Dxc technology reports second quarter fiscal 2020 results
Tysons, va.--(business wire)--dxc technology (nyse: dxc) today reported results for the second quarter of fiscal year 2020, representing the period from july 1 through september 30, 2019. "during my first two months as ceo, i have met with many of our largest customers and most of our people around the world,” said mike salvino, president and ceo. “i am very pleased with our global talent base, capabilities and the scale and scope of our offerings. dxc has a loyal, global customer base for whom we manage mission-critical operations. i am confident that by strengthening our focus on our people, customers and operational execution, we will deliver better financial results and be positioned to grow profitably while unlocking value for our shareholders." financial highlights - second quarter fiscal 2020 diluted earnings per share from continuing operations was $(8.19) in the second quarter, including $(11.10) per share of goodwill impairment, $(0.11) per share of restructuring costs, $(0.18) per share of transaction, separation and integration-related costs, $(0.45) per share of amortization of acquired intangible assets, $2.43 per share of gain on arbitration award, and $(0.11) per share of tax adjustment related to prior restructuring charges. this compares with $0.92 in the year ago period. non-gaap diluted earnings per share from continuing operations was $1.38. this compares with $2.02 in the year ago period. revenue in the second quarter was $4,851 million. revenue decreased 3.2% compared with $5,013 million in the prior year. loss from continuing operations before income taxes was $(1,999) million in the second quarter, including $(2,887) million of goodwill impairment, $(32) million of restructuring costs, $(53) million of transaction, separation and integration-related costs, $(151) million of amortization of acquired intangibles, and $632 million of gain on arbitration award. this compares with $332 million in the year ago period. non-gaap income from continuing operations before income taxes was $492 million compared with $749 million in the year ago period. net loss was $(2,115) million for the second quarter, including $(2,887) million of goodwill impairment, $(28) million of restructuring costs, $(48) million of transaction, separation and integration-related costs, $(117) million of amortization of acquired intangibles, $632 million of gain on arbitration award, and $(29) million of tax adjustment related to prior restructuring charges. this compares with $259 million in the prior year period. non-gaap net income was $362 million. adjusted ebit was $529 million in the second quarter compared with $799 million in the prior year. adjusted ebit margin was 10.9% compared with 15.9% in the year ago quarter. net cash provided by operating activities was $1,651 million in the second quarter, compared with $480 million in the year ago period. adjusted free cash flow was $739 million in the second quarter. global business services (gbs) gbs revenue was $2,285 million in the quarter compared with $2,111 million for the prior year. gbs revenue increased 8.2% year-over-year, including an unfavorable foreign currency exchange rate impact of 2.3%. gbs revenues increased 10.5% year-over-year at constant currency reflecting contribution from acquisitions, including luxoft. gbs profit margin in the quarter was 15.7%, compared with 18.9% in the prior year, reflecting investments to support digital hiring and capabilities. new business awards for gbs were $1.9 billion in the second quarter. global infrastructure services (gis) gis revenue was $2,566 million in the quarter compared with $2,902 million for the prior year. gis revenues decreased 11.6% year-over-year, including an unfavorable foreign currency exchange rate impact of 2.5%. gis revenues decreased 9.1% year-over-year at constant currency, reflecting declines in our traditional