DXC Technology Co 10-Q

ITEM 1. FINANCIAL STATEMENTS Index to Condensed Consolidated Financial Statements Page Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2022 and June 30, 2021 (unaudited) 2 Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended June 30, 2022 and June 30, 2021 (unaudited) 3 Condensed Consolidated Balance Sheets as of June 30, 2022 and March 31, 2022 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2022 and June 30, 2021 (unaudited) 5 Condensed Consolidated Statements of Changes in Equity for the Three Months Ended June 30, 2022 and June 30, 2021 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) Note 1–Summary of Significant Accounting Policies 7 Note 2–Divestitures 8 Note 3–Earnings Per Share 9 Note 4–Receivables 10 Note 5–Leases 10 Note 6–Fair Value 13 Note 7–Derivative I nstruments 13 Note 8–Intangible Assets 16 Note 9–Goodwill 17 Note 10–Debt 18 Note 11–Revenue 19 Note 12–Restructuring Costs 20 Note 13–Pension and Other Benefit Plans 21 Note 14–Income Taxes 21 Note 15–Stockholders’ Equity 22 Note 16–Stock Incentive Plans 23 Note 17–Cash Flows 24 Note 18–Segment Information 24 Note 19–Commitments and Contingencies 26 1 DXC TECHNOLOGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended (in millions, except per-share amounts) June 30, 2022 June 30, 2021 Revenues $ 3,707 $ 4,141 Costs of services (excludes depreciation and amortization and restructuring costs) 2,930 3,255 Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 349 383 Depreciation and amortization 389 422 Restructuring costs 33 67 Interest expense 37 62 Interest income ( 20 ) ( 20 ) Debt extinguishment costs — 28 Gain on disposition of businesses ( 29 ) ( 377 ) Other income, net ( 104 ) ( 103 ) Total costs and expenses 3,585 3,717 Income before income taxes 122 424 Income tax expense 19 142 Net income 103 282 Less: net income attributable to non-controlling interest, net of tax 1 4 Net income attributable to DXC common stockholders $ 102 $ 278 Income per common share: Basic $ 0.44 $ 1.09 Diluted $ 0.43 $ 1.07 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 DXC TECHNOLOGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited) Three Months Ended (in millions) June 30, 2022 June 30, 2021 Net income $ 103 $ 282 Other comprehensive loss, net of taxes: Foreign currency translation adjustments, net of tax expense (benefit) of $ 5 and $( 2 ) ( 176 ) ( 112 ) Cash flow hedges adjustments, net of tax benefit of $ 1 and $ 0 — ( 1 ) Pension and other post-retirement benefit plans, net of tax: Amortization of prior service cost, net of tax benefit of $ 4 and $ 0 ( 2 ) ( 2 ) Pension and other post-retirement benefit plans, net of tax ( 2 ) ( 2 ) Other comprehensive loss, net of taxes ( 178 ) ( 115 ) Comprehensive (loss) income ( 75 ) 167 Less: comprehensive income attributable to non-controlling interest 1 13 Comprehensive (loss) income attributable to DXC common stockholders $ ( 76 ) $ 154 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 DXC TECHNOLOGY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) As of (in millions, except per-share and share amounts) June 30, 2022 March 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 2,209 $ 2,672 Receivables and contract assets, net of allowance of $ 46 and $ 55 3,693 3,854 Prepaid expenses 666 617 Other current assets 270 268 Assets held for sale 10 35 Total current assets 6,848 7,446 Intangible assets, net of accumulated amortization of $ 5,186 and $ 5,124 3,117 3,378 Operating right-of-use assets, net 1,025 1,133 Goodwill 582 617 Deferred income taxes, net 210 221 Property and equipment, net of accumulated depreciation of $ 3,917 and $ 3,998 2,212 2,412 Other assets 4,602 4,850 Assets held for sale - non-current 51 82 Total Assets $ 18,647 $ 20,139 LIABILITIES and EQUITY Current liabilities: Short-term debt and current maturities of long-term debt 904 900 Accounts payable 795 840 Accrued payroll and related costs 610 570 Current operating lease liabilities 346 388 Accrued expenses and other current liabilities 2,479 2,882 Deferred revenue and advance contract payments 938 1,053 Income taxes payable 181 197 Liabilities related to assets held for sale 4 23 Total current liabilities 6,257 6,853 Long-term debt, net of current maturities 3,874 4,065 Non-current deferred revenue 806 862 Non-current operating lease liabilities 742 815 Non-current income tax liabilities and deferred tax liabilities 919 994 Other long-term liabilities 1,000 1,136 Liabilities related to assets held for sale - non-current — 39 Total Liabilities 13,598 14,764 Commitments and contingencies DXC stockholders’ equity: Preferred stock, par value $ 0.01 per share; authorized 1,000,000 shares; none issued as of June 30, 2022 and March 31, 2022 — — Common stock, par value $ 0.01 per share; authorized 750,000,000 shares; issued 232,994,878 as of June 30, 2022 and 240,508,348 as of March 31, 2022 2 3 Additional