Annual Statements Open main menu
  1. Annual Statements
  2. » Companies
  3. » DXC Technology Co
  4. » Quarter Report: 2020 June (Form 10-Q)

DXC Technology Co - Quarter Report: 2020 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, 2020
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
downloada34.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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
 
 
Accelerated Filer
o
 
 
 
 
 
 
 
 
 
 
 
 
Non-accelerated Filer
o
 
 
Smaller reporting company
☐
 
 
 
 
 
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

254,194,590 shares of common stock, par value $0.01 per share, were outstanding on July 31, 2020.


TABLE OF CONTENTS





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, 2020
 
June 30, 2019
 
 
 
 
 
Revenues
 
$
4,502

 
$
4,890

 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
3,629

 
3,622

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
539

 
507

Depreciation and amortization
 
492

 
470

Restructuring costs
 
72

 
142

Interest expense
 
106

 
91

Interest income
 
(23
)
 
(30
)
Other income, net
 
(88
)
 
(118
)
Total costs and expenses
 
4,727

 
4,684

 
 
 
 
 
(Loss) income before income taxes
 
(225
)
 
206

Income tax (benefit) expense
 
(26
)
 
38

Net (loss) income
 
(199
)
 
168

Less: net income attributable to non-controlling interest, net of tax
 
6

 
5

Net (loss) income attributable to DXC common stockholders
 
$
(205
)
 
$
163

 
 
 
 
 
(Loss) income per common share:
 
 
 
 
Basic
 
$
(0.81
)
 
$
0.61

Diluted
 
$
(0.81
)
 
$
0.61




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





2


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

 
 
 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
 
 
 
 
 
 
 
Net (loss) income
 
$
(199
)
 
$
168

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $7 and $12
 
(3
)
 
(135
)
 
Cash flow hedges adjustments, net of tax expense of $3 and $0
 
11

 
4

 
Available-for-sale securities, net of tax expense of $0 and $1
 
4

 
1

 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
Amortization of prior service cost, net of tax benefit of $1 and $0
 
(9
)
 
(1
)
 
Pension and other post-retirement benefit plans, net of tax
 
(9
)
 
(1
)
Other comprehensive income (loss), net of taxes
 
3

 
(131
)
Comprehensive (loss) income
 
(196
)
 
37

 
Less: comprehensive income (loss) attributable to non-controlling interest
 
5

 
(19
)
Comprehensive (loss) income attributable to DXC common stockholders
 
$
(201
)
 
$
56





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, 2020
 
March 31, 2020
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
5,509

 
$
3,679

Receivables and contract assets, net of allowance of $104 and $74
 
4,271

 
4,392

Prepaid expenses
 
667

 
646

Other current assets
 
261

 
270

Total current assets
 
10,708

 
8,987

 
 
 
 
 
Intangible assets, net of accumulated amortization of $4,627 and $4,347
 
5,540

 
5,731

Operating right-of-use assets, net
 
1,602

 
1,428

Goodwill
 
2,057

 
2,017

Deferred income taxes, net
 
285

 
265

Property and equipment, net of accumulated depreciation of $4,072 and $3,818
 
3,503

 
3,547

Other assets
 
4,199

 
4,031

Total Assets
 
$
27,894

 
$
26,006

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
1,682

 
1,276

Accounts payable
 
1,522

 
1,598

Accrued payroll and related costs
 
766

 
630

Current operating lease liabilities
 
488

 
482

Accrued expenses and other current liabilities
 
2,756

 
2,801

Deferred revenue and advance contract payments
 
1,030

 
1,021

Income taxes payable
 
81

 
87

Total current liabilities
 
8,325

 
7,895

 
 
 
 
 
Long-term debt, net of current maturities
 
10,334

 
8,672

Non-current deferred revenue
 
733

 
735

Non-current operating lease liabilities
 
1,208

 
1,063

Non-current income tax liabilities and deferred tax liabilities
 
1,075

 
1,157

Other long-term liabilities
 
1,277

 
1,355

Total Liabilities
 
22,952

 
20,877

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $.01 per share, 1,000,000 shares authorized, none issued as of June 30, 2020 and March 31, 2020
 
—

 
—

Common stock, par value $.01 per share, 750,000,000 shares authorized, 256,382,532 issued as of June 30, 2020 and 255,674,040 issued as of March 31, 2020
 
3

 
3

Additional paid-in capital
 
10,729

 
10,714

Accumulated deficit
 
(5,386
)
 
(5,177
)
Accumulated other comprehensive loss
 
(599
)
 
(603
)
Treasury stock, at cost, 2,291,790 and 2,148,708 shares as of June 30, 2020 and March 31, 2020
 
(154
)
 
(152
)
Total DXC stockholders’ equity
 
4,593

 
4,785

Non-controlling interest in subsidiaries
 
349

 
344

Total Equity
 
4,942

 
5,129

Total Liabilities and Equity
 
$
27,894

 
$
26,006


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, 2020
 
June 30, 2019
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(199
)
 
$
168

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
496

 
474

Operating right-of-use expense
 
156

 
176

Pension & other post-employment benefits, actuarial & settlement losses
 
2

 
—

Share-based compensation
 
16

 
18

Loss (gain) on dispositions
 
4

 
(8
)
Provision for losses on accounts receivable
 
35

 
(4
)
Unrealized foreign currency exchange gain
 
(11
)
 
(14
)
Other non-cash charges, net
 
7

 
(1
)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Increase in assets
 
(100
)
 
(335
)
Decrease in operating lease liability
 
(156
)
 
(174
)
Decrease in other liabilities
 
(131
)
 
(366
)
Net cash provided by (used in) operating activities
 
119

 
(66
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(95
)
 
(105
)
Payments for transition and transformation contract costs
 
(82
)
 
(72
)
Software purchased and developed
 
(48
)
 
(63
)
Payments for acquisitions, net of cash acquired
 
(10
)
 
(1,911
)
Cash collections related to deferred purchase price receivable
 
159

 
371

Proceeds from sale of assets
 
6

 
21

Short-term investing
 
—

 
(75
)
Other investing activities, net
 
9

 
12

Net cash used in investing activities
 
(61
)
 
(1,822
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings of commercial paper
 
748

 
1,401

Repayments of commercial paper
 
(317
)
 
(1,401
)
Borrowings under lines of credit
 
2,500

 
—

Repayment of borrowings under lines of credit
 
(750
)
 
—

Borrowings on long-term debt, net of discount
 
993

 
2,198

Principal payments on long-term debt
 
(1,084
)
 
(509
)
Payments on finance leases and borrowings for asset financing
 
(245
)
 
(210
)
Proceeds from stock options and other common stock transactions
 
—

 
7

Taxes paid related to net share settlements of share-based compensation awards
 
(3
)
 
(12
)
Repurchase of common stock and advance payment for accelerated share repurchase
 
—

 
(500
)
Dividend payments
 
(53
)
 
(51
)
Other financing activities, net
 
(3
)
 
(36
)
Net cash provided by financing activities
 
1,786

 
887

Effect of exchange rate changes on cash and cash equivalents
 
(14
)
 
(30
)
Net increase (decrease) in cash and cash equivalents
 
1,830

 
(1,031
)
Cash and cash equivalents at beginning of year
 
3,679

 
2,899

Cash and cash equivalents at end of period
 
$
5,509

 
$
1,868



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)
 
Three Months Ended June 30, 2020
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
 Accumulated Deficit
Accumulated
Other
Comprehensive Loss
Treasury Stock (1)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Balance at March 31, 2020
255,674

 
$
3

$
10,714

$
(5,177
)
$
(603
)
$
(152
)
$
4,785

$
344

$
5,129

Cumulative effect of adopting ASU 2016-13
 
 
 
 
(4
)
 
 
(4
)
 
(4
)
Net loss
 
 
 
 
(205
)
 
 
(205
)
6

(199
)
Other comprehensive income
 
 
 
 
 
4

 
4

(1
)
3

Share-based compensation expense
 
 
 
15

 
 
 
15

 
15

Acquisition of treasury stock
 
 
 
 
 
 
(2
)
(2
)
 
(2
)
Stock option exercises and other common stock transactions
709

 
 


 
 
 
—

 
—

Balance at June 30, 2020
256,383

 
$
3

$
10,729

$
(5,386
)
$
(599
)
$
(154
)
$
4,593

$
349

$
4,942

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
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


        

(1) 2,291,790 treasury shares as of June 30, 2020.



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

6


DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 - Summary of Significant Accounting Policies

Business

DXC Technology Company ("DXC," the "Company," "we," "us," or "our") helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, the world’s largest companies trust DXC to deploy its enterprise technology stack to deliver new levels of performance, competitiveness and customer experiences.

HHS Sale

On March 9, 2020, DXC entered into a definitive agreement to sell (the “HHS Sale”) its U.S. State and Local Health and Human Services business (the “HHS Business”) to Veritas Capital Fund Management, L.L.C. for $5.0 billion in cash. The HHS Business is an end-to-end provider of technology-enabled, mission critical solutions that are fundamental to the administration and operations of health programs throughout the United States. The transaction is expected to close by September 2020, but no later than December 2020, subject to the satisfaction of certain closing conditions. Following the transaction close, DXC will retain its remaining healthcare practice, servicing customers across the healthcare continuum, including payers, providers and life sciences firms.

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.

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 Statements of Comprehensive (Loss) Income as the "statements of comprehensive income," (iv) the Condensed Consolidated Balance Sheets as the “balance sheets,” and (v) the Condensed Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references throughout to numbered “Notes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.

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

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, 2020 ("fiscal 2020").

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



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. The severity, magnitude and duration, as well as the economic consequences of the coronavirus disease 2019 ("COVID-19") pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods. 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.

Allowance for Credit Losses

Effective April 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” using the modified retrospective method. Refer to Note 2 - "Recent Accounting Pronouncements" and Note 5 - "Receivables" for further discussion of the impact of adoption and other required disclosures. The amendments in this update changed the guidance for credit losses to an expected loss model rather than an incurred loss model. Financial assets subject to impairment under an expected credit loss model include billed and unbilled receivables, other receivables, and contract assets. Certain off-balance sheet arrangements, such as financial guarantees associated with receivables securitization facilities, are also subject to the guidance of ASU 2016-13.

Under an expected credit loss model, the Company immediately recognizes an estimate of credit losses expected to occur over the remaining life of financial assets that are in the scope of ASU 2016-13. DXC considers all available relevant information when estimating expected credit losses, including past events, current market conditions and forecasts and their implications for expected credit losses.



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



Note 2 - Recent Accounting Pronouncements

During the three months ended June 30, 2020, 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
June 2016

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
April 1, 2020
Modified Retrospective
This update requires the measurement and recognition of expected credit losses using the current expected credit loss model for financial assets held at amortized cost, which includes the Company’s trade accounts receivable, certain financial instruments and contract assets. It replaces the existing incurred loss impairment model with an expected loss methodology. The recorded credit losses are adjusted each period for changes in expected lifetime credit losses. The standard requires a cumulative effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective.

The Company adopted this standard using the modified retrospective approach and recorded an immaterial cumulative effect adjustment in retained earnings as of April 1, 2020.


August 2018

ASU 2018-15,
"Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"


April 1, 2020
Prospective

This update helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively.

The Company adopted this standard using the prospective method and determined that the adoption of ASU 2018-15 had no material impact to its condensed consolidated financial statements.


The following ASUs were recently issued but have not yet been adopted by DXC:
Date Issued and ASU
DXC Effective Date
Description
Impact
December 2019

ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
Fiscal 2022
This update is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Early adoption of this update is permitted.
The Company is currently evaluating the potential impact this standard may have on its financial statements in future reporting periods.


Other recently issued ASUs effective after June 30, 2020 are not expected to have a material effect on DXC's consolidated financial statements.

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



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 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 "acquisition date.")

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.

