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DXC Technology Co - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
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
downloada13.jpg
DXC TECHNOLOGY COMPANY
(Exact name of registrant as specified in its charter)
Nevada
 
61-1800317
(State or other jurisdiction 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
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
DXC
New York Stock Exchange
2.750% Senior Notes Due 2025
DXC 25
New York Stock Exchange
1.750% Senior Notes Due 2026
DXC 26
New York Stock Exchange
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

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 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
 
 
 
 
 
Emerging growth company
 

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).
        Yes  x   No

261,962,477 shares of common stock, par value $0.01 per share, were outstanding on July 31, 2019.



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
(in millions, except per-share amounts)
 
June 30, 2019
 
June 30, 2018
 
 
 
 
 
Revenues
 
$
4,890

 
$
5,282

 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
3,622

 
3,867

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
507

 
440

Depreciation and amortization
 
470

 
471

Restructuring costs
 
142

 
185

Interest expense
 
91

 
85

Interest income
 
(30
)
 
(32
)
Other income, net
 
(118
)
 
(94
)
Total costs and expenses
 
4,684

 
4,922

 
 
 
 
 
Income from continuing operations before income taxes
 
206

 
360

Income tax expense
 
38

 
129

Income from continuing operations
 
168

 
231

Income from discontinued operations, net of taxes
 

 
35

Net income
 
168

 
266

Less: net income attributable to non-controlling interest, net of tax
 
5

 
7

Net income attributable to DXC common stockholders
 
$
163

 
$
259

 
 
 
 
 
Income per common share:
 
 
 
 
Basic:
 
 
 
 
Continuing operations
 
$
0.61

 
$
0.79

Discontinued operations
 

 
0.12

 
 
$
0.61

 
$
0.91

Diluted:
 
 
 
 
Continuing operations
 
$
0.61

 
$
0.78

Discontinued operations
 

 
0.12

 
 
$
0.61

 
$
0.90




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





2



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

 
 
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
 
 
 
 
 
 
 
Net income
 
$
168

 
$
266

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $12 and $0
 
(135
)
 
(342
)
 
Cash flow hedges adjustments, net of tax benefit of $0 and $7
 
4

 
(32
)
 
Available-for-sale securities, net of tax expense of $1 and $0
 
1

 
(1
)
 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
Amortization of prior service cost, net of tax expense of $0 and $0
 
(1
)
 
(1
)
 
Pension and other post-retirement benefit plans, net of tax
 
(1
)
 
(1
)
Other comprehensive loss, net of taxes
 
(131
)
 
(376
)
Comprehensive income (loss)
 
37

 
(110
)
 
Less: comprehensive (loss) income attributable to non-controlling interest
 
(19
)
 
1

Comprehensive income (loss) attributable to DXC common stockholders
 
$
56

 
$
(111
)


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)
 
June 30, 2019
 
March 31, 2019
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,868

 
$
2,899

Receivables and contract assets, net of allowance for doubtful accounts of $64 and $60
 
5,234

 
5,181

Prepaid expenses
 
728

 
627

Other current assets
 
360

 
359

Total current assets
 
8,190

 
9,066

 
 
 
 
 
Intangible assets, net of accumulated amortization of $3,638 and $3,399
 
6,468

 
5,939

Operating right-of-use assets, net
 
1,591

 

Goodwill
 
8,806

 
7,606

Deferred income taxes, net
 
356

 
355

Property and equipment, net of accumulated depreciation of $4,150 and $3,958
 
3,628

 
3,179

Other assets
 
3,538

 
3,429

Total Assets
 
$
32,577

 
$
29,574

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
1,511

 
1,942

Accounts payable
 
1,517

 
1,666

Accrued payroll and related costs
 
746

 
652

Current operating lease liabilities
 
586

 

Accrued expenses and other current liabilities
 
3,183

 
3,355

Deferred revenue and advance contract payments
 
1,609

 
1,630

Income taxes payable
 
186

 
208

Total current liabilities
 
9,338

 
9,453

 
 
 
 
 
Long-term debt, net of current maturities
 
7,893

 
5,470

Non-current deferred revenue
 
309

 
256

Non-current operating lease liabilities
 
1,129

 

Non-current income tax liabilities and deferred tax liabilities
 
1,281

 
1,184

Other long-term liabilities
 
1,410

 
1,486

Total Liabilities
 
21,360

 
17,849

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $.01 per share, 1,000,000 shares authorized, none issued as of June 30, 2019 and March 31, 2019
 

 

Common stock, par value $.01 per share, 750,000,000 shares authorized, 263,709,277 issued as of June 30, 2019 and 270,213,891 issued as of March 31, 2019
 
3

 
3

Additional paid-in capital
 
10,916

 
11,301

Retained earnings
 
494

 
478

Accumulated other comprehensive (loss) income
 
(351
)
 
(244
)
Treasury stock, at cost, 1,995,753 and 1,788,658 shares as of June 30, 2019 and March 31, 2019
 
(149
)
 
(136
)
Total DXC stockholders’ equity
 
10,913

 
11,402

Non-controlling interest in subsidiaries
 
304

 
323

Total Equity
 
11,217

 
11,725

Total Liabilities and Equity
 
$
32,577

 
$
29,574


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

4


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
168

 
$
266

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
474

 
509

Operating right-of-use expense
 
176

 

Share-based compensation
 
18

 
22

Gain on dispositions
 
(8
)
 
(46
)
Unrealized foreign currency exchange gains
 
(14
)
 
(16
)
Other non-cash charges, net
 
(5
)
 
12

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Increase in assets
 
(335
)
 
(300
)
Decrease in operating lease liability
 
(174
)
 

Decrease in other liabilities
 
(366
)
 
(78
)
Net cash (used in) provided by operating activities
 
(66
)
 
369

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(105
)
 
(79
)
Payments for transition and transformation contract costs
 
(72
)
 
(92
)
Software purchased and developed
 
(63
)
 
(49
)
Payments for acquisitions, net of cash acquired
 
(1,911
)
 
(43
)
Business dispositions
 

 
(65
)
Cash collections related to deferred purchase price receivable
 
371

 
137

Proceeds from sale of assets
 
21

 
19

Short-term investing
 
(75
)
 

Other investing activities, net
 
12

 
(8
)
Net cash used in investing activities
 
(1,822
)
 
(180
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings of commercial paper
 
1,401

 
633

Repayments of commercial paper
 
(1,401
)
 
(633
)
Borrowings on long-term debt, net of discount
 
2,198

 
483

Principal payments on long-term debt
 
(509
)
 
(1,278
)
Payments on finance leases and borrowings for asset financing
 
(210
)
 
(259
)
Borrowings for USPS spin transaction
 

 
1,114

Proceeds from stock options and other common stock transactions
 
7

 
9

Taxes paid related to net share settlements of share-based compensation awards
 
(12
)
 
(1
)
Repurchase of common stock and advance payment for accelerated share repurchase
 
(500
)
 
(314
)
Dividend payments
 
(51
)
 
(51
)
Other financing activities, net
 
(36
)
 
(3
)
Net cash provided by (used in) financing activities
 
887

 
(300
)
Effect of exchange rate changes on cash and cash equivalents
 
(30
)
 
(39
)
Net decrease in cash and cash equivalents
 
(1,031
)
 
(150
)
Cash and cash equivalents at beginning of year
 
2,899

 
2,729

Cash and cash equivalents at end of period
 
$
1,868

 
$
2,579


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 (1)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Balance at March 31, 2019
270,214

 
$
3

$
11,301

$
478

$
(244
)
$
(136
)
$
11,402

$
323

$
11,725

Net Income
 
 
 
 
163

 
 
163

5

168

Other comprehensive loss
 
 
 
 
 
(107
)
 
(107
)
(24
)
(131
)
Share-based compensation expense
 
 
 
18

 
 
 
18

 
18

Acquisition of treasury stock
 
 
 
 
 
 
(13
)
(13
)
 
(13
)
Share repurchase program
(7,360
)
 


(410
)
(90
)
 
 
(500
)
 
(500
)
Stock option exercises and other common stock transactions
855

 


7

 
 

7

 
7

Dividends declared ($0.21 per share)
 
 
 
 
(57
)
 
 
(57
)
 
(57
)
Balance at June 30, 2019
263,709

 
$
3

$
10,916

$
494

$
(351
)
$
(149
)
$
10,913

$
304

$
11,217

 
 
 
 
 
 
 
 
 
 
 
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
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
 
 
 
 
259

 
 
259

7

266

Other comprehensive loss
 
 
 
 
 
(370
)
 
(370
)
(6
)
(376
)
Share-based compensation expense
 
 
 
22

 
 
 
22

 
22

Acquisition of treasury stock
 
 
 
 
 
 
(2
)
(2
)
 
(2
)
Share repurchase program
(3,779
)
 


(193
)
(131
)
 
 
(324
)
 
(324
)
Stock option exercises and other common stock transactions
215

 


6

 
 
 
6

 
6

Dividends declared ($0.19 per share)
 
 
 
 
(55
)
 
 
(55
)
 
(55
)
Non-controlling interest distributions and other
 
 
 
 
3

 
 
3

(9
)
(6
)
Divestiture of USPS
 
 
 
(177
)
(1,491
)
 
 
(1,668
)
 
(1,668
)
Balance at June 30, 2018
282,829

 
$
3

$
11,868

$

$
(312
)
$
(87
)
$
11,472

$
342

$
11,814


(1) 1,995,753 treasury shares as of June 30, 2019



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"), a world leading independent, end-to-end IT services company, manages and modernizes mission-critical systems, integrating them with new digital solutions to produce better business outcomes. The Company’s global reach and talent, innovative platforms, technology independence and extensive partner network enable and extensive partnership network enable more than 6,000 private and public-sector clients in approximately 70 countries to thrive on change.

Luxoft Acquisition

On June 14, 2019, DXC completed its acquisition of Luxoft Holding, Inc. ("Luxoft"), a global digital strategy and software engineering firm (the "Luxoft Acquisition"). The acquisition builds on DXC’s unique value proposition as an end-to-end, mainstream IT and digital services market leader, and strengthens the Company’s ability to design and deploy transformative digital solutions for clients at scale. See Note 3 - "Acquisitions" for further information.

Separation of USPS

On May 31, 2018, DXC completed the separation of its U.S. Public Sector business ("USPS") (the "Separation"), and combination 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 Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the Condensed Consolidated Statement of Cash Flows for the three months ended June 30, 2018.

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 (Loss) 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.


7

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


The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports and accounting principles generally accepted in the United States ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019 ("fiscal 2019").

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 are not necessarily indicative of the results to be expected for the full fiscal year.

Leases

Effective April 1, 2019, the Company adopted ASU 2016-02, "Leases, Topic ASC 842" using the modified retrospective method. Refer to Note 7 - "Leases" for further discussion of impact of adoption and other required disclosures. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether DXC obtains substantially all economic benefits from and has the ability to direct the use of the asset. Operating leases are included in operating right-of-use ("ROU") assets, net, current operating lease liabilities and non-current operating lease liabilities in DXC's balance sheets. Finance leases are included in property and equipment, net, short term debt and current maturities of long-term debt and long-term debt, net of current maturities in DXC's balance sheets.  

