 
2026
 
750

 
—

$500 million Senior notes
 
4.75%
 
2028
 
509

 
509

$234 million Senior notes
 
7.45%
 
2030
 
276

 
277

Lease credit facility
 
2.8% - 3.2%
 
2019 - 2023
 
35

 
46

Capitalized lease liabilities
 
1.0% - 12.0%
 
2019 - 2024
 
1,226

 
1,235

Borrowings for assets acquired under long-term financing
 
2.3% - 4.0%
 
2019 - 2023
 
382

 
405

Mandatorily redeemable preferred stock outstanding
 
6.0%
 
2023
 
62

 
61

Other borrowings
 
0.5% - 7.4%
 
2019 - 2022
 
119

 
113

Long-term debt
 
 
 
 
 
6,214

 
7,147

Less: current maturities
 
 
 
 
 
805

 
1,055

Long-term debt, net of current maturities
 
 
 
 
 
$
5,409

 
$
6,092

        

(1) 
At DXC's option, DXC can borrow up to a maximum of €1 billion.
(2) 
Approximate weighted average interest rate.
(3) Three-month LIBOR rate plus 0.65%.
(4) Three-month EURIBOR rate plus 0.65%.
(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.
(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 0.00% and 0.75%, based on published credit ratings of DXC.
(8) Three-month LIBOR plus 0.95%.


25
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Senior Notes and Term Loans

Interest on the Company's terms loans is payable monthly or quarterly in arrears at the election of the borrowers. The Company fully and unconditionally guarantees term loans issued by its 100% owned subsidiaries. Interest on the Company's senior notes is payable semi-annually in arrears, except for interest on the £250 million Senior Notes due 2025 and €650 million Senior Notes due 2026 which is payable annually in arrears, and interest on the $650 million Senior Notes due 2021 which is payable quarterly in arrears. Generally, the Company's notes are redeemable at the Company's discretion at the then-applicable redemption premium plus accrued interest.

Subsequent to September 30, 2018, DXC entered into a term loan credit agreement maturing on January 15, 2022, in an aggregate principal amount of £450 million, the proceeds of which were used to repay the £185 million term loan due January 15, 2019 and $150 million of the $650 million Senior Notes due 2021. The Company has excluded the £185 million term loan maturing on January 15, 2019 from short-term debt and current maturities of long-term debt and included the liability in long-term debt, net of current maturities.

Note 12 - Revenue

Revenue Recognition

The following table presents our revenues disaggregated by geography, based on the location of incorporation of the DXC entity providing the related goods or services:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017 (1)
 
September 30, 2018
 
September 30, 2017 (1)
United States
 
$
1,863

 
$
2,083

 
$
3,750

 
$
4,066

United Kingdom
 
760

 
835

 
1,560

 
1,633

Australia
 
391

 
411

 
845

 
837

Other Europe
 
1,263

 
1,322

 
2,610

 
2,568

Other International
 
736

 
802

 
1,530

 
1,585

Total Revenues
 
$
5,013

 
$
5,453

 
$
10,295

 
$
10,689

        

(1) Prior period amounts have not been recast under the modified retrospective transition method.

The revenue by geography pertains to both of the Company’s reportable segments. Refer to Note 19 - "Segment Information" for the Company’s segment disclosures.

Remaining Performance Obligations

Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency. As of September 30, 2018, approximately $30.4 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 24% of these remaining performance obligations in Fiscal 2019, with the remainder of the balance recognized thereafter.

Contract Balances

The following table provides information about the balances of the Company's trade receivables and contract assets and contract liabilities:

26
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


 
 
As of
(in millions)
 
September 30, 2018
 
April 1, 2018
Trade receivables, net
 
$
3,140

 
$
3,937

Contract assets
 
$
342

 
$
444

Contract liabilities
 
$
1,743

 
$
2,053


Change in contract liabilities were as follows:
(in millions)
 
Three months ended September 30, 2018
 
Six months ended September 30, 2018
ASC 605 Balance, beginning of period (1)
 
$
—

 
$
2,434

Adjustment related to Topic 606 adoption (1)
 
—

 
(381
)
ASC 606 Balance, beginning of period
 
1,881

 
2,053

Deferred revenue
 
569

 
1,172

Recognition of deferred revenue
 
(665
)
 
(1,307
)
Currency translation adjustment
 
(19
)
 
(137
)
Other
 
(23
)
 
(38
)
Balance, end of period
 
$
1,743

 
$
1,743

        

(1) ASC 606 was adopted at the beginning of fiscal 2019, as such there was no ASC 605 balance at the beginning of the period or cumulative adjustment related to Topic 606 adoption for the three months ended September 30, 2018.

The following table provides information about the Company’s capitalized costs to obtain and fulfill a contract:
(in millions)
 
As of September 30, 2018
Capitalized sales commission cost (1)
 
$
182

Transition and transformation contract costs, net (2)
 
$
591

        

(1) Capitalized sales commission costs are included within other assets in the accompanying balance sheets. For the three and six months ended September 30, 2018, amortization expense of $12 million and $26 million, respectively, related to the capitalized sales commission assets is included in selling, general, and administrative expenses in the accompanying statements of operations.
(2) Transition and transformation contract costs, net reflect the Company’s setup costs incurred upon initiation of an outsourcing contract that are classified as intangible assets in the accompanying balance sheets. For the three and six months ended September 30, 2018, amortization expense of $73 million and $129 million, respectively, is included within depreciation and amortization in the accompanying statements of operations.
 
Financial Statement Impact

The impact of adoption of ASC 606 on the selected captions of the Company's statements of operations and balance sheets was as follows:
Statement of Operations (Selected Captions)
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
(in millions)
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Revenues
 
$
5,013

 
$
5,009

 
$
4

Costs of services
 
$
3,518

 
$
3,521

 
$
(3
)
Selling, general and administrative
 
$
569

 
$
583

 
$
(14
)
Interest income
 
$
(33
)
 
$
(36
)
 
$
(3
)
Income tax expense
 
$
73

 
$
69

 
$
4

Net income attributable to DXC common stockholders
 
$
262

 
$
248

 
$
14



27
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Statement of Operations (Selected Captions)
 
 
 
 
 
 
 
 
Six Months Ended September 30, 2018
(in millions)
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Revenues
 
$
10,295

 
$
10,281

 
$
14

Costs of services
 
$
7,385

 
$
7,388

 
$
(3
)
Selling, general and administrative
 
$
1,009

 
$
1,036

 
$
(27
)
Interest income
 
$
(65
)
 
$
(72
)
 
$
(7
)
Income tax expense
 
$
202

 
$
194

 
$
8

Net income attributable to DXC common stockholders
 
$
521

 
$
492

 
$
29


Balance Sheet (Selected Captions)
 
 
 
 
 
 
 
 
As of September 30, 2018
(in millions)
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Assets:
 
 
 
 
 
 
Receivables and contract assets, net of allowance for doubtful accounts
 
$
4,928

 
$
4,936

 
$
(8
)
Other current assets
 
$
477

 
$
519

 
$
(42
)
Deferred income taxes, net
 
$
326

 
$
338

 
$
(12
)
Other assets
 
$
2,441

 
$
2,548

 
$
(107
)
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
$
3,268

 
$
3,268

 
$
—

Deferred revenue and advance contract payments
 
$
1,442

 
$
1,520

 
$
(78
)
Income taxes payable
 
$
94

 
$
81

 
$
13

Non-current deferred revenue
 
$
301

 
$
562

 
$
(261
)
Non-current income tax liabilities and deferred tax liabilities
 
$
1,219

 
$
1,198

 
$
21

 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
Retained earnings
 
$
136

 
$
(4
)
 
$
140

Accumulated other comprehensive loss
 
$
(382
)
 
$
(378
)
 
$
(4
)

The adoption of ASC 606 did not materially impact the statement of cash flows.


28
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 13 - Restructuring Costs

The Company recorded restructuring costs of $157 million and $188 million, net of reversals, for the three months ended September 30, 2018 and September 30, 2017, respectively. For the six months ended September 30, 2018 and September 30, 2017, the Company recorded $342 million and $375 million, net of reversals, respectively. The costs recorded during the three and six months ended September 30, 2018 were largely a result of the Fiscal 2019 Plan (defined below).

The composition of restructuring liabilities by financial statement line item is as follows:
 
 
As of
(in millions)
 
September 30, 2018
Accrued expenses and other current liabilities
 
$
415

Other long-term liabilities
 
143

Total
 
$
558


Summary of Restructuring Plans

Fiscal 2019 Plan

During the six months ended September 30, 2018, management approved global cost savings initiatives designed to better align the Company's organizational structure with its strategic initiatives and continue the integration of HPES and other acquisitions (the "Fiscal 2019 Plan"). The Fiscal 2019 Plan includes workforce optimization and rationalization of facilities and data center assets.

Fiscal 2018 Plan

In June 2017, management approved a post-HPES 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 datacenter restructuring program. Costs incurred to date under the Fiscal 2018 Plan total $813 million, comprising $616 million in workforce reductions and $197 million of facilities costs.

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"). Costs incurred to date under the Fiscal 2017 Plan total $215 million, comprising $207 million in workforce reductions and $8 million of facilities costs.

