DXC Technology Co 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The purpose of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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 third quarter and first nine months of fiscal 2022 and our financial condition as of December 31, 2021. 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 third quarters and first nine months of fiscal 2022 and fiscal 2021. 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. The world’s largest companies and public sector organizations trust DXC to deploy services across the Enterprise Technology Stack to drive new levels of performance, competitiveness, and customer experience. 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 customers through our direct sales offices around the world. Our customers 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 third quarters and first nine months of fiscal 2022 and fiscal 2021: Three Months Ended Nine Months Ended (In millions, except per-share amounts) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Revenues $ 4,089 $ 4,288 $ 12,257 $ 13,344 Income, before income taxes 166 1,978 342 1,447 Income tax expense 64 875 145 789 Net income $ 102 $ 1,103 $ 197 $ 658 Diluted earnings per share $ 0.38 $ 4.29 $ 0.73 $ 2.54 Fiscal 2022 Third Quarter Highlights Financial highlights for the third quarter and first nine months of fiscal 2022 include the following: • Revenues for the third quarter and first nine months of fiscal 2022 were $4.1 billion and $12.3 billion, respectively, a decrease of 4.6% and 8.1%, respectively, as compared to the third quarter and first nine months of fiscal 2021. See "Revenues” caption below for additional information. • Net income and diluted earnings per share for the third quarter of fiscal 2022 were $102 million and $0.38, respectively. Net income decreased by $1,001 million during the third quarter of fiscal 2022 as compared to the same period of prior fiscal year. The decrease was primarily due to the gain on disposition of the HHS business during the third quarter of fiscal 2021 and a reduction in revenue in the current period partially offset by cost optimization realized in the current period, lower costs after the dispositions of the HPS and HHS businesses, lower transaction, separation and integration-related costs, a reduction in restructuring activities, and decreases in depreciation and amortization. Net income included the cumulative impact of $137 million, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, gains and losses on dispositions, debt extinguishment costs, pension and other post-retirement benefit ("OPEB") actuarial and settlement losses, and a tax adjustment. This compares with net income and diluted earnings per share of $1,103 million and $4.29, respectively, for the third quarter of fiscal 2021. • Net income and diluted earnings per share for the first nine months of fiscal 2022 were $197 million and $0.73, respectively. Net income decreased by $461 million during the first nine months of fiscal 2022 as compared to the same period of prior fiscal year. In addition to the previously described activity for the third quarter of fiscal 2022, decreases in net income for the first nine months of fiscal 2022 also reflects higher debt extinguishment costs partially offset by the gain on disposition of the HPS business during the first quarter of fiscal 2022. Net income included the cumulative impact of $497 million, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, gains on dispositions, impairment losses, debt extinguishment costs, pension and OPEB actuarial and settlement losses, and a tax adjustment. This compares with net income and diluted earnings per share of $658 million and $2.54, respectively, for the first nine months of fiscal 2021. • Our cash and cash equivalents were $2.9 billion as of December 31, 2021. • We generated $1,230 million of cash from operations during the first nine months of fiscal 2022, as compared to $404 million during the first nine months of fiscal 2021. See “Liquidity and Capital Resources” caption below for additional information. 48 Revenues During the third quarter and first nine months of fiscal 2022 and fiscal 2021, the distribution of our revenues across geographies was as follows: 49 Three Months Ended (in millions) December 31, 2021 December 31, 2020 Change Percentage Change GBS $ 1,946 $ 1,921 $ 25 1.3 % GIS 2,143 2,367 (224) (9.5) % Total Revenues $ 4,089 $ 4,288 $ (199) (4.6) % Nine Months Ended (in millions) December 31, 2021 December 31, 2020 Change Percentage Change GBS $ 5,706 $ 6,337 $ (631) (10.0) % GIS 6,551 7,007 (456) (6.5) % Total Revenues $ 12,257 $ 13,344 $ (1,087) (8.1) % The decrease in revenues for the third quarter of fiscal 2022, compared with fiscal 2021 of the same period, reflects project completions, the dispositions of the HPS business and other insignificant businesses during the first quarter of fiscal 2022, and project terminations. The decrease in revenues was partially offset by additional services provided to new and existing customers, including revenues from software licenses, increased pass-through revenue associated with the resale of hardware and software, and increased run-rate project volumes. The decrease in revenues for first nine months of fiscal 2022 compared with fiscal 2021 of the same period, also reflects the disposition of the HHS business during the third quarter of fiscal 2021. Revenues for the third quarter included an unfavorable foreign currency exchange rate impact of 1.0% and a favorable foreign currency exchange rate impact of 2.1% for the first nine months of fiscal 2022. These impacts were primarily driven by the strengthening of the U.S. dollar against the Euro and Australian Dollar during the third quarter of fiscal 2022 and an overall weakening of the U.S. dollar against the British Pound, Canadian Dollar, and Australian Dollar for the first nine months of fiscal 2022. 