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As most of the Company's leases do not provide an implicit rate, DXC uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that DXC would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term. The rate is dependent on several factors, including the lease term, currency of the lease payments and the Company's credit ratings.

Operating ROU assets also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating ROU assets and lease liabilities include these options when it is reasonably certain that they will be exercised. Lease arrangements generally do not contain any residual value guarantees or material restrictive covenants.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease expense is related to the Company's leased real estate for offices and primarily includes labor and operational costs. DXC subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not material for all periods presented. The Company combines lease and non-lease components under its lease agreements.


8

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


Property and Equipment

Property and equipment, which includes assets under capital leases, are stated at cost less accumulated depreciation. Depreciation is computed predominantly on a straight-line basis over the estimated useful lives of the assets or the remaining lease term, whichever is shorter. The estimated useful lives of DXC’s property and equipment are as follows:
Buildings
Up to 40 years
Computers and related equipment
4 to 7 years
Furniture and other equipment
3 to 15 years
Leasehold improvements
Shorter of lease term or useful life up to 20 years


In accordance with its policy, the Company reviews the estimated useful lives of its property and equipment on an ongoing basis. As a result, effective April 1, 2019, the Company changed its estimate of the useful lives of its computers and related equipment from an average of four to five years to an average of four to seven years, which better reflects the estimated periods during which these assets will remain in service. This change resulted in a $49 million decrease to depreciation expense for three months ended June 30, 2019.

9

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



Note 2 - Recent Accounting Pronouncements

During the three months ended June 30, 2019, 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
February 2016

ASU 2016-02 "Leases (Topic 842)"
April 1, 2019
Modified retrospective
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.

The Company adopted this update on April 1, 2019 utilizing the simplified transition method allowing the Company to not restate comparative periods and apply Topic 842 beginning on April 1, 2019. During adoption, Company has implemented changes in its systems, including the implementation of new lease accounting software, internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance with, the new guidance. The adoption resulted in following impacts.

The Company recorded increases of $1.7 billion in assets and $1.8 billion in liabilities as of April 1 2019, due to the recording of operating right-of-use assets and operating lease liabilities for lease obligations that were historically classified as operating leases. The Company's cumulative adjustment to the opening balance of retained earnings was not material. Additionally, the update does not have a material impact on the statements of operations or statements of cash flows.

DXC elected the practical expedient package permitted under Topic 842, which among other things, permits the Company not to reassess historical conclusions related to contracts that contain leases, lease classification and initial direct costs for leases that commenced prior to the adoption date. DXC applied the lessee component election, allowing the Company to account for lease and non-lease components as a single lease component. In addition, DXC made an accounting policy election to keep leases with an initial term of 12 months or less that do not contain a ‘reasonably certain’ purchase option off the balance sheets.
 
Refer to Note 7 - "Leases" for further discussion of the impact of adoption and other required disclosure.



February 2018

ASU 2018-02 - "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income"

April 1, 2019
Retrospective

This update provides an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect (or portion thereof) of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded.
The Company adopted this update as of April 1, 2019 and opted to not elect to reclassify any stranded tax effects within AOCI to retained earnings, and as such, the adoption of ASU 2018-02 did not have an effect on its condensed consolidated financial statements. In accordance with its accounting policy, the Company uses the portfolio approach and will release income tax effects from AOCI once the reason the tax effects were established cease to exist (e.g., when available-for-sale debt securities are sold or if a pension plan is liquidated).


10

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
June 2016

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”

Fiscal 2021
This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update must be adopted using a prospective transition approach for debt securities for which an other-than-temporary impairment has been recognized before the effective date
DXC is currently evaluating its trade receivables and financial arrangements for the potential impact this update may have on its financial statements in future reporting periods.




Other recently issued ASUs effective after June 30, 2019 are not expected to have a material effect on DXC's consolidated financial statements.

Note 3 - Acquisitions

Fiscal 2020 Acquisitions

Luxoft Acquisition

On June 14, 2019, DXC completed the acquisition of Luxoft, a digital service provider whose offerings encompass strategic consulting, custom software development services, and digital solution engineering for a total consideration of $2.0 billion. The acquisition will combine Luxoft’s digital engineering capabilities with DXC’s expertise in IT modernization and integration. The purchase agreement (“Merger Agreement”) was entered into by DXC and Luxoft on January 6, 2019 and the transaction was closed on June 14, 2019.

The transaction between DXC and Luxoft is an acquisition, with DXC as the acquirer and Luxoft as the acquiree, based on the fact that DXC acquired 100% of the equity interests and voting rights in Luxoft, and that DXC is the entity that transferred the cash consideration.


11

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


The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed, as well as the fair value of non-controlling interest, are based on the information that was available as of the acquisition date, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the acquisition date. The preliminary estimated purchase price is allocated as follows:
(in millions)
 
Estimated Fair Value
Cash and cash equivalents
 
$
113

Accounts receivable
 
217

Other current assets
 
60

Total current assets
 
390

Property and equipment
 
37

Intangible assets
 
628

Other assets
 
85

Total assets acquired
 
1,140

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(154
)
Deferred revenue
 
(5
)
Long-term deferred tax liabilities and income tax payable
 
(106
)
Other liabilities
 
(61
)
Total liabilities assumed
 
(326
)
Net identifiable assets acquired
 
814

Add: Fair value of non-controlling interests
 

Goodwill
 
1,209

Total estimated consideration transferred
 
$
2,023



Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. The goodwill recognized with the acquisition was attributable to the synergies expected to be achieved by combining the businesses of DXC and Luxoft, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The total goodwill arising from the acquisition was allocated to Global Business Services ("GBS") and is not deductible for tax purposes. See Note 11 - "Goodwill."

Due to the recent completion and complexity of the acquisition, DXC recorded the assets acquired and liabilities assumed at their preliminary fair values. The preliminary purchase price allocation is subject to change as DXC completes its analysis of the fair value at the date of the acquisition.

As of June 30, 2019, DXC has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to, receivables; other current assets; property and equipment; intangible assets; other assets; deferred income taxes, net and other income tax liabilities; deferred revenue and advanced contract payments; accounts payable and accrued liabilities; other liabilities; loss contracts; non-controlling interest; and goodwill.

Current assets and liabilities

For the preliminary fair value estimates reported in first quarter of Fiscal 2020, the Company valued current assets and liabilities using existing carrying values as an estimate for the approximate fair value of those items at the acquisition date.


12

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


Property and equipment

The acquired property and equipment are summarized in the following table:
(in millions)
 
Amount
Land, buildings, and leasehold improvements
 
$
14

Computers and related equipment
 
12

Furniture and other equipment
 
11

Total
 
$
37



Based on the nature of the assets, the Company determined that the net book value represents the preliminary fair value of the property and equipment.

Identified intangible assets

The acquired identifiable intangible assets are summarized in the following table:
(in millions)
 
Amount
 
Estimated Useful Lives (Years)
Customer related intangibles
 
$
542

 
6 to 11 years
Developed technology
 
75

 
7
Third-party purchased software
 
11

 
2 to 10 years
Total
 
$
628

 
 


Developed technology and third-party purchased software are included in the software category in Note 10 -"Intangible Assets".

The Company performed an industry benchmarking analysis based on recent and relevant transactions and identified the percentage of the total consideration that should be allocated to the identified intangible assets categories and calculated the preliminary estimated value. The Company determined that the net book value of the purchased software represents the preliminary fair value.

Deferred tax liabilities

The Company preliminarily valued deferred tax liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.

Unaudited Results

Since the acquisition date, Luxoft had revenues and net income of $45 million and $4 million, respectively.

13

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



Fiscal 2019 Acquisitions

Molina Medicaid Solutions Acquisition

On October 1, 2018, DXC completed its acquisition of Molina Medicaid Solutions ("MMS"), a Medicaid Management Information Systems business, from Molina Healthcare, Inc. for total consideration of $233 million. The combination of MMS with DXC expands DXC’s ability to provide services to state agencies in the administration of Medicaid programs, including business processing, information technology development and administrative services.

The purchase price allocation for the MMS acquisition is preliminary and subject to revision as additional information related to the fair value of contract assets and liabilities becomes available. The preliminary purchase price allocation was based upon the current determination of fair values at the date of acquisition as follows: $91 million to current assets, $112 million to intangible assets other than goodwill, $11 million to other assets, $51 million to current liabilities, $22 million to other liabilities and $92 million to goodwill. The goodwill is associated with the Company's GBS segment and is tax deductible. The intangible assets acquired include customer relationships and developed technology which have a 13-year weighted average estimated useful life.

Other Acquisitions

In addition to the MMS acquisition, DXC completed seven acquisitions to complement the Company's Microsoft Dynamics and ServiceNow offerings and to provide opportunities for future growth. The acquired businesses are included in the results for the GBS segment. The purchase consideration of $232 million includes contingent consideration with an estimated fair value of $41 million. For acquisitions within the measurement period, the Company's purchase price allocation is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The purchase price is allocated to assets acquired and liabilities assumed based upon determination of fair values at the dates of acquisition as follows: $74 million to current assets, $71 million to intangible assets other than goodwill, $9 million to other non-current assets, $63 million to current liabilities and $141 million to goodwill. The goodwill is associated with the Company's GBS segment, some of which is tax deductible.

Note 4 - Divestitures

Separation of USPS

During fiscal 2019, the Company completed the USPS Separation and Mergers to form Perspecta, an independent public company.

Implementation of the Separation and DXC's post-Separation relationship with 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.


14

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


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 for the three months ended June 30, 2019 and balances due to and from Perspecta were immaterial to the Company's balance sheet as of June 30, 2019.

The following is a summary of the operating results for USPS which have been reflected within income from discontinued operations, net of tax:
 
 
Three Months Ended
(in millions)
 
June 30, 2018
Revenue
 
$
431

 
 
 
Costs of services
 
311

Selling, general and administrative
 
50

Depreciation and amortization
 
33

Restructuring costs
 
1

Interest expense
 
8

Other income, net
 
(25
)
Total costs and expenses
 
378

Total income from discontinued operations, before income taxes
 
53

Income tax expense
 
18

Total income from discontinued operations
 
$
35


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:
 
 
Three Months Ended
(in millions)
 
June 30, 2018
Depreciation
 
$
16

Amortization
 
$
17

Capital expenditures
 
$
(47
)
Significant operating non-cash items:
 
 
Gain on dispositions
 
$
24



15

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
(in millions, except per-share amounts)

June 30, 2019
 
June 30, 2018
Net income attributable to DXC common shareholders:
 
 
 
 
From continuing operations
 
$
163

 
$
224

From discontinued operations
 
$

 
$
35

 
 
 
 
 
Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
267.00

 
284.44

Dilutive effect of stock options and equity awards
 
1.97

 
4.86

Weighted average common shares outstanding for diluted EPS
 
268.97

 
289.30

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
 
 
 
Continuing operations
 
$
0.61

 
$
0.79

Discontinued operations
 
$

 
$
0.12

Total
 
$
0.61

 
$
0.91

 
 
 
 
 
Diluted
 
 
 
 
Continuing operations
 
$
0.61

 
$
0.78

Discontinued operations
 
$

 
$
0.12

Total
 
$
0.61

 
$
0.90



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
 
 
June 30, 2019
 
June 30, 2018
Stock Options
 
4,824

 

RSUs
 
589,569

 
54,961



During the first quarter of fiscal 2020, the Company entered into an accelerated share repurchase ("ASR") arrangement, with a maturity date in the second quarter of fiscal 2020. See Note 17 - "Stockholders' Equity". The Company evaluated the ASR arrangement for its potential impact on EPS, and excluded 81,292 shares because their effect would have been anti-dilutive.