Other Prior Year Plans

Other prior year plans are comprised of the Fiscal 2016 Plan and Fiscal 2015 Plan. As of September 30, 2018, activities under these plans are substantially complete.

Acquired Restructuring Liabilities

As a result of the HPES Merger, DXC acquired restructuring liabilities under restructuring plans that were initiated for HPES under plans approved by the HPE Board of Directors.


29
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Restructuring Liability Reconciliations by Plan
 
 
Restructuring Liability as of March 31, 2018
 
Costs Expensed, Net of Reversals(1)
 
Costs Not Affecting Restructuring Liability (2)
 
Cash Paid
 
Other(3)
 
Restructuring Liability as of September 30, 2018
Fiscal 2019 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
—

 
$
241

 
$
—

 
$
(66
)
 
$
(3
)
 
$
172

Facilities Costs
 
—

 
112

 
(5
)
 
(30
)
 
(1
)
 
76

Total
 
$
—

 
$
353

 
$
(5
)
 
$
(96
)
 
$
(4
)
 
$
248

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2018 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
257

 
$
(8
)
 
$
—

 
$
(106
)
 
$
(14
)
 
$
129

Facilities Costs
 
98

 
(5
)
 
(3
)
 
(29
)
 
(5
)
 
56

Total
 
$
355

 
$
(13
)
 
$
(3
)
 
$
(135
)
 
$
(19
)
 
$
185

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2017 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
19

 
$
—

 
$
—

 
$
(10
)
 
$
(1
)
 
$
8

Facilities Costs
 
3

 
(1
)
 
—

 
(2
)
 
—

 
—

Total
 
$
22

 
$
(1
)
 
$
—

 
$
(12
)
 
$
(1
)
 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Prior Year Plans
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
4

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
3

Facilities Costs
 
2

 
—

 
—

 
—

 
—

 
2

Total
 
$
6

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
110

 
$
2

 
$
—

 
$
(23
)
 
$
(2
)
 
$
87

Facilities Costs
 
$
27

 
1

 
—

 
(3
)
 
—

 
25

Total
 
$
137

 
$
3

 
$
—

 
$
(26
)
 
$
(2
)
 
$
112

        

(1) Costs expensed, net of reversals include $15 million, $1 million and $1 million of costs reversed from the Fiscal 2018 Plan, the Fiscal 2017 Plan and Other Prior Year Plans, respectively.
(2) Asset impairments.
(3) Foreign currency translation adjustments.

Note 14 - 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.

The Company contributed $13 million and $40 million to the defined benefit pension and other post-retirement benefit

30
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


plans during the three and six months ended September 30, 2018, respectively. The Company expects to contribute an additional $42 million during the remainder of fiscal 2019, which does not include certain salary deferral programs and future potential termination benefits related to the Company's potential restructuring activities.

The components of net periodic pension income were:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Service cost
 
$
22

 
$
34

 
$
45

 
$
66

Interest cost
 
63

 
61

 
128

 
121

Expected return on assets
 
(138
)
 
(132
)
 
(287
)
 
(260
)
Amortization of prior service costs
 
(6
)
 
(4
)
 
(7
)
 
(8
)
Contractual termination benefit
 
—

 
2

 
—

 
11

Curtailment gain
 
—

 
—

 
(1
)
 
—

Net periodic pension income
 
$
(59
)
 
$
(39
)
 
$
(122
)
 
$
(70
)

The service cost component of net periodic pension income is presented in cost of services and selling, general and administrative and the other components of net periodic pension income are presented in other income, net in the Company’s statements of operations. See Note 2 - "Recent Accounting Pronouncements," for further discussion of the updated guidance related to the presentation of net periodic pension cost.

The weighted-average rates used to determine net periodic pension cost for the three and six months ended September 30, 2018 and September 30, 2017 were:
 
 
September 30, 2018
 
September 30, 2017
Discount or settlement rates
 
2.3
%
 
2.5
%
Expected long-term rates of return on assets
 
5.3
%
 
4.9
%
Rates of increase in compensation levels
 
2.1
%
 
2.7
%

Deferred Compensation Plans

Effective as of the HPES 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 HPES Merger. The ES DCP covers eligible employees who participated in the HPE Executive Deferred Compensation Plan prior to the HPES 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.

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 balance sheets, was $66 million as of September 30, 2018 and $65 million as of March 31, 2018.

31
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 15 - Income Taxes

The Company's effective tax rate from continuing operations ("ETR") was 22.0% and 27.8% for the three months ended September 30, 2018 and September 30, 2017, respectively, and 29.2% and 16.5% for the six months ended September 30, 2018 and September 30, 2017, respectively. For the three months ended September 30, 2018, the primary unfavorable drivers of the ETR were global mix of income; increase in state tax expense due to remeasurement of deferred taxes, and the impact of U.S. proposed regulations on the ability to claim certain foreign tax credits. The primary favorable drivers of the ETR were due to the filing of the October 31, 2017 U.S. federal tax return and a decrease in valuation allowances on certain foreign subsidiary deferred tax assets. For the six months ended September 30, 2018, the primary unfavorable drivers of the ETR were the global mix of income; the increase in the provisional transition tax and the impact of the U.S. proposed regulations on the ability to claim certain foreign tax credits. The primary favorable drivers of the ETR were due to filing of the October 31, 2017 U.S. federal tax return and net decrease in valuation allowances on certain foreign deferred tax assets. For the three and six months ended September 30, 2017, the primary drivers of the ETR were the change in global mix of income due to the HPES Merger, the reduction of a deferred tax liability recorded on the outside basis difference of a foreign subsidiary due to current year earnings and taxes, excess tax benefits related to employee share-based payment awards and releases of valuation allowances for deferred tax assets of legacy CSC.

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 tax on certain foreign earnings of foreign subsidiaries and subjects certain payments from U.S. corporations to foreign related parties to additional taxes. 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.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act effective in the reporting period of enactment. 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.

As of September 30, 2018, our accounting for the Act is incomplete. However, as noted in our fiscal 2018 Annual Report on Form 10-K, the Company was able to make reasonable estimates of certain effects and recorded provisional adjustments. We expect to complete our accounting within the measurement period for all provisional amounts.

For the following provisional items, we did not record any additional measurement period adjustments during the period ended September 30, 2018, for the following reasons:

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 and the impact of IRS Notice 2018-26 and proposed regulations. The Company was able to make a reasonable estimate of the transition tax and recorded a provisional discrete income tax expense and related liability of $361 million in fiscal 2018 and an additional income tax liability of $25 million in the period ended June 30, 2018. The total transition tax obligation to date of $386 million has been recorded. The transition tax obligation is payable over up to eight years. 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 non-U.S. income taxes.

32
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Permanent reinvestment assertion: Beginning January 1, 2018, the Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax for U.S. corporate shareholders, companies must still account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. During fiscal 2018 the Company recorded a provisional estimate for those subsidiaries for which we were able to make a reasonable estimate of the tax effects of such repatriation for withholding taxes, state taxes, and India dividend distribution tax of $12 million, $7 million and $80 million, respectively. The Company has not completed its analysis of the foreign tax rules for certain foreign subsidiaries. In addition, guidance may be released by various state jurisdictions, which could also impact these estimates.

Executive compensation: As a result of changes made by the Act, starting with compensation paid in fiscal 2019, Section 162(m) will limit compensation deductions, 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 a full analysis of the binding contract requirement on the various compensation plans to determine the impact of the law change. During fiscal 2018, the Company recorded a provisional income tax expense estimate of $2 million for executive compensation relating to the change in covered individuals. As part of the fiscal 2019 forecasted ETR, the Company has estimated the Section 162(m) adjustment under the new guidance for compensation arrangements entered into after November 2, 2017.

For the following provisional items, incremental measurement adjustments were recognized during the period ended September 30, 2018, but the items are still determined to be provisional for the following reasons:

Global intangible low taxed income ("GILTI"): The Company continues to evaluate the impact of the GILTI provisions under the Act, which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election 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 the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s accounting policy election with respect to the new GILTI Tax rules will depend, in part, on analyzing its global income to determine whether it can reasonably estimate the tax impact. While the Company has included an estimate of the U.S. tax cost of GILTI in its full-year forecasted ETR for fiscal 2019 of $18 million, it has not completed its analysis and has not elected an accounting method during the current period. Adjustments related to the amount of GILTI tax recorded in its financial statements may be required based on the outcome of this election.

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 deferred tax assets and deferred tax liabilities, the Company previously recorded a provisional deferred income tax discrete benefit of $338 million, resulting in a $338 million decrease in net deferred tax liabilities as of March 31, 2018. The Company filed its October 31, 2017 U.S. federal tax return in the period ending September 30, 2018 which impacted the provisional amount recorded. The adjustment was not material. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate tax rate, the final amount will be impacted by changes in deferred tax balances prior to the end of the measurement period when the reversal of the deferred tax assets and liabilities are known. The full amount of provisional remeasurement was recorded in fiscal year 2018 as part of continuing operations.

Capital expensing: During fiscal 2018 the Company recorded a provisional benefit of $87 million based on its intent to fully expense all qualifying expenses. This resulted in a decrease of approximately $87 million to the Company's current income taxes payable and a corresponding increase in its net deferred tax liabilities. The Company filed its October 31, 2017 U.S. federal tax return in the period ending September 30, 2018. The adjustment was not material. The Company has not yet completed all of the computations necessary or completed an inventory of its 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.