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, 2021. As a global company, approximately 71% of our revenues for the first nine months of fiscal 2022 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: 50 Three Months Ended (in millions) Constant Currency December 31, 2021 December 31, 2020 Change Percentage Change GBS $ 1,971 $ 1,921 $ 50 2.6 % GIS 2,163 2,367 (204) (8.6) % Total $ 4,134 $ 4,288 $ (154) (3.6) % Nine Months Ended (in millions) Constant Currency December 31, 2021 December 31, 2020 Change Percentage Change GBS $ 5,606 $ 6,337 $ (731) (11.5) % GIS 6,373 7,007 (634) (9.0) % Total $ 11,979 $ 13,344 $ (1,365) (10.2) % Global Business Services Our GBS revenues were $1.9 billion in the third quarter and $5.7 billion in the first nine months of fiscal 2022, an increase of 1.3% for the third quarter and a decrease of 10.0% for the first nine months of fiscal 2022 as compared to the same periods in fiscal 2021. GBS revenue in constant currency increased by 2.6% in the third quarter and decreased 11.5% during the first nine months of fiscal 2022 as compared to the same periods in fiscal 2021. The increase in GBS revenues for the third quarter of fiscal 2022 was primarily due to an increase in run-rate project volumes and additional services provided to new and existing customers, including revenues from software licenses. The increase in revenue for the third quarter of fiscal 2022 was partially offset by the disposition of the HPS business at the beginning of the first quarter of fiscal 2022 and project completions. The decrease in GBS revenues for the first nine months of fiscal 2022 also reflects the disposition of the HHS business during the third quarter fiscal 2021. For the third quarter and first nine months of fiscal 2022, GBS contract awards were $2.5 billion and $6.6 billion, respectively, as compared to $2.7 billion and $8.6 billion in the corresponding periods of fiscal 2021. Global Infrastructure Services Our GIS revenues were $2.1 billion in the third quarter and $6.6 billion in the first nine months of fiscal 2022, a decrease of 9.5% and 6.5%, respectively, compared to the same periods in fiscal 2021. GIS revenues in constant currency decreased by 8.6% and 9.0% in the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods in fiscal 2021. The decrease in GIS revenues for the third quarter of fiscal 2022 was primarily due to project completions, project terminations, and a decrease in run-rate project volumes. The decrease in GIS revenues was partially offset by increased pass-through revenue associated with the resale of hardware and software and additional services provided to new and existing customers. The decrease in GIS revenues for the first nine months of fiscal 2022 also reflects the dispositions of the HHS business during the third quarter fiscal 2021 and other insignificant businesses. For the third quarter and first nine months of fiscal 2022, GIS contract awards were $2.5 billion and $6.7 billion, respectively, as compared to $2.2 billion and $6.5 billion in the corresponding periods of fiscal 2021. 51 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) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Costs of services (excludes depreciation and amortization and restructuring costs) $ 3,179 $ 3,333 77.8 % 77.8 % — Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 340 517 8.3 12.1 (3.8) Depreciation and amortization 424 475 10.4 11.1 (0.7) Restructuring costs 36 104 0.9 2.4 (1.5) Interest expense 38 82 0.9 1.9 (1.0) Interest income (15) (28) (0.4) (0.7) 0.3 Debt extinguishment costs 2 — — — — Loss (gain) on disposition of businesses 4 (2,046) 0.1 (47.7) 47.8 Other income, net (85) (127) (2.1) (3.0) 0.9 Total Costs and Expenses $ 3,923 $ 2,310 95.9 % 53.9 % 42.0 Nine Months Ended Amount Percentage of Revenues Percentage Point Change (in millions) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Costs of services (excludes depreciation and amortization and restructuring costs) $ 9,522 $ 10,525 77.7 % 78.9 % (1.2) Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 1,093 1,595 8.9 12.0 (3.1) Depreciation and amortization 1,294 1,492 10.6 11.2 (0.6) Restructuring costs 248 441 2.0 3.3 (1.3) Interest expense 161 284 1.3 2.1 (0.8) Interest income (51) (76) (0.4) (0.6) 0.2 Debt extinguishment costs 311 — 2.5 — 2.5 Gain on disposition of businesses (373) (2,046) (3.0) (15.3) 12.3 Other income, net (290) (318) (2.4) (2.4) — Total Costs and Expenses $ 11,915 $ 11,897 97.2 % 89.2 % 8.0 The 42.0 and 8.0 percentage point increase in total costs and expenses as a percentage of revenue for the third quarter and first nine months of fiscal 2022 primarily reflects the gain on disposition of businesses resulting from the sale of the Company’s HHS business that occurred during the third quarter of fiscal 2021. 