16

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



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 subsequently sells the 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 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. Cash receipts on the DPP are classified as cash flows from investing activities.

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 June 30, 2019, the total availability under the Receivables Facility was approximately $431 million and the drawn amount was $414 million. As of June 30, 2019, the Company recorded a $17 million receivable within receivables, net because the amount of cash proceeds received by the Company under the Receivables Facility was 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 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 CSC, as initial servicer, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the Purchasers. However, the performance guaranty does not cover CSC Receivables’ obligations to pay yield, fees or invested amounts to the administrative agent or any of the Purchasers.

The following table is a reconciliation of the beginning and ending balances of the DPP:
(in millions)
 
As of and for the
Three Months Ended
June 30, 2019
 
As of and for the
Three Months Ended
June 30, 2018
Beginning balance
 
$
574

 
$
233

    Transfers of receivables
 
1,214

 
540

Collections
 
(1,265
)
 
(522
)
Change in funding availability
 
2

 
(15
)
Fair value adjustment
 

 
(29
)
Ending balance
 
$
525

 
$
207




17

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


Federal Receivables Sales Facility

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

The following table reflects activity of the Federal Receivables Sales Facility, prior to the Separation:
(in millions)
 
As of and for the
Three Months Ended
June 30, 2018
Transfers of receivables
 
$
464

Collections
 
$
521

Operating cash flow effect
 
$
(57
)



18

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


Note 7 - Leases

The Company has operating and finance leases for data centers, corporate offices, retail stores and certain equipment. Our leases have remaining lease terms of 1 to 13 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 to 3 years.

The components of lease expense were as follows:
(in millions)
 
Three Months ended June 30, 2019
Operating lease cost
 
$
176

Short-term lease cost
 
10

Variable lease cost
 
15

Sublease income
 
(9
)
     Total operating costs
 
$
192

 
 
 
Finance lease cost:
 
 
     Amortization of right-of-use assets
 
$
109

     Interest on lease liabilities
 
17

     Total finance lease cost
 
$
126



Cash payments made from variable lease costs and short-term leases are not included in the measurement of operating and finance lease liabilities, and as such, are excluded from the supplemental cash flow information stated below. In addition, for the supplemental non-cash information on operating and finance leases, please refer to Note 19 - "Cash Flows."
(in millions)
 
Three Months ended June 30, 2019
Cash paid for amounts included in the measurement of:
 
 
     Operating cash flows from operating leases
 
$
174

     Operating cash flows from finance leases
 
$
17

     Financing cash flows from finance leases
 
$
145




19

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


Supplemental Balance Sheet information related to leases was as follows:
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
June 30, 2019
Assets:
 
 
 
 
ROU operating lease assets
 
Operating right-of-use assets, net
 
$
1,591

ROU finance lease assets
 
Property and Equipment, net
 
1,424

Total
 
 
 
$
3,015

 
 
 
 
 
Liabilities:
 
 
 
 
Current
 
 
 
 
Operating lease
 
Current operating lease liabilities
 
$
586

Finance lease
 
Short-term debt and current maturities of long-term debt
 
478

Total
 
 
 
$
1,064

 
 
 
 
 
Non-current
 
 
 
 
Operating lease
 
Non-current operating lease liabilities
 
$
1,129

Finance lease
 
Long-term debt, net of current maturities
 
738

Total
 
 
 
$
1,867


The following table provides information on the weighted average remaining lease term and weighted average discount rate for operating and finance leases:
Weighted Average remaining lease term:
 
Years
     Operating leases
 
4.4

     Finance leases
 
2.9

 
 
 
Weighted average remaining discount rate:
 
Rate
     Operating leases
 
2.8
%
     Finance leases
 
5.2
%


The following maturity analysis presents expected undiscounted cash payments for operating and finance leases on an annual basis as of June 30, 2019:
Fiscal year
 
Operating Leases
 
 
(in millions)
 
Real Estate
 
Equipment
 
Finance Leases
Remainder of 2020
 
$
310

 
$
124

 
$
427

2021
 
367

 
92

 
387

2022
 
287

 
30

 
281

2023
 
207

 
5

 
150

2024
 
157

 
1

 
47

Thereafter
 
281

 

 
1

     Total lease payments
 
1,609

 
252

 
1,293

Less: imputed interest
 
(139
)
 
(7
)
 
(77
)
     Total payments
 
$
1,470

 
$
245

 
$
1,216




20

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


Prior to fiscal 2020, disclosure under ASC 840 required minimum fixed rentals under operating leases that have initial or remaining terms in excess of one year at March 31, 2019, was as follows:

Fiscal year
 
Operating Leases
(in millions)
 
Real Estate
 
Equipment
2020
 
$
409

 
$
248

2021
 
288

 
119

2022
 
203

 
27

2023
 
159

 
4

2024
 
124

 
1

Thereafter
 
274

 

Minimum fixed rentals
 
1,457

 
399

Less: sublease rental income
 
(149
)
 

     Total rental payments
 
$
1,308

 
$
399


Prior to fiscal 2020, disclosure under ASC 840 required future minimum lease payments to be made under finance leases as of March 31, 2019, was as follows:

Fiscal year
 
 
(in millions)
 
Finance leases
2020
 
$
509

2021
 
310

2022
 
212

2023
 
128

2024
 
36

Thereafter
 

Total minimum lease payments
 
1,195

Less: Amount representing interest and executory costs
 
(68
)
     Present value of net minimum lease payments
 
$
1,127





21

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


Note 8 - 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 9 - "Derivative and Hedging Activities" for information about the fair value of the Company's derivative assets and liabilities. There were no transfers between any of the levels during the periods presented.
 
 
 
 
Fair Value Hierarchy
(in millions)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
June 30, 2019
Money market funds and money market deposit accounts
 
$
7

 
$
7

 
$

 
$

Time deposits(1)
 
153

 
153

 

 

Other debt securities(2)
 
55

 

 
51

 
4

Deferred purchase price receivable
 
525

 

 

 
525

Total assets
 
$
740

 
$
160

 
$
51

 
$
529

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
45

 
$

 
$

 
$
45

Total liabilities
 
$
45

 
$

 
$

 
$
45




 
 
March 31, 2019
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
6

 
$
6

 
$

 
$

Time deposits(1)
 
194

 
194

 

 

Other debt securities(2)
 
53

 

 
49

 
4

Deferred purchase price receivable
 
574

 

 

 
574

Total assets
 
$
827

 
$
200

 
$
49

 
$
578

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
41

 
$

 
$

 
$
41

Total liabilities
 
$
41

 
$

 
$

 
$
41


        

(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 $39 million and $38 million, and unrealized gains of $12 million and $11 million, as of June 30, 2019 and March 31, 2019, respectively.

The fair value of money market funds, money market deposit accounts, and time deposits, included in cash and cash equivalents, are based on quoted market prices. The fair value of other debt securities, included in other long-term assets, is based on actual market prices. 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, included in other liabilities, is based on contractually defined targets of financial performance and other considerations.


22

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


Other Fair Value Disclosures

The carrying amounts of the Company’s financial instruments with short-term maturities, primarily accounts receivable, accounts payable, short-term debt, and financial liabilities included in other accrued liabilities, are deemed to approximate their market values due to their short-term nature. If measured at fair value, these financial instruments would be classified 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 finance lease liabilities, was $7.6 billion and $5.6 billion as of June 30, 2019 and March 31, 2019, respectively, as compared with carrying value of $7.5 billion and $5.6 billion as of June 30, 2019 and March 31, 2019, respectively. If measured at fair value, long-term debt, excluding finance 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.

Note 9 - Derivative and Hedging Activities

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

The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee, British Pounds and Euro denominated intercompany obligations and forecasted transactions. The notional amounts of foreign currency forward contracts designated as cash flow hedges as of June 30, 2019 and March 31, 2019 was $463 million and $277 million, respectively. As of June 30, 2019, the related forecasted transactions extend through June 2020.

For the three months ended June 30, 2019 and June 30, 2018, 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 months ended June 30, 2019 and June 30, 2018, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of June 30, 2019, $6 million of the existing amount of gains related to the cash flow hedge reported in AOCI is expected to be reclassified into earnings within the next 12 months.

Net investment hedges

During fiscal 2019, the Company designated certain foreign currency forward contracts as net investment hedges. These contracts were de-designated and settled during the three months ended June 30, 2019, and as of June 30, 2019, there were none outstanding. As of June 30, 2018, there were no foreign currency forward contracts designated as net investment hedges.


23

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


The pre-tax impact of gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive income was $(10) million and in income from continuing operations was $2 million for the three months ended June 30, 2019.

Derivatives Not Designated for Hedge Accounting

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

Foreign currency forward contracts

The Company manages the exposure to fluctuations in foreign currencies by using short-term 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 June 30, 2019 and March 31, 2019 was $2.5 billion and $2.5 billion, respectively.

The following table presents the pretax amounts impacting income related to foreign currency forward contracts:
 
 
 
 
For the Three Months Ended
(in millions)
 
Statement of Operations Line Item
 
June 30, 2019
 
June 30, 2018
Foreign currency forward contracts
 
Other expense (income), net
 
$
19

 
$
32



Fair Value of Derivative Instruments

All derivative instruments are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables present the fair values of derivative instruments included in the balance sheets:
 
 
Derivative Assets
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
7

 
38

Total fair value of derivatives designated for hedge accounting
 
$
7

 
$
38

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
2

 
$
5

Total fair value of derivatives not designated for hedge accounting
 
$
2

 
$
5


24

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



 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
1

 
$
4

Total fair value of derivatives designated for hedge accounting:
 
$
1

 
$
4

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
2

 
$
9

Total fair value of derivatives not designated for hedge accounting
 
$
2

 
$
9



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

Other Risks for Derivative Instruments

The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty's obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. With respect to its foreign currency derivatives, as of June 30, 2019, there were seven counterparties with concentration of credit risk, and based on gross fair value, the maximum amount of loss that the Company could incur is approximately $6 million.