33
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The tax expense associated with discontinued operations was $0 million and $43 million for the three months ended September 30, 2018 and September 30, 2017, respectively. The tax expense associated with discontinued operations was $18 million and $72 million for the six months ended September 30, 2018 and September 30, 2017, respectively. The primary driver of the variance in the tax expense for these periods was the difference in income before tax for the respective periods.

The income tax assets and liabilities that were part of the balances classified as assets and liabilities of discontinued operations and that were distributed in the Separation of USPS include $154 million of deferred tax liabilities, $60 million of uncertain tax position liabilities, including interest, and income tax receivables of $162 million. In connection with the Separation, the Company entered into a tax matters agreement with Perspecta. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the Separation of USPS. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE for these liabilities, pursuant to the tax matters agreement between the Company and HPE. The Company is also liable to HPE for tax receivables and refunds which it receives from Perspecta related to pre-HPES Merger periods that were transferred to Perspecta. Pursuant to the tax matters agreement with Perspecta, the Company recorded a tax indemnification receivable from Perspecta of $162 million and a tax indemnification payable to Perspecta of $74 million related to income tax and other tax liabilities. The Company continues to have indemnification balances to and from HPE for the same amounts as a result of the HPES Merger.

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2017. 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 April 30, 2019. In October 2018, the HPES IRS exam related to fiscal years 2008 and 2009 was resolved resulting in a refund due to Perspecta that relates to a pre-HPES merger period. The refund due to Perspecta will reduce the $162 million indemnification receivable from Perspecta and correspondingly reduce the indemnification payable to HPE by approximately $68 million.

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 Company has agreed to extend the statute of limitations associated with this audit through July 31, 2019. The IRS is also examining CSC's fiscal 2014 through 2017 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 $24 million to $25 million, excluding interest, penalties and tax carry-forwards.

Note 16 - Stockholders' Equity

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.


34
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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 2019
 
Fiscal 2018
Fiscal Period
 
Number of Shares Repurchased
 
Average Price Per Share
 
Amount(1)               (in millions)
 
Number of Shares Repurchased
 
Average Price Per Share
 
Amount (in millions)
1st Quarter
 
3,779,194
 
$
85.86

 
$
324

 
250,000

 
$
77.39

 
$
19

2nd Quarter
 
1,448,729

 
$
87.16

 
$
127

 
591,505

 
$
78.20

 
$
47

Total
 
5,227,923

 
$
86.22

 
$
451

 
841,505

 
$
77.96

 
$
66

        

(1) DXC recorded $9 million as an accrued liability for shares purchased but not yet settled in cash as of September 30, 2018.

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
 
Available-for-sale Securities
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2018
 
$
(261
)
 
$
9

 
$
9

 
$
301

 
$
58

Current-period other comprehensive loss
 
(408
)
 
(30
)
 
(1
)
 
—

 
(439
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
—

 
5

 
—

 
(6
)
 
(1
)
Balance at September 30, 2018
 
$
(669
)
 
$
(16
)
 
$
8

 
$
295

 
$
(382
)

(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Available-for-sale Securities
 
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 (loss)
 
109

 
(5
)
 
—

 
—

 
104

Amounts reclassified from accumulated other comprehensive loss
 
(5
)
 
—

 
—

 
(7
)
 
(12
)
Balance at September 30, 2017
 
$
(354
)
 
$
15

 
$
—

 
$
269

 
$
(70
)

Note 17 - Stock Incentive Plans

Equity Plans

As a result of the Separation of USPS, shared-based awards issued by the Company were modified. The number of stock options and exercise price were adjusted to generally preserve the intrinsic value immediately prior to the

35
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Separation. There was no incremental share-based compensation expense recognized as a result of the modification of the awards.

As a result of the HPES 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 HPES Merger as the terms and conditions applicable to such awards prior to the HPES 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 HPES 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 HPES 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 HPES Merger, outstanding options (vested and unvested) and unvested RSU awards were converted upon the HPES Merger into economically equivalent DXC option and RSU awards, with terms and conditions substantially the same as the terms of such awards prior to the HPES Merger.

In March 2017, prior to the HPES 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 3-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 3-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

36
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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 2,877 and 5,495 shares purchased under this plan during the three and six months ended September 30, 2018.

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 September 30, 2018
 
Reserved for issuance
 
Available for future grants
DXC Employee Equity Plan
34,200,000

 
21,878,972

DXC Director Equity Plan
230,000

 
104,310

DXC Share Purchase Plan
250,000

 
243,031

Total
34,680,000

 
22,226,313


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, 2018(1)
 
2,933,501

 
$
32.54

 
5.24
 
$
185

Granted
 
—

 
$
—

 
 
 
 
Issued due to Separation modification
 
400,170

 
$
31.72

 
 
 
 
Exercised
 
(676,021
)
 
$
37.62

 
 
 
$
35

Canceled/Forfeited
 
(6,825
)
 
$
31.02

 
 
 
 
Expired
 
—

 
$
—

 
 
 
 
Outstanding as of September 30, 2018
 
2,650,825

 
$
31.13

 
5.00
 
$
165

Vested and expected to vest in the future as of September 30, 2018
 
2,648,720

 
$
31.11

 
5.00
 
$
165

Exercisable as of September 30, 2018
 
2,629,871

 
$
30.97

 
4.99
 
$
164


        

(1) The amount of the weighted average exercise price per share has been revised to reflect the impact of the Separation.


37
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



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, 2018(1)
3,985,616

 
$
47.25

 
66,386

 
$
37.26

Granted
816,973

 
$
81.09

 
19,200

 
$
87.88

Issued due to Separation modification

649,649

 
$
51.97

 
10,488

 
$
37.69

Settled
(695,632
)
 
$
46.13

 
(18,960
)
 
$
54.30

Canceled/Forfeited
(516,527
)
 
$
56.65

 
—

 
$
—

Outstanding as of September 30, 2018
4,240,079

 
$
53.54

 
77,114

 
$
45.74

        

(1) The amount of the weighted average fair value per share has been revised to reflect the impact of the Separation.

Share-Based Compensation

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Total share-based compensation cost
 
$
19

 
$
17

 
$
41

 
$
57

Related income tax benefit
 
$
3

 
$
6

 
$
6

 
$
19

Total intrinsic value of options exercised
 
$
25

 
$
45

 
$
35

 
$
74

Tax benefits from exercised stock options and awards
 
$
14

 
$
18

 
$
19

 
$
53


As of September 30, 2018, total unrecognized compensation expense related to unvested DXC stock options and unvested DXC RSUs, net of expected forfeitures was less than $1 million and $143 million, respectively. The unrecognized compensation expense for unvested RSUs is expected to be recognized over a weighted-average period of 2.06 years.

38
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 18 - Cash Flows

Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
 
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
Cash paid for:
 
 
 
 
Interest
 
$
149

 
$
91

Taxes on income, net of refunds
 
$
74

 
$
72

 
 
 
 
 
Non-cash activities:
 
 
 
 
Investing:
 
 
 
 
Capital expenditures in accounts payable and accrued expenses
 
$
28

 
$
3

Capital expenditures through capital lease obligations
 
$
396

 
$
109

Deferred purchase price receivable
 
$
716

 
$
53

Assets acquired under long-term financing
 
$
76

 
$
236

Financing:
 
 
 
 
Dividends declared but not yet paid
 
$
54

 
$
52

Stock issued for the acquisition of HPES
 
$
—

 
$
9,850


39
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 19 - 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 Separation, USPS is no longer included as a reportable segment and its results have been reclassified to discontinued operations, net of taxes, for all periods presented. See Note 4 - "Divestitures." DXC now operates in two reportable segments as described below:

Global Business Services

GBS provides innovative technology solutions that help its clients address key business challenges and accelerate digital transformations tailored to each client’s industry and specific objectives. GBS offerings include:

•
Enterprise, Cloud Applications and Consulting. GBS provides industry, business process systems integration and technical delivery experience to maximize value from enterprise application portfolios. GBS also helps clients accelerate their digital transformations and business results with industry, business, technology and complex integration services.
•
Application Services. GBS's comprehensive services helps clients modernize, develop, test and manage their applications.
•
Analytics. GBS's portfolio of analytics services and robust partner ecosystem helps clients gain rapid insights and accelerate their digital transformation journeys.
•
Business Process Services. GBS provides seamless digital integration and optimization of front and back office processes, including its Agile Process Automation approach.
•
Industry Software and Solutions. GBS's industry-specific solutions enable businesses to quickly integrate technology, transform their operations and develop new ways of doing business. GBS's vertical-specific IP includes insurance, healthcare and life sciences, travel and transportation, and banking and capital markets solutions.

Global Infrastructure Services

GIS provides a portfolio of offerings that deliver predictable outcomes and measurable results while reducing business risk and operational costs for clients. GIS offerings include:

•
Cloud and Platform Services. GIS helps clients maximize their private cloud, public cloud and legacy infrastructures, as well as securely manage their hybrid environments.
•
Workplace and Mobility. GIS's workplace, mobility and Internet of Things ("IoT") services provides a consumer-like experience with enterprise security and instant connectivity for its clients.
•
Security. GIS's security solutions help predict attacks, proactively respond to threats, ensure compliance and protect data, applications, infrastructure and endpoints.