The Company's allocation of the purchase price to the assets acquired and liabilities assumed as of the Luxoft acquisition date is as follows:

(in millions)
 
Fair Value
Cash and cash equivalents
 
$
113

Accounts receivable
 
233

Other current assets
 
15

Total current assets
 
361

Property and equipment
 
31

Intangible assets
 
577

Other assets
 
99

Total assets acquired
 
1,068

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(121
)
Deferred revenue
 
(8
)
Long-term deferred tax liabilities and income tax payable
 
(106
)
Other liabilities
 
(72
)
Total liabilities assumed
 
(307
)
Net identifiable assets acquired
 
761

Goodwill
 
1,262

Total consideration transferred
 
$
2,023



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 10 - "Goodwill."

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



The Company valued current assets and liabilities using existing carrying values as an estimate of the approximate fair value of those items at the acquisition date except for certain contract receivables for which the Company determined fair value based on a cost plus margin approach. The Company valued acquired property and equipment using predominately the direct capitalization method of the income approach and in certain specific cases, the Company determined that the net book value represents the fair value. The Company valued customer relationships using the multi-period excess earnings method under the income approach and valued trade names and developed technology using a relief from royalty method under the income approach. The Company determined that the net book value of the purchased software represents the fair value.

Below are the estimated useful lives of the acquired intangibles:
 
 
Estimated Useful Lives (Years)
Customer related intangibles
 
10
Trade names
 
20
Developed technology
 
3
Third-party purchased software
 
3


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

Note 4 - Earnings (Loss) per Share

Basic earnings (loss) per share ("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, 2020
 
June 30, 2019
Net (loss) income attributable to DXC common shareholders:
 
$
(205
)
 
$
163

 
 
 
 
 
Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
253.63

 
267.00

Dilutive effect of stock options and equity awards
 
—

 
1.97

Weighted average common shares outstanding for diluted EPS
 
253.63

 
268.97

 
 
 
 
 
(Loss) Earnings per share:
 
 
 
 
Basic
 
$
(0.81
)
 
$
0.61

Diluted
 
$
(0.81
)
 
$
0.61



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, 2020(1)
 
June 30, 2019
Stock Options
 
1,749,189

 
4,824

Restricted Stock Units
 
3,149,436

 
589,569

Performance Stock Units
 
233,762

 
—

        

(1) Due to the Company's net loss for the three months ended June 30, 2020, stock options, restricted stock units and performance stock units were excluded from the computation of dilutive EPS because they would have had an anti-dilutive effect.

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



Note 5 - Receivables

Receivables Facility

The Company has an accounts receivable sales facility (as amended, restated, supplemented or otherwise modified as of June 30, 2020, 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, certain of the Company's subsidiaries (the "Sellers") sell accounts receivable to DXC Receivables LLC ("Receivables SPV"), a wholly owned bankruptcy-remote entity, in a true sale. Receivables SPV subsequently sells certain of the receivables in their entirety to the Purchasers pursuant to a receivables purchase agreement. The financial obligations of Receivables SPV to the Purchasers under the Receivables Facility are limited to the assets it owns and non-recourse to the Company. Sales of receivables by Receivables SPV occur continuously and are settled on a monthly basis. During the first quarter of fiscal 2021, Receivables SPV amended the Receivables Facility (the "Amendment") to decrease the facility limit from $750 million to $600 million and extend the termination date to August 19, 2020. Under the terms of the Receivables Facility, there is no longer any deferred purchase price ("DPP") for receivables as the entire purchase price is paid in cash when the receivables are sold to the Purchasers. Prior to the Amendment, DPPs were realized by Receivables SPV upon the ultimate collection of the underlying receivables sold to the Purchasers. Cash receipts on the DPP were classified as cash flows from investing activities.

The 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, 2020, the total availability under the Receivables Facility was $324 million, and the amount sold to the Purchasers was $403 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $79 million liability within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility was more than the total availability. The Receivables Facility is scheduled to terminate on August 19, 2020, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Company uses the proceeds from the sale of receivables 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.

While the Company guarantees certain non-financial performance obligations of the Sellers, the Purchasers bear customer credit risk associated with the receivables sold under the Receivables Facility and have recourse in the event of credit-related customer non-payment solely to the assets of the Receivables SPV.

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

    Transfers of receivables
 
1,214

Collections
 
(1,265
)
Change in funding availability
 
2

Ending balance
 
$
525




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


Milano Receivables Facility

On June 5, 2020, the Company entered into an accounts receivable securitization facility (the "Milano Facility") with certain unaffiliated financial institutions (the "Milano Purchasers") for the sale of commercial accounts receivable related to Medicaid Management Information Systems ("MMiS") contracts in the United States. The Milano Facility is scheduled to terminate on June 4, 2021, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Milano Facility has a facility limit of $275 million. Under the Milano Facility, certain of the Company's subsidiaries (the "Milano Sellers") sell MMiS accounts receivable to Milano Receivables Funding LLC ("Milano Receivables SPV"), a wholly owned bankruptcy-remote entity, in a true sale. Milano Receivables SPV subsequently sells the receivables in their entirety to the Milano Purchasers pursuant to a receivables purchase agreement. The financial obligations of Milano Receivables SPV to the Milano Purchasers under the Milano Facility are limited to the assets it owns and non-recourse to the Company. Sales of MMiS receivables by Milano Receivables SPV occur continuously and are settled on a monthly basis.

The amount available under the Milano 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, 2020, the total availability under the Milano Facility was approximately $251 million, and the amount sold to the Milano Purchasers was $263 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $12 million liability within accounts payable because the amount of cash proceeds received by the Company under the Milano Facility was more than the total availability. The Company uses the proceeds from the sale of receivables under the Milano 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.

While the Company guarantees certain non-financial performance obligations of the Milano Sellers, the Milano Purchasers bear customer credit risk associated with the receivables sold under the Milano Facility and have recourse in the event of credit-related customer non-payment solely to the assets of the Milano Receivables SPV.

German Receivables Facility

On October 1, 2019, the Company executed an accounts receivable securitization facility (as amended, restated, supplemented or otherwise modified as of June 30, 2020, the "DE Receivables Facility") with certain unaffiliated financial institutions (the "DE Purchasers") for the sale of commercial accounts receivable in Germany. The DE Receivables Facility has a facility limit of €200 million (approximately $225 million as of June 30, 2020). Under the DE Receivables Facility, certain subsidiaries of the Company organized in Germany (the "DE Sellers") sell accounts receivable to DXC ARFacility Designated Activity Company ("DE Receivables SPV"), a trust-owned bankruptcy-remote entity, in a true sale. Pursuant to a receivables purchase agreement, DE Receivables SPV subsequently sells the receivables to the DE Purchasers in return for payments of capital. Sales of receivables by DE Receivables SPV occur continuously and are settled on a monthly basis. During the first quarter of fiscal 2021, DE Receivables SPV amended the DE Receivables Facility. Under the terms of the DE Receivables Facility, there is no longer any DPP for receivables as the entire purchase price is paid in cash when the receivables are sold to the DE Purchasers. Prior to the Amendment, DPPs were realized by DE Receivables SPV upon the ultimate collection of the underlying receivables sold to the DE Purchasers. Cash receipts on the DPPs were classified as cash flows from investing activities. The DPP balance was $102 million before the Amendment was executed. Upon execution of the Amendment, the Purchasers extinguished the DPP balance and returned title to the applicable underlying receivables to DE Receivables SPV. The DPP extinguishment was classified as a non-cash investing activity, please refer to Note 18 - "Cash Flows."


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


The amount available under the DE 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, 2020, the total availability under the DE Receivables Facility was approximately $116 million, and the amount sold to the DE Purchasers was $123 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $7 million liability within accounts payable because the amount of cash proceeds received by the Company under the DE Receivables Facility was more than the total availability. The DE Receivables Facility is scheduled to terminate on September 30, 2020, but provides for one or more optional one-year extensions, if agreed to by the DE Purchasers. The Company uses the proceeds from DE Receivables SPV's sale of receivables under the DE Receivables Facility for general corporate purposes.

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

Certain obligations of DE Sellers under the DE Receivables Facility and certain DXC subsidiaries located in Germany, as initial servicers, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the DE Purchasers. However, the performance guaranty does not cover DE Receivables SPV’s obligations to pay yield, fees or invested amounts to the administrative agent or any of the DE Purchasers.

The following table is a reconciliation of the beginning and ending balances of the DPP:
(in millions)
 
As of June 30, 2020
Beginning balance
 
$
103

Transfers of receivables
 
417

Collections
 
(420
)
Change in funding availability
 
2

Facility amendments
 
(102
)
Ending balance
 
$
—




Allowance for Doubtful Accounts

The Company calculates expected credit losses for trade accounts receivable based on historical credit loss rates for each aging category as adjusted for the current market conditions and forecasts about future economic conditions. The following table presents the activity in the allowance for doubtful accounts for trade accounts receivable:
(in millions)
 
As of and for the Three Months Ended
 
 
June 30, 2020
Beginning balance
 
$
74

Impact of adoption of the Credit Loss Standard
 
4

Provisions for expected credit losses
 
35

Write-offs charged against the allowance
 
(9
)
Ending balance
 
$
104




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



Note 6 - Leases

The Company has operating and finance leases for data centers, corporate offices, retail stores and certain equipment. Its 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, 2020
 
Three Months Ended June 30, 2019
Operating lease cost
 
$
156

 
$
176

Short-term lease cost
 
15

 
10

Variable lease cost
 
8

 
15

Sublease income
 
(12
)
 
(9
)
     Total operating costs
 
$
167

 
$
192

 
 
 
 
 
Finance lease cost:
 
 
 
 
     Amortization of right-of-use assets
 
$
116

 
$
109

     Interest on lease liabilities
 
14

 
17

     Total finance lease cost
 
$
130

 
$
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 18 - "Cash Flows."

Supplemental Cash Flow information related to leases was as follows:
(in millions)
 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
Cash paid for amounts included in the measurement of:
 
 
 
 
     Operating cash flows from operating leases
 
$
156

 
$
174

     Operating cash flows from finance leases
 
$
14

 
$
17

     Financing cash flows from finance leases
 
$
138

 
$
145




15
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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, 2020
 
March 31, 2020
Assets:
 
 
 
 
 
 
ROU operating lease assets
 
Operating right-of-use assets, net
 
$
1,602

 
$
1,428

ROU finance lease assets
 
Property and Equipment, net
 
1,137

 
1,220

Total
 
 
 
$
2,739

 
$
2,648

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Current
 
 
 
 
 
 
Operating lease
 
Current operating lease liabilities
 
$
488

 
$
482

Finance lease
 
Short-term debt and current maturities of long-term debt
 
432

 
444

Total
 
 
 
$
920

 
$
926

 
 
 
 
 
 
 
Non-current
 
 
 
 
 
 
Operating lease
 
Non-current operating lease liabilities
 
$
1,208

 
$
1,063

Finance lease
 
Long-term debt, net of current maturities
 
583

 
602

Total
 
 
 
$
1,791

 
$
1,665


The following table provides information on the weighted average remaining lease term and weighted average discount rate for operating and finance leases:
 
 
As of
 
 
June 30, 2020
 
March 31, 2020
Weighted Average remaining lease term:
 
Years
     Operating leases
 
4.9

 
4.8

     Finance leases
 
2.7

 
2.7

 
 
 
 
 
Weighted average remaining discount rate:
 
Rate
     Operating leases
 
4.1
%
 
4.0
%
     Finance leases
 
4.2
%
 
6.4
%



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


The following maturity analysis presents expected undiscounted cash payments for operating and finance leases on an annual basis as of June 30, 2020:
Fiscal year
 
Operating Leases
 
 
(in millions)
 
Real Estate
 
Equipment
 
Finance Leases
Remainder of 2021
 
$
356

 
$
51

 
$
345

2022
 
403

 
38

 
370

2023
 
321

 
18

 
223

2024
 
248

 
10

 
99

2025
 
168

 
5

 
23

Thereafter
 
261

 
3

 
1

     Total lease payments
 
1,757

 
125

 
1,061

Less: imputed interest
 
(181
)
 
(5
)
 
(46
)
     Total payments
 
$
1,576

 
$
120

 
$
1,015



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



Note 7 - Fair Value

Fair Value Measurements on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding pension assets and derivative assets and liabilities. See Note 8 - "Derivative 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)
 
June 30, 2020
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
706

 
$
706

 
$
—

 
$
—

U.S. treasury bills(1)
 
500

 
500

 
—

 
—

Time deposits(1)
 
305

 
305

 
—

 
—

Other debt securities(2)
 
56

 
—

 
53

 
3

Total assets
 
$
1,567

 
$
1,511

 
$
53

 
$
3

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
48

 
$
—

 
$
—

 
$
48

Total liabilities
 
$
48

 
$
—

 
$
—

 
$
48




 
 
March 31, 2020
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
156

 
$
156

 
$
—

 
$
—

Time deposits(1)
 
595

 
595

 
—

 
—

Other debt securities(2)
 
51

 
—

 
48

 
3

Deferred purchase price receivable
 
103

 
—

 
—

 
103

Total assets
 
$
905

 
$
751

 
$
48

 
$
106

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
46

 
$
—

 
$
—

 
$
46

Total liabilities
 
$
46

 
$
—

 
$
—

 
$
46


        

(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 $38 million and $37 million, and unrealized gains of $15 million and $11 million, as of June 30, 2020 and March 31, 2020, respectively.