The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company's policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements. The potential effect of such netting arrangements on the Company's balance sheets is not material for the periods presented.

Non-Derivative Financial Instruments Designated for Hedge Accounting

The Company applies hedge accounting for foreign currency-denominated debt used to manage foreign currency exposures on its net investments in certain non-U.S. operations. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged.

Net Investment Hedges

DXC seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations with foreign currency-denominated debt. For foreign currency denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation. Gains or losses on individual net investments in non-U.S. operations are reclassified to earnings from accumulated other comprehensive (loss) income when such net investments are sold or substantially liquidated.

DXC had designated $1.7 billion as of June 30, 2019 and $0 billion as of March 31, 2019 of foreign currency-denominated debt, as hedges of net investments in non-U.S. subsidiaries. The pre-tax impact of gain (loss) on foreign currency-denominated debt designated for hedge accounting recognized in other comprehensive income (loss) was $(10) million for the three months ended June 30, 2019.


25

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



Note 10 - Intangible Assets

Intangible assets consisted of the following:
 
 
As of June 30, 2019
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
4,114

 
$
2,358

 
$
1,756

Customer related intangible assets
 
5,909

 
1,254

 
4,655

Other intangible assets
 
83

 
26

 
57

Total intangible assets
 
$
10,106

 
$
3,638

 
$
6,468

 
 
As of March 31, 2019
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,864

 
$
2,235

 
$
1,629

Customer related intangible assets
 
5,389

 
1,139

 
4,250

Other intangible assets
 
85

 
25

 
60

Total intangible assets
 
$
9,338

 
$
3,399

 
$
5,939



The components of amortization expense were as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Intangible asset amortization
 
$
236

 
$
226

Transition and transformation contract cost amortization(1)
 
67

 
56

Total amortization expense
 
$
303

 
$
282

        

(1) 
Included within other assets on the balance sheet.

Estimated future amortization related to intangible assets as of June 30, 2019 is as follows:
Fiscal Year
 
(in millions)

Remainder of 2020
 
$
950

2021
 
$
963

2022
 
$
864

2023
 
$
771

2024
 
$
697



26

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



Note 11 - Goodwill

The following table summarizes the changes in the carrying amount of goodwill, by segment, as of June 30, 2019.
(in millions)
 
GBS
 
GIS
 
Total
Balance as of March 31, 2019, net
 
$
4,599

 
$
3,007

 
$
7,606

Acquisitions
 
1,215

 

 
1,215

Foreign currency translation
 
(9
)
 
(6
)
 
(15
)
Balance as of June 30, 2019, net
 
$
5,805

 
$
3,001

 
$
8,806



The additions to goodwill were due to the acquisitions described in Note 3 - "Acquisitions". The foreign currency translation amount reflects 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. As of June 30, 2019, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators and therefore, it was unnecessary to perform an interim goodwill impairment test as of June 30, 2019.

27

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



Note 12 - Debt

The following is a summary of the Company's debt:
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
June 30, 2019
 
March 31, 2019
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Euro-denominated commercial paper(1)
 
(0.10)% - 2.76%(2)
 
2020
 
$
704

 
$
694

Current maturities of long-term debt
 
Various
 
2020 - 2021
 
329

 
766

Current maturities of finance lease liabilities
 
1.10% - 11.70%
 
2020 - 2021
 
478

 
482

Short-term debt and current maturities of long-term debt
 
 
 
 
 
$
1,511

 
$
1,942

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
 
 
 
 
AUD term loan
 
2.29% - 2.66%(3)
 
2021
 
561

 
567

GBP term loan
 
1.60% - 1.63%(4)
 
2022
 
571

 
583

EUR term loan
 
0.65%(5)
 
2022
 
852

 

EUR term loan
 
0.80%(6)
 
2023
 
852

 

USD term loan
 
3.67%(7)
 
2025
 
498

 

$500 million Senior notes
 
2.88%
 
2020
 

 
502

$500 million Senior notes
 
3.47% - 3.69%(8)
 
2021
 
498

 
498

$274 million Senior notes
 
4.45%
 
2023
 
277

 
277

$171 million Senior notes
 
4.45%
 
2023
 
172

 
172

$500 million Senior notes
 
4.25%
 
2025
 
506

 
506

£250 million Senior notes
 
2.75%
 
2025
 
315

 
322

€650 million Senior notes
 
1.75%
 
2026
 
735

 
725

$500 million Senior notes
 
4.75%
 
2028
 
508

 
508

$234 million Senior notes
 
7.45%
 
2030
 
273

 
273

Lease credit facility
 
3.44% - 3.50%
 
2020 - 2023
 
21

 
25

Finance lease liabilities
 
1.10% - 11.70%
 
2020 - 2025
 
1,216

 
1,127

Borrowings for assets acquired under long-term financing
 
1.76% - 4.50%
 
2020 - 2025
 
707

 
462

Mandatorily redeemable preferred stock outstanding
 
6.00%
 
2023
 
62

 
62

Other borrowings
 
0.50% - 7.40%
 
2020 - 2022
 
76

 
109

Long-term debt
 
 
 
 
 
8,700

 
6,718

Less: current maturities
 
 
 
 
 
807

 
1,248

Long-term debt, net of current maturities
 
 
 
 
 
$
7,893

 
$
5,470

        

(1) 
At DXC's option, DXC can borrow up to a maximum of €1 billion or its equivalent in U.S. dollars.
(2) 
Approximate weighted average interest rate.
(3) Variable interest rate equal to the bank bill swap bid rate for a one-, two-, three- or six-month interest period plus 0.60% to 0.95% based on the published credit ratings of DXC.
(4) Three-month LIBOR rate plus 0.80%.
(5) 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 between 0.40% and 0.9%, based on 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 between 0.55% and 1.05%, 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 between 1.00% and 1.50%, based on published credit ratings of DXC or the Base Rate plus a margin between 0.00% and 0.50%, based on published credit ratings of DXC.
(8) Three-month LIBOR plus 0.95%.


28

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 $500 million Senior Notes due 2021 which is payable quarterly in arrears, and interest on the £250 million Senior notes due 2025 and the €650 million Senior Notes due 2026 which are payable annually in arrears. Generally, the Company's notes are redeemable at the Company's discretion at the then-applicable redemption premium plus accrued interest.

Note 13 - 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
(in millions)
 
June 30, 2019
 
June 30, 2018
United States
 
$
1,851

 
$
1,887

United Kingdom
 
715

 
800

Australia
 
373

 
454

Other Europe
 
1,230

 
1,347

Other International
 
721

 
794

Total Revenues
 
$
4,890

 
$
5,282


The revenue by geography pertains to both of the Company’s reportable segments. Refer to Note 20 - "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 June 30, 2019, approximately $28.0 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 34% of these remaining performance obligations in fiscal 2020, 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:
 
 
As of
(in millions)
 
June 30, 2019
 
March 31, 2019
Trade receivables, net
 
$
3,445

 
$
3,232

Contract assets
 
$
437

 
$
390

Contract liabilities
 
$
1,918

 
$
1,886



29

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


Change in contract liabilities were as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
 
$
1,886

 
$
2,053

Deferred revenue
 
770

 
603

Recognition of deferred revenue
 
(717
)
 
(642
)
Currency translation adjustment
 
(5
)
 
(118
)
Other
 
(16
)
 
(15
)
Balance, end of period
 
$
1,918

 
$
1,881



The following table provides information about the Company’s capitalized costs to obtain and fulfill a contract:
 
 
As of
(in millions)
 
June 30, 2019
 
June 30, 2018
Capitalized sales commission cost (1)
 
$
240

 
$
165

Transition and transformation contract costs, net (2)
 
$
958

 
$
758

        

(1) Capitalized sales commission costs are included within other assets in the accompanying balance sheets. Amortization expense of $17 million and $14 million for the three months ended June 30, 2019 and June 30, 2018, 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 and is included in other assets in the accompanying balance sheets. Amortization expense for the three months ended June 30, 2019 and June 30, 2018 were $67 million and $56 million, respectively, and are included within depreciation and amortization in the accompanying statements of operations.

Note 14 - Restructuring Costs

The Company recorded restructuring costs of $142 million and $185 million, net of reversals, for the three months ended June 30, 2019 and June 30, 2018, respectively. The costs recorded during the three months ended June 30, 2019 were largely a result of the Fiscal 2020 Plan (defined below).

The composition of restructuring liabilities by financial statement line item is as follows:
 
 
As of
(in millions)
 
June 30, 2019
Accrued expenses and other current liabilities
 
$
284

Other long-term liabilities
 
43

Total
 
$
327



Summary of Restructuring Plans

Fiscal 2020 Plan

During fiscal 2020, management approved cost savings initiatives designed to reduce operating costs by re-balancing its workforce and facilities structures (the "Fiscal 2020 Plan"). The Fiscal 2020 Plan includes workforce optimization programs and facilities and data center rationalization.


30

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


Fiscal 2019 Plan

During fiscal 2019, 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. Costs incurred to date under the Fiscal 2019 Plan total $508 million, comprising $364 million in employee severance and $144 million of facilities costs.

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 Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and re-balancing the pyramid structure. Additionally, this plan included global facility restructuring, including a global data center restructuring program. Costs incurred to date under the Fiscal 2018 Plan total $772 million, comprising $585 million in employee severance and $187 million of facilities costs.

Other Prior Year Plans

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 $214 million, comprising $205 million in employee severance and $9 million of facilities costs.

Other prior year plans also include the Fiscal 2016 Plan and Fiscal 2015 Plan. As of June 30, 2019, activities under these plans are substantially complete.


31

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


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.

Restructuring Liability Reconciliations by Plan
 
 
Restructuring Liability as of March 31, 2019
 
Adoption of ASC 842(1)
 
Costs Expensed, Net of Reversals(2)
 
Costs Not Affecting Restructuring Liability(3)
 
Cash Paid
 
Other(4)
 
Restructuring Liability as of June 30, 2019
Fiscal 2020 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$

 
$

 
$
148

 
$
(10
)
 
$
(28
)
 
$
2

 
$
112

Facilities Costs
 

 

 
5

 
(5
)
 

 

 

Total
 
$

 
$

 
$
153

 
$
(15
)
 
$
(28
)
 
$
2

 
$
112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2019 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
138

 
$

 
$
1

 
$
1

 
$
(43
)
 
$
(1
)
 
$
96

Facilities Costs
 
68

 
(53
)
 

 

 
(4
)
 
1

 
12

Total
 
$
206

 
$
(53
)
 
$
1

 
$
1

 
$
(47
)
 
$

 
$
108

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2018 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
59

 
$

 
$
(9
)
 
$

 
$
(11
)
 
$
(2
)
 
$
37

Facilities Costs
 
35

 
(36
)
 
(1
)
 

 
(2
)
 
4

 

Total
 
$
94

 
$
(36
)
 
$
(10
)
 
$

 
$
(13
)
 
$
2

 
$
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Prior Year Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
9

 
$

 
$
(2
)
 
$

 
$
(1
)
 
$
(2
)
 
$
4

Facilities Costs
 
1

 
(1
)
 

 

 

 

 

Total
 
$
10

 
$
(1
)
 
$
(2
)
 
$

 
$
(1
)
 
$
(2
)
 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
51

 
$

 
$

 
$

 
$
(3
)
 
$
1

 
$
49

Facilities Costs
 
$
18

 

 

 

 

 
(1
)
 
17

Total
 
$
69

 
$

 
$

 
$

 
$
(3
)
 
$

 
$
66

        

(1) Represents restructuring liability recorded as an offset to right-of-use assets upon the adoption of ASC 842.
(2) Costs expensed, net of reversals include $4 million, $11 million, and $2 million of costs reversed from the Fiscal 2019 Plan, Fiscal 2018 Plan and Other Prior Year Plans, respectively.
(3) Pension benefit augmentations recorded as a pension liability, asset impairments and restructuring costs associated with right-of-use assets.
(4)Foreign currency translation adjustments.