40
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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
 
Total Reportable Segments
 
All Other
 
Totals
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,111

 
$
2,902

 
$
5,013

 
$
—

 
$
5,013

Segment profit
 
$
400

 
$
473

 
$
873

 
$
(74
)
 
$
799

Depreciation and amortization(1)
 
$
16

 
$
305

 
$
321

 
$
31

 
$
352

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,311

 
$
3,142

 
$
5,453

 
$
—

 
$
5,453

Segment profit
 
$
369

 
$
450

 
$
819

 
$
(79
)
 
$
740

Depreciation and amortization(1)
 
$
15

 
$
298

 
$
313

 
$
24

 
$
337


41
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



(in millions)
 
GBS
 
GIS
 
Total Reportable Segments
 
All Other
 
Totals
Six Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,324

 
$
5,971

 
$
10,295

 
$
—

 
$
10,295

Segment profit
 
$
803

 
$
947

 
$
1,750

 
$
(148
)
 
$
1,602

Depreciation and amortization(1)
 
$
36

 
$
586

 
$
622

 
$
66

 
$
688

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,578

 
$
6,111

 
$
10,689

 
$
—

 
$
10,689

Segment profit
 
$
643

 
$
721

 
$
1,364

 
$
(54
)
 
$
1,310

Depreciation and amortization(1)
 
$
51

 
$
471

 
$
522

 
$
47

 
$
569

        
 
1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $132 million and $145 million for the three months ended September 30, 2018 and 2017, respectively, and $267 million and $255 million for the six months ended September 30, 2018 and 2017, respectively.

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

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Profit
 
 
 
 
 
 
 
 
Total profit for reportable segments
 
$
873

 
$
819

 
$
1,750

 
$
1,364

All other loss
 
(74
)
 
(79
)
 
(148
)
 
(54
)
Interest income
 
33

 
16

 
65

 
32

Interest expense
 
(83
)
 
(73
)
 
(168
)
 
(147
)
Restructuring costs
 
(157
)
 
(188
)
 
(342
)
 
(375
)
Transaction, separation and integration-related costs
 
(128
)
 
(66
)
 
(198
)
 
(190
)
Amortization of acquired intangible assets
 
(132
)
 
(145
)
 
(267
)
 
(255
)
Income from continuing operations before income taxes
 
$
332

 
$
284

 
$
692

 
$
375

 
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.

42
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 20 - Commitments and Contingencies

Commitments

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 September 30, 2018 were as follows:
Fiscal year
 
Minimum Purchase Commitment(1)
(in millions)
 
Remainder of 2019
 
$
1,529

2020
 
2,243

2021
 
573

2022
 
329

2023
 
327

Thereafter
 
163

     Total
 
$
5,164

        

(1) A significant portion of the minimum purchase commitments in fiscal 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 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 September 30, 2018:
(in millions)
 
 Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021 and Thereafter
 
Totals
Surety bonds
 
$
40

 
$
299

 
$
97

 
$
436

Letters of credit
 
122

 
68

 
294

 
484

Stand-by letters of credit
 
36

 
27

 
85

 
148

Totals
 
$
198

 
$
394

 
$
476

 
$
1,068


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.

43
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



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. In a ruling dated September 20, 2018, the Court allowed the Company’s counterclaim for indemnification to proceed with respect to liability for claims not arising under the Federal False Claims Act. The Parties participated in a non-binding mediation on November 29, 2017, but no settlement has been reached to date. Although deferred pending mediation, discovery has now commenced. The Company believes that these claims are without merit and intends to continue to defend itself vigorously.

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

44
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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. In a ruling dated September 21, 2018, the Court denied the Company’s motions for judgment as a matter of law, and for decertification. Further rulings on the scope of damages are pending. 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 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.

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. In April 2018 the other former CBA employee was committed to stand trial in the Australian criminal courts. The Company 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.

45
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


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.

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 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. On March 2, 2018, the Texas court denied the venue transfer motion. The pending vacatur motion was accordingly transferred to the Texas court, and a new memorandum of law in support of the motion was filed in that jurisdiction on March 30, 2018. On August 27, 2018, the Magistrate Judge issued its Report and Recommendation denying the vacatur motion. On September 10, 2018, the Company filed its objections to this report to the United States District Judge who reviews the decision de novo. On September 18, 2018, the District Court summarily accepted the Report and Recommendation without further briefing and entered a Final Judgment in the case. On September 27, 2018, the Company filed a notice of appeal to the Fifth Circuit Court of Appeals. The Company has also paid the portion of the judgment that is uncontested on appeal, and Kemper recorded this partial satisfaction of the judgment on September 26, 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 certain named and opt-in plaintiffs who had 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 for those named and opt-in plaintiffs. Accordingly, the Court has stayed the entire action pending arbitration for these individuals, and administratively closed the case. Plaintiffs filed a motion for reconsideration as well as a notice of

46
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


appeal to the Ninth Circuit (which has been denied as premature). The reconsideration motion was denied without oral argument. In that same decision, the Court held that a joint arbitration was permissible. The Company subsequently sought and obtained leave of Court to file a motion for reconsideration arguing that joint arbitration is not permitted under the relevant employee agreements. The Court denied the motion on April 17, 2018, ruling that interpretation of the employee agreements is an issue delegated to the arbitrator. The American Arbitration Association, which was designated to manage the arbitration process, has selected a single arbitrator to conduct the proceedings. An initial case management conference before the arbitrator was held on June 29, 2018. Pursuant to the release agreements, however, mediation is a precondition to arbitration. A mediation was held on October 4-5, 2018, and a settlement was reached with all 16 named and opt-in plaintiffs who were compelled to arbitrate. A settlement agreement has been signed. The case will continue to proceed in Court, however, with respect to other putative class members. Former business units of the Company now owned by Perspecta will be proportionately liable for any recovery by plaintiffs in this matter.

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 United Kingdom. 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 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.


47
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Note 21 - Reconciliation of Previously Reported Amounts to Recast Financial Statements

As described in Note 2 - "Recent Accounting Pronouncements," during the first quarter of fiscal 2019, the Company adopted ASU's 2017-07, 2016-18 and 2016-15. The adoption of these standards requires the Company to recast each prior period presented consistent with the new guidance. As described in Note 4 - "Divestitures," on May 31, 2018, the Company completed the Separation of USPS. As a result, the results of operations and financial position of USPS are reflected in the accompanying statements of operations and balance sheets as discontinued operations and each prior period presented has been recast to present USPS as a discontinued operation.

A reconciliation of the amounts previously reported for the three and six months ended September 30, 2017 in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 to those as adjusted within the accompanying financial statements is shown in the tables below for selected financial amounts:
Condensed Consolidated Statement of Operations
 
Three Months Ended September 30, 2017
(in millions)
 
As Previously Reported
 
Reclassification of Discontinued Operations
 
Retrospective Adoption of ASU 2017-07
 
As Adjusted
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
4,312

 
$
(509
)
 
$
67

 
$
3,870

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
$
672

 
$
(34
)
 
$
6

 
$
644

Other expense (income), net
 
$
1

 
$
—

 
$
(73
)
 
$
(72
)

Condensed Consolidated Statement of Operations
 
Six Months Ended September 30, 2017
(in millions)
 
As Previously Reported
 
Reclassification of Discontinued Operations
 
Retrospective Adoption of ASU 2017-07
 
As Adjusted
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
9,100

 
$
(1,045
)
 
$
124

 
$
8,179

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
$
1,082

 
$
(57
)
 
$
12

 
$
1,037

Other income, net
 
$
(80
)
 
$
—

 
$
(136
)
 
$
(216
)


Condensed Consolidated Statement of Cash Flows
 
Six Months Ended September 30, 2017
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2016-15
 
Retrospective Adoption of ASU 2016-18
 
As Adjusted
Net cash provided by operating activities
 
$
1,543

 
$
(33
)
 
$
—

 
$
1,510

Net cash provided by investing activities
 
$
437

 
$
33

 
$
26

 
$
496

Cash and cash equivalents at beginning of year
 
$
1,263

 
$
—

 
$
5

 
$
1,268

Cash and cash equivalents at end of period
 
$
2,671

 
$
—

 
$
31

 
$
2,702




48
DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 22 - Subsequent Events

Acquisitions

On October 1, 2018 DXC acquired Molina Medicaid Solutions ("MMS"), a Medicaid Management Information Systems (MMIS) business, from Molina Healthcare, Inc. The combination of DXC and MMS strengthens DXC’s ability to provide high quality services to state agencies in the administration of Medicaid programs, including business processing, information technology development and administrative services. On October 1, 2018 DXC also acquired System Partners, a Salesforce Platinum partner in Australia and New Zealand, and argodesign, a product design consultancy based in the United States. On November 2, 2018, DXC acquired TESM, a ServiceNow partner in the United Kingdom, and BusinessNow, a ServiceNow partner in the Nordics.

Share Repurchase Program

On November 8, 2018, DXC announced that its board of directors has approved an incremental $2.0 billion share repurchase authorization. As of October 31, 2018, the Company had $1.3 billion remaining under its previous repurchase authorization. Combined with this authorization, DXC has a current buyback authorization of $3.3 billion. 