paid-in capital 9,708 10,057 Accumulated deficit ( 4,239 ) ( 4,450 ) Accumulated other comprehensive loss ( 563 ) ( 385 ) Treasury stock, at cost, 3,160,188 and 2,878,079 shares as of June 30, 2022 and March 31, 2022 ( 183 ) ( 173 ) Total DXC stockholders’ equity 4,725 5,052 Non-controlling interest in subsidiaries 324 323 Total Equity 5,049 5,375 Total Liabilities and Equity $ 18,647 $ 20,139 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 DXC TECHNOLOGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended (in millions) June 30, 2022 June 30, 2021 Cash flows from operating activities: Net income $ 103 $ 282 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 398 427 Operating right-of-use expense 106 130 Share-based compensation 28 25 Deferred taxes ( 38 ) ( 25 ) Gain on dispositions ( 62 ) ( 414 ) Provision for losses on accounts receivable 2 ( 3 ) Unrealized foreign currency exchange loss (gain) 46 ( 8 ) Debt extinguishment costs — 28 Other non-cash charges, net 3 3 Changes in assets and liabilities, net of effects of acquisitions and dispositions: (Increase) decrease in assets ( 69 ) 26 Decrease in operating lease liability ( 106 ) ( 130 ) Decrease in other liabilities ( 248 ) ( 370 ) Net cash provided by (used in) operating activities 163 ( 29 ) Cash flows from investing activities: Purchases of property and equipment ( 68 ) ( 98 ) Payments for transition and transformation contract costs ( 57 ) ( 55 ) Software purchased and developed ( 50 ) ( 122 ) Business dispositions, net of cash sold ( 36 ) 513 Proceeds from sale of assets 14 67 Other investing activities, net 5 6 Net cash (used in) provided by investing activities ( 192 ) 311 Cash flows from financing activities: Borrowings of commercial paper 292 216 Repayments of commercial paper ( 239 ) ( 194 ) Borrowings on long-term debt — 19 Principal payments on long-term debt — ( 352 ) Payments on finance leases and borrowings for asset financing ( 159 ) ( 494 ) Proceeds from stock options and other common stock transactions 1 9 Taxes paid related to net share settlements of share-based compensation awards ( 12 ) ( 11 ) Payments for debt extinguishment costs — ( 28 ) Repurchase of common stock and advance payment for accelerated share repurchase ( 272 ) ( 48 ) Other financing activities, net ( 5 ) 17 Net cash used in financing activities ( 394 ) ( 866 ) Effect of exchange rate changes on cash and cash equivalents ( 50 ) 13 Net decrease in cash and cash equivalents including cash classified within current assets held for sale ( 473 ) ( 571 ) Cash classified within current assets held for sale 10 63 Net decrease in cash and cash equivalents ( 463 ) ( 508 ) Cash and cash equivalents at beginning of year 2,672 2,968 Cash and cash equivalents at end of period $ 2,209 $ 2,460 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 DXC TECHNOLOGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited) Three Months Ended June 30, 2022 (in millions, except shares in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock (1) Total DXC Equity Non- Controlling Interest Total Equity Shares Amount Balance at March 31, 2022 240,508 $ 3 $ 10,057 $ ( 4,450 ) $ ( 385 ) $ ( 173 ) $ 5,052 $ 323 $ 5,375 Net income 102 102 1 103 Other comprehensive loss ( 178 ) ( 178 ) ( 178 ) Share-based compensation expense 24 24 24 Acquisition of treasury stock ( 10 ) ( 10 ) ( 10 ) Share repurchase program ( 8,851 ) ( 1 ) ( 374 ) 109 ( 266 ) ( 266 ) Stock option exercises and other common stock transactions 1,338 1 1 1 Balance at June 30, 2022 232,995 $ 2 $ 9,708 $ ( 4,239 ) $ ( 563 ) $ ( 183 ) $ 4,725 $ 324 $ 5,049 Three Months Ended June 30, 2021 (in millions, except shares in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total DXC Equity Non- Controlling Interest Total Equity Shares Amount Balance at March 31, 2021 257,053 $ 3 $ 10,761 $ ( 5,331 ) $ ( 302 ) $ ( 158 ) $ 4,973 $ 335 $ 5,308 Net income 278 278 4 282 Other comprehensive loss ( 124 ) ( 124 ) 9 ( 115 ) Share-based compensation expense 18 18 18 Acquisition of treasury stock ( 10 ) ( 10 ) ( 10 ) Share repurchase program ( 1,750 ) ( 74 ) 7 ( 67 ) ( 67 ) Stock option exercises and other common stock transactions 1,378 8 8 8 Non-controlling interest distributions and other 1 1 ( 39 ) ( 38 ) Balance at June 30, 2021 256,681 $ 3 $ 10,713 $ ( 5,045 ) $ ( 426 ) $ ( 168 ) $ 5,077 $ 309 $ 5,386 (1) 3,160,188 treasury shares as of June 30, 2022. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 – Summary of Significant Accounting Policies Business DXC Technology Company (“DXC,” the “Company,” “we,” “us,” or “our”) helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, the world’s largest companies and public sector organizations trust DXC to deploy services to drive new levels of performance, competitiveness, and customer experience across their IT estates. Basis of Presentation In order to make this report easier to read, DXC refers throughout to (i) the interim unaudited Condensed Consolidated Financial Statements as the “financial statements,” (ii) the Condensed Consolidated Statements of Operations as the “statements of operations,” (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income as the “statements of comprehensive income,” (iv) the Condensed Consolidated Balance Sheets as the “balance sheets,” and (v) the Condensed Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references are made throughout to the numbered Notes to the Condensed Consolidated Financial Statements (“Notes”) in this Quarterly Report on Form 10-Q. The accompanying financial statements include the accounts of DXC, its consolidated subsidiaries, and those business entities in which DXC maintains a controlling interest. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Other investments are accounted for by the cost method. Non-controlling interests are presented as a separate component within equity in the balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the statements of operations and comprehensive income attributable to non-controlling interests are presented separately in the statements of comprehensive income. All intercompany transactions and balances have been eliminated. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation. The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports and accounting principles generally accepted in the United States (“GAAP”). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (“fiscal 2022”). 7 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Use of Estimates The preparation of the financial statements, in accordance with GAAP, requires the Company’s management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. The Company bases its estimates on assumptions regarding historical experience, currently available information, and anticipated developments that it believes are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. The severity, magnitude and duration, as well as the economic consequences of the ongoing coronavirus disease 2019 (“COVID-19”) crisis, are uncertain, rapidly changing and difficult to predict. Therefore, accounting estimates and assumptions may change over time in response to the COVID-19 crisis and may change materially in future periods. Estimates are used for, but are not limited to, contracts accounted for using the percentage-of-completion method, cash flows used in the evaluation of impairment of goodwill and other long-lived assets, reserves for uncertain tax positions, valuation allowances on deferred tax assets, loss accruals for litigation, and obligations related to our pension plans. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary, including those of a normal recurring nature, to fairly present the financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. Recent Accounting Pronouncements Recently issued ASUs effective after June 30, 2022 are not expected to have a material effect on DXC’s condensed consolidated financial statements. Note 2 – Divestitures Fiscal 2023 Divestitures During the first quarter of fiscal 2023, the Company sold insignificant businesses that resulted in a gain of $ 38 million. During the first quarter of fiscal 2023, the Company also classified certain insignificant businesses as held for sale and recognized a loss of $ 9 million. Planned FDB Sale During the third quarter of fiscal 2022, a subsidiary of DXC entered into a purchase agreement to sell (the "FDB Sale") its German financial services subsidiary ("FDB" or the "FDB Business") to the FNZ Group ("FNZ") for € 300 million (approximately $ 314 million as of June 30, 2022), subject to certain adjustments. The closing of the transaction is subject to certain conditions, including receipt of certain regulatory consents. Until these regulatory constraints are satisfied, FDB continues to be reported within ongoing operations. At June 30, 2022, FDB held approximately $ 566 million in cash which primarily related to customer deposit liabilities. 8 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Fiscal 2022 Divestitures HPS Sale On April 1, 2021, DXC completed the sale of its HPS Business to Dedalus for € 468 million (approximately $ 551 million), which included € 10 million (approximately $ 12 million) related to future services to be provided by the Company. The HPS Sale resulted in a pre-tax gain on sale of $ 341 million, net of closing costs, for the three months ended June 30, 2021. The pre-tax gain on sale was further adjusted during subsequent quarters of fiscal 2022 resulting in a final pre-tax gain on sale of $ 331 million for fiscal 2022. Other Divestitures During the first quarter of fiscal 2022, the Company also sold some insignificant businesses that resulted in a gain of $ 49 million. This was partially offset by $ 13 million in sales price adjustments related to prior year