The fair value of money market funds, money market deposit accounts, U.S. Treasury bills with less than three months maturity and time deposits, included in cash and cash equivalents, are based on quoted market prices. The fair value of other debt securities, included in other long-term assets, is based on actual market prices. The fair value of the DPPs, 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.


18
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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 as Level 2 or Level 3 within 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 $10.2 billion and $8.2 billion as of June 30, 2020 and March 31, 2020, respectively, as compared with carrying value of $10.0 billion and $8.4 billion as of June 30, 2020 and March 31, 2020, respectively. If measured at fair value, long-term debt, excluding finance lease liabilities would be classified as Level 1 or Level 2 within 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 as Level 3 within the fair value hierarchy. There were no significant impairments recorded during the fiscal period covered by this report.

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



Note 8 - 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 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 purposes.

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-denominated intercompany obligations and forecasted transactions. The notional amounts of foreign currency forward contracts designated as cash flow hedges as of June 30, 2020 and March 31, 2020 were $450 million and $455 million, respectively. As of June 30, 2020, the related forecasted transactions extend through September 2022.

For the three months ended June 30, 2020 and June 30, 2019, respectively, the Company performed an assessment at the inception of the cash flow hedge transactions and determined that 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, 2020 and June 30, 2019, respectively, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of June 30, 2020, $6 million of the existing amount of loss related to the cash flow hedge reported in accumulated other comprehensive loss is expected to be reclassified into earnings within the next 12 months.

Net investment hedges

During the fiscal year ended March 31, 2019, the Company designated certain foreign currency forward contracts as net investment hedges to protect its investment in certain foreign operations against adverse changes in exchange rates between the Euro and the U.S. dollar. These contracts were de-designated and settled during the fiscal year ended March 31, 2020, and as of June 30, 2020, there were none outstanding.

During the three months ended June 30, 2020, the pre-tax gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive income (loss) was $11 million and in loss from operations was $(4) million.

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 to.

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 amounts of the foreign currency forward contracts outstanding as of June 30, 2020 and March 31, 2020 were $2.1 billion and $2.2 billion, respectively.

The following table presents the pretax amounts impacting income related to designated and non-designated foreign currency forward contracts:
 
 
 
 
For the Three Months Ended
(in millions)
 
Statement of Operations Line Item
 
June 30, 2020
 
June 30, 2019
Foreign currency forward contracts
 
Other expense (income), net
 
$
25

 
$
19




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


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, 2020
 
March 31, 2020
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
2

 
$
—

Total fair value of derivatives designated for hedge accounting
 
$
2

 
$
—

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
3

 
$
16

Total fair value of derivatives not designated for hedge accounting
 
$
3

 
$
16


 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
June 30, 2020
 
March 31, 2020
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
8

 
$
20

Total fair value of derivatives designated for hedge accounting:
 
$
8

 
$
20

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
5

 
$
12

Total fair value of derivatives not designated for hedge accounting
 
$
5

 
$
12



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, 2020, there were no counterparties with concentration of credit risk.

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.


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


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 when such net investments are sold or substantially liquidated.

As of June 30, 2020, DXC had $1.4 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries. For the three months ended June 30, 2020, the pre-tax impact of loss on foreign currency-denominated debt designated for hedge accounting recognized in other comprehensive loss was $27 million. As of March 31, 2020, DXC had $1.9 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries.


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



Note 9 - Intangible Assets

Intangible assets consisted of the following:
 
 
As of June 30, 2020
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
4,086

 
$
2,729

 
$
1,357

Customer related intangible assets
 
5,843

 
1,859

 
3,984

Other intangible assets
 
238

 
39

 
199

Total intangible assets
 
$
10,167

 
$
4,627

 
$
5,540

 
 
As of March 31, 2020
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
4,048

 
$
2,614

 
$
1,434

Customer related intangible assets
 
5,795

 
1,697

 
4,098

Other intangible assets
 
235

 
36

 
199

Total intangible assets
 
$
10,078

 
$
4,347

 
$
5,731



The components of amortization expense were as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
Intangible asset amortization
 
$
253

 
$
236

Transition and transformation contract cost amortization(1)
 
61

 
67

Total amortization expense
 
$
314

 
$
303

        

(1) 
Transaction and transformation contract costs are included within other assets on the balance sheet.

Estimated future amortization related to intangible assets as of June 30, 2020 is as follows:
Fiscal Year
 
(in millions)

Remainder of 2021
 
$
743

2022
 
$
940

2023
 
$
860

2024
 
$
753

2025
 
$
668



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



Note 10 - Goodwill

The following table summarizes the changes in the carrying amount of goodwill, by segment, as of June 30, 2020.

(in millions)
 
GBS
 
GIS
 
Total
Goodwill, gross
 
$
6,507

 
$
5,066

 
$
11,573

Accumulated impairment losses
 
(4,490
)
 
(5,066
)
 
(9,556
)
Balance as of March 31, 2020, net
 
$
2,017

 
$
—

 
$
2,017


 
 
 
 
 
 
Acquisitions
 
16

 
—

 
16

Foreign currency translation
 
24

 
—

 
24

 
 
 
 
 
 
 
Goodwill, gross
 
6,547

 
5,066

 
11,613

Accumulated impairment losses
 
(4,490
)
 
(5,066
)
 
(9,556
)
Balance as of June 30, 2020, net
 
$
2,057

 
$
—

 
$
2,057



The addition to goodwill was due to an insignificant acquisition. 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, 2020, 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, 2020.


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


Note 11 - Debt

The following is a summary of the Company's debt:
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
June 30, 2020
 
March 31, 2020
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Commercial paper(1)
 
(0.22)% - 0.44%
 
2021 - 2022
 
$
967

 
$
542

Current maturities of long-term debt
 
Various
 
2021 - 2022
 
283

 
290

Current maturities of finance lease liabilities
 
0.62% - 18.47%
 
2021
 
432

 
444

Short-term debt and current maturities of long-term debt
 
 
 
 
 
$
1,682

 
$
1,276

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
 
 
 
 
AUD term loan
 
0.94% - 0.96%(2)
 
2022
 
344

 
489

GBP term loan
 
1.46%(3)
 
2022
 
369

 
556

EUR term loan
 
0.65%(4)
 
2022 - 2023
 
280

 
822

EUR term loan
 
0.80%(5)
 
2023 - 2024
 
839

 
821

USD term loan
 
1.42% - 2.24%(6)
 
2025
 
379

 
480

$274 million Senior notes
 
4.45%
 
2023
 
276

 
276

$171 million Senior notes
 
4.45%
 
2023
 
172

 
172

$500 million Senior notes
 
4.25%
 
2025
 
505

 
505

$500 million Senior notes
 
4.00%
 
2024
 
497

 
—

$500 million Senior notes
 
4.13%
 
2026
 
496

 
—

£250 million Senior notes
 
2.75%
 
2025
 
306

 
307

€650 million Senior notes
 
1.75%
 
2026
 
726

 
709

$500 million Senior notes
 
4.75%
 
2028
 
507

 
507

$234 million Senior notes
 
7.45%
 
2030
 
271

 
271

Revolving credit facility
 
1.27% - 2.08%
 
2024 - 2025
 
3,250

 
1,500

Lease credit facility
 
1.17% - 1.99%
 
2021 - 2023
 
8

 
11

Finance lease liabilities
 
0.62% - 18.47%
 
2021 - 2027
 
1,015

 
1,046

Borrowings for assets acquired under long-term financing
 
0.48% - 6.39%
 
2021 - 2028
 
740

 
802

Mandatorily redeemable preferred stock outstanding
 
6.00%
 
2023
 
62

 
62

Other borrowings
 
Various
 
2021 - 2022
 
7

 
70

Long-term debt
 
 
 
 
 
11,049

 
9,406

Less: current maturities
 
 
 
 
 
715

 
734

Long-term debt, net of current maturities
 
 
 
 
 
$
10,334

 
$
8,672

        

(1) 
At DXC's option, DXC can borrow up to a maximum of €1 billion or its equivalent in €, £, and $. Under this existing €1.0 billion commercial paper program, the Company issued £600 million via direct sale to the Bank of England.
(2) 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.
(3) Three-month LIBOR rate plus 0.80%.
(4) 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.
(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 0.55% and 1.05%, based on published credit ratings of DXC.
(6) 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.


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



Senior Notes and Term Loans

During the first quarter of fiscal 2021, the Company issued two senior notes with an aggregate principal of $1.0 billion, consisting of (i) $500 million of 4.00% Senior Notes due fiscal 2024, and (ii) $500 million of 4.13% Senior Notes due fiscal 2026. The proceeds from these notes were applied towards the early prepayment of our term loan facilities, including prepayment of €500 million of Euro Term Loan due fiscal 2023, £150 million of GBP Term Loan due fiscal 2022, A$300 million of AUD Term Loan due fiscal 2022, and $100 million of USD Term Loan due fiscal 2025.

Interest on the Company's term 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. The interest on the Company's senior notes is payable semi-annually in arrears, except for interest on the £250 million Senior Notes due 2025 and 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.

Revolving Credit Facility

During the first quarter of fiscal 2021, the Company borrowed the remaining $2.5 billion under the $4.0 billion credit facility agreement ("Credit Agreement") as a precautionary measure to increase its cash position and increase financial flexibility in light of continuing uncertainty in the global economy and financial capital markets resulting from the COVID-19 pandemic. During the quarter, the Company repaid $750 million, which became available under the revolving credit facility for redraw at the request of the Company.

The Company expects to use the proceeds from the borrowings under the Credit Agreement for working capital, general corporate purposes or other purposes permitted under the Credit Agreement. Borrowings under the Credit Agreement will bear interest at a variable rate based on LIBOR or on a base rate, plus an individual margin based on DXC’s long-term debt rating.

Note 12 - Revenue

Revenue Recognition

The following table presents DXC's 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, 2020
 
June 30, 2019
United States
 
$
1,709

 
$
1,851

United Kingdom
 
573

 
715

Australia
 
361

 
373

Other Europe
 
1,205

 
1,230

Other International
 
654

 
721

Total Revenues
 
$
4,502

 
$
4,890


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

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



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, 2020, approximately $23 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 35% of these remaining performance obligations in fiscal 2021, 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, 2020
 
March 31, 2020
Trade receivables, net
 
$
2,986

 
$
3,059

Contract assets
 
$
442

 
$
454

Contract liabilities
 
$
1,763

 
$
1,756


Change in contract liabilities were as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
Balance, beginning of period
 
$
1,756

 
$
1,886

Deferred revenue
 
698

 
770

Recognition of deferred revenue
 
(719
)
 
(717
)
Currency translation adjustment
 
30

 
(5
)
Other
 
(2
)
 
(16
)
Balance, end of period
 
$
1,763

 
$
1,918



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



Note 13 - Restructuring Costs

The Company recorded restructuring costs of $72 million and $142 million, net of reversals, for the three months ended June 30, 2020 and June 30, 2019, respectively. The costs recorded during the three months ended June 30, 2020 were largely a result of the Fiscal 2021 Plan (defined below).