49

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 HPES Merger within the anticipated time frame or in the anticipated amounts;
•
other risks related to the HPES Merger including anticipated tax treatment, unforeseen liabilities, and future capital expenditures;
•
the USPS Separation and Mergers may result in disruptions to relationships with customers and other business partners or may not achieve the intended results;
•
the USPS Separation and Mergers could result in substantial tax liability to DXC and our stockholders;
•
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; and
•
the other factors described in Part I Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.

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.


50

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 six months ended September 30, 2018. 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 a world leading independent, end-to-end IT services company, serving nearly 6,000 private and public sector clients from a diverse array of industries across 70 countries. Our technology independence, global talent and extensive partner network deliver transformative digital offerings and solutions that help clients harness the power of innovation to thrive on change.

We generate revenue by offering a wide range of information technology services and solutions primarily in North America, Europe, Asia and Australia. We operate through two segments: GBS and GIS. We market and sell our services directly to clients through our direct sales force operating out of sales offices around the world. Our clients include commercial businesses of many sizes and in many industries and public sector enterprises.

Separation of USPS

On May 31, 2018, we completed the Separation of USPS, and combination with Vencore Holding Corp. and KeyPoint Government Solutions to form Perspecta, an independent public company. As a result of the Separation, the statements of operations, balances sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the statements of cash flows for all periods presented.


51

Segments and Services

Our reportable segments are GBS and GIS. Segment information is included in Note 19 - "Segment Information" to our financial statements. For a discussion of risks associated with our foreign operations, see Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

Global Business Services

GBS provides innovative technology solutions that help our clients address key business challenges and accelerate digital transformations tailored to each client’s industry and specific objectives. GBS offerings include:

•
Enterprise, Cloud Applications and Consulting. We provide industry, business process systems integration and technical delivery experience to maximize value from enterprise application portfolios. We also help clients accelerate their digital transformations and business results with industry, business, technology and complex integration services.
•
Application Services. Our comprehensive services help clients modernize, develop, test and manage their applications.
•
Analytics. Our portfolio of analytics services and robust partner ecosystem helps clients gain rapid insights and accelerate their digital transformation journeys.
•
Business Process Services. We provide seamless digital integration and optimization of front and back office processes, including our Agile Process Automation approach.
•
Industry Software and Solutions. Our industry-specific solutions enable businesses to quickly integrate technology, transform their operations and develop new ways of doing business. Our vertical-specific IP includes insurance, healthcare and life sciences, travel and transportation, and banking and capital markets solutions.

Global Infrastructure Services

GIS provides a portfolio of offerings that deliver predictable outcomes and measurable results, while reducing business risk and operational costs for clients. GIS offerings include:

•
Cloud and Platform Services. We help clients maximize their private cloud, public cloud and legacy infrastructures, as well as securely manage their hybrid environments.
•
Workplace and Mobility. Our workplace, mobility and Internet of Things ("IoT") services provide a consumer-like experience with enterprise security and instant connectivity for our clients.
•
Security. Our security solutions help predict attacks, proactively respond to threats, ensure compliance and protect data, applications, infrastructure and endpoints.



52

Results of Operations

The following table calculates the period-over-period changes in the statements of operations:
 
 
Three Months Ended
(In millions, except per-share amounts)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
Revenues
 
$
5,013

 
$
5,453

 
$
(440
)
 
(8.1
)%
Total costs and expenses
 
4,681

 
5,169

 
(488
)
 
(9.4
)%
Income from continuing operations before income taxes
 
332

 
284

 
48

 
16.9
 %
Income tax expense
 
73

 
79

 
(6
)
 
(7.6
)%
Income from continuing operations
 
259

 
205

 
54

 
26.3
 %
Income from discontinued operations, net of taxes
 
—

 
60

 
(60
)
 
(100.0
)%
Net income
 
$
259

 
$
265

 
$
(6
)
 
(2.3
)%
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.92

 
$
0.67

 
$
0.25

 
37.3
 %

 
 
Six Months Ended
(In millions, except per-share amounts)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
Revenues
 
$
10,295

 
$
10,689

 
$
(394
)
 
(3.7
)%
Total costs and expenses
 
9,603

 
10,314

 
(711
)
 
(6.9
)%
Income from continuing operations before income taxes
 
692

 
375

 
317

 
84.5
 %
Income tax expense
 
202

 
62

 
140

 
225.8
 %
Income from continuing operations
 
490

 
313

 
177

 
56.5
 %
Income from discontinued operations, net of taxes
 
35

 
125

 
(90
)
 
(72.0
)%
Net income
 
$
525

 
$
438

 
$
87

 
19.9
 %
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
1.69

 
$
1.00

 
$
0.69

 
69.0
 %


Fiscal 2019 Highlights

Financial highlights for the second quarter and first six months of fiscal 2019 include the following:

•
Revenues for the second quarter and first six months of fiscal 2019 were $5.0 billion and $10.3 billion, respectively, a decrease of 8.1% and 3.7%, respectively, as compared to same periods of the prior fiscal year.
•
Income from continuing operations and diluted EPS from continuing operations for the second quarter of fiscal 2019 were $259 million and $0.92, respectively, including the cumulative impact of certain items of $314 million, reflecting restructuring costs, transaction, separation and integration-related costs and amortization of acquired intangible assets. This compares with income from continuing operations and diluted EPS from continuing operations of $205 million and $0.67, respectively, for the same period of the prior fiscal year.
•
Income from continuing operations and diluted EPS from continuing operations for the first six months of fiscal 2019 were $490 million and $1.69, respectively, including the cumulative impact of certain items of $647 million, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets and a tax adjustment related to U.S. tax reform. This compares with income from continuing operations and diluted EPS from continuing operations of $313 million and $1.00, respectively, for the same period of the prior fiscal year.
•
Our cash and cash equivalents increased to $2.8 billion as of September 30, 2018 from $2.6 billion as of March 31, 2018.

53

•
Net cash provided by operating activities was $885 million during the first six months of fiscal 2019, as compared to $1,510 million during the first six months of fiscal 2018.
•
We returned $552 million to shareholders in the form of common stock dividends and share repurchases during the first six months of fiscal 2019, as compared to $138 million during the first six months of fiscal 2018.


54

Revenues

Our revenues for the second quarter and first six months of fiscal 2019 and fiscal 2018 were as follows:
 
 
Three Months Ended
 
 
 
 
(in millions)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
GBS
 
$
2,111

 
$
2,311

 
$
(200
)
 
(8.7
)%
GIS
 
2,902

 
3,142

 
(240
)
 
(7.6
)%
Total Revenues
 
$
5,013

 
$
5,453

 
$
(440
)
 
(8.1
)%

 
 
Six Months Ended
 
 
 
 
(in millions)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
GBS
 
$
4,324

 
$
4,578

 
$
(254
)
 
(5.5
)%
GIS
 
5,971

 
6,111

 
(140
)
 
(2.3
)%
Total Revenues
 
$
10,295

 
$
10,689

 
$
(394
)
 
(3.7
)%

During the second quarter and first six months of fiscal 2019 and fiscal 2018, the distribution of our revenues across geographies was as follows:

chart-0be71ae7c99171e2cdea21.jpg


55

chart-665c69767bf69118070a21.jpg
As a global company, approximately 64% of our revenues for the first six months of fiscal 2019 were earned internationally. As a result, the comparison of revenues denominated in currencies other than the U.S. dollar from period to period is impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. Constant currency revenues are a non-GAAP measure calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. The table below summarizes our constant currency revenues:
 
 
Three Months Ended
 
 
 
 
(in millions)
 
Constant Currency September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
GBS
 
$
2,151

 
$
2,311

 
$
(160
)
 
(6.9
)%
GIS
 
2,962

 
3,142

 
(180
)
 
(5.7
)%
Total
 
$
5,113

 
$
5,453

 
$
(340
)
 
(6.2
)%

 
 
Six Months Ended
 
 
 
 
(in millions)
 
Constant Currency September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
GBS
 
$
4,314

 
$
4,578

 
$
(264
)
 
(5.8
)%
GIS
 
5,940

 
6,111

 
(171
)
 
(2.8
)%
Total
 
$
10,254

 
$
10,689

 
$
(435
)
 
(4.1
)%

56



Our revenues were $5,013 million in the second quarter of fiscal 2019, a decrease of 8.1% compared to the second quarter of fiscal 2018. Revenues for the second quarter of fiscal 2019 included an unfavorable foreign currency exchange rate impact of 1.9%, primarily driven by by the strengthening of the U.S. dollar in the majority of our international markets.

Our revenues were $10,295 million in the first six months of fiscal 2019, a decrease of 3.7% compared to the first six months of fiscal 2018. Revenues for the first six months of fiscal 2019 included a favorable foreign currency exchange rate impact of 0.4%, primarily driven by the strengthening of the Euro and British Pound against the U.S. dollar.

Global Business Services

GBS revenue was $2,111 million in the second quarter and $4,324 million in the first six months of fiscal 2019, a decrease of 8.7% and 5.5%, respectively, compared to the corresponding periods in fiscal 2018. GBS revenue in constant currency decreased 6.9% and 5.8% in the second quarter and first six months of fiscal 2019, respectively, as compared to the corresponding periods in fiscal 2018. The decrease in GBS revenue in fiscal 2019 periods reflects a decline in the traditional application maintenance and management business. This was partially offset by growth in our enterprise and cloud applications business.