Note 15 - 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.


32

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


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 $10 million to the defined benefit pension and other post-retirement benefit plans during the three months ended June 30, 2019. The Company expects to contribute an additional $71 million during the remainder of fiscal 2020, which does not include certain salary deferral programs and future potential termination benefits related to the Company's potential restructuring activities.

As additional contractual termination benefits for certain employees are part of the restructuring plans (see Note 14 - "Restructuring Costs"), the Company accrued $11 million for fiscal 2020. This amount is reflected in the projected benefit obligation and in the net periodic pension cost.

The components of net periodic pension expense were:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Service cost
 
$
23

 
$
23

Interest cost
 
60

 
65

Expected return on assets
 
(161
)
 
(149
)
Amortization of prior service costs
 
(2
)
 
(1
)
Contractual termination benefit
 
11

 

Curtailment gain
 

 
(1
)
Net periodic pension income
 
$
(69
)
 
$
(63
)


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.

The weighted-average rates used to determine net periodic pension cost were:
 
 
Three Months Ended
 
 
June 30, 2019
 
June 30, 2018
Discount or settlement rates
 
2.4
%
 
2.3
%
Expected long-term rates of return on assets
 
5.8
%
 
5.3
%
Rates of increase in compensation levels
 
2.0
%
 
2.1
%


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.


33

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


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, amounted to $54 million as of June 30, 2019 and $59 million as of March 31, 2019.

34

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



Note 16 - Income Taxes

The Company's effective tax rate from continuing operations ("ETR") was 18.4% and 35.8% for the three months ended June 30, 2019 and June 30, 2018, respectively. For the three months ended June 30, 2019, the primary drivers of the ETR were the global mix of income and the reduction of our estimated fiscal 2019 base erosion anti-avoidance tax ("BEAT") for the October 31, 2019 tax year due to electing out of additional first year bonus depreciation. For the three months ended June 30, 2018, the primary drivers of the ETR were the global mix of income, offset by the impact of transition tax and the new global intangible low taxed income tax ("GILTI") on certain non-U.S. earnings due to U.S. tax reform and an increase in our state valuation allowances on separate company state return deferred tax assets of legacy CSC due to the spin-off of our USPS business.
 
The tax expense associated with discontinued operations for the three months ended June 30, 2019 was $0 million as compared to $18 million during the same periods of the prior fiscal year. The primary driver of the variance in the tax expense for the three months ended June 30, 2019 and June 30, 2018 was the difference in income before tax for the respective periods.

As the result of the issuance of new U.S. Treasury regulations in the first quarter of fiscal 2020, the Company changed its permanent reinvestment assertion with respect to certain foreign corporations, reducing the amount that will ultimately be repatriated to the U.S. by approximately $506 million. With the exception of this change, our prior permanent reinvestment assertion, that we will repatriate all current and accumulated earnings for all non-U.S. subsidiaries other than India, continues to apply. We do not believe this assertion change will have an adverse effect on the Company as U.S. cash needs will be satisfied from other sources of non-U.S. earnings.

In connection with the Separation of USPS, 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 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 $95 million and a tax indemnification payable to Perspecta of $69 million related to income tax and other tax liabilities. As a result of the HPES Merger, the Company continues to have a net receivable of $16 million from HPE, comprised of a $101 million tax indemnification receivable related to tax payables, a $49 million tax indemnification receivable related to uncertain tax positions (net of related deferred tax benefits), and $134 million of tax indemnification payable related to other tax receivables.

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 November 30, 2019.
 
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. In the first quarter of fiscal 2020, we filed for competent authority relief relating to certain transfer pricing adjustments. The Company has agreed to extend the statute of limitations associated with this audit through March 31, 2020. The IRS is also examining CSC's fiscal 2014 through 2017 federal income tax returns. The Company has received several proposed adjustments for this cycle in the first quarter of fiscal 2020 and expects to receive a Revenue Agent's Report in the second quarter of fiscal 2020. The Company continues to believe that its tax positions are more-likely-than-not sustainable and that the Company will ultimately prevail. The company has agreed to extend the statute of limitations for the fiscal 2014 through fiscal 2016 tax years through March 31, 2020. The Company expects to reach a resolution for all years no earlier than the second quarter of fiscal 2021.


35

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


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 for unrecognized tax benefits. 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 $2 million to $6 million, excluding interest, penalties and tax carry-forwards.

Note 17 - 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. On November 8, 2018, DXC's Board of Directors approved an incremental $2.0 billion share repurchase authorization. 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.

As part of the share repurchase program, on June 13, 2019, DXC entered into an ASR agreement with a third-party financial institution. On June 26, 2019, DXC paid a third-party financial institution $200 million and received an initial settlement of 1,849,194 shares of common stock for $100 million at a weighted average price of $54.08 per share. The remaining $100 million prepayment is expected to be settled in August 2019.

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 Year
 
Number of Shares Repurchased
 
Average Price Per Share
 
Amount (in millions)
First Quarter Fiscal 2020
 
 
 
 
 
 
Open market purchases
 
5,510,415

 
$
54.44

 
$
300

ASR
 
1,849,194

 
54.08

 
100

Total
 
7,359,609

 
$
54.35

 
$
400

First Quarter Fiscal 2019
 
 
 
 
 
 
Open market purchases
 
3,779,194

 
$
85.86

 
$
324

Total
 
3,779,194

 
$
85.86

 
$
324


Accumulated other comprehensive income (loss)

The following table shows the changes in accumulated other comprehensive income (loss), net of taxes:

36

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


(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, 2019
 
$
(517
)
 
$
(3
)
 
$
9

 
$
267

 
$
(244
)
Current-period other comprehensive income (loss)
 
(111
)
 
6

 
1

 

 
(104
)
Amounts reclassified from accumulated other comprehensive income
 

 
(2
)
 

 
(1
)
 
(3
)
Balance at June 30, 2019
 
$
(628
)
 
$
1

 
$
10

 
$
266

 
$
(351
)

(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
 
(342
)
 
(32
)
 
(1
)
 

 
(375
)
Amounts reclassified from accumulated other comprehensive loss
 
6

 

 

 
(1
)
 
5

Balance at June 30, 2018
 
$
(597
)
 
$
(23
)
 
$
8

 
$
300

 
$
(312
)


Note 18 - Stock Incentive Plans

Equity Plans

The Compensation Committee of the Board of Directors (the "Board") has broad authority to grant awards and otherwise administer the DXC Employee Equity Plan. The plan became effective March 30, 2017 and will continue in effect for a period of 10 years thereafter, unless earlier terminated by the Board. The Board has the authority to amend the plan in such respects as it deems desirable, subject to approval of DXC’s stockholders for material modifications.

RSUs represent the right to receive one share of DXC common stock upon a future settlement date, subject to vesting and other terms and conditions of the award, plus any dividend equivalents accrued during the award period. In general, if the employee’s status as a full-time employee is terminated prior to the vesting of the RSU grant in full, then the RSU grant is automatically canceled on the termination date and any unvested shares and dividend equivalents are forfeited. Certain executives were awarded service-based "career share" RSUs for which the shares are settled over the 10 anniversaries following the executive's separation from service as a full-time employee, provided the executive complies with certain non-competition covenants during that period.

The Company also grants PSUs, which generally vest over a period of 3 years. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified financial performance criteria over a three-year period. If the specified performance criteria are met, awards are settled for shares of DXC common stock and dividend equivalents upon the filing with the SEC of the Annual Report on Form 10-K for the last fiscal year of the performance period. PSU awards include the potential for up to 25% of the shares granted to be earned after the first and second fiscal years if certain of the Company's performance targets are met early, subject to vesting based on the participant's continued employment through the end of the three-year performance period.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The terms of the DXC Director Equity Plan allow DXC to grant RSU awards to non-employee directors of DXC. Such RSU awards vest in full at the earlier of (i) the first anniversary of the grant date or (ii) the next annual meeting date, and are automatically redeemed for DXC common stock and dividend equivalents either at that time or, if an RSU deferral election form is submitted, upon the date or event elected by the director. Distributions made upon a director’s separation from the Board may occur in either a lump sum or in annual installments over periods of 5, 10, or 15 years, per the director’s election. In addition, RSUs vest in full upon a change in control of DXC.

The DXC Share Purchase Plan allows DXC’s employees located in the United Kingdom to purchase shares of DXC’s common stock at the fair market value of such shares on the applicable purchase date. There were 4,900 shares purchased under this plan during the three months ended June 30, 2019.

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 June 30, 2019
 
Reserved for issuance
 
Available for future grants
DXC Employee Equity Plan
34,200,000

 
19,847,710

DXC Director Equity Plan
230,000

 
98,451

DXC Share Purchase Plan
250,000

 
230,489

Total
34,680,000

 
20,176,650



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, 2019
 
2,318,768

 
$
30.40

 
4.80
 
$
79

Granted
 

 
$

 
 
 
 
Exercised
 
(210,885
)
 
$
31.82

 
 
 
$
6

Canceled/Forfeited
 
(618
)
 
$
48.60

 
 
 
 
Expired
 
(1,051
)
 
$
31.99

 
 
 
 
Outstanding as of June 30, 2019
 
2,106,214

 
$
30.25

 
4.82
 
$
52

Vested and expected to vest in the future as of June 30, 2019
 
2,105,979

 
$
30.25

 
4.82
 
$
52

Exercisable as of June 30, 2019
 
2,102,270

 
$
30.20

 
4.81
 
$
52



38

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




Restricted Stock

 
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, 2019
2,809,775

 
$
67.27

 
75,750

 
$
46.31

Granted
2,103,678

 
$
50.35

 
3,200

 
$
77.62

Settled
(644,601
)
 
$
48.92

 

 
$

Canceled/Forfeited
(114,098
)
 
$
65.14

 

 
$

Outstanding as of June 30, 2019
4,154,754

 
$
61.61

 
78,950

 
$
47.58



     


Share-Based Compensation

 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Total share-based compensation cost
 
$
18

 
$
22

Related income tax benefit
 
$
4

 
$
3

Total intrinsic value of options exercised
 
$
6

 
$
10

Tax benefits from exercised stock options and awards
 
$
9

 
$
5



As of June 30, 2019, total unrecognized compensation expense related to unvested DXC stock options and unvested DXC RSUs, net of expected forfeitures was less than $1 million and $184 million, respectively. The unrecognized compensation expense for unvested RSUs is expected to be recognized over a weighted-average period of 2.24 years.