The composition of restructuring liabilities by financial statement line item is as follows:
 
 
As of
(in millions)
 
June 30, 2020
Accrued expenses and other current liabilities
 
$
165

Other long-term liabilities
 
33

Total
 
$
198



Summary of Restructuring Plans

Fiscal 2021 Plan

During fiscal 2021, management approved global cost savings initiatives designed to better align the Company's workforce and facility structures (the "Fiscal 2021 Plan").

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. Costs incurred to date under the Fiscal 2020 Plan total $287 million, comprising $270 million in employee severance and $17 million of facilities costs.

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 the Enterprise Services business of Hewlett Packard Enterprise Company ("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 $477 million, comprising $336 million in employee severance and $141 million of facilities costs.

Other Prior Year Plans

In June 2017, management approved a post-HPES Merger (as defined below) 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 $985 million, comprising $789 million in employee severance and $196 million of facilities costs.

Acquired Restructuring Liabilities

As a result of the merger of Computer Sciences Corporation ("CSC") and HPES ("HPES Merger"), DXC acquired restructuring liabilities under restructuring plans that were initiated for HPES under plans approved by the HPE Board of Directors.


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


Restructuring Liability Reconciliations by Plan
 
 
Restructuring Liability as of March 31, 2020
 
Costs Expensed, Net of Reversals(1)
 
Costs Not Affecting Restructuring Liability(2)
 
Cash Paid
 
Other(3)
 
Restructuring Liability as of June 30, 2020
Fiscal 2021 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
—

 
$
78

 
$
(2
)
 
$
(20
)
 
$
—

 
$
56

Facilities Costs
 
—

 
5

 
(1
)
 
(2
)
 
—

 
2

Total
 
$
—

 
$
83

 
$
(3
)
 
$
(22
)
 
$
—

 
$
58

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2020 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
74

 
$
(1
)
 
$
1

 
$
(25
)
 
$
—

 
$
49

Facilities Costs
 
2

 
(4
)
 
4

 
(1
)
 
—

 
1

Total
 
$
76

 
$
(5
)
 
$
5

 
$
(26
)
 
$
—

 
$
50

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2019 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
25

 
$
(2
)
 
$
(1
)
 
$
(4
)
 
$
1

 
$
19

Facilities Costs
 
5

 
(3
)
 
2

 
—

 
—

 
4

Total
 
$
30

 
$
(5
)
 
$
1

 
$
(4
)
 
$
1

 
$
23

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Prior Year Plans
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
24

 
$
(1
)
 
$
2

 
$
(8
)
 
$
1

 
$
18

Facilities Costs
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
24

 
$
(1
)
 
$
2

 
$
(8
)
 
$
1

 
$
18

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
39

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
38

Facilities Costs
 
$
11

 
—

 
—

 
—

 
—

 
11

Total
 
$
50

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
49

        

(1) Costs expensed, net of reversals include $6 million, $7 million, and $3 million of costs reversed from the Fiscal 2020 Plan, Fiscal 2019 Plan and Other Prior Year Plans, respectively.
(2) Pension benefit augmentations recorded as a pension liability, asset impairments and restructuring costs associated with right-of-use assets.
(3)Foreign currency translation adjustments.

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



Note 14 - Pension and Other Benefit Plans

The Company offers a number of pension and other post-retirement benefit ("OPEB") plans, life insurance benefits, deferred compensation and defined contribution plans. Most of the Company's pension plans are not admitting new participants; therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates.

Defined Benefit Plans

The Company sponsors a number of defined benefit and post-retirement medical benefit plans for the benefit of eligible employees. The benefit obligations of the Company's U.S. pension, U.S. OPEB, and non-U.S. OPEB represent an insignificant portion of the Company's pension and other post-retirement benefits. As a result, the disclosures below include the Company's U.S. and non-U.S. pension plans on a global consolidated basis.

During the three months ended June 30, 2020, the Company remeasured plan assets and liabilities as of June 1, 2020 under certain U.K. pension plans due to the end of a public sector contract. The remeasurement resulted in a net loss of $2 million, comprising a curtailment gain of $9 million and an actuarial loss of $11 million. The net loss was recognized within other income.

The components of net periodic pension income were:
 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
Service cost
 
$
22

 
$
23

Interest cost
 
58

 
60

Expected return on assets
 
(153
)
 
(161
)
Amortization of prior service costs
 
(2
)
 
(2
)
Contractual termination benefit
 
—

 
11

Curtailment gain
 
(9
)
 
—

Recognition of actuarial loss

 
11

 
—

Net periodic pension income
 
$
(73
)
 
$
(69
)


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, except for contractual termination benefit which is included in restructuring, in the Company’s statements of operations.

Deferred Compensation Plans

Effective as of the HPES Merger, DXC assumed sponsorship of the Computer Sciences Corporation Deferred Compensation Plan, which was renamed the “DXC Technology Company Deferred Compensation Plan” (the “DXC DCP”) and adopted the Enterprise Services Executive Deferred Compensation Plan (the “ES DCP”). Both plans are non-qualified deferred compensation plans maintained for a select group of management, highly compensated employees and non-employee directors.

The DXC DCP covers eligible employees who participated in CSC’s Deferred Compensation Plan prior to the HPES Merger. The ES DCP covers eligible employees who participated in the HPE Executive Deferred Compensation Plan prior to the HPES Merger. Both plans allow participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under DXC’s tax-qualified 401(k) plan, the DXC Technology Matched Asset Plan. Neither plan provides for employer contributions. As of April 3, 2017, the ES DCP does not admit new participants.

Certain management and highly compensated employees are eligible to defer all, or a portion of, their regular salary that exceeds the limitation set forth in Internal Revenue Section 401(a)(17) and all or a portion of their incentive compensation.

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


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 $49 million as of June 30, 2020 and $48 million as of March 31, 2020.

Note 15 - Income Taxes

The Company's effective tax rate ("ETR") was 11.6% and 18.4% for the three months ended June 30, 2020 and June 30, 2019, respectively. For the three months ended June 30, 2020, the primary drivers of the ETR were the global mix of income, adjustment of the prior tax provisions due to the filing of tax returns in non-U.S. jurisdictions and generation of additional foreign tax credits in the U.S. 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.

The majority of unremitted foreign earnings have been taxed in the U.S. We expect a significant portion of the unremitted earnings of our foreign subsidiaries will no longer be subject to U.S. federal income tax upon repatriation to the U.S. However, a portion of these earnings may still be subject to foreign and U.S. state tax consequences when remitted. Earnings in India are indefinitely reinvested. Other foreign earnings are not indefinitely reinvested except for approximately $501 million that could be taxable when repatriated to the U.S. under Treasury regulations that were issued during the first quarter of fiscal 2020.

In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-HPES Merger tax liabilities including adjustments made by tax authorities to HPES U.S. and non-U.S. income tax returns. Likewise, DXC is liable to HPE for income tax receivables and refunds which it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a net receivable of $16 million due to $44 million of tax indemnification receivable related to uncertain tax positions net of related deferred tax benefits, $86 million of tax indemnification receivable related to other tax payables and $114 million of tax indemnification payable related to other tax receivables.

In connection with the USPS Separation, the Company entered into a tax matters agreement with Perspecta. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the USPS Separation. 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 remains 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, the Company has recorded a tax indemnification receivable from Perspecta of $66 million and a tax indemnification payable to Perspecta of $45 million related to income tax and other tax liabilities.

The IRS is examining the Company's federal income tax returns for fiscal 2008 through tax year ended October 31, 2019. 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 March 31, 2021.

The Company has agreed to extend the statute of limitations associated with the fiscal years 2011 through 2013 through December 31, 2020. The Company has agreed to extend the statute of limitations for fiscal years 2014 through fiscal 2016 through December 31, 2020 and for the employment tax audit of fiscal years 2015 and 2016 until January 31, 2021. The Company expects to reach a resolution for all years no earlier than the second quarter of fiscal 2022 except agreed issues related to fiscal 2008 through 2010 and fiscal 2011 through 2013 federal tax returns, which are expected to be resolved within twelve months.


31
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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 as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously met a more-likely-than-not standard if such positions are not upheld. Conversely, the Company could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. The Company believes that the outcomes that are reasonably possible within the next 12 months may result in a reduction in liability for uncertain tax positions of $23 million to $28 million, excluding interest, penalties and tax carry-forwards.

Note 16 - Stockholders' Equity

Share Repurchases

On April 3, 2017, DXC announced the establishment of a share repurchase program approved by the Board of Directors with an initial authorization of $2.0 billion for future repurchases of outstanding shares of DXC common stock. 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.

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. There was no share repurchase activity during the three months ended June 30, 2020. The details of shares repurchased during the three months ended June 30, 2019 are shown below:
 
 
Fiscal 2020
Fiscal Period
 
Number of Shares Repurchased
 
Average Price Per Share
 
Amount (in millions)
1st Quarter
 
 
 
 
 
 
Open market purchases
 
5,510,415

 
$
54.44

 
$
300

Accelerated stock repurchases
 
1,849,194

 
54.08

 
100

1st Quarter Total
 
7,359,609

 
$
54.35

 
$
400


Accumulated Other Comprehensive Loss

The following table shows the changes in accumulated other comprehensive income (loss), net of taxes:
(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Available-for-sale Securities
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Loss
Balance at March 31, 2020
 
$
(851
)
 
$
(20
)
 
$
9

 
$
259

 
$
(603
)
Current-period other comprehensive income
 
(2
)
 
7

 
4

 
—

 
9

Amounts reclassified from accumulated other comprehensive loss
 
—

 
4

 
—

 
(9
)
 
(5
)
Balance at June 30, 2020
 
$
(853
)
 
$
(9
)
 
$
13

 
$
250

 
$
(599
)


32
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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
Balance at March 31, 2019
 
$
(517
)
 
$
(3
)
 
$
9

 
$
267

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

 
1

 


 
(104
)
Amounts reclassified from accumulated other comprehensive loss
 


 
(2
)
 


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

 
$
10

 
$
266

 
$
(351
)


Note 17 - 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.

In fiscal 2021, DXC issued awards that are considered to have a market condition. A Monte Carlo simulation model was used for the valuation of the grants. Settlement of shares for the fiscal 2021 PSU awards will be made at the end of the third fiscal year subject to certain compounded annual growth rates of the stock price and continued employment through the last day of the third fiscal year.

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 14,882 shares purchased under this plan during the three months ended June 30, 2020.


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


The Board has reserved for issuance shares of DXC common stock, par value $0.01 per share, under each of the plans as detailed below:
 
 
As of June 30, 2020
 
 
Reserved for Issuance
 
Available for Future Grants
DXC Employee Equity Plan
 
34,200,000

 
14,648,697

DXC Director Equity Plan
 
230,000

 
26,551

DXC Share Purchase Plan
 
250,000

 
191,728

Total
 
34,680,000

 
14,866,976



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, 2020
 
1,869,815

 
$
29.92

 
4.27
 
$
—

Granted
 
—

 
$
—

 
 
 
 
Exercised
 
(1,203
)
 
$
11.77

 
 
 
$
—

Canceled/Forfeited
 
—

 
$
—

 
 
 
 
Expired
 
(48,980
)
 
$
25.46

 
 
 
 
Outstanding as of June 30, 2020
 
1,819,632

 
$
30.05

 
4.10
 
$
1

Vested and exercisable as of June 30, 2020
 
1,819,632

 
$
30.05

 
4.10
 
$
1




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, 2020
 
4,174,476

 
$
55.45

 
114,615

 
$
37.69

Granted
 
7,135,966

 
$
16.23

 
12,900

 
$
14.36

Settled
 
(713,578
)
 
$
59.26

 
—

 
$
—

Canceled/Forfeited
 
(392,495
)
 
$
62.92

 
—

 
$
—

Outstanding as of June 30, 2020
 
10,204,369

 
$
27.47

 
127,515

 
$
35.33



     
Share-Based Compensation

 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
Total share-based compensation cost
 
$
16

 
$
18

Related income tax benefit
 
$
1

 
$
4

Total intrinsic value of options exercised
 
$
—

 
$
6

Tax benefits from exercised stock options and awards
 
$
3

 
$
9



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



As of June 30, 2020, total unrecognized compensation expense related to unvested DXC stock options and unvested DXC RSUs, net of expected forfeitures was $0 million and $194 million, respectively. The unrecognized compensation expense for unvested RSUs is expected to be recognized over a weighted-average period of 2.33 years.