For the second quarter and first six months of fiscal 2019, GBS contract awards were $2.2 billion and $4.2 billion, respectively, compared to $2.5 billion and $4.9 billion in the corresponding periods of fiscal 2018.

Global Infrastructure Services

GIS revenue was $2,902 million in the second quarter and $5,971 million in the first six months of fiscal 2019, a decrease of 7.6% and 2.3%, respectively, compared to the corresponding periods in fiscal 2018. GIS revenue in constant currency decreased 5.7% and 2.8% in the second quarter and fist six months of fiscal 2019, respectively, as compared to the corresponding periods in fiscal 2018. The decrease in GIS revenue in fiscal 2019 periods reflects the timing of client migrations from traditional to cloud environments.

For the second quarter and first six months of fiscal 2019, GIS contract awards were $2.5 billion and $5.1 billion, respectively, compared to $2.8 billion and $6.5 billion in the corresponding periods of fiscal 2018.


57

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)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,518

 
$
3,870

 
70.1
 %
 
71.1
 %
 
(1.0
)%
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
569

 
644

 
11.4

 
11.8

 
(0.4
)
Depreciation and amortization
 
484

 
482

 
9.7

 
8.8

 
0.9

Restructuring costs
 
157

 
188

 
3.1

 
3.4

 
(0.3
)
Interest expense
 
83

 
73

 
1.7

 
1.3

 
0.4

Interest income
 
(33
)
 
(16
)
 
(0.7
)
 
(0.3
)
 
(0.4
)
Other income, net
 
(97
)
 
(72
)
 
(1.9
)
 
(1.3
)
 
(0.6
)
Total costs and expenses
 
$
4,681

 
$
5,169

 
93.4
 %
 
94.8
 %
 
(1.4
)%

 
 
Six Months Ended
 
 
 
 
Amount
Percentage of Revenues
 
Percentage of Revenue Change
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
7,385

 
$
8,179

 
71.8
 %
 
76.5
 %
 
(4.7
)%
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,009

 
1,037

 
9.8

 
9.7

 
0.1

Depreciation and amortization
 
955

 
824

 
9.3

 
7.7

 
1.6

Restructuring costs
 
342

 
375

 
3.3

 
3.5

 
(0.2
)
Interest expense
 
168

 
147

 
1.6

 
1.4

 
0.2

Interest income
 
(65
)
 
(32
)
 
(0.6
)
 
(0.3
)
 
(0.3
)
Other income, net
 
(191
)
 
(216
)
 
(1.9
)
 
(2.0
)
 
0.1

Total costs and expenses
 
$
9,603

 
$
10,314

 
93.3
 %
 
96.5
 %
 
(3.2
)%

The 1.4% and 3.2% improvement in costs and expenses as a percentage of revenue for the second quarter and first six months of fiscal 2019, respectively, reflects continued execution of our major synergy initiatives, including workforce optimization, supply chain efficiencies and rationalization of our real estate footprint.

Costs of Services

Cost of services, excluding depreciation and amortization and restructuring costs ("COS"), was $3.5 billion and $7.4 billion for the second quarter and first six months of fiscal 2019, respectively. COS decreased $0.4 billion and $0.8 billion, or 1.0% and 4.7% as a percentage of revenue, during the second quarter and first six months of fiscal 2019, respectively, as compared to the same periods of the prior fiscal year. These decreases were driven by headcount reduction and procurement efficiencies. Employee labor costs, as a percentage of revenue, decreased in both segments and across our geographic regions, year-over-year.


58

Selling, General, and Administrative

Selling, general, and administrative expense, excluding depreciation and amortization and restructuring costs ("SG&A"), was $569 million and $1,009 million for the second quarter and first six months of fiscal 2019, respectively. The $75 million decrease in SG&A in the second quarter reflects the previously disclosed classification error in the prior year statement of operations, which resulted in an overstatement of approximately $124 million to SG&A and an understatement of $124 million to COS for the second quarter of fiscal 2018, after giving effect to the Separation. This error had no impact on the year-over-year comparison for the six month periods. SG&A expense as a percentage of revenue for the first six months of fiscal 2019 was consistent on a year-over-year basis.

Transaction, separation and integration-related costs of $128 million and $198 million were included in SG&A for the second quarter and first six months of fiscal 2019, respectively, as compared to $66 million and $190 million for the comparable periods of the prior fiscal year.

Depreciation and Amortization

Depreciation expense decreased $3 million and amortization expense increased $5 million for the second quarter of fiscal 2019, compared to the second quarter fiscal 2018. For the first six months of fiscal 2019, depreciation expense increased $35 million and amortization expense increased $96 million compared to the first six months of fiscal 2018.

The increase in depreciation expense for the first six months of fiscal 2019 was due to an increase in depreciable assets for the six months ended September 30, 2018 as compared to the same period in the prior fiscal year.

The increase in amortization expense for the first six months of fiscal 2019 was primarily due to the acceleration of amortization related to transition and transformation contract costs and an increase in software as compared the first six months of fiscal 2019.

Restructuring Costs

During fiscal 2019, management approved global cost savings initiatives designed to better align our organizational structure with our strategic initiatives and continue the integration of HPES and other acquisitions. During the second quarter and the first six months of fiscal 2019, restructuring costs, net of reversals, were $157 million and $342 million, respectively, as compared to $188 million and $375 million during the same periods of the prior fiscal year.

For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 13 - "Restructuring Costs."

Interest Expense and Interest Income

Interest expense in the second quarter and first six months of fiscal 2019 increased $10 million and $21 million, respectively, over the same periods in the prior fiscal year. The increase in interest expense was primarily due to our cross currency cash pool arrangements and is offset by interest income resulting from those arrangements.

Interest income in the second quarter and first six months of fiscal 2019 increased $17 million and $33 million, respectively, over the same periods in the prior fiscal year. The year-over-year increase in interest income was due to an increase in cash balances in countries with higher interest rates.


59

Other Income, Net

Other income, net, which includes non-service cost components of net periodic pension income, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates, gain on sale of non-operating assets and other miscellaneous gains and losses increased $25 million year-over-year for the second quarter of fiscal 2019.

The $25 million decrease in other income, net for the first six months of fiscal 2019, as compared to the same period of fiscal 2018, was due to a year-over-year unfavorable foreign currency impact of $90 million resulting primarily from the change in the functional currency of a European holding company during the first six months of fiscal 2018, which was not present in the current fiscal year. This unfavorable impact was partially offset by the year-over-year increase in the non-service cost components of net periodic pension income, the gain on sale of certain non-operating assets, and other miscellaneous gains.

Taxes

Our ETR from continuing operations ("ETR") was 22.0% and 27.8% for the three months ended September 30, 2018 and September 30, 2017, respectively, and 29.2% and 16.5% for the six months ended September 30, 2018 and September 30, 2017, respectively. For the three months ended September 30, 2018, the primary unfavorable drivers of the ETR were global mix of income; increase in state tax expense due to remeasurement of deferred taxes, and the impact of U.S. proposed regulations on the ability to claim certain foreign tax credits. The primary favorable drivers of the ETR were due to the filing of the October 31, 2017 U.S. federal tax return and a decrease in valuation allowances on certain foreign subsidiary deferred tax assets. For the six months ended September 30, 2018, the primary unfavorable drivers of the ETR were the global mix of income; the increase in the provisional transition tax and the proposed regulations on the ability to claim certain foreign tax credits. The primary favorable drivers of the ETR were due to filing of the October 31, 2017 U.S. federal tax return and net decrease in valuation allowances on certain foreign deferred tax assets. For the three and six months ended September 30, 2017, the primary drivers of the ETR were the change in global mix of income due to the HPES Merger, the reduction of a deferred tax liability recorded on the outside basis difference of a foreign subsidiary due to current year earnings and taxes, excess tax benefits related to employee share-based payment awards and releases of valuation allowances for deferred tax assets of legacy CSC.

The tax expense associated with discontinued operations was $0 million and $43 million for the three months ended September 30, 2018 and September 30, 2017, respectively. The tax expense associated with discontinued operations was $18 million and $72 million for the six months ended September 30, 2018 and September 30, 2017, respectively. The primary driver of the variance in the tax expense for these periods was the difference in income before tax for the respective periods.

Income from Discontinued Operations

Income from discontinued operations reflects the net income generated by USPS. As the Separation occurred on May 31, 2018, there are only two months of USPS results included in the first six months of fiscal 2019.

Earnings per Share

Diluted EPS from continuing operations for the second quarter and first six months of fiscal 2019 increased $0.25 and $0.69, respectively, from the same periods in the prior fiscal year. This increase reflects an increase of $54 million and $177 million in income from continuing operations for the second quarter and first six months of fiscal 2019, respectively, over the same periods in the prior fiscal year.

Diluted EPS from continuing operations for the second quarter of fiscal 2019 includes $0.41 per share of restructuring costs, $0.34 per share of transaction, separation and integration-related costs and $0.35 per share of amortization of acquired intangible assets.