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



Note 19 - Cash Flows

Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Cash paid for:
 
 
 
 
Interest
 
$
91

 
$
68

Taxes on income, net of refunds (1)
 
$
43

 
$
73

 
 
 
 
 
Non-cash activities:
 
 
 
 
Operating:
 
 
 
 
ROU assets obtained in exchange for lease, net (2)
 
$
(22
)
 
$

   Prepaid assets acquired under long-term financing
 
$
30

 
$

Investing:
 
 
 
 
Capital expenditures in accounts payable and accrued expenses
 
$
13

 
$
44

Capital expenditures through finance lease obligations
 
$
253

 
$
191

Assets acquired under long-term financing
 
$
235

 
$
56

Increase in deferred purchase price receivable
 
$
321

 
$
141

Financing:
 
 
 
 
Dividends declared but not yet paid
 
$
57

 
$
55


        
     
(1) Income tax refunds were $13 million and $74 million for the three months ended June 30, 2019 and June 30, 2018, respectively.
(2) Net of $87 million change in lease classification from operating to finance lease.




Note 20 - 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:


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


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.


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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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,159

 
$
2,731

 
$
4,890

 
$

 
$
4,890

Segment profit
 
$
366

 
$
340

 
$
706

 
$
(54
)
 
$
652

Depreciation and amortization(1)
 
$
29

 
$
275

 
$
304

 
$
28

 
$
332

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,213

 
$
3,069

 
$
5,282

 
$

 
$
5,282

Segment profit
 
$
403

 
$
474

 
$
877

 
$
(74
)
 
$
803

Depreciation and amortization(1)
 
$
20

 
$
281

 
$
301

 
$
35

 
$
336


        
     
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $138 million and $135 million for the three months ended June 30, 2019 and June 30, 2018, 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
(in millions)
 
June 30, 2019
 
June 30, 2018
Profit
 
 
 
 
Total profit for reportable segments
 
$
706

 
$
877

All other loss
 
(54
)
 
(74
)
Interest income
 
30

 
32

Interest expense
 
(91
)
 
(85
)
Restructuring costs
 
(142
)
 
(185
)
Transaction, separation and integration-related costs
 
(105
)
 
(70
)
Amortization of acquired intangible assets
 
(138
)
 
(135
)
Income from continuing operations before income taxes
 
$
206

 
$
360


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 21 - 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 June 30, 2019 were as follows:
Fiscal year
 
Minimum Purchase Commitment(1)
(in millions)
 
Remainder of 2020
 
$
1,671

2021
 
1,126

2022
 
544

2023
 
435

2024
 
267

Thereafter
 
25

     Total
 
$
4,068


        

(1) A significant portion of the minimum purchase commitments for fiscal 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 June 30, 2019:
(in millions)
 
 Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022 and Thereafter
 
Totals
Surety bonds
 
$
170

 
$
185

 
$
150

 
$
505

Letters of credit
 
175

 
29

 
379

 
583

Stand-by letters of credit
 
68

 
95

 
20

 
183

Totals
 
$
413

 
$
309

 
$
549

 
$
1,271



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.

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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, based on 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"), 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 lawsuits seek treble statutory damages, other civil penalties and attorneys’ fees and costs.

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 allowed the remaining claims to proceed. In September 2016, the United States and the State of New York each filed amended complaints-in-intervention, asserting additional claims that the compensation provisions of CSC’s contract with New York City rendered it ineligible to serve as a billing agent under state law. 

CSC filed motions to dismiss and in August 2017, the Court granted in part and denied in part CSC's motions. In January 2018, CSC asserted a counterclaim against the State of New York on a theory of contribution and indemnification. The court denied the State's motion to dismiss CSC's counterclaim with respect to liability for claims not arising under the Federal False Claims Act. The Parties participated in a non-binding mediation in November 2017, but no settlement has been reached to date. 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, several plaintiffs 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 alleged similar state-law Rule 23 class claims pursuant to Connecticut and California statutes. Plaintiffs claimed double overtime damages, liquidated damages, and other amounts and remedies.

In 2015 the Court entered an order granting conditional certification under the FLSA of the collective of over 4,000 system administrators. Approximately 1,000 system administrators filed consents with the Court to participate in the FLSA collective. The class/collective action is currently made up of approximately 800 individuals who held the title of associate professional or professional system administrator.

In June 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. CSC sought permission to appeal the Rule 23 decision to the Second Circuit Court of Appeals, which was denied.

In December 2017, a jury trial was held and a verdict was returned in favor of plaintiffs. On August 6, 2019, the Court issued an order awarding plaintiffs $18.75 million in damages. The Company disagrees with the jury verdict and the damages award and intends to appeal the judgment of the Court.

Computer Sciences Corporation v. Eric Pulier, et al.: On May 12, 2015, CSC filed a civil complaint in the Court of Chancery of the State of Delaware against Eric Pulier, the former CEO of Service Mesh Inc. ("SMI"), which CSC had acquired in November 2013. The complaint asserted claims for fraud, breach of contract and breach of fiduciary duty, based on allegations that Mr. Pulier had engaged in fraudulent transactions with two employees of the Commonwealth Bank of Australia Ltd. (“CBA”). 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, all of which the Court dismissed in whole or in part, except for claims for breach of Mr. Pulier’s retention agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



In July 2017, the Court granted a motion by the United States for a 90-day stay of discovery pending the completion of a criminal investigation by the U.S. Attorney’s Office for the Central District of California. In September 2017, a federal grand jury returned an indictment against Mr. 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 Chancery Court granted.

In December 2018, the Government filed an application to dismiss the indictment against Mr. Pulier, which was granted, and the indictment was dismissed with prejudice. In March 2019, the Delaware Chancery Court lifted the stay and denied CSC’s motion for a temporary restraining order and preliminary injunction with respect to certain of Mr. Pulier’s assets. The Court has set a trial date of April 20, 2020. Discovery is ongoing.

In February 2016, Mr. Pulier filed a complaint in Delaware Chancery Court seeking advancement of his legal fees and costs in the civil and criminal actions, pursuant to the terms of his agreements with SMI. 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 civil and criminal actions. Pursuant to agreements with SMI, Mr. Pulier is obligated 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. 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. In October 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 to confirm the award in federal district court in Texas.

CSC moved to vacate the award, and in August 2018, the Magistrate Judge issued its Report and Recommendation denying CSC's vacatur motion. In September 2018, the District Court summarily accepted the Report and Recommendation without further briefing and entered a Final Judgment in the case. The Company promptly filed a notice of appeal to the Fifth Circuit Court of Appeals. The matter has been fully briefed, and oral argument has been scheduled for September 5, 2019.

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:  On August 18, 2016, this purported class and collective action was filed 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 may be proportionately liable for any recovery by plaintiffs in this matter.

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 and who were 40 years of age or older at the time of termination. The class seeks to cover those impacted by WFRs on or after December 2014. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012.


45

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


In January 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 release agreements as part of their WFR packages. In September 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. The Court has stayed the entire action pending arbitration for these individuals, and administratively closed the case.

A mediation was held in October 2018 with the 16 named and opt-in plaintiffs who were involved in the case at that time. A settlement was reached, which included seven plaintiffs who were employed by former business units of HPE that are now owned by the Company. In June 2019, a second mediation was held with 145 additional opt-in plaintiffs who were compelled to arbitration pursuant to their release agreements. No agreement was reached, but settlement negotiations are ongoing.

Former business units of the Company now owned by Perspecta may be proportionately liable for any recovery by plaintiffs in this matter.

Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company: On March 22, 2016, Oracle filed a complaint against HPE in the Northern District of California, alleging copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. The litigation relates in part to former business units of HPE that are now owned by the Company. The Company may be required to indemnify HPE for a portion of any recovery by Oracle in the litigation related to these business units.

Oracle’s claims arise primarily out of HPE’s prior relationship with a third-party maintenance provider named Terix Computer Company, Inc. (“Terix”). Oracle claims that Terix infringed its copyrights while acting as HPE’s subcontractor for certain customers of HPE’s multivendor support business. Oracle claims that HPE is liable for vicarious and contributory infringement arising from the alleged actions of Terix and for direct infringement arising from its own alleged conduct.

On June 14, 2018, the court heard oral argument on the parties’ cross-motions for summary judgment. On January 29, 2019, the court granted HPE’s motion for summary judgment and denied Oracle’s motion for summary judgment, resolving the matter in HPE’s favor. Oracle has appealed the judgment to the U.S. Court of Appeals for the Ninth Circuit. The parties are scheduled to submit briefs in the appellate case between July and September 2019.

In re DXC Technology Company Securities Litigation: On December 27, 2018, a purported class action lawsuit was filed in the United States District Court for the Eastern District of Virginia against the Company and two of its current officers. The lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of February 8, 2018 to November 6, 2018. The Company has moved to dismiss the claims in their entirety. On July 26, 2019, the court heard oral argument on the Company’s motion to dismiss, and a decision is now pending.

In March 2019, three related shareholder derivative lawsuits were filed in the District Court of the State of Nevada, in and for Clark County, against two of the Company’s current officers and the members of the Company’s board of directors, asserting claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment.

The Company believes the claims are without merit and intends to vigorously defend all claims asserted.

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 has substantially completed its internal investigation and plans to provide supplemental information to OFAC in August 2019.


46

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


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


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, divestitures, competitive position, growth opportunities, share repurchases, dividend payments, 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 Computer Sciences Corporation's ("CSC") and Enterprise Services business of Hewlett Packard Enterprise Company's ("HPES") 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;
risks relating to the Luxoft Acquisition and the ability to achieve the expected results therefrom;
the U.S. Public Sector business ("USPS") Separation and Mergers (defined below) 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;
the risk of liability or damage to our reputation resulting from security breaches or disclosure of sensitive data or failure to comply with data protection laws and regulations;
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, 2019.

No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.


48


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 our results of operations and cash flows for the first quarter of fiscal 2020 and our financial condition as of June 30, 2019. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and notes.

The MD&A is organized in the following sections:
Background
Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations
Critical Accounting Policies and Estimates

The following discussion includes a comparison of our results of operations and liquidity and capital resources for the first quarters of fiscal 2020 and fiscal 2019.

Background

DXC Technology, a world leading independent, end-to-end IT services company, manages and modernizes mission-critical systems, integrating them with new digital solutions to produce better business outcomes. The Company’s global reach and talent, innovation platforms, technology independence and extensive partner network enable more than 6,000 private and public-sector clients in 70 countries 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.