Note 18 - 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, 2020
 
June 30, 2019
Cash paid for:
 
 
 
 
Interest
 
$
103

 
$
91

Taxes on income, net of refunds (1)
 
$
31

 
$
43

 
 
 
 
 
Non-cash activities:
 
 
 
 
Operating:
 
 
 
 
ROU assets obtained in exchange for lease, net (2)
 
$
275

 
$
(22
)
   Prepaid assets acquired under long-term financing
 
$
2

 
$
30

Investing:
 
 
 
 
Capital expenditures in accounts payable and accrued expenses
 
$
11

 
$
13

Capital expenditures through finance lease obligations
 
$
88

 
$
253

Assets acquired under long-term financing
 
$
2

 
$
235

(Decrease) increase in deferred purchase price receivable
 
$
(52
)
 
$
321

Contingent consideration
 
$
3

 
$
—

Financing:
 
 
 
 
Dividends declared but not yet paid
 
$
1

 
$
57


        
     
(1) Income tax refunds were $18 million and $13 million for the three months ended June 30, 2020 and June 30, 2019, respectively.
(2) Net of $87 million change in lease classification from operating to finance lease in fiscal 2020.

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



Note 19 - Segment Information

DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industries and geographic regions. 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.

Global Business Services ("GBS")

GBS provides innovative technology solutions that help its customers address key business challenges and accelerate digital transformations tailored to each customers industry and specific objectives. GBS enterprise technology stack offerings include:

•
Analytics and Engineering. GBS's portfolio of analytics services and extensive partner ecosystem help customers gain rapid insights, automate operations, and accelerate their digital transformation journeys. GBS provides software engineering and solutions that enable businesses to run and manage their mission-critical functions, transform their operations and develop new ways of doing business.
•
Applications. GBS uses advanced technologies and methods to accelerate the creation, modernization, delivery and maintenance of high-quality, secure applications allowing customers to innovate faster while reducing risk, time to market, and total cost of ownership, across industries. GBS's vertical-specific IP includes solutions for insurance; banking and capital markets; and automotive, among others.

GBS offerings also includes business process services, which include digital integration and optimization of front and back office processes, and agile process automation. This helps companies to reduce cost, and minimize business disruption, human error, and operational risk while improving customer experiences.

Global Infrastructure Services ("GIS")

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

•
Cloud and Security. GIS helps customers to rapidly modernize by adapting legacy apps to cloud, migrate the right workloads, and securely manage their multi-cloud environments. GIS's security solutions help predict attacks, proactively respond to threats, ensure compliance and protect data, applications and infrastructure.
•
IT Outsourcing ("ITO"). GIS's ITO services support infrastructure, applications, and workplace IT operations, including hardware, software, physical/virtual end-user devices, collaboration tools, and IT support services. GIS helps customers securely optimize operations to ensure continuity of their systems and respond to new business and workplace demands, while achieving cost takeout, all with limited resources, expertise and budget.

GIS offerings also include workplace and mobility services to fit its customer's employee, business and IT needs from intelligent collaboration, modern device management, digital support services Internet of Things ("IoT") and mobility services, providing a consumer-like, digital experience.


36
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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, 2020
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,174

 
$
2,328

 
$
4,502

 
$
—

 
$
4,502

Segment profit
 
$
215

 
$
23

 
$
238

 
$
(48
)
 
$
190

Depreciation and amortization(1)
 
$
50

 
$
267

 
$
317

 
$
27

 
$
344

 
 
 
 
 
 
 
 
 
 
 
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


        
     
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $148 million and $138 million for the three months ended June 30, 2020 and 2019, 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 cost of services, segment selling, general and administrative, depreciation and amortization, and other income (excluding the movement in foreign currency exchange rates on DXC's 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, 2020
 
June 30, 2019
Profit
 
 
 
 
Total profit for reportable segments
 
$
238

 
$
706

All other loss
 
(48
)
 
(54
)
Interest income
 
23

 
30

Interest expense
 
(106
)
 
(91
)
Restructuring costs
 
(72
)
 
(142
)
Transaction, separation and integration-related costs
 
(110
)
 
(105
)
Amortization of acquired intangible assets
 
(148
)
 
(138
)
Pension and OPEB actuarial and settlement losses
 
(2
)
 
—

(Loss) income before income taxes
 
$
(225
)
 
$
206


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.

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



Note 20 - Commitments and Contingencies

Commitments

The Company signed long-term purchase agreements with certain software, hardware, telecommunication, and other service providers to obtain favorable pricing and terms for services, and products that are necessary for the operations of business activities. Under the terms of these agreements, the Company is contractually committed to purchase specified minimums over periods ranging from 1 to 5 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, 2020 were as follows:
Fiscal year
 
Minimum Purchase Commitment(1)
(in millions)
 
Remainder of 2021
 
$
1,525

2022
 
624

2023
 
537

2024
 
261

2025
 
25

     Total
 
$
2,972


        

(1) A significant portion of the minimum purchase commitments for fiscal 2021 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, 2020:
(in millions)
 
 Remainder of Fiscal 2021
 
Fiscal 2022
 
Fiscal 2023 and Thereafter
 
Totals
Surety bonds
 
$
105

 
$
195

 
$
86

 
$
386

Letters of credit
 
99

 
109

 
400

 
608

Stand-by letters of credit
 
64

 
11

 
26

 
101

Totals
 
$
268

 
$
315

 
$
512

 
$
1,095



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.

38
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED 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.

In June 2020, the Parties executed a stipulation resolving the matter and dismissing the action. The Company agreed to pay a total of $1.85 million, to be split between the United States and the State of New York. In July 2020, the stipulation was approved by the Court and the case was dismissed.

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. In September 2019, Plaintiffs filed a motion seeking $14.1 million in attorneys’ fees and costs. In July 2020, the Court issued an order awarding Plaintiffs $8.1 million in attorneys’ fees and costs. The Company disagrees with the jury verdict, the damages award, and the fee award, and is appealing the judgment of the Court.


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


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.

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.

In August 2019, the Company entered into an agreement with Mr. Pulier, resolving all claims and counterclaims in the Delaware litigation through the division of amounts previously held in escrow for post-closing disputes.

The Securities and Exchange Commission (“SEC”) has filed a complaint against Mr. Pulier alleging various claims, including for fraud and falsifying books and records (Securities and Exchange Commission v. Eric Pulier, Case No. 2:17-cv-07124). The Court has set a trial date of December 1, 2020.

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.

The Company remains obligated to advance amounts for Mr. Pulier’s legal fees and costs to defend the SEC action against him.

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. Following the submission of briefs, oral argument was held on September 5, 2019. On January 10, 2020, the Court of Appeals issued a decision denying the Company’s appeal. On January 24, 2020, the Company filed a Petition for Rehearing, seeking review by the entire en banc Court of Appeals. On February 14, 2020, the Court of Appeals denied the Company's Petition.


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


The Company has been pursuing coverage for the full scope of the award, interest, and legal fees and expenses, under the Company's applicable insurance policies. Certain carriers have accepted coverage while others have denied coverage. On February 21, 2020, the Company paid the balance of the judgment, which net of insurance recovery totalled $60 million. The Company has since recovered an additional $12.5 million from its insurance carriers. The Company continues to pursue recovery with its insurance carriers.

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.

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. In December 2019, a settlement was reached with 142 of the opt-in plaintiffs, 35 of whom were employed by former business units of HPE that are now owned by the Company, and for which the Company is liable.

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 have submitted their briefs in the appellate case, and oral argument was held on June 8, 2020. The case has been submitted and a decision is now pending.


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


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 moved to dismiss the claims in their entirety, and on June 2, 2020, the court granted the Company’s motion, dismissing all claims and entering judgment in the Company’s favor. On July 1, 2020, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit. The appeal remains pending.

In March 2019, three related shareholder derivative lawsuits were filed in the Eighth Judicial District Court of the State of Nevada, in and for Clark County, against one of the Company’s current officers and a former officer as well as members of the Company’s board of directors, asserting claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. By agreement of the parties and order of the court, those lawsuits were consolidated on July 18, 2019, and are presently stayed pending the outcome of the appeal of the Eastern District of Virginia matter.

On August 20, 2019, a purported class action lawsuit was filed in the Superior Court of the State of California, County of Santa Clara, against the Company, directors of the Company, and a former officer of the Company, among other defendants. On September 16, 2019, a substantially similar purported class action lawsuit was filed in the United States District Court for the Northern District of California against the Company, directors of the Company, and a former officer of the Company, among other defendants. On November 8, 2019, a third purported class action lawsuit was filed in the Superior Court of the State of California, County of San Mateo, against the Company, directors of the Company, and a former officer of the Company, among other defendants. The third lawsuit was voluntarily dismissed by the plaintiff and re-filed in the Superior Court of the State of California, County of Santa Clara on November 26, 2019, and thereafter was consolidated with the earlier-filed action in the same court on December 10, 2019. The California lawsuits assert claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, and are premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s prospects and expected performance. Plaintiff in the federal action filed an amended complaint on January 8, 2020. The putative class of plaintiffs in these cases includes all persons who acquired shares of the Company’s common stock pursuant to the offering documents filed with the Securities and Exchange Commission in connection with the April 2017 transaction that formed DXC. On July 15, 2020, the Superior Court of California, County of Santa Clara, denied the Company’s motion to stay the state court case but extended the Company’s deadline to seek dismissal of the state action, until after a decision on the Company’s motion to dismiss the federal action. On July 27, 2020, the United States District Court for the Northern District of California granted the Company’s motion to dismiss the federal action. The Court’s order permits plaintiffs to amend and refile their complaint within 60 days.

On October 2, 2019, a shareholder derivative lawsuit was filed in the Eighth Judicial District Court of the State of Nevada, in and for Clark County, asserting various claims, including for breach of fiduciary duty and unjust enrichment, and challenging certain sales of securities by officers under Rule 10b5-1 plans. The shareholder filed this action after making a demand on the board of directors, alleging breaches of fiduciary duty, corporate waste and disclosure violations, and demanding that the Board take certain actions to evaluate the allegations and respond. The Company’s board of directors analyzed the demand, and has determined to defer its decision on the demand pending developments in the securities and derivative lawsuits described above. The Company moved to dismiss the complaint on the basis that the Board’s decision to defer action was not a refusal of the demand and was within its discretion. The Company’s motion to dismiss was denied on January 22, 2020. By agreement of the parties and order of the court, the case is presently stayed, pending the outcome of the appeal of the Eastern District of Virginia matter.
 
On March 31, 2020, a group of individual shareholders filed a complaint in the United States District Court for the Northern District of California, asserting non-class claims based on allegations substantially similar to those at issue in the earlier-filed putative class action complaints pending in the Northern District of California and Eastern District of Virginia. The plaintiffs assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and under Sections 11 and 15 of the Securities Act of 1933, as amended. On April 29, 2020, the court granted an administrative motion to relate the case with the earlier-filed putative class action pending in the Northern District of California. And on May 13, 2020, the parties filed a stipulation requesting to stay the case subject to resolution of the motions to dismiss in the Northern District of California and Eastern District of Virginia class actions.


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


The Company believes that the lawsuits described above are without merit, and it intends to vigorously defend them.

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 provided supplemental information to OFAC on January 31, 2020.