infrastructure businesses. gis profit margin in the quarter was 9.5%, compared with 16.3% in the prior year, reflecting a slowdown in delivery cost take-out actions. new business awards for gis were $1.9 billion in the second quarter. returning capital to shareholders during the second quarter, dxc technology returned $306 million to shareholders, consisting of $56 million in common stock dividends and $250 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 4:45 p.m. est. the dial-in number for domestic callers is 888-204-4368. callers who reside outside of the united states should dial +1-929-477-0402. the passcode for all participants is 1570708. 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 november 18, 2019. 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 1570708. 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 (nyse: dxc), the world’s leading independent, end-to-end it services company, manages and modernizes mission-critical systems, integrating them with new digital solutions to produce better business outcomes. the company’s global reach and talent, innovation platforms, technology independence and extensive partner network enable more than 6,000 private- and public-sector customers in 70 countries to thrive on change. for more information, visit www.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, 2019, and any updating information in subsequent sec filings including dxc's upcoming quarterly report on form 10-q for the quarterly period ended september 30, 2019. no assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. we do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this 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 six months ended (in millions, except per-share amounts) september 30, 2019 september 30, 2018 september 30, 2019 september 30, 2018 revenues $ 4,851 $ 5,013 $ 9,741 $ 10,295 costs of services 3,679 3,518 7,301 7,385 selling, general and administrative 489 569 996 1,009 depreciation and amortization 467 484 937 955 goodwill impairment losses 2,887 — 2,887 — restructuring costs 32 157 174 342 interest expense 104 83 195 168 interest income (67 ) (33 ) (97 ) (65 ) gain on arbitration award (632 ) — (632 ) — other income, net (109 ) (97 ) (227 ) (191 ) total costs and expenses 6,850 4,681 11,534 9,603 (loss) income from continuing operations before income taxes (1,999 ) 332 (1,793 ) 692 income tax expense 116 73 154 202 (loss) income from continuing operations (2,115 ) 259 (1,947 ) 490 income from discontinued operations, net of tax — — — 35 net (loss) income (2,115 ) 259 (1,947 ) 525 less: net income (loss) attributable to non-controlling interest, net of tax 4 (3 ) 9 4 net (loss) income attributable to dxc common stockholders $ (2,119 ) $ 262 $ (1,956 ) $ 521 (loss) income per common share: basic: continuing operations $ (8.19 ) $ 0.93 $ (7.44 ) $ 1.72 discontinued operations — — — 0.12 $ (8.19 ) $ 0.93 $ (7.44 ) $ 1.84 diluted: continuing operations $ (8.19 ) $ 0.92 $ (7.44 ) $ 1.69 discontinued operations — — — 0.12 $ (8.19 ) $ 0.92 $ (7.44 ) $ 1.81 cash dividend per common share $ 0.21 $ 0.19 $ 0.42 $ 0.38 weighted average common shares outstanding for: basic eps 258.71 281.37 262.83 282.89 diluted eps 258.71 285.78 262.83 287.53 selected consolidated balance sheet data (preliminary and unaudited) as of (in millions) september 30, 2019 march 31, 2019 assets cash and cash equivalents $ 2,880 $ 2,899 receivables, net 4,611 5,181 prepaid expenses 671 627 other current assets 328 359 total current assets 8,490 9,066 intangible assets, net 6,293 5,939 operating right-of-use assets, net 1,482 — goodwill 5,784 7,606 deferred income taxes, net 330 355 property and equipment, net 3,555 3,179 other assets 3,582 3,429 total assets $ 29,516 $ 29,574 liabilities short-term debt and current maturities of long-term debt $ 1,471 $ 1,942 accounts payable 1,603 1,666 accrued payroll and related costs 684 652 current operating lease liabilities 489 — accrued expenses and other current liabilities 2,943 3,355 deferred revenue and advance contract payments 1,571 1,630 income taxes payable 213 208 total current liabilities 8,974 9,453 long-term debt, net of current maturities 7,698 5,470 non-current deferred revenue 234 256 non-current operating lease liabilities 1,139 — non-current income tax liabilities and deferred tax liabilities 1,269 1,184 other long-term liabilities 1,332 1,486 total liabilities 20,646 17,849 total equity 8,870 11,725 total liabilities and equity $ 29,516 $ 29,574 condensed consolidated statements of cash flows (preliminary and unaudited) six months ended (in millions) september 30, 2019 september 30, 2018 cash flows from operating activities: net (loss) income $ (1,947 ) $ 525 adjustments to reconcile net income to net cash provided by operating activities: depreciation and amortization 946 1,002 goodwill impairment losses 2,887 — operating right-of-use expense 340 — share-based compensation 48 41 gain on dispositions (4 ) (65 ) unrealized foreign currency exchange gains (50 ) (12 ) other non-cash charges, net 2 (18 ) changes in assets and liabilities, net of effects of acquisitions and dispositions: decrease (increase) in assets 167 (483 ) decrease in operating lease liability (340 ) — decrease in other liabilities (464 ) (141 ) net cash provided by operating activities 1,585 849 cash flows from investing activities: purchases of property and equipment (192 ) (133 ) payments for transition and transformation contract costs (158 ) (183 ) software purchased and developed (126 ) (125 ) payments for acquisitions, net of cash acquired (1,921 ) (43 ) business dispositions — (65 ) cash collections related to deferred purchase price receivable 371 445 proceeds from sale of assets 40 57 short-term investing (75 ) — other investing activities, net 14 (1 ) net cash used in investing activities (2,047 ) (48 ) cash flows from financing activities: borrowings of commercial paper 2,879 1,158 repayments of commercial paper (2,866 ) (1,158 ) borrowings on long-term debt, net of discount 2,198 483 principal payments on long-term debt (519 ) (2,036 ) payments on finance leases and borrowings for asset financing (421 ) (475 ) borrowings for usps spin transaction — 1,114 proceeds from bond issuance — 753 proceeds from stock options and other common stock transactions 10 36 taxes paid related to net share settlements of share-based compensation awards (12 ) (20 ) repurchase of common stock and advance payment for accelerated share repurchase (650 ) (447 ) dividend payments (107 ) (105 ) other financing activities, net (32 ) 11 net cash provided by (used in) financing activities 480 (686 ) effect of exchange rate changes on cash and cash equivalents (37 ) (64 ) net (decrease) increase in cash and cash equivalents (19 ) 51 cash and cash equivalents at beginning of year 2,899 2,729 cash and cash equivalents at end of period $ 2,880 $ 2,780 segment results the following table summarizes segment revenue for the second quarter and first six months of fiscal 2020 and 2019: segment revenue three months ended (in millions) september 30, 2019 september 30, 2018 % change % change in constant currency global business services $ 2,285 $ 2,111 8.2 % 10.5% global infrastructure services 2,566 2,902 (11.6 )% (9.1)% total revenues $ 4,851 $ 5,013 (3.2 )% (0.8)% six months ended (in millions) september 30, 2019 september 30, 2018 % change % change in constant currency global business services $ 4,444 $ 4,324 2.8 % 5.4% global infrastructure services 5,297 5,971 (11.3 )% (8.3)% total revenues $ 9,741 $ 10,295 (5.4 )% (2.6)% 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 six months ended (in millions) september 30, 2019 september 30, 2018 september 30, 2019 september 30, 2018 profit gbs profit $ 359 $ 400 $ 725 $ 803 gis profit 243 473 583 947 all other loss (73 ) (74 ) (127 ) (148 ) interest income 67 33 97 65 interest expense (104 ) (83 ) (195 ) (168 ) restructuring costs (32 ) (157 ) (174 ) (342 ) transaction, separation and integration-related costs (53 ) (128 ) (158 ) (198 ) amortization of acquired intangible assets (151 ) (132 ) (289 ) (267 ) goodwill impairment losses (2,887 ) — (2,887 ) — gain on arbitration award gain 632 — 632 — (loss) income from continuing operations before income taxes $ (1,999 ) $ 332 $ (1,793 ) $ 692 segment profit margins gbs 15.7 % 18.9 % 16.3 % 18.6 % gis 9.5 % 16.3 % 11.0 % 15.9 % 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. reconciliation of non-gaap financial measures dxc's 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 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. goodwill impairment losses - reflects impairment losses on goodwill. arbitration award gain - reflects a gain related to the hpes merger arbitration award. tax adjustment - for fiscal 2020 periods, reflects the impact of tax entries related to prior restructuring charges, and for fiscal 2019 periods, reflects the estimated non-recurring benefit of the tax cuts and jobs act of 2017. income tax expense of other non-gaap adjustments is computed by applying the jurisdictional tax rate to the pre-tax adjustments on a jurisdictional basis. ebit and adjusted ebit a reconciliation of net income to adjusted ebit is as follows: three months ended six months ended (in millions) september 30, 2019 september 30, 2018 september 30, 2019 september 30, 2018 net (loss) income $ (2,115 ) $ 259 $ (1,947 ) $ 525 income from discontinued operations, net of taxes — — — (35 ) income tax expense 116 73 154 202 interest income (67 ) (33 ) (97 ) (65 ) interest expense 104 83 195 168 ebit (1,962 ) 382 (1,695 ) 795 restructuring costs 32 157 174 342 transaction, separation, and integration-related costs 53 128 158 198 amortization of acquired intangible assets 151 132 289 267 goodwill impairment losses 2,887 — 2,887 — gain on arbitration award (632 ) — (632 ) — adjusted ebit $ 529 $ 799 $ 1,181 $ 1,602 adjusted ebit margin 10.9 % 15.9 % 12.1 % 15.6 % ebit margin (40.4 )% 7.6 % (17.4 )% 7.7 % 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 september 30, 2019 six months ended september 30, 2019 net cash provided by operating activities $ 1,651 $ 1,585 net cash used in investing activities (1) (225 ) (1,972 ) acquisitions, net of cash acquired 10 1,921 payments on capital leases and other long-term asset financings (211 ) (421 ) payments on transaction, separation and integration-related costs 41 135 payments on restructuring costs 105 197 arbitration award (632 ) (632 ) adjusted free cash flow $ 739 $ 813 (1) excludes short-term investments. non-gaap results a reconciliation of reported results to non-gaap results is as follows: three months ended september 30, 2019 (in millions, except per-share amounts) as reported restructuring costs transaction, separation and integration- related costs amortization of acquired intangible assets goodwill impairment losses gain on arbitration award tax adjustment non-gaap results costs of services (excludes depreciation and amortization and restructuring costs) $ 3,679 $ — $ — $ — $ — $ — $ — $ 3,679 selling, general and administrative (excludes depreciation and amortization and restructuring costs) 489 — (53 ) — — — — 436 (loss) income from continuing operations before income taxes (1,999 ) 32 53 151 2,887 (632 ) — 492 income tax expense 116 4 5 34 — — (29 ) 130 net (loss) income (2,115 ) 28 48 117 2,887 (632 ) 29 362 less: net income attributable to non-controlling interest, net of tax 4 — — — — — — 4 net (loss) income attributable to dxc common stockholders $ (2,119 ) $ 28 $ 48 $ 117 $ 2,887 $ (632 ) $ 29 $ 358 effective tax rate (5.8 )% 26.4 % basic eps from continuing operations $ (8.19 ) $ 0.11 $ 0.19 $ 0.45 $ 11.16 $ (2.44 ) $ 0.11 $ 1.38 diluted eps from continuing operations $ (8.19 ) $ 0.11 $ 0.18 $ 0.45 $ 11.10 $ (2.43 ) $ 0.11 $ 1.38 weighted average common shares outstanding for: basic