52 Costs of Services Costs of services, excluding depreciation and amortization and restructuring costs (“COS”), was $3.2 billion and $9.5 billion for the third quarter and first nine months of fiscal 2022, respectively. COS decreased by $154 million and $1,003 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. The decrease in COS for the third quarter of fiscal 2022, compared with fiscal 2021 of the same period, primarily reflects cost optimization savings realized during fiscal 2022 and reduced costs resulting from the dispositions of the HPS business and other insignificant businesses during the first quarter of fiscal 2022. The decrease in COS for the first nine months of fiscal 2022 compared with fiscal 2021 of the same period, also reflects the disposition of the HHS business during the third quarter of fiscal 2021. COS as a percentage of revenues were consistent during the third quarter and decreased 1.2 points during the first nine months of fiscal 2022, as compared to the same period of the prior fiscal year. This point decrease was primarily driven by cost reductions exceeding the associated decline 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 $340 million and $1,093 million for the third quarter and first nine months of fiscal 2022, respectively. SG&A decreased by $177 million and $502 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. The decrease in SG&A for the third quarter of fiscal 2022, compared with fiscal 2021 of the same period, reflects lower transaction, separation and integration-related costs, cost optimization savings realized during fiscal 2022, and reduced costs resulting from the dispositions of the HPS business and other insignificant businesses during the first quarter of fiscal 2022. The decrease in SG&A for the first nine months of fiscal 2022 compared with fiscal 2021 of the same period, also reflects the disposition of the HHS business during the third quarter of fiscal 2021 Transaction, separation and integration-related costs of $11 million and $23 million were included in SG&A for the third quarter and first nine months of fiscal 2022, as compared to $96 million and $307 million for the comparable periods of the prior fiscal year. Depreciation and Amortization Depreciation expense was $156 million and $479 million for the third quarter and first nine months of fiscal 2022, respectively. Depreciation expense decreased by $29 million and $84 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. The net decrease in depreciation expense for the third quarter of fiscal 2022 was primarily due to impairment of undeployed assets in the prior year and asset retirements. The net decrease in depreciation expense for the first nine months of fiscal 2022 was primarily due to asset useful life adjustments in the prior year, a reduction in assets due to impairment of undeployed assets in the prior year, and asset retirements. Amortization expense was $268 million and $815 million for the third quarter and first nine months of fiscal 2022, respectively. Amortization expense decreased by $22 million and $114 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. The net decrease in amortization expense for the third quarter of fiscal 2022 was primarily due to asset retirements and a decline in amortization related to transition and transformation contract costs. The net decrease in amortization expense for the first nine months of fiscal 2022 was primarily due to a reduction in customer related intangibles related to the disposition of the HHS business at the beginning of the third quarter of fiscal 2021. See Note 4 – “Divestitures” for additional information. 53 Restructuring Costs During fiscal 2022, management approved global cost savings initiatives designed to better align our workforce and facility structures. During the third quarter and first nine months of fiscal 2022, restructuring costs, net of reversals, were $36 million and $248 million, respectively, as compared to $104 million and $441 million during the same periods of the prior fiscal year. For an analysis of changes in our restructuring liabilities by restructuring plans, see Note 14 – “Restructuring Costs” to the financial statements. Interest Expense and Interest Income Interest expense was $38 million and $161 million for the third quarter and first nine months of fiscal 2022, respectively. Interest expense decreased by $44 million and $123 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. These decreases were primarily due to a reduction in bonds and term loans, decreased amounts drawn on our revolving credit facility, and decreases to finance leases and asset financing. Interest income was $15 million and $51 million for the third quarter and first nine months of fiscal 2022, respectively. Interest income decreased by $13 million and $25 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. These decreases were primarily driven by lower income from our multicurrency cash pools and money market accounts as well as decreases in lease interest income. Debt Extinguishment Costs Debt extinguishment costs were $2 million and $311 million for the third quarter and first nine months of fiscal 2022, respectively. Debt extinguishment costs for the third quarter of fiscal 2022 include costs related to the decrease in our revolving credit facility limit from $4 billion to $3 billion. Debt