Perspecta Arbitration: In October 2019, Perspecta Inc. (“Perspecta”) submitted a demand for arbitration claiming that in June 2018 DXC breached certain obligations under the Separation and Distribution Agreement ("SDA") between Perspecta and DXC and seeking at least $120 million in alleged damages. During the course of discovery, Perspecta increased the amount of its alleged damages, first to $500 million and then to over $800 million. Perspecta has since increased its damages calculations to include interest, bringing its total claim to $990 million. The Company believes there is no valid basis for Perspecta's claims for these amounts. In its arbitration demand, Perspecta also challenges $39 million in invoices issued by DXC in June 2019 under its IT Services Agreement with Perspecta. DXC believes the invoices were properly issued and the amounts are owed by Perspecta. DXC believes that Perspecta's claims are without merit and intends to vigorously defend itself.

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.

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



Note 21 - Subsequent Events

Ransomware Attack

On July 5, 2020, the Company announced the ransomware attack of its subsidiary, Xchanging. DXC has confirmed containment of the incident in the immediate days following identification with minimal impact on Xchanging customers; no loss of DXC or Xchanging customer data; no impact on the wider Xchanging or DXC IT estates; and full restoration of Xchanging customer operations.

Proposed Sale of Healthcare Provider Software Business

On July 17, 2020, the Company entered into a purchase agreement with Dedalus Holding S.p.A. ("Dedalus"), a company organized under the laws of Italy, pursuant to which Dedalus will acquire DXC’s healthcare provider software business for a purchase price of €459 million (approximately $525 million), subject to certain adjustments. The closing of the transaction is subject to certain conditions for the benefit of DXC and Dedalus, including (i) receipt of certain regulatory consents, (ii) the absence of any injunction or other order from a governmental authority that prevents the closing, and (iii) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, the other party. In addition, the closing is subject to certain conditions for the benefit of Dedalus, including (i) the absence of a material adverse effect on the business or the ability of DXC to consummate the transaction and (ii) receipt of certain customer consents.

44

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. Furthermore, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the coronavirus disease 2019 (“COVID-19”) pandemic and the impact of varying private and governmental responses that affect our customers, employees, vendors and the economies and communities where they operate.

Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to:

•
the uncertainty of the magnitude, duration, geographic reach, impact on the global economy and current and potential travel restrictions, stay-at-home orders, economic restrictions implemented to address the COVID-19 pandemic;
•
the current, and uncertain future, impact of the COVID-19 pandemic, as well as other emerging developments and disruption to economic activity, and their resulting impact on our clients that may affect our business, growth, prospects, financial condition, operating results, cash flows and liquidity;
•
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, cyber-attacks or disclosure of sensitive data or failure to comply with data protection laws and regulations, including the ransomware attack recently experienced by our subsidiary, Xchanging;
•
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, respond to emerging technological trends and maintain and grow our customer relationships over time;

45

•
the ability to succeed in our strategic objectives, including strategic alternatives material for our business;
•
the ability to achieve the expected benefits of our restructuring plans;
•
the ability to maintain and grow our customer relationships over time and to comply with customer contracts or government contracting regulations or requirements;
•
the execution and performance of contracts by us and our suppliers, customers, clients and partners;
•
our credit rating and the ability to manage working capital, refinance and raise additional capital for future needs;
•
our substantial amount of indebtedness;
•
our ability to remediate any material weakness and maintain effective internal control over financial reporting;
•
the resolution of pending investigations, claims and disputes;
•
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 merger of CSC and HPES (the "HPES Merger") within the anticipated time frame or in the anticipated amounts;
•
other risks related to the HPES Merger including anticipated tax treatment, unforeseen liabilities, and future capital expenditures;
•
the spin-off of our former U.S. public sector business and its related mergers with Vencore Holding Corp. and KeyPoint Government Solutions to form Perspecta Inc. (the "USPS") Separation and Mergers could result in substantial tax liability to DXC and our stockholders;
•
risks relating to the respective abilities of the parties to our acquisition of Luxoft Holding, Inc. to achieve the expected results therefrom;
•
risks relating to the consummation of the HHS Sale and the sale of our healthcare provider software business to Dedalus, and the ability to achieve the expected results therefrom; 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, 2020 and Part II Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.

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.


46

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 2021 and our financial condition as of June 30, 2020. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying 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 2021 and fiscal 2020.

Background

DXC Technology helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, the world’s largest companies trust DXC to deploy our enterprise technology stack to deliver new levels of performance, competitiveness and customer experiences.

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: Global Business Services ("GBS") and Global Infrastructure Services ("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.

47


Results of Operations

The following table sets forth certain financial data for the first quarters of fiscal 2021 and fiscal 2020:
 
 
Three Months Ended
(In millions, except per-share amounts)
 
June 30, 2020
 
June 30, 2019
 
 
 
 
 
Revenues
 
$
4,502

 
$
4,890

 
 
 
 
 
(Loss) income, before income taxes
 
(225
)
 
206

Income tax (benefit) expense
 
(26
)
 
38

Net (loss) income
 
$
(199
)
 
$
168

 
 
 
 
 
Diluted earnings (loss) per share:
 
$
(0.81
)
 
$
0.61


Fiscal 2021 Highlights

Financial highlights for the first quarter of fiscal 2021 include the following:

•
Revenues for the first quarter of fiscal 2021 were $4.5 billion, a decrease of 7.9% as compared to the first quarter of fiscal 2020.
•
Net loss and diluted loss per share for the first quarter of fiscal 2021 were $199 million and $0.81, respectively, including the cumulative impact of certain items of $258 million, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, and pension and other post-retirement benefit ("OPEB") actuarial and settlement losses. This compares with net income and diluted earnings per share of $168 million and $0.61, respectively, for the first quarter of fiscal 2020.
•
Our cash and cash equivalents were $5.5 billion as of June 30, 2020.
•
We generated $119 million of cash from operations during the first quarter of fiscal 2021, as compared to cash used of $66 million during the first quarter of fiscal 2020.


48

Revenues
 
 
Three Months Ended
 
 
 
 
(in millions)
 
June 30, 2020
 
June 30, 2019
 
Change
 
Percentage Change
GBS
 
$
2,174

 
$
2,159

 
$
15

 
0.7
 %
GIS
 
2,328

 
2,731

 
(403
)
 
(14.8
)%
Total Revenues
 
$
4,502

 
$
4,890

 
$
(388
)
 
(7.9
)%

The decrease in revenues for the first quarter of fiscal 2021, compared with fiscal 2020 of the same period, reflects terminations, price-downs, and demand weakness related to the COVID-19 pandemic. This was partially offset by contributions from our Luxoft acquisition. Fiscal 2021 revenues included an unfavorable foreign currency exchange rate impact of 2.0%, primarily driven by the strengthening of the U.S. dollar against the Euro and British Pound.

During the first quarters of fiscal 2021 and fiscal 2020, the distribution of our revenues across geographies was as follows:
chart-8d8fb8db0c8b5184b66.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, 2020.


49

As a global company, over 62% of our revenues for the first quarter of fiscal 2021 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 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, 2020
 
June 30, 2019
 
Change
 
Percentage Change
GBS
 
$
2,212

 
$
2,159

 
$
53

 
2.5
 %
GIS
 
2,391

 
2,731

 
(340
)
 
(12.4
)%
Total
 
$
4,603

 
$
4,890

 
$
(287
)
 
(5.9
)%

Global Business Services

Our GBS revenues were $2,174 million in the quarter compared to $2,159 million for the prior year. GBS revenue increased 0.7% year-over-year, including an unfavorable foreign currency exchange rate impact of 1.8%. GBS revenue in constant currency increased 2.5% year-over-year primarily as a result of contributions from our Luxoft acquisition. This was partially offset by project run-offs, completions, and terminations.

For the first quarter of fiscal 2021, GBS contract awards were $3.5 billion as compared to $2.4 billion during the first quarter of fiscal 2020.

Global Infrastructure Services

Our GIS revenues were $2,328 million in the quarter compared to $2,731 million for the prior year. GIS revenue decreased 14.8% year-over-year, including an unfavorable foreign currency exchange rate impact of 2.4%. GIS revenue in constant currency decreased 12.4% year-over-year as a result of terminations, price-downs, and project run-offs.

For the first quarter of fiscal 2021, GIS contract awards were $1.8 billion as compared to $1.8 billion during the first quarter of fiscal 2020.


50

Costs and Expenses

Our total costs and expenses are shown in the tables below:
 
 
Three Months Ended
 
 
 
 
Amount
Percentage of Revenues
 
Percentage Point Change
(in millions)
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,629

 
$
3,622

 
80.6
 %
 
74.0
 %
 
6.6

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
539

 
507

 
12.0

 
10.4

 
1.6

Depreciation and amortization
 
492

 
470

 
10.9

 
9.6

 
1.3

Restructuring costs
 
72

 
142

 
1.6

 
2.9

 
(1.3
)
Interest expense
 
106

 
91

 
2.4

 
1.9

 
0.5

Interest income
 
(23
)
 
(30
)
 
(0.5
)
 
(0.6
)
 
0.1

Other income, net
 
(88
)
 
(118
)
 
(2.0
)
 
(2.4
)
 
0.4

Total costs and expenses
 
$
4,727

 
$
4,684

 
105.0
 %
 
95.8
 %
 
9.2


Total costs and expenses were consistent in the first quarter of fiscal 2021 compared to the same period in the prior fiscal year. The 9.2 point increase in total costs and expenses as a percentage of revenue for the first quarter of fiscal 2021 was primarily driven by a reduction in revenue for the first quarter of fiscal 2021 compared to the same period in the prior fiscal year.


Costs of Services

Cost of services, excluding depreciation and amortization and restructuring costs ("COS"), was $3.6 billion for the first quarter of fiscal 2021, consistent with the comparable period of the prior fiscal year. Within COS for the first quarter of fiscal 2021 is a $26 million one-time accrual relating to the settlement of customer disputes. This was partially offset by cost optimization savings realized during the quarter. COS as a percentage of revenue increased 6.6 points primarily driven by a reduction in revenue compared to the same period in the prior fiscal year.

Selling, General, and Administrative

Selling, general, and administrative expense, excluding depreciation and amortization and restructuring costs ("SG&A"), was $539 million for the first quarter of fiscal 2021, consistent with the comparable period of the prior fiscal year.

Transaction, separation and integration-related costs of $110 million were included in SG&A for the first quarter of fiscal 2021, as compared to $105 million for the comparable period of the prior fiscal year.

Depreciation and Amortization

Depreciation expense was $178 million and amortization expense was $314 million for the first quarter of fiscal 2021, consistent with the comparable period of the prior fiscal year.


51

Restructuring Costs

During fiscal 2021, management approved global cost savings initiatives designed to designed to better align the our workforce and facility structures. During the first quarter of fiscal 2021, restructuring costs, net of reversals, were $72 million, as compared to $142 million during the same period of the prior fiscal year.

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


Interest Expense and Interest Income

Interest expense for the first quarter of fiscal 2021 increased $15 million over the same period in the prior fiscal year due to an increase in borrowings and asset financing activities. See the "Capital Resources" caption below and Note 11 - “Debt” for additional information.

Interest income for the first quarter of fiscal 2021 decreased $7 million over the same period in the prior fiscal year primarily driven by lower yields within our money market accounts.

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 $30 million decrease in other income, net for the first quarter of fiscal 2021, as compared to the same period of the prior fiscal year, was due to a year-over-year decrease of $9 million in other gains related to sales of non-operating assets, year-over-year decrease of $9 million in non-service components of net periodic pension income and a year-over-year unfavorable foreign currency impact of $12 million.


Taxes

Our effective tax rate ("ETR") was 11.6% and 18.4% for the three months ended June 30, 2020 and June 30, 2019, respectively. For the three months ended June 30, 2020, the primary drivers of the ETR were the global mix of income, adjustment of the prior tax provisions due to the filing of tax returns in non-U.S. jurisdictions and generation of additional foreign tax credits in the U.S. 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.
 
Earnings (Loss) Per Share

Diluted EPS for the first quarter of fiscal 2021 decreased $1.42 from the same period in the prior fiscal year. This decrease was due to a decrease of $367 million in net income.