dispositions, which resulted from changes in estimated net working capital. Note 3 – Earnings per Share Basic earnings per share (“EPS”) is computed using the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the incremental shares issuable upon the assumed exercise of stock options and equity awards. The following table reflects the calculation of basic and diluted EPS: Three Months Ended (in millions, except per-share amounts) June 30, 2022 June 30, 2021 Net income attributable to DXC common shareholders: $ 102 $ 278 Common share information: Weighted average common shares outstanding for basic EPS 232.48 254.67 Dilutive effect of stock options and equity awards 4.90 5.65 Weighted average common shares outstanding for diluted EPS 237.38 260.32 Earnings per share: Basic $ 0.44 $ 1.09 Diluted $ 0.43 $ 1.07 Certain share-based equity awards were excluded from the computation of dilutive EPS because inclusion of these awards would have had an anti-dilutive effect. The number of awards excluded were as follows: Three Months Ended June 30, 2022 June 30, 2021 Stock Options 480,727 529,216 Restricted Stock Units 1,542,055 759,922 Performance Stock Units 234,731 393,802 9 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 4 – Receivables Allowance for Doubtful Accounts The following table presents the change in balance for the allowance for doubtful accounts: As of (in millions) June 30, 2022 March 31, 2022 Beginning balance $ 55 $ 91 Provisions for losses on accounts receivable 2 5 Other adjustments to allowance and write offs ( 11 ) ( 41 ) Ending balance $ 46 $ 55 Receivables Facility The Company has an accounts receivable sales facility (as amended, restated, supplemented or otherwise modified as of June 30, 2022, the “Receivables Facility”) with certain unaffiliated financial institutions for the sale of commercial accounts receivable in the United States. As of June 30, 2022, the total availability under the Receivables Facility was $ 371 million, and the amount sold to the Purchasers was $ 400 million, which was derecognized from the Company’s balance sheet. As of June 30, 2022, the Company recorded a $ 29 million liability within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility was more than the total availability. The Receivables Facility was amended on July 29, 2022 extending the termination date to July 28, 2023. The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, no gain or loss on sale of receivables was recorded. Note 5 – Leases The Company has operating and finance leases for data centers, corporate offices, and certain equipment. Its leases have remaining lease terms of one to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within one to three years . Operating Leases The components of operating lease expense were as follows: (in millions) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Operating lease cost $ 106 $ 130 Short-term lease cost 8 11 Variable lease cost 22 18 Sublease income ( 4 ) ( 9 ) Total operating costs $ 132 $ 150 10 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Cash payments made for variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and as such, are excluded from the supplemental cash flow information stated below. (in millions) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Cash paid for amounts included in the measurement of operating lease liabilities – operating cash flows $ 106 $ 130 ROU assets obtained in exchange for operating lease liabilities (1) $ 55 $ 52 (1) Net of $ 338 million and $ 242 million in lease modifications and terminations for the three months ended June 30, 2022 and June 30, 2021, respectively. See Note 17 – “Cash Flows” for further information on non-cash activities affecting cash flows. The following table presents operating lease balances: As of (in millions) Balance Sheet Line Item June 30, 2022 March 31, 2022 ROU operating lease assets Operating right-of-use assets, net $ 1,025 $ 1,133 Operating lease liabilities Current operating lease liabilities $ 346 $ 388 Operating lease liabilities Non-current operating lease liabilities 742 815 Total operating lease liabilities $ 1,088 $ 1,203 The weighted-average operating lease term was 4.2 years and 4.4 years as of June 30, 2022 and March 31, 2022, respectively. The weighted-average operating lease discount rate was 3.4 % and 3.3 % as of June 30, 2022 and March 31, 2022, respectively. The following maturity analysis presents expected undiscounted cash payments for operating leases as of June 30, 2022: Fiscal Year (in millions) Remainder of 2023 2024 2025 2026 2027 Thereafter Total Operating lease payments $ 286 $ 304 $ 232 $ 141 $ 68 $ 150 $ 1,181 Less: imputed interest ( 93 ) Total operating lease liabilities $ 1,088 11 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Finance Leases The components of finance lease expense were as follows: (in