Market Overview

DXC Technology Delivers Solid First Quarter with Growth in Revenue, Earnings per Share and Margins

Share:
  • Q1 earnings per share from continuing operations was $0.78,
    including the cumulative impact of certain items of $(1.15) per share,
    reflecting restructuring costs, transaction, separation and
    integration-related costs, amortization of acquired intangible assets,
    and a tax adjustment related to U.S. tax reform
  • Q1 non-GAAP earnings per share was $1.93
  • Q1 income from continuing operations was $231 million, including
    the cumulative impact of certain items of $(333) million, reflecting
    restructuring costs, transaction, separation and integration-related
    costs, and amortization of acquired intangible assets
  • Q1 non-GAAP income from continuing operations was $564 million
  • Q1 EBIT of $413 million, adjusted for certain items is $803 million
    and adjusted EBIT margin was 15.2%, compared with 10.9% in the prior
    year
  • Q1 net cash from operating activities was $473 million
  • Q1 adjusted free cash flow was $321 million

DXC
Technology
(NYSE:DXC) today reported results for the first quarter
of fiscal year 2019, representing the period from April 1 through June
30, 2018. All results from continuing operations and comparisons exclude
the U.S. Public Sector business, which was combined with Vencore Holding
Corp. and KeyPoint Government Solutions to form a new publicly-traded
company, Perspecta.

"In the first quarter of fiscal 2019, DXC Technology delivered
year-over-year growth in revenue, earnings per share, and margins," said
Mike Lawrie,
DXC's chairman, president and CEO. "We continue to build momentum in
digital, with double-digit growth in each of our digital areas, and we
also drove growth in our industry offerings, where we are seeing strong
demand in financial services and healthcare. During the quarter, we
completed the separation of our U.S. Public Sector business, and we also
recently announced our intent to acquire Molina Medicaid Solutions from
Molina Healthcare. This transaction will expand our state Medicaid
business while enhancing the capabilities we provide these agencies. DXC
is on track to deliver against its fiscal 2019 financial targets."

Financial Highlights - First Quarter Fiscal 2019

  • Diluted earnings per share from continuing operations was $0.78 in the
    first quarter, including $(0.50) per share of restructuring costs,
    $(0.19) per share of transaction, separation and integration-related
    costs, $(0.35) per share of amortization of acquired intangible
    assets, and $(0.11) per share or tax adjustment related to U.S. tax
    reform. This compares with $0.33 in the year ago period.
  • Non-GAAP diluted earnings per share from continuing operations was
    $1.93. This compares with $1.23 in the year ago period.
  • Revenue in the first quarter was $5,282 million. Revenue
    grew 0.9% compared with $5,236 million in the prior year.
  • Income from continuing operations before income taxes was $360 million
    in the first quarter, including $(185) million of restructuring costs,
    $(70) million of transaction, separation and integration-related
    costs, and $(135) million of amortization of acquired intangibles.
    This compares with $91 million in the year ago period.
  • Non-GAAP income from continuing operations before income taxes was
    $750 million compared with $512 million in the year ago period on a
    GAAP basis.
  • Net income was $266 million for the first quarter, including $(144)
    million of restructuring costs, $(54) million of transaction,
    separation and integration-related costs, $(102) million of
    amortization of acquired intangibles and $(33) million of tax
    adjustment related to U.S. tax reform. This compares with $173
    million in the prior year period.
  • Non-GAAP net income was $599 million.
  • Adjusted EBIT was $803 million in the first quarter compared with $570
    million in the prior year. Adjusted EBIT margin was 15.2% compared
    with 10.9% in the year ago quarter.
  • Net cash provided by operating activities was $473 million in the
    first quarter, compared with $519 million in the year ago period.
  • Adjusted free cash flow was $321 million in the first quarter.

Global Business Services (GBS)

GBS revenue was $2,213 million in the quarter compared to $2,267
million for the prior year. GBS revenue decreased 2.4% year-over-year,
reflecting the completion of several traditional application contracts.
This was partially offset by strong growth in our Enterprise and Cloud
Applications business. GBS profit margin in the quarter was 18.2%, up
from 12.1% in the prior year, reflecting ongoing cost actions in the
business. New business awards for GBS were $2.0 billion in the first
quarter.

Global Infrastructure Services (GIS)

GIS revenue was $3,069 million in the quarter compared to $2,969
million for the prior year. GIS revenues grew 3.4% year-over-year,
reflecting a continued moderation of the decline in our IT outsourcing
services business as well as strong growth in Cloud and Platform
Services, Security, and Workplace and Mobility. GIS profit margin in the
quarter was 15.4%, up from 9.1% in the prior year, reflecting ongoing
cost actions and process automation. New business awards for GIS
were $2.6 billion in the first quarter.