Diluted EPS for the first quarter of fiscal 2021 includes $0.24 per share of restructuring costs, $0.32 per share of transaction, separation and integration-related costs, $0.45 per share of amortization of acquired intangible assets, and $0.01 per share of pension and OPEB actuarial and settlement losses.


52

Non-GAAP Financial Measures

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

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

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

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

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


53

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, 2020
 
June 30, 2019
 
Change
(Loss) income before income taxes
 
$
(225
)
 
$
206

 
$
(431
)
Non-GAAP income before income taxes
 
$
107

 
$
591

 
$
(484
)
Net (loss) income

 
$
(199
)
 
$
168

 
$
(367
)
Adjusted EBIT
 
$
190

 
$
652

 
$
(462
)


Reconciliation of Non-GAAP Financial Measures

Our non-GAAP adjustments include:
•
Restructuring costs - reflects costs, net of reversals, related to workforce optimization and real estate charges.
•
Transaction, separation and integration-related costs - reflects costs to execute on strategic alternatives, 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.
•
Pension and OPEB actuarial and settlement gains and losses - reflects pension and OPEB actuarial and settlement gains and losses.
•
Income tax expense of non-GAAP adjustments is computed by applying the jurisdictional tax rate to the pre-tax adjustments on a jurisdictional basis.




54

A reconciliation of reported results to non-GAAP results is as follows:
 
 
Three Months Ended June 30, 2020
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Pension and OPEB Actuarial and Settlement Losses
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
3,629

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,629

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
539

 
—

 
(110
)
 
—

 
—

 
429

(Loss) income before income taxes
 
(225
)
 
72

 
110

 
148

 
2

 
107

Income tax (benefit) expense
 
(26
)
 
12

 
28

 
34

 
—

 
48

Net (loss) income
 
(199
)
 
60

 
82

 
114

 
2

 
59

Less: net income attributable to non-controlling interest, net of tax
 
6

 
—

 
—

 
—

 
—

 
6

Net (loss) income attributable to DXC common stockholders
 
$
(205
)
 
$
60

 
$
82

 
$
114

 
$
2

 
$
53

 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
11.6
%
 
 
 
 
 
 
 
 
 
44.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
$
(0.81
)
 
$
0.24

 
$
0.32

 
$
0.45

 
$
0.01

 
$
0.21

Diluted EPS
 
$
(0.81
)
 
$
0.24

 
$
0.32

 
$
0.45

 
$
0.01

 
$
0.21

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
253.63

 
253.63

 
253.63

 
253.63

 
253.63

 
253.63

Diluted EPS
 
253.63

 
254.41

 
254.41

 
254.41

 
254.41

 
254.41







55

 
 
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 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
 
$
0.61

 
$
0.43

 
$
0.31

 
$
0.40

 
$
1.75

Diluted EPS
 
$
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



A reconciliation of net income to adjusted EBIT is as follows:
 
 
Three Months Ended
(in millions)
 
June 30, 2020
 
June 30, 2019
Net (loss) income
 
$
(199
)
 
$
168

Income tax (benefit) expense
 
(26
)
 
38

Interest income
 
(23
)
 
(30
)
Interest expense
 
106

 
91

EBIT
 
(142
)
 
267

Restructuring costs
 
72

 
142

Transaction, separation and integration-related costs
 
110

 
105

Amortization of acquired intangible assets
 
148

 
138

Pension and OPEB actuarial and settlement losses
 
2

 
—

Adjusted EBIT
 
$
190

 
$
652



56

Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of June 30, 2020, our cash and cash equivalents ("cash") was $5.5 billion, of which $1.6 billion was held outside of the U.S. As of March 31, 2020, our cash was $3.7 billion, of which $1.2 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 and current income inclusions for global intangible low taxed income, we expect a significant portion of the cash held by our foreign subsidiaries will no longer be subject to U.S. federal income tax consequences upon subsequent repatriation to the U.S. However, a portion of this cash may still be subject to foreign and U.S. state income tax consequences upon future remittance. Therefore, if additional funds held outside the U.S. are needed for our operations in the U.S., we plan to repatriate these funds not designated as indefinitely reinvested.

The following table summarizes our cash flow activity:
 
 
Three Months Ended
 
 
(in millions)
 
June 30, 2020
 
June 30, 2019
 
Change
Net cash provided by (used in) operating activities
 
$
119

 
$
(66
)
 
$
185

Net cash used in investing activities
 
(61
)
 
(1,822
)
 
1,761

Net cash provided by financing activities
 
1,786

 
887

 
899

Effect of exchange rate changes on cash and cash equivalents
 
(14
)
 
(30
)
 
16

Net decrease in cash and cash equivalents
 
$
1,830

 
$
(1,031
)
 
$
2,861

Cash and cash equivalents at beginning-of-year
 
3,679

 
2,899

 
 
Cash and cash equivalents at the end-of-period
 
$
5,509

 
$
1,868

 
 

Operating cash flow

Net cash provided by (used in) operating activities during the first quarter of fiscal 2021 was $119 million as compared to $(66) million during the comparable period of the prior fiscal year. The increase of $185 million was due to a decrease in working capital cash outflows of $488 million offset by a decrease in net income, net of adjustments of $303 million.

Investing cash flow

Net cash used in investing activities during the first quarter of fiscal 2021 was $61 million as compared to $1,822 million during the comparable period of the prior fiscal year. The decrease in cash used of $1,761 million was primarily due to a decrease in cash paid for acquisitions of $1,901 million and short-term investing of $75 million in fiscal 2020, offset by a decrease in cash collections related to deferred purchase price receivable of $212 million.

Financing cash flow

Net cash provided by financing activities during the first quarter of fiscal 2021 was $1,786 million as compared to $887 million during the comparable period of the prior fiscal year. The $899 million increase was primarily due to borrowings under lines of credit of $2,500 million, absence of common stock repurchases and advance payment for accelerated share repurchase of $500 million in fiscal 2020, and an increase of commercial paper borrowings, net of repayments of $431 million. This was partially offset by a decrease in borrowings on term loans and other long-term debt of $1,205 million, repayments of borrowings under lines of credit of $750 million, and an increase in payments on long-term debt of $575 million.

57


Capital Resources

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

The following table summarizes our total debt:
 
 
As of
(in millions)
 
June 30, 2020
 
March 31, 2020
Short-term debt and current maturities of long-term debt
 
$
1,682

 
$
1,276

Long-term debt, net of current maturities
 
10,334

 
8,672

Total debt
 
$
12,016

 
$
9,948


The $2.1 billion increase in total debt during the first quarter of fiscal 2021 was primarily attributed to the $1.8 billion net borrowing from the credit facility agreement ("Credit Agreement") and the new senior notes with an aggregate principal of $1.0 billion, consisting of (i) $500 million of 4.00% Senior Notes due fiscal 2024, and (ii) $500 million of 4.13% Senior Notes due fiscal 2026. The purpose of the draw from the Credit Agreement was to secure liquidity as additional cash on hand to support our liquidity resources during the COVID-19 pandemic and to mitigate the uncertainties caused by volatile capital markets, changing governmental policies, and evolving impact on world economies. The proceeds from the new notes were applied towards the early prepayment of our term loan facilities, including prepayment of €500 million of Euro Term Loan due fiscal 2023, £150 million of GBP Term Loan due fiscal 2022, A$300 million of AUD Term Loan due fiscal 2022, and $100 million of USD Term Loan due fiscal 2025.

During the quarter, we applied for and were confirmed eligible to participate in the Bank of England’s (“BOE”) COVID Corporate Funding Facility, a BOE program that provides term liquidity funding to investment grade corporate issuers with significant operations in the UK, in order to stabilize and facilitate continued access to sterling commercial paper markets. At our option, we can borrow up to a maximum of €1 billion or its equivalent in Euro, British Pound and U.S. dollar. On June 15, 2020, DXC Capital Funding DAC (previously named DXC Capital Funding Limited), an indirect subsidiary of the Company, issued £600 million in commercial paper maturing May 2021 under its existing €1.0 billion commercial paper program via direct sale to the BOE.

We also repaid $750 million on the previously drawn Credit Agreement that was used to mitigate our reliance on volatile short-term commercial paper markets during the quarter. Thus, this amount became available under the revolving credit facility for redraw at the request of the Company.

We were in compliance with all financial covenants associated with our borrowings as of June 30, 2020 and June 30, 2019.


58

The debt maturity chart below summarizes the future maturities of long-term debt principal for fiscal years subsequent to June 30, 2020 and excludes maturities of borrowings for assets acquired under long-term financing and finance lease liabilities. See Note 11 - "Debt" for more information.
chart-7ae94beb73975f5e839.jpg
The following table summarizes our capitalization ratios:
 
 
As of
(in millions)
 
June 30, 2020
 
March 31, 2020
Total debt
 
$
12,016

 
$
9,948

Cash and cash equivalents
 
5,509

 
3,679

Net debt(1)
 
$
6,507

 
$
6,269

 
 
 
 
 
Total debt
 
$
12,016

 
$
9,948

Equity
 
4,942

 
5,129

Total capitalization
 
$
16,958

 
$
15,077

 
 
 
 
 
Debt-to-total capitalization
 
70.9
%
 
66.0
%
Net debt-to-total capitalization(1)
 
38.4
%
 
41.6
%
        

(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.



59

Our credit ratings are as follows:
Rating Agency
 
Long Term Ratings
 
Short Term Ratings
 
Outlook
Fitch
 
BBB
 
F-2
 
Stable
Moody's
 
Baa2
 
P-2
 
Negative
S&P
 
BBB-
 
-
 
Stable

On June 10, Fitch downgraded DXC’s long-term credit ratings by one notch, to BBB from BBB+, and changed DXC’s outlook to Stable from Negative. Also, on July 2, S&P downgraded DXC’s long-term credit ratings by one notch, to BBB- from BBB, and changed DXC’s outlook to Stable from Negative.

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

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 raise capital through the issuance of capital market debt instruments such as commercial paper, term loans, and bonds. In addition, we currently utilize, and will further utilize our cross currency cash pool for liquidity needs. However, there is no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future.

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

The following table summarizes our total liquidity:
 
 
As of
(in millions)
 
June 30, 2020
Cash and cash equivalents
 
$
5,509

Available borrowings under our revolving credit facility
 
750

Total liquidity 
 
$
6,259


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. This program became effective on April 3, 2017 with no end date established. There were no share repurchases during the first quarter ended June 30, 2020.

Dividends

To enhance our financial flexibility under current uncertain market conditions, we have elected to suspend payment of quarterly dividends. This decision will be reevaluated by our Board of Directors as market conditions stabilize.


60

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 5 - "Receivables" and Note 20 - "Commitments and Contingencies" to the financial statements in this Quarterly Report on Form 10-Q.

Contractual Obligations

With the exception of the net borrowings under the Credit Agreement of $1.8 billion and the new senior notes with an aggregate principal amount of $1.0 billion, consisting of (i) $500 million of 4.00% Senior Notes due fiscal 2024; and (ii) $500 million of 4.13% Senior Notes due fiscal 2026 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, 2020. 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, 2020.

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, 2020, there were no changes to our accounting estimates from those described in our fiscal 2020 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, 2020. Our exposure to market risk has not changed materially since March 31, 2020.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and 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 Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2020 because of the material weakness in our internal control over financial reporting described below.

Control Activities

As previously disclosed during the third quarter of fiscal 2020, Management concluded there was a material weakness in internal controls over financial reporting related to the design and implementation of effective control activities based on the criteria established in the COSO framework. These control deficiencies constituted a material weakness in the

61

aggregate related to reassessing policies and procedures, to determine their continued relevance, as impacted by complex transactions and processes.

Deficiencies that contributed to the aggregation included:

•
Management did not reassess in a timely manner the control activities related to goodwill impairment upon adoption of ASU 2017-04 which resulted in an immaterial out of period adjustment between quarters within fiscal 2020 related to the tax effect of the impairment recognized.
•
Management did not reassess the control and procedures related to the balance sheet classification of deferred revenue following a large and complex acquisition which resulted in an immaterial out of period adjustment to the balance sheets during the third quarter ended December 31, 2019.