eps 258.71 258.71 258.71 258.71 258.71 258.71 258.71 258.71 diluted eps 258.71 260.03 260.03 260.03 260.03 260.03 260.03 260.03 six months ended september 30, 2019 (in millions, except per-share amounts) as reported restructuring costs transaction, separation and integration- related costs amortization of acquired intangible assets goodwill impairment losses gain on arbitration award tax adjustment non-gaap results costs of services (excludes depreciation and amortization and restructuring costs) $ 7,301 $ — $ — $ — $ — $ — $ — $ 7,301 selling, general, and administrative (excludes depreciation and amortization and restructuring costs) 996 — (158 ) — — — — 838 (loss) income from continuing operations before income taxes (1,793 ) 174 158 289 2,887 (632 ) — 1,083 income tax expense 154 32 27 65 — — (29 ) 249 net (loss) income (1,947 ) 142 131 224 2,887 (632 ) 29 834 less: net income attributable to non-controlling interest, net of tax 9 — — — — — — 9 net (loss) income attributable to dxc common stockholders $ (1,956 ) $ 142 $ 131 $ 224 $ 2,887 $ (632 ) $ 29 $ 825 effective tax rate (8.6 )% 23.0 % basic eps from continuing operations $ (7.44 ) $ 0.54 $ 0.50 $ 0.85 $ 10.98 $ (2.40 ) $ 0.11 $ 3.14 diluted eps from continuing operations $ (7.44 ) $ 0.54 $ 0.50 $ 0.85 $ 10.91 $ (2.39 ) $ 0.11 $ 3.12 weighted average common shares outstanding for: basic eps 262.83 262.83 262.83 262.83 262.83 262.83 262.83 262.83 diluted eps 262.83 264.61 264.61 264.61 264.61 264.61 264.61 264.61 three months ended september 30, 2018 (in millions, except per-share amounts) as reported restructuring costs transaction, separation and integration-related costs amortization of acquired intangible assets non-gaap results costs of services (excludes depreciation and amortization and restructuring costs) $ 3,518 $ — $ — $ — $ 3,518 selling, general and administrative (excludes depreciation and amortization and restructuring costs) 569 — (128 ) — 441 income from continuing operations before income taxes 332 157 128 132 749 income tax expense 73 41 30 32 176 income from continuing operations 259 116 98 100 573 income from discontinued operations, net of tax — — — — — net income 259 116 98 100 573 less: net (loss) attributable to non-controlling interest, net of tax (3 ) — — — (3 ) net income attributable to dxc common stockholders $ 262 $ 116 $ 98 $ 100 $ 576 effective tax rate 22.0 % 23.5 % basic eps from continuing operations $ 0.93 $ 0.41 $ 0.35 $ 0.36 $ 2.05 diluted eps from continuing operations $ 0.92 $ 0.41 $ 0.34 $ 0.35 $ 2.02 weighted average common shares outstanding for: basic eps 281.37 281.37 281.37 281.37 281.37 diluted eps 285.78 285.78 285.78 285.78 285.78 six months ended september 30, 2018 (in millions, except per-share amounts) as reported restructuring costs transaction, separation and integration-related costs amortization of acquired intangible assets tax adjustment non-gaap results costs of services (excludes depreciation and amortization and restructuring costs) $ 7,385 $ — $ — $ — $ — $ 7,385 selling, general, and administrative (excludes depreciation and amortization and restructuring costs) 1,009 — (198 ) — — 811 income from continuing operations before income taxes 692 342 198 267 — 1,499 income tax expense (benefit) 202 82 46 65 (33 ) 362 income from continuing operations 490 260 152 202 33 1,137 income from discontinued operations, net of tax 35 — — — — 35 net income 525 260 152 202 33 1,172 less: net income attributable to non-controlling interest, net of tax 4 — — — — 4 net income attributable to dxc common stockholders $ 521 $ 260 $ 152 $ 202 $ 33 $ 1,168 effective tax rate 29.2 % 24.1 % basic eps from continuing operations $ 1.72 $ 0.92 $ 0.54 $ 0.71 $ 0.12 $ 4.01 diluted eps from continuing operations $ 1.69 $ 0.90 $ 0.53 $ 0.70 $ 0.11 $ 3.94 weighted average common shares outstanding for: basic eps 282.89 282.89 282.89 282.89 282.89 282.89 diluted eps 287.53 287.53 287.53 287.53 287.53 287.53