Diluted EPS from continuing operations for the first six months of fiscal 2019 includes $0.90 per share of restructuring costs, $0.53 per share of transaction, separation and integration-related costs, $0.70 per share of amortization of acquired intangible assets and $0.11 per share of tax adjustment related to U.S. tax reform.


60

Non-GAAP Financial Measures

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

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

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

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)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
Income from continuing operations before income taxes
 
$
332

 
$
284

 
$
48

 
16.9
 %
Non-GAAP income from continuing operations before income taxes
 
$
749

 
$
683

 
$
66

 
9.7
 %
Net income

 
$
259

 
$
265

 
$
(6
)
 
(2.3
)%
Adjusted EBIT
 
$
799

 
$
740

 
$
59

 
8.0
 %

 
 
Six Months Ended
 
 
 
 
(in millions)
 
September 30, 2018
 
September 30, 2017
 
Change
 
Percentage Change
Income from continuing operations before income taxes
 
$
692

 
$
375

 
$
317

 
84.5
%
Non-GAAP income from continuing operations before income taxes
 
$
1,499

 
$
1,195

 
$
304

 
25.4
%
Net income

 
$
525

 
$
438

 
$
87

 
19.9
%
Adjusted EBIT
 
$
1,602

 
$
1,310

 
$
292

 
22.3
%


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, separation and integration-related costs - reflects costs related to integration planning, financing and advisory fees associated with the HPES Merger and other acquisitions and costs related to the separation of USPS.
•
Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business

61

combinations.
•
Tax adjustment - reflects the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017 for fiscal 2019,
and the application of an approximate 28% tax rate for fiscal 2018, which is within the targeted effective tax rate range for the prior year.



A reconciliation of reported results to non-GAAP results is as follows:
 
 
Three Months Ended September 30, 2018
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,518

 
$
—

 
$
—

 
$
—

 
$
3,518

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
569

 
—

 
(128
)
 
—

 
441

Income from continuing operations before income taxes
 
332

 
157

 
128

 
132

 
749

Income tax expense
 
73

 
41

 
30

 
32

 
176

Income from continuing operations
 
259

 
116

 
98

 
100

 
573

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
—

 
—

Net income
 
259

 
116

 
98

 
100

 
573

Less: net (loss) income attributable to non-controlling interest, net of tax
 
(3
)
 
—

 
—

 
—

 
(3
)
Net income attributable to DXC common stockholders
 
$
262

 
$
116

 
$
98

 
$
100

 
$
576

 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
22.0
%
 
 
 
 
 
 
 
23.5
%
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.93

 
$
0.41

 
$
0.35

 
$
0.36

 
$
2.05

Diluted EPS from continuing operations
 
$
0.92

 
$
0.41

 
$
0.34

 
$
0.35

 
$
2.02

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
281.37

 
281.37

 
281.37

 
281.37

 
281.37

Diluted EPS
 
285.78

 
285.78

 
285.78

 
285.78

 
285.78



62

 
 
Six Months Ended September 30, 2018
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Tax Adjustment
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
7,385

 
$
—

 
$
—

 
$
—

 
$
—

 
$
7,385

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,009

 
—

 
(198
)
 
—

 
—

 
$
811

Income before income taxes
 
692

 
342

 
198

 
267

 
—

 
1,499

Income tax expense (benefit)
 
202

 
82

 
46

 
65

 
(33
)
 
362

Income from continuing operations
 
490

 
260

 
152

 
202

 
33

 
1,137

Income from discontinued operations, net of tax
 
35

 
—

 
—

 
—

 
—

 
35

Net income
 
525

 
260

 
152

 
202

 
33

 
1,172

Less: net income attributable to non-controlling interest, net of tax
 
4

 
—

 
—

 
—

 
—

 
4

Net income attributable to DXC common stockholders
 
$
521

 
$
260

 
$
152

 
$
202

 
$
33

 
$
1,168

 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
29.2
%
 
 
 
 
 
 
 
 
 
24.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
1.72

 
$
0.92

 
$
0.54

 
$
0.71

 
$
0.12

 
$
4.01

Diluted EPS from continuing operations
 
$
1.69

 
$
0.90

 
$
0.53

 
$
0.70

 
$
0.11

 
$
3.94

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
282.89

 
282.89

 
282.89

 
282.89

 
282.89

 
282.89

Diluted EPS
 
287.53

 
287.53

 
287.53

 
287.53

 
287.53

 
287.53



63

 
 
Three Months Ended September 30, 2017
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Tax Adjustment
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,870

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,870

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
644

 
—

 
(66
)
 
—

 
—

 
$
578

Income before income taxes
 
284

 
188

 
66

 
145

 
—

 
683

Income tax expense
 
79

 
—

 
—

 
—

 
112

 
191

Income from continuing operations
 
205

 
188

 
66

 
145

 
(112
)
 
492

Income from discontinued operations, net of tax
 
60

 
—

 
—

 
—

 
 
 
60

Net income
 
265

 
188

 
66

 
145

 
(112
)
 
552

Less: net income attributable to non-controlling interest, net of tax
 
9

 
 
 
 
 
—

 
—

 
9

Net income attributable to DXC common stockholders
 
$
256

 
$
188

 
$
66

 
$
145

 
$
(112
)
 
$
543

 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
27.8
%
 
 
 
 
 
 
 
 
 
28.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.69

 
$
0.66

 
$
0.23

 
$
0.51

 
$
(0.39
)
 
$
1.70

Diluted EPS from continuing operations
 
$
0.67

 
$
0.65

 
$
0.23

 
$
0.50

 
$
(0.39
)
 
$
1.67

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.87

 
284.87

 
284.87

 
284.87

 
284.87

 
284.87

Diluted EPS
 
289.29

 
289.29

 
289.29

 
289.29

 
289.29

 
289.29



64

 
 
Six Months Ended September 30, 2017
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Tax Adjustment
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
8,179

 
$
—

 
$
—

 
$
—

 
$
—

 
$
8,179

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
1,037

 
—

 
(190
)
 
—

 
—

 
847

Income before income taxes
 
375

 
375

 
190

 
255

 
—

 
1,195

Income tax expense
 
62

 
—

 
—

 
—

 
272

 
334

Income from continuing operations
 
313

 
375

 
190

 
255

 
(272
)
 
861

Income from discontinued operations, net of tax
 
125

 
—

 
—

 
—

 
—

 
125

Net income
 
438

 
375

 
190

 
255

 
(272
)
 
986

Less: net income attributable to non-controlling interest, net of tax
 
23

 
—

 
—

 
—

 
—

 
23

Net income attributable to DXC common stockholders
 
$
415

 
$
375

 
$
190

 
$
255

 
$
(272
)
 
$
963

 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
16.5
%
 
 
 
 
 
 
 
 
 
28.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
1.02

 
$
1.32

 
$
0.67

 
$
0.90

 
$
(0.96
)
 
$
2.95

Diluted EPS from continuing operations
 
$
1.00

 
$
1.30

 
$
0.66

 
$
0.88

 
$
(0.94
)
 
$
2.90

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.35

 
284.35

 
284.35

 
284.35

 
284.35

 
284.35

Diluted EPS
 
289.38

 
289.38

 
289.38

 
289.38

 
289.38

 
289.38




A reconciliation of net income to adjusted EBIT is as follows:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income
 
$
259

 
$
265

 
$
525

 
$
438

Income from discontinued operations, net of taxes
 
—

 
(60
)
 
(35
)
 
(125
)
Income tax expense
 
73

 
79

 
202

 
62

Interest income
 
(33
)
 
(16
)
 
(65
)
 
(32
)
Interest expense
 
83

 
73

 
168

 
147

EBIT
 
382

 
341

 
795

 
490

Restructuring
 
157

 
188

 
342

 
375

Transaction, separation and integration-related costs
 
128

 
66

 
198

 
190

Amortization of acquired intangible assets
 
132

 
145

 
267

 
255

Adjusted EBIT
 
$
799

 
$
740

 
$
1,602

 
$
1,310


65


Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of September 30, 2018, our cash and cash equivalents were $2.8 billion, of which $1.1 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 Tax Cuts and Jobs Act of 2017, and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries, 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 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.

Cash and cash equivalents ("cash") increased to $2.8 billion as of September 30, 2018 from $2.6 billion as of March 31, 2018. The cash flows of USPS have not been segregated and are included in the statements of cash flows for all periods presented. The following table summarizes our cash flow activity:
 
 
Six Months Ended
 
 
(in millions)
 
September 30, 2018
 
September 30, 2017
 
Change
Net cash provided by operating activities
 
$
885

 
$
1,510

 
$
(625
)
Net cash (used in) provided by investing activities
 
(84
)
 
496

 
(580
)
Net cash used in financing activities
 
(686
)
 
(621
)
 
(65
)
Effect of exchange rate changes on cash and cash equivalents
 
(64
)
 
49

 
(113
)
Net increase in cash and cash equivalents
 
$
51

 
$
1,434

 
$
(1,383
)
Cash and cash equivalents at beginning-of-year
 
2,729

 
1,268

 
 
Cash and cash equivalents at the end-of-period
 
$
2,780

 
$
2,702

 
 

Net cash provided by operating activities during the first six months of fiscal 2019 was $885 million as compared to $1,510 million during the comparable period of the prior fiscal year. The year-over-year decrease of $625 million was due to a decrease in working capital movements of $679 million, an increase of $65 million in gain on dispositions, a decrease in other non-cash items of $50 million and the increase in unrealized foreign currency gain of $16 million over the prior fiscal year. These decreases were partially offset by an increase in net income of $87 million and an increase in depreciation and amortization expense of $98 million.