extinguishment costs for the first nine months of fiscal 2022 also includes activity from the first and second quarters of fiscal 2022 consisting of full redemption of our Euro-denominated term loan facility, two series of 4.45% senior notes due fiscal 2023, 4.25% senior notes due fiscal 2025, 2.75% senior notes due fiscal 2025, 4.125% senior notes due fiscal 2026, 4.750% senior notes due fiscal 2028, 7.45% senior notes due fiscal 2030, and extinguishment of debt associated with asset financing. There were no debt extinguishment costs recorded during the same period in fiscal 2021. Gain on Disposition of Businesses During the first quarter of fiscal 2022, DXC sold its HPS business for $551 million which resulted in an estimated pre-tax gain on sale of $337 million, net of closing costs for the first nine months of fiscal 2022. Insignificant businesses were also sold during the first quarter of fiscal 2022 that resulted in a gain of $49 million for the first nine months of fiscal 2022. This was partially offset by $13 million in sales price adjustments related to prior year dispositions for the first nine months of fiscal 2022, which resulted from changes in projected closing net working capital. During the third quarter of fiscal 2021, DXC sold its U.S. State and Local Health and Human Services business for a total enterprise value of $5.0 billion and resulted in an estimated pre-tax gain on sale of $2,041 million, net of closing costs for both the third quarter and first nine months of fiscal 2021. Insignificant businesses were also sold during the third quarter of fiscal 2021 that resulted in a gain of $5 million. The gain on sale of the U.S. State and Local Health and Human Services business was adjusted during the fourth quarter of fiscal 2021 for $27 million. 54 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. Other income was $85 million and $290 million for the third quarter and first nine months of fiscal 2022, respectively. Other income decreased by $42 million and $28 million during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. These decreases were primarily due to lower net gains on sales of operating and non-operating assets and a decrease in non-service components of net periodic pension income. Taxes Our effective tax rate (“ETR”) was 38.6% and 44.2% for the three months ended December 31, 2021 and December 31, 2020, respectively, and 42.4% and 54.5% for the nine months ended December 31, 2021 and December 31, 2020, respectively. For the three months ended December 31, 2021, the primary drivers of the ETR were the global mix of income, an increase in unrecognized tax benefits primarily related to deductions taken in prior tax returns and tax rate changes in non-U.S. jurisdictions. For the nine months ended December 31, 2021, the primary drivers of the ETR were the global mix of income, gain on sale of HPS business, tax rate changes in non-U.S. jurisdictions and recording a valuation allowance on certain deferred tax assets in non-U.S. jurisdictions. For the three and nine months ended December 31, 2020, the primary drivers of the ETR were the gain on sale of HHS Business, global mix of income and foreign tax credits. The United States Congress is currently working to enact a tax reform bill, which would result in significant changes to the U.S. tax system. We expect that if a bill is enacted, it could have a material impact on our Consolidated Financial Statements in future periods. We continue to monitor developments and assess the impact to DXC. The IRS recently published final regulations for U.S. foreign tax credits that will be effective for future periods. The Company is currently assessing the impact of these regulations. 55 Earnings Per Share Diluted EPS for the third quarter and first nine months of fiscal 2022 was $0.38 and $0.73, respectively. Diluted EPS decreased by $3.91 and $1.81 during the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of the prior fiscal year. Decreases in diluted EPS were due to decreases in net income of $1,001 million and $461 million during the third quarter and first nine months of fiscal 2022, respectively, over the same periods in the prior fiscal year. Diluted EPS for the third quarter of fiscal 2022 includes $0.13 per share of restructuring costs, $0.04 per share of transaction, separation and integration-related costs, $0.36 per share of amortization of acquired intangible assets, $0.02 per share of net losses on dispositions, $0.01 per share of debt extinguishment costs, $0.02 per share of pension and OPEB actuarial and settlement losses, and $(0.04) per share of tax adjustments relating to the net revaluation of deferred taxes resulting from changes in non-US jurisdiction tax rates. Diluted EPS for the first nine months of fiscal 2022 includes $0.78 per share of restructuring costs, $0.07 per share of transaction, separation and integration-related costs, $1.02 per share of amortization of acquired intangible assets, $(0.98) per share of net gains on dispositions, $0.03 per share of impairment losses, $0.92 per share of debt extinguishment costs, $0.02 per share of pension and OPEB actuarial and settlement losses, and $0.07 per share of tax adjustments relating to the net revaluation of deferred taxes resulting from changes in non-US jurisdiction tax rates. 