Returning Capital to Shareholders

During the first quarter, DXC Technology returned $375 million to
shareholders, consisting of $51 million in common stock dividends and
$324 million in share repurchases.

Earnings Conference Call and Webcast

DXC Technology senior management will host a conference call and webcast
to discuss these results today at 5 p.m. EDT. The dial-in number for
domestic callers is 888-682-0995. Callers who reside outside of the
United States should dial +1-334-323-0509. The passcode for all
participants is 6328180. The webcast audio and any presentation slides
will be available on DXC Technology's Investor Relations website.

A replay of the conference call will be available from approximately two
hours after the conclusion of the call until August 14, 2018. The replay
dial-in number is 888-203-1112 for domestic callers and +1-719-457-0820
for callers who reside outside of the United States. The replay passcode
is also 6328180. A replay of this webcast will also be available on DXC
Technology's Investor Relations website.

Non-GAAP Measures

In an effort to provide investors with supplemental financial
information, in addition to the preliminary and unaudited financial
information presented on a GAAP basis, we have also disclosed in this
press release preliminary non-GAAP information including: constant
currency, earnings before interest and taxes ("EBIT"), adjusted EBIT,
adjusted EBIT margin, adjusted free cash flow, and non-GAAP results
including non-GAAP income from continuing operations before taxes,
non-GAAP income from continuing operations and non-GAAP EPS from
continuing operations.

About DXC Technology

DXC Technology is the world's leading independent, end-to-end IT
services company, serving nearly 6,000 private and public-sector clients
from a diverse array of industries across 70 countries. The company's
technology independence, global talent and extensive partner network
deliver transformative digital offerings and solutions that help clients
harness the power of innovation to thrive on change. DXC Technology is
recognized among the best corporate citizens globally. For more
information, visit dxc.technology.

All statements in this press release that do not directly and
exclusively relate to historical facts constitute "forward-looking
statements." These statements represent current expectations and
beliefs, and no assurance can be given that the results described in
such statements will be achieved. 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. For a written
description of these factors, see the section titled "Risk Factors" in
DXC's Annual Report on Form 10-K for the fiscal year ended March 31,
2018, and any updating information in subsequent SEC filings including
DXC's upcoming Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2018. No assurance can be given that any goal or plan set
forth in any forward-looking statement can or will be achieved, and
readers are cautioned not to place undue reliance on such statements
which speak only as of the date they are made. We do not undertake any
obligation to update or release any revisions to any forward-looking
statement or to report any events or circumstances after the date of
this press release or to reflect the occurrence of unanticipated events
except as required by law.

 

Condensed Consolidated Statements of Operations

(preliminary and unaudited)

 
 
      Three Months Ended
(in millions, except per-share amounts) June 30, 2018       June 30, 2017
 
Revenues $ 5,282   $ 5,236  
 
Costs of services 3,867 4,309
Selling, general and administrative 440 393
Depreciation and amortization 471 342
Restructuring costs 185 187
Interest expense 85 74
Interest income (32 ) (16 )
Other income, net   (94 )   (144 )
Total costs and expenses   4,922     5,145  
 
Income from continuing operations before income taxes 360 91
Income tax expense (benefit)   129     (17 )
Income from continuing operations 231 108
Income from discontinued operations, net of tax   35     65  
Net income 266 173
Less: net income attributable to non-controlling interest, net of tax   7     14  
Net income attributable to DXC common stockholders $ 259   $ 159  
 
Income per common share:
Basic:
Continuing operations $ 0.79 $ 0.33
Discontinued operations   0.12     0.23  
$ 0.91   $ 0.56  
Diluted:
Continuing operations $ 0.78 $ 0.33
Discontinued operations   0.12     0.22  
$ 0.90   $ 0.55  
 
Cash dividend per common share $ 0.19 $ 0.18
 
Weighted average common shares outstanding for:
Basic EPS 284.44 283.83
Diluted EPS 289.30 289.47
 
 

Selected Consolidated Balance Sheet Data

(preliminary and unaudited)

 
 
      As of
(in millions) June 30, 2018       March 31, 2018
Assets
Cash and cash equivalents $ 2,579 $ 2,593
Receivables, net 5,271 5,481
Prepaid expenses 577 496
Other current assets 389 469
Assets of discontinued operations     581
Total current assets 8,816 9,620
 
Intangible assets, net 6,899 7,179
Goodwill 7,451 7,619
Deferred income taxes, net 332 373
Property and equipment, net 3,349 3,363
Other assets 2,279 2,404
Assets of discontinued operations - non-current     3,363
Total Assets $ 29,126 $ 33,921
 