As a result, we have concluded that there is a reasonable possibility that a material misstatement to our Condensed Consolidated Financial Statements would not be prevented or detected on a timely basis and therefore we concluded that the aggregation of these deficiencies represents a material weakness in our internal control over financial reporting as of June 30, 2020.

Notwithstanding the identified material weakness, management believes that the Condensed Consolidated Financial Statements and related financial information included in this 10-Q fairly present, in all material respects, our balance sheets, statements of operations, comprehensive (loss) income and cash flows as of and for the periods presented.

Remediation Plan

Our remediation efforts are ongoing. Management continues to implement remediation actions to address the specific control deficiencies that, in the aggregate, led to a material weakness. Additionally, Management has completed a detailed root cause analysis which was designed to identify areas of focus where enhancements can be made to the internal control environment to support the continued timely reassessment of policies and procedures and reduce the occurrence of future deficiencies caused by complex transactions and processes. Management has remediated certain of the identified control deficiencies that lead to the material weakness.

The following activities are designed as part of this remediation plan:

•
Appointment of a new advisor reporting directly to our Chief Financial Officer with the appropriate level of knowledge and experience to help develop and execute the remediation plan.
•
Enhance periodic reviews by management and review existing documentation to determine if policies, procedures, and related control activities have continued relevance or need updating due to changes within the organization with a specific focus on the areas identified by the root cause analysis.
•
Align the Sarbanes-Oxley Act (“SOX") compliance function under the newly appointed Chief Risk Officer.
•
Establish periodic reporting of the remediation plan progress to the Audit Committee.
•
Expand SOX training and implementation of succession planning for SOX control owners.

Management continues to be actively engaged to take steps to remediate the material weakness noted above, including (1) appointment of an external advisor to lead the remediation activities (2) hiring a new Global SOX Director reporting to the Chief Risk Officer (3) establishment of progress reporting to the Audit Committee and (4) establishment of a control owner transition process. In additional to the items noted above, Management has developed expanded SOX training to be incorporated in the onboarding process and evaluated management level reporting to identify key performance indicators for monitoring.  These additional remediation efforts have begun and are expected to be completed in the subsequent quarters. While we have made significant progress, there has not been sufficient time to resolve the material weakness in internal control over financial reporting.

As we continue to improve the effectiveness of our internal control over financial reporting, we may supplement our remediation activities as our work progresses where appropriate. Our goal is to have enhanced control policies, procedures, processes in place as promptly as practicable. However, due to the nature of the work and subsequent testing required to conclude that a material weakness no longer exists, we are not in a position to complete our

62

remediation plan and concluded that our internal control over financial reporting is not designed or operating effectively as of the quarter ended June 30,2020.

Changes in Internal Control over Financial Reporting

In addition to the remediation efforts described above, we adopted ASC 326 effective April 1, 2020, as described in Note 2 - “Recent Accounting Pronouncements” to the financial statements during the first quarter of fiscal 2021. We began using a new model and redesigned certain processes and controls relating to our reserves and expected losses.


63

PART II


ITEM 1. LEGAL PROCEEDINGS

See Note 20 - "Commitments and Contingencies" to the financial statements under the caption “Contingencies” for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, which may materially and adversely affect our business, financial condition, and results of operations, and the actual outcome of matters as to which forward-looking statements are made in this Quarterly Report on Form 10-Q. In such case, the trading price for DXC common stock could decline, and you could lose all or part of your investment. Past performance may not be a reliable indicator of future financial performance and historical trends should not be used to anticipate results or trends in future periods. Future performance and historical trends may be adversely affected by the aforementioned risks, and other variables and risks and uncertainties not currently known or that are currently expected to be immaterial may also materially and adversely affect our business, financial condition, and results of operations or the price of our common stock in the future. Apart from the risk factors disclosed below, there have been no material changes in the three months ended June 30, 2020 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, 2020.


Our business and financial results have been adversely affected and could continue to be materially adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has caused disruptions in global economies, financial and commodities markets and rapid shifts in governmental and public health policies in the countries where we operate or our customers are located or the industries in which we and our customers compete. The COVID-19 pandemic and the actions taken by governments, businesses and individuals to curtail the spread of the disease have negatively impacted, and are expected to continue to negatively impact, our business, results of operations, cash flows and financial condition.

Negative impacts that have occurred, or may occur in the future, include disruptions or restrictions on our employees’ ability to work effectively, as well as temporary closures of our facilities or the facilities of our clients or our subcontractors, or the requirements to deliver our services by working remotely. This could potentially affect our ability to perform under our contracts with customers. Cost increases may not be recoverable from customers or covered by insurance, which could impact our profitability. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected.

In addition, the COVID-19 pandemic has resulted in a widespread global health crisis that is adversely affecting the economies and financial markets of many countries, which could result in an economic downturn that may negatively affect demand for our services, including the financial failure of some of our clients. This economic downturn, depending upon its severity and duration, could also lead to the deterioration of worldwide credit and financial markets that could limit our customers’ ability or willingness to pay us in a timely manner and our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in a higher rate of losses on our accounts receivables due to credit defaults.

Our financial results may also be materially and adversely impacted by a variety of factors related to COVID-19 that have not yet been determined, including potential impairments of goodwill and other assets, and changes to our contingent liabilities, for which actual amounts may materially exceed management estimates, and our calculation of global tax liabilities. Even after the COVID-19 pandemic has subsided, depending upon its duration and potential recurrence, and the governmental policies in response thereto, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that may occur or be continuing as a result.


64

We continue to evaluate the extent to which COVID-19 has impacted us and our employees, customers and suppliers and the extent to which it and other emerging developments will impact us and our employees, customers and suppliers in the future. We caution investors that any of the items mentioned above could have material and adverse impacts on our current and future business, results of operations, cash flows and financial condition.

To the extent the COVID-19 pandemic and the resulting economic disruption continue to adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K, such as those relating to our level of indebtedness, our ability to generate sufficient cash flows to service our indebtedness and to comply with the covenants contained in the agreements that govern our indebtedness and our counterparty credit risk.

We have identified a material weakness in our internal control over financial reporting. Without effective internal control over financial reporting, we may fail to detect or prevent a material misstatement in our financial statements, which could materially harm our business, our reputation and our stock price. 
 
While we have not identified any material misstatements in our previously reported consolidated financial statements, as previously disclosed in our Quarterly Report for the quarterly period ended December 31, 2019, our management identified a material weakness in our internal control over financial reporting as of December 31, 2019 related to reassessing policies and procedures to determine their continued relevance, as impacted by complex transactions and processes. See "Item 4. Controls and Procedures." Without effective internal control over financial reporting, we may fail to detect or prevent a material misstatement in our financial statements. In that event, we may be required to restate our financial statements. A restatement or an unremediated material weakness could result in a loss of confidence in us by our investors, customers, regulators and/or counterparties. In addition, our remediation efforts are still ongoing and if we are unable to promptly remediate the material weakness identified above, or if we were to conclude in the future that we have one or more additional weaknesses, our investors, regulators, customers and/or counterparties may lose confidence in our reported financial information. Additionally, management may be required to devote significant time and incur significant expense to remediate the material weakness, and management may not be able to complete such remediation in a timely manner. Any of the foregoing could materially harm our business, our reputation and the market price of our common stock.

We could be held liable for damages, our reputation could suffer, or we may experience service interruptions from security breaches, cyber-attacks or disclosure of confidential information or personal data, which could cause significant financial loss.

As a provider of IT services to private and public sector customers operating in a number of regulated industries and countries, we store and process increasingly large amounts of data for our clients, including sensitive and personally identifiable information. We also manage IT infrastructure of our own and of clients. We possess valuable proprietary information, including copyrights, trade secrets and other intellectual property and, we collect and store certain personal and financial information from customers and employees. Our security measures designed to identify and protect against security breaches and cyber-attacks may fail to detect, prevent or adequately respond to a future threat incident.

The continued occurrence of high-profile data breaches and cyber-attacks, including by state actors, reflects an external environment that is increasingly hostile to information and corporate security. Cybersecurity incidents can result from unintentional events or deliberate attacks by insiders or third parties, including criminals, competitors, nation-states, and hacktivists. Like other companies, we face an evolving array of cybersecurity and data security threats that pose risks to us and our clients. We can also be harmed by attacks on third parties, such as denial-of-service attacks. We see regular unauthorized efforts to access our systems, which we evaluate for severity and frequency. For example, in July 2020, certain systems of our subsidiary, Xchanging, experienced a ransomware attack. See Note 21 - "Subsequent Events" to the financial statements. While incidents experienced thus far have not resulted in significant disruption to our business, it is possible that we could suffer a severe attack or incident, with potentially material and adverse effects on our business, reputation, customer relations, results of operations or financial condition. We could be exposed to regulatory actions, client attrition due to reputational concerns or otherwise, containment and remediation expenses, and claims brought by our clients or others for breaching contractual confidentiality and security provisions or data protection laws. We must expend capital and other resources to protect against attempted security breaches and cyber-attacks and to alleviate problems caused by successful breaches or attacks. The cost, potential monetary damages and operational consequences of responding to breaches and cyber-attacks and implementing remediation measures could be significant and may be in excess of insurance policy limits or be not covered by our insurance at all.


65

We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. Security breaches such as through an advanced persistent threat attack, or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our clients or our customers, could expose us to risk of loss of this information, regulatory scrutiny, actions and penalties, extensive contractual liability and other litigation, reputational harm, and a loss of customer confidence which could potentially have an adverse impact on future business with current and potential customers. Moreover, failure to maintain effective internal accounting controls related to data security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and could subject us to regulatory scrutiny.

Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect our data and that of clients, including sensitive customer transaction data. A party who is able to circumvent our security measures or those of our contractors, partners or vendors could access our systems and misappropriate proprietary information, the confidential data of our customers, employees or business partners or cause interruption in our or their operations.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers have deployed and may continue to develop and deploy ransomware, malware and other malicious software programs through phishing and other methods that attack our products or otherwise exploit any security vulnerabilities of these products. In addition, sophisticated hardware and operating system software and applications produced or procured from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the security and operation of our systems, or harm those of third parties with whom we may interact. The costs to eliminate or alleviate cyber or other security problems, including ransomware, malware, bugs, malicious software programs and other security vulnerabilities, could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers, which may impede our sales, distribution or other critical functions.

Increasing cybersecurity, data privacy and information security obligations around the world could also impose additional regulatory pressures on our customers’ businesses and, indirectly, on our operations, or lead to inquiries or enforcement actions. In the United States, we are seeing increasing obligations and expectations from federal and non-federal customers. In response, some of our customers have sought, and may continue to seek, to contractually impose certain strict data privacy and information security obligations on us. Some of our customer contracts may not limit our liability for the loss of confidential information. If we are unable to adequately address these concerns, our business and results of operations could suffer.

Compliance with new privacy and security laws, requirements and regulations, such as the European Union General Data Protection Regulation, which became effective in May 2018, where required or undertaken by us, may result in cost increases due to expanded compliance obligations, potential systems changes, the development of additional administrative processes and increased enforcement actions, fines and penalties. While we strive to comply with all applicable data protection laws and regulations, as well as internal privacy policies, any failure or perceived failure to comply or any misappropriation, loss or other unauthorized disclosure of sensitive or confidential information may result in proceedings or actions against us by government or other entities, private lawsuits against us (including class actions) or the loss of customers, which could potentially have an adverse effect on our business, reputation and results of operations.

Portions of our infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could reduce our revenues, increase our expenses, damage our reputation, and adversely affect our stock price.






66


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
    
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. 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.

There was no share repurchase activity during the three months ended June 30, 2020.


ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


67


ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
Number
Description of Exhibit
4.1
4.2
4.3
10.1
10.2
10.3*
10.4*
31.1**
31.2**
32.1***
32.2***
101.INS
Interactive Data Files
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Management contract or compensatory plan or agreement
** Filed herewith
*** Furnished herewith
    

68


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 7, 2020
By:
/s/ Neil A. Manna
 
 
Name:
Neil A. Manna
 
 
Title:
Senior Vice President, Corporate Controller Principal Accounting Officer
 


69