Results of Operations

The following table sets forth certain financial data for the first quarters of fiscal 2020 and fiscal 2019:
 
 
Three Months Ended
(In millions, except per-share amounts)
 
June 30, 2019
 
June 30, 2018
 
 
 
 
 
 
 
Revenues
 
$
4,890

 
$
5,282

 
 
 
 
 
 
 
Income from continuing operations, before taxes
 
206

 
360

 
Income tax expense
 
38

 
129

 
Income from continuing operations
 
168

 
231

 
Income from discontinued operations, net of taxes
 

 
35

 
Net income
 
$
168

 
$
266

 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
Continuing operations
 
$
0.61

 
$
0.78

 
Discontinued operations
 
$

 
$
0.12

 

49




Fiscal 2020 Highlights

Financial highlights for first quarter of fiscal 2020 include the following:

Revenues for the first quarter of fiscal 2020 were $4.9 billion, a decrease of 7% as compared to the first quarter of fiscal 2019.
First quarter fiscal 2020 income from continuing operations and diluted EPS from continuing operations were $168 million and $0.61, respectively, including the cumulative impact of certain items of $304 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 $231 million and $0.78, respectively, for the first quarter of fiscal 2019.
Our cash and cash equivalents were $1.9 billion as of June 30, 2019.
We used $66 million of cash to fund the operations during the first quarter of fiscal 2020, as compared to cash generated of $369 million during the first quarter of fiscal 2019.
We returned $451 million to shareholders in the form of common stock dividends and share repurchases during the first quarter of fiscal 2020, as compared to $375 million during the first quarter of fiscal 2019.

Revenues
 
 
Three Months Ended
 
 
 
 
(in millions)
 
June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
GBS
 
$
2,159

 
$
2,213

 
$
(54
)
 
(2.4
)%
GIS
 
2,731

 
3,069

 
(338
)
 
(11.0
)%
Total Revenues
 
$
4,890

 
$
5,282

 
$
(392
)
 
(7.4
)%

The decrease in revenues for the first quarter of fiscal 2020 compared with fiscal 2019 of the same period, reflects an ongoing decline in our traditional application maintenance business and legacy infrastructure services. Fiscal 2020 revenues included an unfavorable foreign currency exchange rate impact of 3.2%, primarily driven by the strengthening of the U.S. dollar against the Euro and British Pound.


50


During the first quarters of fiscal 2020 and fiscal 2019, the distribution of our revenues across geographies was as follows:

chart-a5067a37d9e068b9306.jpg

For the discussion of risks associated with our foreign operations, see Part 1, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

As a global company, over 62% of our revenues for the first quarter of fiscal 2020 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 June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
GBS
 
$
2,225

 
$
2,213

 
$
12

 
0.5
 %
GIS
 
2,835

 
3,069

 
(234
)
 
(7.6
)%
Total
 
$
5,060

 
$
5,282

 
$
(222
)
 
(4.2
)%



51


Global Business Services

GBS revenue was $2,159 million in the quarter compared to $2,213 million for the prior year. GBS revenue decreased 2.4% year-over-year, including an unfavorable foreign currency exchange rate impact of 2.9%. GBS revenues increased 0.5% year-over-year at constant currency as a result of continued growth in our Enterprise and Cloud applications business, contributions from acquisitions. This was offset by continued headwinds in our traditional application maintenance and management business.

GBS contract awards were $2.4 billion during the first quarter of fiscal 2020 as compared to $2.0 billion during the first quarter of fiscal 2019.

Global Infrastructure Services

GIS revenue was $2,731 million in the quarter compared with $3,069 million for the prior year. GIS revenues decreased 11.0% year-over-year, including an unfavorable foreign currency exchange rate impact of 3.4%. GIS revenues decreased 7.6% year-over-year at constant currency as a result of the acceleration of client savings on several large contracts as well as continued decline in our IT outsourcing services business as clients shift to cloud environments.

GIS contract awards were $1.8 billion during the first quarter of fiscal 2020, as compared to $2.6 billion during the first quarter of fiscal 2019.

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)
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,622

 
$
3,867

 
74.0
 %
 
73.3
 %
 
0.7
 %
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
507

 
440

 
10.4

 
8.3

 
2.1

Depreciation and amortization
 
470

 
471

 
9.6

 
8.9

 
0.7

Restructuring costs
 
142

 
185

 
2.9

 
3.5

 
(0.6
)
Interest expense
 
91

 
85

 
1.9

 
1.6

 
0.3

Interest income
 
(30
)
 
(32
)
 
(0.6
)
 
(0.6
)
 

Other income, net
 
(118
)
 
(94
)
 
(2.4
)
 
(1.8
)
 
(0.6
)
Total costs and expenses
 
$
4,684

 
$
4,922

 
95.8
 %
 
93.2
 %
 
2.6
 %

The 2.6% increase in costs and expenses as a percentage of revenue reflects an increase in selling, general and administrative costs as a result of acquisitions and integration activities and the timing of cost reduction initiatives which impacts cost of services.

Costs of Services

Cost of services, excluding depreciation and amortization and restructuring costs ("COS"), was $3.6 billion for the first quarter of fiscal 2020. The $0.2 billion decrease in COS as compared to the same period of the prior fiscal year, was driven by our workforce and facilities cost savings initiatives. COS as a percentage of revenue increased 0.7% due to the decline in revenue exceeding associated cost reductions in our traditional application and IT outsourcing services businesses.


52


Selling, General, and Administrative

Selling, general, and administrative expense, excluding depreciation and amortization and restructuring costs ("SG&A"), was $507 million for the first quarter of fiscal 2020. The $67 million increase in SG&A, as compared to the same period of the prior fiscal year reflects an increase in transaction, separation and integration-related costs. Transaction, separation and integration-related costs of $105 million were included in SG&A for the first quarter of fiscal 2020, as compared to $70 million for the comparable period of the prior fiscal year

Depreciation and Amortization

Depreciation expense decreased $22 million and amortization expense increased $21 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018.

The net decrease in depreciation was primarily due to a $49 million benefit from a change in estimated useful lives of certain equipment described in Note 1 - "Summary of Significant Accounting Policies", offset by an increase in depreciation on assets placed into service as well as dissipation of the benefit from the conversion of assets from operating to finance leases.

The increase in amortization expense was primarily due to an increase in amortization related to transition and transformation contract costs and software as compared to the same period in the prior fiscal year.

Restructuring Costs

During the first quarter of fiscal 2020, management approved global cost savings initiatives designed to reduce operating costs by re-balancing our workforce and facilities structures. During the first quarter of fiscal 2020, restructuring costs, net of reversals, were $142 million, as compared with $185 million during the comparable period of the prior fiscal year.

For an analysis of changes in our restructuring liabilities by restructuring plan, see Note 14 - "Restructuring Costs" to the financial statements.

Interest Expense and Interest Income

Interest expense for the first quarter of fiscal 2020 increased $6 million over the same period in the prior fiscal year due to an increase in borrowings under our term loans, including the new term loan credit agreement discussed below under the caption "Capital Resources."

Interest income for the first quarter of fiscal 2020 did not change materially as compared to the same period in the prior fiscal year.
 
Other Income, Net

Other income, net comprises non-service cost components of net periodic pension income, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses.

The $24 million increase in other income for the first quarter of fiscal 2020 as compared to the same period of the prior fiscal year was primarily due to a year-over-year increase of $22 million in non-service components of net periodic pension income and a year-over-year favorable foreign currency impact of $21 million. These increases were partially offset by a $19 million decrease in other gains related to sales of non-operating assets.


53


Taxes

Our ETR from continuing operations was 18.4% and 35.8% for the first quarter of fiscal 2020 and 2019, respectively. For the first quarter of fiscal 2020, the primary drivers of the ETR were the global mix of income and the reduction of our estimated fiscal 2019 base erosion anti-avoidance tax ("BEAT") for the October 31, 2019 tax year due to electing out of additional first year bonus depreciation. For the first quarter of fiscal 2019, the primary drivers of the ETR were the global mix of income, offset by the impact of transition tax and the new global intangible low taxed income tax ("GILTI") on certain non-U.S. earnings due to U.S. tax reform and an increase in our state valuation allowances on separate company state return deferred tax assets of legacy CSC due to the separation of USPS.


Income from Discontinued Operations

The $35 million of income from discontinued operations reflects the net income generated by USPS during the first quarter of fiscal 2019.

Earnings Per Share

Diluted EPS from continuing operations for the first quarter of fiscal 2020 decreased $0.17 from the same period a year ago. This decrease was due to a decrease of $63 million in income from continuing operations.

Diluted EPS from continuing operations for the first quarter of fiscal 2020 includes $0.42 per share of restructuring costs, $0.31 per share of transaction, separation and integration-related costs, and $0.40 per share of amortization of acquired intangible assets.


54


Non-GAAP Financial Measures

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

We present these non-GAAP financial measures to provide investors with meaningful supplemental financial information, in addition to the financial information presented on a GAAP basis. 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 operations on a comparable basis from period to period. DXC management believes the non-GAAP measures provided are also considered important measures by financial analysts covering DXC, as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS targets.

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

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

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

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)
 
June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
Income from continuing operations before income taxes
 
$
206

 
$
360

 
$
(154
)
 
(42.8
)%
Non-GAAP income from continuing operations before income taxes
 
$
591

 
$
750

 
$
(159
)
 
(21.2
)%
Net income

 
$
168

 
$
266

 
$
(98
)
 
(36.8
)%
Adjusted EBIT
 
$
652

 
$
803

 
$
(151
)
 
(18.8
)%


55


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 combinations.
Tax adjustment - reflects the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017 for fiscal 2019.