Liabilities
Short-term debt and current maturities of long-term debt $ 2,307 $ 1,918
Accounts payable 1,326 1,513
Accrued payroll and related costs 755 744
Accrued expenses and other current liabilities 3,288 3,120
Deferred revenue and advance contract payments 1,530 1,641
Income taxes payable 108 127
Liabilities of discontinued operations     789
Total current liabilities 9,314 9,852
 
Long-term debt, net of current maturities 4,747 6,092
Non-current deferred revenue 351 795
Non-current income tax liabilities and deferred tax liabilities 1,182 1,166
Other long-term liabilities 1,718 1,723
Liabilities of discontinued operations - long-term     456
Total Liabilities 17,312 20,084
 
Total Equity 11,814 13,837
       
Total Liabilities and Equity $ 29,126 $ 33,921
 
           

Condensed Consolidated Statements of Cash Flows

(preliminary and unaudited)

 
 
Three Months Ended
(in millions) June 30, 2018 June 30, 2017
Cash flows from operating activities:
Net income $ 266 $ 173
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 509 363
Share-based compensation 22 40
Gain on dispositions (46 ) (4 )
Unrealized foreign currency exchange losses (16 ) (132 )
Other non-cash charges, net 12 17
Changes in assets and liabilities, net of effects of acquisitions
and dispositions:
Increase in assets (196 ) (42 )
(Decrease) increase in liabilities   (78 )   104  
Net cash provided by operating activities   473     519  
 
Cash flows from investing activities:
Purchases of property and equipment (79 ) (69 )
Payments for transition and transformation contract costs (92 ) (23 )
Software purchased and developed (49 ) (47 )
Cash acquired through Merger 974
Payments for acquisitions, net of cash acquired (43 )
Business dispositions (65 )
Deferred purchase price receivable 33 15
Proceeds from sale of assets 19 9
Other investing activities, net   (8 )   15  
Net cash (used in) provided by investing activities   (284 )   874  
 
Cash flows from financing activities:
Borrowings of commercial paper 633 611
Repayments of commercial paper (633 ) (553 )
Borrowings on long-term debt, net of discount 483
Principal payments on long-term debt (1,278 ) (27 )
Payments on capital leases and borrowings for asset financing (259 ) (124 )
Borrowings for USPS spin transaction 1,114
Proceeds from stock options and other common stock transactions 9 25
Taxes paid related to net share settlements of share-based
compensation awards
(1 ) (62 )
Repurchase of common stock (314 ) (14 )
Dividend payments (51 ) (20 )
Other financing activities, net   (3 )   (4 )
Net cash used in financing activities   (300 )   (168 )
Effect of exchange rate changes on cash and cash equivalents   (39 )   29  
Net (decrease) increase in cash and cash equivalents (150 ) 1,254
Cash and cash equivalents at beginning of year   2,729     1,268  
Cash and cash equivalents at end of period $ 2,579   $ 2,522  
 

Segment Results

The following table summarizes segment revenue for the three months
ended June 30, 2018 as compared to the three months ended June 30, 2017:

                       

Segment Revenue

(in millions) June 30, 2018 June 30, 2017 % Change

% Change in

Constant Currency

Global Business Services $ 2,213 $ 2,267 (2.4 )% (4.6 )%
Global Infrastructure Services   3,069   2,969 3.4 % 0.3 %
Total Revenues $ 5,282 $ 5,236 0.9 % (1.8 )%
 

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

           

Segment Profit

Three Months Ended
(in millions) June 30, 2018 June 30, 2017
Profit
GBS profit $ 403 $ 274
GIS profit 474 271
All other (loss) profit (74 ) 25
Interest income 32 16
Interest expense (85 ) (74 )
Restructuring costs (185 ) (187 )
Transaction, separation and integration-related costs (70 ) (124 )
Amortization of acquired intangible assets   (135 )   (110 )

Income from continuing operations before income taxes

$ 360   $ 91  
 
Segment profit margins
GBS 18.2 % 12.1 %
GIS 15.4 % 9.1 %
 

Non-GAAP Financial Measures

We present non-GAAP financial measures of performance which are derived
from the unaudited condensed consolidated statements of operations of
DXC. These non-GAAP financial measures include earnings before interest
and taxes ("EBIT"), EBIT margin, adjusted EBIT, adjusted EBIT margin,
adjusted free cash flow, and non-GAAP results including non-GAAP income
from continuing operations before taxes, non-GAAP income from continuing
operations and non-GAAP EPS from continuing operations.

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

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

Reconciliation of Non-GAAP Financial Measures

DXC's non-GAAP adjustments include:

  • Restructuring costs - reflects restructuring costs, net of reversals,
    related to workforce optimization and real estate charges.
  • Transaction, separation and integration-related costs - reflects costs
    related to integration planning, financing, and advisory fees
    associated with the HPES Merger and other acquisitions and costs
    related to the separation of USPS.
  • Amortization of acquired intangible assets - reflects amortization of
    intangible assets acquired through business combinations.
  • Tax adjustment - reflects the estimated non-recurring benefit of the
    Tax Cuts and Jobs Act of 2017 for fiscal 2019, and the application of
    an approximate 28% tax rate for fiscal 2018, which is within the
    targeted effective tax rate range for the prior year .
           