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, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS, and constant currency revenues. We believe EBIT, adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS provide investors with useful supplemental information about our operating performance after excluding certain categories of expenses. We believe constant currency revenues provides investors with useful supplemental information about our revenues after excluding the effect of currency exchange rate fluctuations for currencies other than U.S. dollars in the periods presented. See below for a description of the methodology we use to present constant currency revenues. One category of expenses excluded from adjusted EBIT, non-GAAP income before tax, non-GAAP net income and non-GAAP EPS, 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 intangible 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. Another category of expenses excluded from adjusted EBIT, non-GAAP income before tax, non-GAAP net income and non-GAAP EPS is impairment losses, which may result in a significant difference in period over period expense on a GAAP basis. We exclude impairment losses as these non-cash amounts, reflect generally an acceleration of what would be multiple periods of expense and do not expect to occur frequently. Further assets such as goodwill may be significantly impacted by market conditions outside of management’s control. 56 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. Selected references are made on a “constant currency basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a “constant currency basis” are non-GAAP measures calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Fiscal 2022 Third Quarter Highlights.” Certain 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) December 31, 2021 December 31, 2020 Change Percentage Change Income before income taxes $ 166 $ 1,978 $ (1,812) (91.6) % Non-GAAP income before income taxes $ 332 $ 246 $ 86 35.0 % Net income $ 102 $ 1,103 $ (1,001) (90.8) % Adjusted EBIT $ 355 $ 300 $ 55 18.3 % Nine Months Ended (in millions) December 31, 2021 December 31, 2020 Change Percentage Change Income before income taxes $ 342 $ 1,447 $ (1,105) (76.4) % Non-GAAP income before income taxes $ 923 $ 565 $ 358 63.4 % Net income $ 197 $ 658 $ (461) (70.1) % Adjusted EBIT $ 1,033 $ 773 $ 260 33.6 % 57 Reconciliation of Non-GAAP Financial Measures Our non-GAAP adjustments include: • Restructuring costs – includes costs, net of reversals, related to workforce and real estate optimization and other similar charges. • Transaction, separation and integration-related (“TSI”) costs – includes costs related to integration, planning, financing and advisory fees and other similar charges associated with mergers, acquisitions, strategic investments, joint ventures, and dispositions and other similar transactions. (1) • Amortization of acquired intangible assets – includes amortization of intangible assets acquired through business combinations. • Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities. (2) • Impairment losses – impairment losses on assets classified as long-term on the balance sheet. (3) • Debt extinguishment costs – costs associated with early retirement, redemption, repayment or repurchase of debt and debt-like items including any breakage, make-whole premium, prepayment penalty or similar costs as well as solicitation and other legal and advisory expenses. (4) • Pension and OPEB actuarial and settlement gains and losses – pension and OPEB actuarial mark to market adjustments and settlement gains and losses. • Tax adjustments – discrete tax adjustments to impair or recognize certain deferred tax assets, adjustments for changes in tax legislation and the impact of merger and divestitures. Income tax expense of all other (non-discrete) non-GAAP adjustments is based on the difference in the GAAP annual effective tax rate (AETR) and overall non-GAAP provision (consistent with the GAAP methodology). (5) (1) TSI-Related Costs include fees and other internal and external expenses associated with legal, accounting, consulting, due diligence, investment banking advisory, and other services, as well as financing fees, retention incentives, and resolution of transaction related claims in connection with, or resulting from, exploring or executing potential, acquisitions, dispositions and strategic investments, whether or not announced or consummated. The TSI-Related costs for the third quarter of fiscal 2022 include $10 million of costs incurred in connection with activities related to acquisitions and divestitures; and $1 million of expenses related to integration projects from the HPES merger. The TSI-Related costs for the first nine months of fiscal 2022 include $13 million of costs to execute the strategic alternatives; $4 million legal costs and ($14 million) credit towards Peraton Arbitration settlement, $5 million in expenses related to integration projects resulting from the HPES merger (including costs associated with continuing efforts to separate certain IT systems) and $15 million of costs incurred in connection with activities related to other acquisitions and divestitures. (2) Gains and losses on dispositions for the first nine months of fiscal 2022 include a $337 million gain on sale of the HPS business, gains of $19 million on other dispositions and ($13 million) of adjustments relating to the sale of the