A reconciliation of reported results to non-GAAP results is as follows:
 
 
Three Months Ended June 30, 2019
(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)
 
$
3,622

 
$

 
$

 
$

 
$
3,622

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
507

 

 
(105
)
 

 
402

Income from continuing operations before income taxes
 
206

 
142

 
105

 
138

 
591

Income tax expense
 
38

 
28

 
22

 
31

 
119

Net income
 
168

 
114

 
83

 
107

 
472

Less: net income attributable to non-controlling interest, net of tax
 
5

 

 

 

 
5

Net income attributable to DXC common stockholders
 
$
163

 
$
114

 
$
83

 
$
107

 
$
467

 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
18.4
%
 
 
 
 
 
 
 
20.1
%
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.61

 
$
0.43

 
$
0.31

 
$
0.40

 
$
1.75

Diluted EPS from continuing operations
 
$
0.61

 
$
0.42

 
$
0.31

 
$
0.40

 
$
1.74

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
267.00

 
267.00

 
267.00

 
267.00

 
267.00

Diluted EPS
 
268.97

 
268.97

 
268.97

 
268.97

 
268.97



56


 
 
Three Months Ended June 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)
 
$
3,867

 
$

 
$

 
$

 
$

 
$
3,867

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
440

 

 
(70
)
 

 

 
$
370

Income from continuing operations before income taxes
 
360

 
185

 
70

 
135

 

 
750

Income tax expense
 
129

 
41

 
16

 
33

 
(33
)
 
186

Income from continuing operations
 
231

 
144

 
54

 
102

 
33

 
564

Income from discontinued operations, net of tax
 
35

 

 

 

 

 
35

Net income
 
266

 
144

 
54

 
102

 
33

 
599

Less: net income attributable to non-controlling interest, net of tax
 
7

 

 

 

 

 
7

Net income attributable to DXC common stockholders
 
$
259

 
$
144

 
$
54

 
$
102

 
$
33

 
$
592

 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
35.8
%
 
 
 
 
 
 
 
 
 
24.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
0.79

 
$
0.51

 
$
0.19

 
$
0.36

 
$
0.12

 
$
1.96

Diluted EPS from continuing operations
 
$
0.78

 
$
0.50

 
$
0.19

 
$
0.35

 
$
0.11

 
$
1.93

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.44

 
284.44

 
284.44

 
284.44

 
284.44

 
284.44

Diluted EPS
 
289.30

 
289.30

 
289.30

 
289.30

 
289.30

 
289.30


A reconciliation of net income to adjusted EBIT is as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Net income
 
$
168

 
$
266

Income from discontinued operations, net of taxes
 

 
(35
)
Income tax expense
 
38

 
129

Interest income
 
(30
)
 
(32
)
Interest expense
 
91

 
85

EBIT
 
267

 
413

Restructuring
 
142

 
185

Transaction, separation and integration-related costs
 
105

 
70

Amortization of acquired intangible assets
 
138

 
135

Adjusted EBIT
 
$
652

 
$
803



57


Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of June 30, 2019, our cash and cash equivalents were $1.9 billion, of which $0.9 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") decreased to $1.9 billion from March 31, 2019 to June 30, 2019. The following table summarizes our cash flow activity:
 
 
Three Months Ended
 
 
(in millions)
 
June 30, 2019
 
June 30, 2018
 
Change
Net cash (used in) provided by operating activities
 
$
(66
)
 
$
369

 
$
(435
)
Net cash used in investing activities
 
(1,822
)
 
(180
)
 
(1,642
)
Net cash provided by (used in) financing activities
 
887

 
(300
)
 
1,187

Effect of exchange rate changes on cash and cash equivalents
 
(30
)
 
(39
)
 
9

Net decrease in cash and cash equivalents
 
$
(1,031
)
 
$
(150
)
 
$
(881
)
Cash and cash equivalents at beginning-of-year
 
2,899

 
2,729

 
 
Cash and cash equivalents at the end-of-period
 
$
1,868

 
$
2,579

 
 

Net cash (used in) provided by operating activities during the first quarter of fiscal 2020 was $(66) million as compared to $369 million during the comparable period of the prior fiscal year. The year-over-year decrease of $435 million was due to a decrease in working capital movements of $497 million, a decrease in net income of $98 million, a decrease in depreciation and amortization of $35 million, and a reduction in other non-cash items of $17 million. These decreases were partially offset by a decrease in gain on dispositions of $38 million.

Net cash used in investing activities during the first quarter of fiscal 2020 was $1,822 million as compared to $180 million during the comparable period of the prior fiscal year. The increase of $1,642 million was predominately due to cash paid for acquisitions of $1,911 million in the first quarter of fiscal 2020. The increase is partially offset by additional cash collections related to deferred purchase price receivable of $234 million.

Net cash provided by (used in) financing activities during the first quarter of fiscal 2020 was $887 million as compared to $(300) million during the comparable period of the prior fiscal year. The $1,187 million increase was primarily due to additional borrowings on long-term debt of $1,715 million and a decrease in payments on long-term debt of $769 million. This was partially offset by borrowings for the USPS spin transaction of $1,114 in the prior fiscal year and additional repurchase of common stock and advance payment for accelerated share repurchase of $186 million.


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Capital Resources

See Note 21 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."

The following table summarizes our total debt:
 
 
As of
(in millions)
 
June 30, 2019
 
March 31, 2019
Short-term debt and current maturities of long-term debt
 
$
1,511

 
$
1,942

Long-term debt, net of current maturities
 
7,893

 
5,470

Total debt
 
$
9,404

 
$
7,412


The $2.0 billion increase in total debt during the first quarter of fiscal 2020 was primarily attributed to the new term loan credit agreement in an aggregate principal of $2.2 billion, consisting of three tranches: (i) $500 million maturing on fiscal 2025; (ii) €750 million maturing on fiscal 2022; and (iii) €750 million maturing on fiscal 2023. The proceeds from the new borrowing was used to finance the Luxoft acquisition. Additionally, during June 30, 2019 we repaid the $500 million Senior Notes due 2020. We were in compliance with all financial covenants associated with our borrowings as of June 30, 2019 and June 30, 2018.

The maturity chart below summarizes the future maturities of long-term debt principal for fiscal years subsequent to June 30, 2019 and excludes maturities of borrowings for assets acquired under long-term financing and finance lease liabilities. For more information on our debt, see Note 12 - "Debt" to the financial statements.

chart-fb71248681655bbbb2e.jpg




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The following table summarizes our capitalization ratios:
 
 
As of
(in millions)
 
June 30, 2019
 
March 31, 2019
Total debt
 
$
9,404

 
$
7,412

Cash and cash equivalents
 
1,868

 
2,899

Net debt(1)
 
$
7,536

 
$
4,513

 
 
 
 
 
Total debt
 
$
9,404

 
$
7,412

Equity
 
11,217

 
11,725

Total capitalization
 
$
20,621

 
$
19,137

 
 
 
 
 
Debt-to-total capitalization
 
45.6
%
 
38.7
%
Net debt-to-total capitalization(1)
 
36.5
%
 
23.6
%
        

(1) Net debt and Net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone.

Net debt-to-total capitalization as of June 30, 2019 increased as compared to March 31, 2019, due to the increase in total debt and decrease in cash and cash equivalents attributed to the Luxoft acquisition.

As of June 30, 2019, 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
 
-

See Note 21 - "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.


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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)
 
June 30, 2019
Cash and cash equivalents
 
$
1,868

Available borrowings under our revolving credit facility
 
4,000

Total liquidity 
 
$
5,868


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 and during the third quarter of fiscal 2019, our Board of Directors approved an incremental $2.0 billion share repurchase authorization. This program became effective on April 3, 2017 with no end date established. During the first quarter of fiscal 2020, we repurchased 7,359,609 shares of our common stock at an aggregate cost of $400 million. The repurchase included 1,849,194 shares under the accelerated share repurchase ("ASR") agreement at an average price of $54.08 per share. See Note 17 - "Stockholders' Equity " to the financial statements.

Dividends

During the first quarter of fiscal 2019, our Board of Directors declared aggregate cash dividends to our stockholders of $0.21 per share, or approximately $57 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, the receivables securitization facility and certain other financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheets. There have been no material changes to our off-balance-sheet arrangements reported under Part II, Item 7 of our Annual Report on Form 10-K other than as disclosed below and in Note 6 - "Sale of Receivables" and Note 21 - "Commitments and Contingencies" to the financial statements in this Quarterly Report on Form 10-Q.


Contractual Obligations

With the exception of the new term loan credit agreement in an aggregate principal of $2.2 billion, consisting of three tranches: (i) $500 million maturing on fiscal 2025; (ii) €750 million maturing on fiscal 2022; and (iii) €750 million maturing on fiscal 2023, and repayment of the $500 million Senior Notes due 2020 as discussed above under the subheading "Capital Resources," there have been no material changes, outside the ordinary course of business, to our contractual obligations since March 31, 2019. For further information see "Contractual Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.



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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 three months ended June 30, 2019, there were no changes to our accounting estimates from those described in our fiscal 2019 Annual Report on Form 10-K except as mentioned in Note 1 - "Summary of Significant Accounting Policies".

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, 2019. Our exposure to market risk has not changed materially since March 31, 2019.


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, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Operating Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019.

Changes in Internal Control Over Financial Reporting

During the first quarter of fiscal 2020, we adopted ASC 842 effective April 1, 2019, as described in Note 2 - “Recent Accounting Pronouncements” and Note 7 - “Leases” to the financial statements. We implemented a new lease accounting system and redesigned certain processes and controls pertaining to our lease portfolio. There were no other changes in our internal control over financial reporting during the first three months of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II


ITEM 1. LEGAL PROCEEDINGS

See Note 21 - "Commitments and Contingencies" to the financial statements under the caption “Contingencies” for information regarding legal proceedings in which we are involved.


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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, the additional risks listed below, as well as 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. Other than as described below, there have been no material changes in the three months ended June 30, 2019 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, 2019.

Risks Related to the Luxoft Acquisition


The Luxoft Acquisition may result in disruptions to relationships with customers and other business partners.

On June 14, 2019, we completed the Luxoft Acquisition. This transaction could cause disruptions in our business and the Luxoft business, including by disrupting operations or causing customers to delay or to defer decisions or to end their relationships, or otherwise limiting the ability to compete for or perform certain contracts or services. If we and Luxoft face difficulties in integrating our businesses, or the Luxoft business faces difficulties in its business generally, the Luxoft Acquisition may not achieve the intended results.

Further, it is possible that current or prospective employees of our business and the Luxoft business could experience uncertainty about their future roles with the combined company, which could harm our ability to attract and retain key personnel. Any of the foregoing could adversely affect our business, financial condition and results of operations.

The actions required to implement the Luxoft Acquisition will take management time and attention and may require us to incur additional costs.

The Luxoft Acquisition will require management's time and resources, which will be in addition to, and may divert from, management's time and attention to the operation of our existing businesses and the execution of our other strategic initiatives. Additionally, we may incur additional costs in connection with the Luxoft Acquisition beyond those that are currently anticipated.


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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 June 30, 2019, 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
April 1, 2019 to April 30, 2019
 

 
$—
 
 
$2,523,936,426
May 1, 2019 to May 31, 2019
 
1,729,567

 
$57.82
 
1,729,567
 
$2,423,936,450
June 1, 2019 to June 30, 2019
 
5,630,042

 
$53.29
 
5,630,042
 
$2,123,936,464
    
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. On November 8, 2018, DXC's Board of Directors approved an incremental $2.0 billion share repurchase authorization. An expiration date has not been established for this repurchase plan.

On June 13, 2019, DXC entered into an ASR agreement with a third-party financial institution, and on June 26, 2019, under the ASR agreement, the Company repurchased 1,849,194 shares of its common stock at a weighted average price of $54.08 per share. See Note 17 - "Stockholders' Equity " to the financial statements.

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.


64



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
2.15

65


2.16
2.17
2.18
2.19
2.20
2.21
2.22
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

66


4.13
4.14
4.15
4.16
4.17
4.18

4.19

4.20
10.1
10.2
31.1
31.2
32.1
32.2
101
Interactive Data Files
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
 

67



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:
August 9, 2019
By:
/s/ Neil A. Manna
 
 
Name:
Neil A. Manna
 
 
Title:
Senior Vice President, Corporate Controller Principal Accounting Officer
 


68