Net cash used in investing activities during the first six months of fiscal 2019 was $84 million, as compared to net cash provided by investing activities of $496 million during the comparable period of the prior fiscal year. The decrease of $580 million was primarily due to a reduction in cash received from the HPES Merger of $974 million, offset by a reduction in cash paid for acquisitions of $109 million and a net cash outflow from business dispositions of $65 million over the prior fiscal year. These decreases were partially offset by cash collections of $376 million associated with the deferred purchase price receivable generated from the sale of our trade receivables and presented within investing activities pursuant to ASU 2016-15 as discussed in Note 2 - "Recent Accounting Pronouncements."

Net cash used in financing activities during the first six months of fiscal 2019 was $686 million, as compared to $621 million during the comparable period of the prior fiscal year. The $65 million increase in cash used in financing activities was primarily due to an increase in payments on long-term debt obligations of $927 million, an increase in payments on capitalized lease obligations and borrowings for asset financing of $32 million, an increase in repurchases of common stock of $381 million and an increase in dividend payments of $33 million. These cash outflows were offset by borrowings related to the Separation of USPS of $1,114 million and a reduction of payments on borrowings under lines of credit of $335 million.


66


Capital Resources

The following table summarizes our total debt:
 
 
As of
(in millions)
 
September 30, 2018
 
March 31, 2018
Short-term debt and current maturities of long-term debt
 
$
1,618

 
$
1,918

Long-term debt, net of current maturities
 
5,409

 
6,092

Total debt
 
$
7,027

 
$
8,010


The $1.0 billion decrease in total debt during the first six months of fiscal 2019 was primarily attributed to the repayment of $899 million principal amount of the USD term loan due 2022. This debt repayment was financed from the cash payment received from Perspecta in connection with the Separation. During the second quarter of fiscal 2019, we completed a senior notes offering in an aggregate principal of €650 million due 2026, the proceeds of which were used to repay the outstanding EUR term facilities and the outstanding USD term facility.

Subsequent to September 30, 2018, we entered into a term loan credit agreement maturing on January 15, 2022, in an aggregate principal amount of £450 million, the proceeds of which were used to repay the £185 million term loan due January 15, 2019 and $150 million of the $650 million Senior Notes due 2021. We have excluded the £185 million term loan maturing on January 15, 2019 from short-term debt and current maturities of long-term debt and included the liability in long-term debt, net of current maturities.

We were in compliance with all financial covenants associated with our borrowings as of September 30, 2018 and September 30, 2017.

The maturity chart below, as of September 30, 2018, summarizes the future maturities of long-term debt principal for the remainder of fiscal 2019 and subsequent fiscal years and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities. For more information on our debt, see Note 11 - "Debt" to the financial statements.


67

chart-7078ec85658a58be93ca21.jpg



The following table summarizes our capitalization ratios:
 
 
As of
(in millions)
 
September 30, 2018
 
March 31, 2018
Total debt
 
$
7,027

 
$
8,010

Cash and cash equivalents
 
2,780

 
2,593

Net debt(1)
 
$
4,247

 
$
5,417

 
 
 
 
 
Total debt
 
$
7,027

 
$
8,010

Equity
 
11,837

 
13,837

Total capitalization
 
$
18,864

 
$
21,847

 
 
 
 
 
Debt-to-total capitalization
 
37.3
%
 
36.7
%
Net debt-to-total capitalization(1)
 
22.5
%
 
24.8
%
        

(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 2.3% decrease in net debt-to-total capitalization as of September 30, 2018 as compared to March 31, 2018 is due to the decrease in total debt and increase in cash and cash equivalents.


68

As of September 30, 2018 , 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
 
Stable
 
-

On September 14, 2018 S&P upgraded its outlook for DXC from Negative to Stable. On September 12, 2018, Fitch affirmed its ratings and outlook for DXC and on September 17, 2018, Moody's assigned a Baa2 rating with a Stable outlook to DXC's Euro denominated Senior Notes due 2026, which were issued during the second quarter of fiscal 2019.

See Note 20 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below.

Liquidity

We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our normal operating requirements for the next 12 months. We expect to continue 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. In addition, we also currently utilize and will further utilize our cross currency cash pool for liquidity needs. However, there is no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future.

Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.

The following table summarizes our total liquidity:
 
 
As of
(in millions)
 
September 30, 2018
Cash and cash equivalents
 
$
2,780

Available borrowings under our revolving credit facility
 
4,000

Total liquidity 
 
$
6,780


Share Repurchases

During the first quarter of fiscal 2018, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. This program became effective on April 3, 2017 with no end date established. During the six months ended September 30, 2018, we repurchased 5,227,923 shares of our common stock at an aggregate cost of $451 million.

Dividends

During the six months ended September 30, 2018, our Board of Directors declared aggregate cash dividends to our stockholders of $0.38 per share, or approximately $109 million. Future dividends are subject to customary board review and approval prior to declaration.

Off-Balance Sheet Arrangements

In the normal course of business, we are party to arrangements that include guarantees, receivables securitization facility and financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance

69

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 Item 7, included in Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2018, other than as disclosed in Note 6 - "Sale of Receivables" and Note 20 - "Commitments and Contingencies" to the financial statements in this Quarterly Report on Form 10-Q.

Contractual Obligations

With the exception of the early repayment of $1.5 billion of term loans and the issuance of the €650 million Senior Notes due 2026 discussed under the subheading "Capital Resources," there have been no material changes, outside the ordinary course of business, to our contractual obligations since March 31, 2018. For further information see "Contractual Obligations" in Item 7, included in Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2018.

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. During the second quarter and first six months of fiscal 2019, there were no changes to our accounting estimates from those described in our fiscal 2018 Annual Report on Form 10-K except as mentioned below.

Revenue Recognition

Most of our revenues are recognized based on objective criteria and do not require significant estimates that may change over time. However, some arrangements may require significant estimates, including contracts which include multiple-element deliverables.

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 performance obligations for revenue recognition purposes, and, when considered appropriate, how the total transaction price should be allocated among the performance obligations and the timing of revenue recognition for each performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Certain of our arrangements involve the sale of DXC proprietary software, post contract customer support and other software-related services. The standalone selling price generally is determined for each performance obligation using an adjusted market assessment approach based on the price charged where each deliverable is sold separately. In certain limited cases (typically for software licenses) when the historical selling price is highly variable, the residual approach is used. This approach allocates revenue to the performance obligation equal to the difference between the total transaction price and the observable standalone selling prices for the other performance obligations. These methods involve significant judgments and estimates that we assess periodically by considering market and entity-specific factors, such as type of customer, features of the products or services and market conditions.


70

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.

Costs to obtain contracts with customers

Accounting for the costs to obtain contracts with customers requires significant judgments and estimates with regards to the determination of sales commission payments that qualify for deferral of costs and the related amortization period. Most of our sales commission plans are quota-based and payments are made by achieving targets related to a large number of new and renewed contracts. Certain sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. We defer and amortize these costs on a straight-line basis over an average period of benefit of five years, which is determined and regularly assessed by considering the length of our customer contracts, our technology and other factors. Significant changes in these estimates or impairment may result if material contracts terminate earlier than the expected benefit period, or if there are material changes in the average contract period.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting DXC, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018. Our exposure to market risk has not changed materially since March 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2018 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 20 - "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, which may materially and adversely affect our business, financial condition, and results of operations, and the actual outcome of matters as to which forward-looking statements are made in this Quarterly Report on Form 10-Q. In such case, the trading price for DXC common stock could decline, and you could lose all or part of your investment. 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 and other variables and risks and uncertainties not currently known or that are currently expected to be immaterial may also materially and adversely affect our business, financial condition, and results of operations or the price of our common stock in the future. There have been no material changes in the three months ended September 30, 2018 to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.




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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

The following table provides information on a monthly basis for the quarter ended September 30, 2018, 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
July 1, 2018 to July 31, 2018
 
998,729

 
$84.03
 
998,729
 
$1,454,097,566
August 1, 2018 to August 31, 2018
 
—

 
$—
 
—
 
$1,454,097,566
September 1, 2018 to September 30, 2018
 
450,000

 
$94.11
 
450,000
 
$1,411,749,723
Total:
 
1,448,729

 
$87.16
 
1,448,729
 
 
    
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

None.

ITEM 6. EXHIBITS

The following exhibits are filed with this report.
Exhibit
Number
Description of Exhibit
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14

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2.15
2.16
2.17
2.18
2.19
2.20
2.21
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

75

4.13
4.14
4.15

4.16
10.1*
10.2*
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
31.1
31.2
32.1
32.2
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
_______________


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*Management contract or compensatory plan or agreement

77


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:
November 8, 2018
By:
/s/ Neil A. Manna
 
 
Name:
Neil A. Manna
 
 
Title:
Senior Vice President, Corporate Controller Principal Accounting Officer
 


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