HHS business. (3) Impairment losses on dispositions for the first nine months of fiscal 2022 includes a $10 million impairment charge of capitalized transition and transformation costs. (4) Debt extinguishment costs adjustments for the third quarter of fiscal 2022 include $2 million related to the decrease in our revolving credit facility limit. Debt extinguishment costs adjustments for the first nine months of fiscal 2022 reflects $2 million related to the decrease in our revolving credit facility limit, $18 million to fully redeem two series of our 4.45% senior notes due fiscal 2023, $7 million associated with asset financing, $1 million to fully redeem our Euro-denominated term loan facility, $41 million to fully redeem our 4.25% senior notes due fiscal 2025, $26 million to fully redeem our 2.75% senior notes due fiscal 2025, $58 million to fully redeem our 4.125% senior notes due fiscal 2026, $87 million to fully redeem our 4.750% senior notes due fiscal 2028, and $71 million to fully redeem our 7.45% senior notes due fiscal 2030. (5) Tax adjustment for the first nine months of fiscal 2022 reflects net revaluation of deferred taxes resulting from changes in non-US jurisdiction tax rates. 58 A reconciliation of reported results to non-GAAP results is as follows: Three Months Ended December 31, 2021 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Gains and Losses on Dispositions Debt Extinguishment Costs Pension and OPEB Actuarial and Settlement Losses Tax Adjustment Non-GAAP Results Income before income taxes $ 166 $ 36 $ 11 $ 106 $ 4 $ 2 $ 7 $ — $ 332 Income tax expense 64 4 1 13 — — 1 10 93 Net income 102 32 10 93 4 2 6 (10) 239 Less: net income attributable to non-controlling interest, net of tax 4 — — — — — — — 4 Net income attributable to DXC common stockholders $ 98 $ 32 $ 10 $ 93 $ 4 $ 2 $ 6 $ (10) $ 235 Effective Tax Rate 38.6 % 28.0 % Basic EPS $ 0.39 $ 0.13 $ 0.04 $ 0.37 $ 0.02 $ 0.01 $ 0.02 $ (0.04) $ 0.94 Diluted EPS $ 0.38 $ 0.13 $ 0.04 $ 0.36 $ 0.02 $ 0.01 $ 0.02 $ (0.04) $ 0.92 Weighted average common shares outstanding for: Basic EPS 250.27 250.27 250.27 250.27 250.27 250.27 250.27 250.27 250.27 Diluted EPS 254.82 254.82 254.82 254.82 254.82 254.82 254.82 254.82 254.82 Nine Months Ended December 31, 2021 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Gains and Losses on Dispositions Impairment Losses Debt Extinguishment Costs Pension and OPEB Actuarial and Settlement Losses Tax Adjustment Non-GAAP Results Income before income taxes $ 342 $ 248 $ 23 $ 325 $ (343) $ 10 $ 311 $ 7 $ — $ 923 Income tax expense 145 48 6 63 (91) 2 73 1 (18) 229 Net income 197 200 17 262 (252) 8 238 6 18 694 Less: net income attributable to non-controlling interest, net of tax 9 — — — — — — — — 9 Net income attributable to DXC common stockholders $ 188 $ 200 $ 17 $ 262 $ (252) $ 8 $ 238 $ 6 $ 18 $ 685 Effective Tax Rate 42.4 % 24.8 % Basic EPS $ 0.74 $ 0.79 $ 0.07 $ 1.04 $ (1.00) $ 0.03 $ 0.94 $ 0.02 $ 0.07 $ 2.71 Diluted EPS $ 0.73 $ 0.78 $ 0.07 $ 1.02 $ (0.98) $ 0.03 $ 0.92 $ 0.02 $ 0.07 $ 2.66 Weighted average common shares outstanding for: Basic EPS 252.44 252.44 252.44 252.44 252.44 252.44 252.44 252.44 252.44 252.44 Diluted EPS 257.59 257.59 257.59 257.59 257.59 257.59 257.59 257.59 257.59 257.59 59 Three Months Ended December 31, 2020 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Gain on Disposition of Businesses Non-GAAP Results Income before income taxes $ 1,978 $ 104 $ 96 $ 114 (2,046) $ 246 Income tax expense 875 11 16 26 (903) 25 Net income 1,103 93 80 88 (1,143) 221 Less: net income attributable to non-controlling interest, net of tax 5 — — — — 5 Net income attributable to DXC common stockholders $ 1,098 $ 93 $ 80 $ 88 $ (1,143) $ 216 Effective Tax Rate 44.2 % 10.2 % Basic EPS $ 4.32 $ 0.37 $ 0.31 $ 0.35 $ (4.49) $ 0.85 Diluted EPS $ 4.29 $ 0.36 $ 0.31 $ 0.34 $ (4.47) $ 0.84 Weighted average common shares outstanding for: Basic EPS 254.32 254.32 254.32 254.32 254.32 254.32 Diluted EPS 255.75 255.75 255.75 255.75 255.75 255.75 Nine Months Ended December 31, 2020 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Gain on Disposition of Businesses Pension and OPEB Actuarial and Settlement Losses Tax Adjustment Non-GAAP Results Income before income taxes $ 1,447 $ 441 $ 307 $ 414 $ (2,046) $ 2 — $ 565 Income tax expense 789 75 70 95 (903) — (2) 124 Net income 658 366 237 319 (1,143) 2 2 441 Less: net income attributable to non-controlling interest, net of tax 9 — — — — — — 9 Net income attributable to DXC common stockholders $ 649 $ 366 $ 237 $ 319 $ (1,143) $ 2 $ 2 $ 432 Effective Tax Rate 54.5 % 21.9 % Basic EPS $ 2.55 $ 1.44 $ 0.93 $ 1.26 $ (4.50) $ 0.01 $ 0.01 $ 1.70 Diluted EPS $ 2.54 $ 1.43 $ 0.93 $ 1.25 $ (4.48) $ 0.01 $ 0.01 $ 1.69 Weighted average common shares outstanding for: Basic EPS 254.03 254.03 254.03 254.03 254.03 254.03 254.03 254.03 Diluted EPS 255.20 255.20 255.20 255.20 255.20 255.20 255.20 255.20 60 Reconciliations of net income to EBIT and adjusted EBIT are as follows: Three Months Ended Nine Months Ended (in millions) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Net income $ 102 $ 1,103 $ 197 $ 658 Income tax expense 64 875 145 789 Interest income (15) (28) (51) (76) Interest expense 38 82 161 284 EBIT 189 2,032 452 1,655 Restructuring costs 36 104 248 441 Transaction, separation and integration-related costs 11 96 23 307 Amortization of acquired