EBIT and Adjusted EBIT

 

A reconciliation of net income to adjusted EBIT is as follows:

 
Three Months Ended
(in millions) June 30, 2018 June 30, 2017
Net income $ 266 $ 173
Income from discontinued operations, net of taxes (35 ) (65 )
Income tax expense (benefit) 129 (17 )
Interest income (32 ) (16 )
Interest expense   85     74  
EBIT 413 149
Restructuring costs 185 187
Transaction, separation, and integration-related costs 70 124
Amortization of acquired intangible assets   135     110  
Adjusted EBIT $ 803   $ 570  
 
Adjusted EBIT margin 15.2 % 10.9 %
EBIT margin 7.8 % 2.8 %
 
   

Adjusted Free Cash Flow

 

A reconciliation of net cash provided by operating activities to
adjusted free cash flow is as follows:

 
(in millions)

Three Months Ended

June 30, 2018

Net cash provided by operating activities $ 473
Net cash used in investing activities (284 )
Acquisitions, net of cash acquired 43
Business dispositions 65
Payments on capital leases and other long-term asset financings (259 )
Payments on transaction, separation and integration-related costs 105
Payments on restructuring costs 148
Sale of accounts receivables, net DPP (26 )
Sale of USPS accounts receivables   56  
Adjusted free cash flow $ 321  
 
 

Non-GAAP Results

 

A reconciliation of reported results to non-GAAP results is as
follows:

 
      Three Months Ended June 30, 2018
(in millions, except per-share amounts) As Reported      

Restructuring

Costs

     

Transaction,

Separation and

Integration-Related

Costs

     

Amortization of

Acquired

Intangible Assets

     

Tax

Adjustment

     

Non-GAAP

Results

Costs of services (excludes depreciation and amortization and
restructuring costs)
$ 3,867 $ $ $ $ $ 3,867
Selling, general and administrative (excludes depreciation and
amortization and restructuring costs)
440 (70 ) 370
 
Income from continuing operations before income taxes 360 185 70 135 750
Income tax expense   129     41   16     33   (33 )   186  
Income from continuing operations 231 144 54 102 33 564
Income from discontinued operations, net of tax   35                 35  
Net income 266 144 54 102 33 599
Less: net income attributable to non-controlling interest, net of tax   7                 7  
Net income attributable to DXC common stockholders $ 259   $ 144 $ 54   $ 102 $ 33   $ 592  
 
Effective tax rate 35.8 % 24.8 %
 
Basic EPS from continuing operations $ 0.79 $ 0.51 $ 0.19 $ 0.36 $ 0.12 $ 1.96
Diluted EPS from continuing operations $ 0.78 $ 0.50 $ 0.19 $ 0.35 $ 0.11 $ 1.93
 
Weighted average common shares outstanding for:
Basic EPS 284.44 284.44 284.44 284.44 284.44 284.44
Diluted EPS 289.30 289.30 289.30 289.30 289.30 289.30
 
                                   
Three Months Ended June 30, 2017
(in millions, except per-share amounts)

As Reported

Restructuring

Costs

Transaction,

Separation and

Integration-Related

Costs

Amortization of

Acquired

Intangible Assets

Tax

Adjustment

Non-GAAP

Results

Costs of services (excludes depreciation and amortization and
restructuring costs)
$ 4,309 $ $ $ $ $ 4,309
Selling, general and administrative (excludes depreciation and
amortization and restructuring costs)
393 (124 ) 269
 
Income from continuing operations before income taxes 91 187 124 110 512

Income tax (benefit) expense

  (17 )           160     143  
Income from continuing operations 108 187 124 110 (160 ) 369
Income from discontinued operations, net of tax   65                 65  
Net income 173 187 124 110 (160 ) 434
Less: net income attributable to non-controlling interest, net of tax   14                 14  
Net income attributable to DXC common stockholders $ 159   $ 187 $ 124   $ 110 $ (160 ) $ 420  
 
Effective Tax Rate (18.7 )% 28.0 %
 
Basic EPS from continuing operations $ 0.33 $ 0.66 $ 0.44 $ 0.39 $ (0.56 ) $ 1.25
Diluted EPS from continuing operations $ 0.33 $ 0.65 $ 0.43 $ 0.38 $ (0.55 ) $ 1.23
 
Weighted average common shares outstanding for:
Basic EPS 283.83 283.83 283.83 283.83 283.83 283.83
Diluted EPS 289.47 289.47 289.47 289.47 289.47 289.47
 

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