intangible assets 106 114 325 414 (Gains) and losses on dispositions 4 (2,046) (343) (2,046) Impairment losses — — 10 — Debt extinguishment costs 2 — 311 — Pension and OPEB actuarial and settlement losses 7 — 7 2 Adjusted EBIT $ 355 $ 300 $ 1,033 $ 773 61 Liquidity and Capital Resources Cash and Cash Equivalents and Cash Flows As of December 31, 2021, our cash and cash equivalents (“cash”) were $2.9 billion, of which $1.5 billion was held outside of the U.S. As of March 31, 2021, our cash was $3.0 billion, of which $1.3 billion was held outside of the U.S. We maintain various multi-currency, multi-entity, cross-border, physical and notional cash pool arrangements with various counterparties to manage liquidity efficiently that enable participating subsidiaries to draw on the Company’s pooled resources to meet liquidity needs. A significant portion of the cash held by our foreign subsidiaries is not expected to be impacted by U.S. federal income tax upon repatriation. 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 the funds not designated as indefinitely reinvested. We have $0.1 billion in cash held by foreign subsidiaries used for local operations that is subject to country-specific limitations which may restrict or result in increased costs in the repatriation of these funds. In addition, other practical considerations may limit our use of consolidated cash. This includes cash of $0.7 billion held in a German financial services subsidiary subject to regulatory requirements, and $0.2 billion held by majority owned consolidated subsidiaries where third-parties or public shareholders hold minority interests. The following table summarizes our cash flow activity: Nine Months Ended (in millions) December 31, 2021 December 31, 2020 Change Net cash provided by operating activities $ 1,230 $ 404 $ 826 Net cash provided by investing activities 93 4,500 (4,407) Net cash used in financing activities (1,460) (4,671) 3,211 Effect of exchange rate changes on cash and cash equivalents 25 20 5 Cash classified within current assets held for sale 63 (13) 76 Net (decrease) increase in cash and cash equivalents (49) 240 $ (289) Cash and cash equivalents at beginning of year 2,968 3,679 Cash and cash equivalents at the end of period $ 2,919 $ 3,919 Operating cash flow Net cash provided by operating activities during the first nine months of fiscal 2022 was $1,230 million as compared to $404 million during the comparable period of the prior fiscal year. The increase of $826 million was primarily due to an increase in net income, net of adjustments of $1,503 million, partially offset by a $677 million unfavorable change in working capital due to higher working capital outflows during the first nine months of fiscal 2022. The following table contains certain key working capital metrics: Nine Months Ended December 31, 2021 December 31, 2020 Days of sales outstanding in accounts receivable 64 64 Days of purchases outstanding in accounts payable (40) (38) Cash conversion cycle 24 26 62 Investing cash flow Net cash provided by investing activities during the first nine months of fiscal 2022 was $93 million as compared to $4,500 million during the comparable period of the prior fiscal year. The decrease in net cash provided of $4,407 million was primarily due to a decrease in business dispositions of $4,423 million and a decrease in cash collections related to deferred purchase price receivables of $159 million. This was partially offset by an increase in proceeds from sale of assets of $68 million, a decrease in capital expenditures of $33 million, and proceeds from short-term investing of $24 million. Financing cash flow Net cash used in financing activities during the first nine months of fiscal 2022 was $1,460 million as compared to $4,671 million during the comparable period of the prior fiscal year. The $3,211 million decrease in cash used was primarily due to increased net borrowings on long-term debt of $1,998 million, and net draws on commercial paper of $492 million. In addition, net repayments totaling $1,500 million were made during fiscal 2021 on lines of credit that were not drawn against during fiscal 2022 and dividends of $53 million were paid in fiscal 2021, but not paid during fiscal 2022. This was partially offset by share repurchases of $352 million, payments for debt extinguishment costs of $344 million, and an increase in payments on capital leases and borrowings for asset financing of $161 million. Capital Resources See Note 21 – “Commitments and Contingencies” for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the “Liquidity” subheading. The following table summarizes our total debt: As of (in millions) December 31, 2021 March 31, 2021 Short-term debt and current maturities of long-term debt $ 706 $ 1,167 Long-term debt, net of current maturities 4,236 4,345 Total debt $ 4,942 $ 5,512 The $0.6 billion decrease in total debt during the first nine months of fiscal 2022 was primarily attributed to the retirement of all the remaining $319 million of the 4.45% senior notes due fiscal 2023 using the proceeds from the sale of our HPS Business, and the repurchase of the $33 million of the 4.125% senior notes due fiscal 2026 during the first quarter of fiscal 2022. Approximately $500 million of net finance lease liabilities and borrowings for assets acquired under long-term financing were also repaid during the first nine months of fiscal 2022 using the proceeds from the divestitures of other businesses and existing cash on hand. The decrease was partially offset by the issuance of Euro and U.S. Dollar Senior Notes of which proceeds were used to repay term loans and senior notes as discussed below. Euro Senior Notes Issuance During the second quarter of fiscal 2022, we issued (i) €750 million aggregate principal amount of our 0.450% senior notes due fiscal 2028 and (ii) €600 million aggregate principal amount of our 0.950% senior notes due fiscal 2032 (collectively, the “Euro Notes”). The proceeds from the Euro Notes were applied principally to the repayment in full of the €400 million aggregate principal amount of outstanding borrowings under our Euro-denominated term loan facility, the repayment of our U.S. dollar-denominated 4.25% senior notes due fiscal 2025 and the repayment of our Sterling-denominated 2.75% senior notes due fiscal 2025. 63 U.S. Dollar Senior Notes Issuance During the second quarter of fiscal 2022, we issued (i) $700 million aggregate principal amount of our 1.80% senior notes due fiscal 2027, and (ii) $650 million aggregate principal amount of our 2.375% senior notes due fiscal 2029 (collectively, the “USD Notes”). The proceeds from the USD Notes were used for the repayment of our remaining 4.125% senior notes due fiscal 2026, our 4.75% senior notes due fiscal 2028 and our 7.45% senior notes due fiscal 2030. We were in compliance with all financial covenants associated with our borrowings as of December 31, 2021 and March 31, 2021. 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 Stable S&P BBB- - Stable 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 using 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 borrowing under our revolving credit facility, 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 the contracts. The recovery of these investments is over the life of the contracts and is dependent upon our performance as well as customer acceptance. The following table summarizes our total liquidity: As of (in millions) December 31, 2021 Cash and cash equivalents $ 2,919 Available borrowings under our revolving credit facility 3,000 Total liquidity $ 5,919 During November 2021 we amended our revolving credit facility to among other things, decrease available borrowings from $4.0 billion to $3.0 billion. 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. During the nine months ended December 31, 2021, we repurchased 10,617,767 shares of our common stock at an aggregate cost of $363 million. See Note 17 – “Stockholders’ Equity” to the financial statements. Dividends To maintain our financial flexibility, we continue to suspend payment of quarterly dividends for fiscal 2022. 64 Off-Balance Sheet Arrangements In the normal course of business, we are party to arrangements that include guarantees, the receivables securitization facility and certain other financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheets. There have been no material changes to our off-balance-sheet arrangements reported under Part II, Item 7 of our Annual Report on Form 10-K other than as disclosed below and in Note 6 – “Receivables” and Note 21 – “Commitments and Contingencies” to the financial statements in this Quarterly Report on Form 10-Q. Contractual Obligations The transactions below represent material changes to our contractual obligations since March 31, 2021. Debt retirements and repayments: • Retirement of the remaining $319 million in two series of 4.45% senior notes due fiscal 2023 • Repayment of the remaining aggregate principal amount of the Euro-denominated €400 million in term loan facility due fiscal 2023-2024 • Repayment of the remaining aggregate principal amount of $500 million in 4.25% senior notes due fiscal 2025 • Repayment of the remaining aggregate principal amount of the Sterling-denominated £250 million in 2.75% senior notes due fiscal 2025 • Repayment of the remaining aggregate principal amount of $500 million in 4.125% senior notes due fiscal 2026 • Repayment of the remaining aggregate principal amount of $500 million in 4.75% senior notes due fiscal 2028 • Repayment of the remaining aggregate principal amount of $234 million in 7.45% senior notes due fiscal 2030 • Retirement and prepayment of certain capital leases and equipment related financing Debt issuances: • Issuance of (i) $700 million in aggregate principal amount of 1.80% senior notes due fiscal 2027 and (ii) $650 million in aggregate principal amount of 2.375% senior notes due fiscal 2029 • Issuance of (i) Euro-denominated €750 million in aggregate principal amount of 0.45% senior notes due fiscal 2028 and Euro-denominated €600 million in aggregate principal amount of 0.95% senior notes due fiscal 2032 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, 2021. For our minimum purchase commitments as of December 31, 2021, in connection with our long-term purchase agreements with certain software, hardware, telecommunication, and other service providers, see Note 21 – “Commitments and Contingencies.” 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 December 31, 2021, there were no changes to our critical accounting policies and estimates from those described in our fiscal 2021 Annual Report on Form 10-K except as mentioned in Note 1 – “Summary of Significant Accounting Policies.” 65