millions) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Amortization of right-of-use assets $ 61 $ 87 Interest on lease liabilities 5 9 Total finance lease cost $ 66 $ 96 The following table provides supplemental cash flow information related to the Company’s finance leases: (in millions) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Interest paid for finance lease liabilities – Operating cash flows $ 5 $ 9 Cash paid for amounts included in the measurement of finance lease obligations – financing cash flows 96 170 Total cash paid in the measurement of finance lease obligations $ 101 $ 179 Capital expenditures through finance lease obligations (1) $ 26 $ 71 (1) See Note 17 – ”Cash Flows” for further information on non-cash activities affecting cash flows. The following table presents finance lease balances: As of (in millions) Balance Sheet Line Item June 30, 2022 March 31, 2022 ROU finance lease assets Property and Equipment, net $ 534 $ 602 Finance lease Short-term debt and current maturities of long-term debt $ 267 $ 289 Finance lease Long-term debt, net of current maturities 321 354 Total finance lease liabilities (1) $ 588 $ 643 (1) See Note 10 – “Debt” for further information on finance lease liabilities. The weighted-average finance lease term was 2.8 years as of June 30, 2022 and March 31, 2022, respectively. The weighted-average finance lease discount rate was 2.9 % as of June 30, 2022 and March 31, 2022, respectively. The following maturity analysis presents expected undiscounted cash payments for finance leases as of June 30, 2022: Fiscal Year (in millions) Remainder of 2023 2024 2025 2026 2027 Thereafter Total Finance lease payments $ 217 $ 196 $ 116 $ 58 $ 26 $ 1 $ 614 Less: imputed interest ( 26 ) Total finance lease liabilities $ 588 12 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 6 – Fair Value Fair Value Measurements on a Recurring Basis The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding pension assets and derivative assets and liabilities. See Note 7 – “Derivative Instruments” for information about derivative assets and liabilities. Note 10 – “Debt” includes information about the estimated fair value of the Company’s long-term debt. There were no transfers between any of the levels during the periods presented. Fair Value Hierarchy (in millions) June 30, 2022 Assets: Fair Value Level 1 Level 2 Level 3 Money market funds and money market deposit accounts $ 10 $ 10 $ — $ — Time deposits (1) 46 46 — — Other securities (2) 46 — 44 2 Total assets $ 102 $ 56 $ 44 $ 2 Liabilities: Contingent consideration $ 2 $ — $ — $ 2 Total liabilities $ 2 $ — $ — $ 2 March 31, 2022 Assets: Fair Value Level 1 Level 2 Level 3 Money market funds and money market deposit accounts $ 5 $ 5 $ — $ — Time deposits (1) 51 51 — — Other securities (2) 51 — 49 2 Total assets $ 107 $ 56 $ 49 $ 2 Liabilities: Contingent consideration $ 8 $ — $ — $ 8 Total liabilities $ 8 $ — $ — $ 8 (1) Cost basis approximated fair value due to the short period of time to maturity. (2) Other securities include available-for-sale equity security investments with Level 2 inputs that have a cost basis of $ 50 million and $ 53 million, and accumulated (losses) of $( 6 ) million and $( 4 ) million, as of June 30, 2022 and March 31, 2022, respectively. (Loss) gain included in other income, net in the Company’s statements of operations was $( 2 ) million and $ 1 million for the three months ended June 30, 2022 and June 30, 2021, respectively. Note 7 – Derivative Instruments In the normal course of business, the Company is exposed to interest rate and foreign exchange rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. The Company does not use derivative instruments for trading or any speculative purposes. 13 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Derivatives Designated for Hedge Accounting Cash flow hedges The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee-denominated intercompany obligations and forecasted transactions. The notional amounts of foreign currency forward contracts designated as cash flow hedges as of June 30, 2022 and March 31, 2022 were $ 787 million and $ 727 million, respectively. As of June 30, 2022, the related forecasted transactions extend through June 2024. For the three months ended June 30, 2022 and June 30, 2021, respectively, the Company performed an assessment at the inception of the cash flow hedge transactions and determined that all critical terms of the hedging instruments and hedged items matched. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three months ended June 30, 2022 and June 30, 2021, respectively, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of June 30, 2022, $ 14 million of the existing amount of gain related to the cash flow hedge reported in accumulated other comprehensive loss is expected to be reclassified into earnings within the next 12 months. Amounts recognized in other comprehensive loss and income before income taxes During the three months ended June 30, 2022, the pre-tax gain on derivatives designated for hedge accounting recognized in other comprehensive loss was $ 2 million and income before income taxes was $ 4 million. During the three months ended June 30, 2021, the pre-tax gain (loss) on derivatives designated for hedge accounting was not material. Derivatives Not Designated for Hedge Accounting The derivative instruments not designated as hedges for purposes of hedge accounting include certain short-term foreign currency forward contracts. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. Foreign currency forward contracts The Company manages the exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and forecasted transactions. The net notional amounts of the foreign currency forward contracts outstanding as of June 30, 2022 and March 31, 2022 were $ 1.7 billion and $ 2.1 billion, respectively. The following table presents the pretax amounts impacting income related to designated and non-designated foreign currency forward contracts: For the Three Months Ended (in millions) Statement of Operations Line Item June 30, 2022 June 30, 2021 Foreign currency forward contracts Other income (expense), net $ 38 $ ( 35 ) 14 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Fair Value of Derivative Instruments All derivative instruments are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables present the fair values of derivative instruments included in the balance sheets: Derivative Assets As of (in millions) Balance Sheet Line Item June 30, 2022 March 31, 2022 Derivatives designated for hedge accounting: Foreign currency forward contracts Other current assets $ 20 $ 18 Derivatives not designated for hedge accounting: Foreign currency forward contracts Other current assets $ 25 $ 9 Derivative Liabilities As of (in millions) Balance Sheet Line Item June 30, 2022 March 31, 2022 Derivatives designated for hedge accounting: Foreign currency forward contracts Accrued expenses and other current liabilities $ 5 $ — Derivatives not designated for hedge accounting: Foreign currency forward contracts Accrued expenses and other current liabilities $ 16 $ 15 The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates and is based on the period-end foreign currency exchange rates and forward points which are classified as Level 2 inputs. Other Risks for Derivative Instruments The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty’s obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. With respect to its foreign currency derivatives, as of June 30, 2022, there were eleven counterparties with concentration of credit risk, and based on gross fair value, the maximum amount of loss that the Company could incur is $ 27 million. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company’s policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements. The potential effect of such netting arrangements on the Company’s balance sheets is not material for the periods presented. 15 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Non-Derivative Financial Instruments Designated for Hedge Accounting The Company applies hedge accounting for foreign currency-denominated debt used to manage foreign currency exposures on its net investments in certain non-U.S. operations. To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Net Investment Hedges DXC seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations with foreign currency-denominated debt. For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation. Gains or losses on individual net investments in non-U.S. operations are reclassified to earnings from accumulated other comprehensive loss when such net investments are sold or substantially liquidated. As of June 30, 2022, DXC had $ 0.3 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries. For the three months ended June 30, 2022, the pre-tax impact of gain on foreign currency-denominated debt designated for hedge accounting recognized in other comprehensive loss was $ 17 million. As of March 31, 2022, DXC had $ 0.3 billion of foreign currency-denominated debt designated as hedges of net investments in non-U.S. subsidiaries. Note 8 – Intangible Assets Intangible assets consisted of the following: As of June 30, 2022 (in millions) Gross Carrying Value Accumulated Amortization Net Carrying Value Software $ 4,025 $ 3,071 $ 954 Customer related intangible assets 3,985 2,016 1,969 Other intangible assets 293 99 194 Total intangible assets $ 8,303 $ 5,186 $ 3,117 As of March 31, 2022 (in millions) Gross Carrying Value Accumulated Amortization Net Carrying Value Software $ 4,063 $ 3,039 $ 1,024 Customer related intangible assets 4,148 1,995 2,153 Other intangible assets 291 90 201 Total intangible assets $ 8,502 $ 5,124 $ 3,378 16 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The components of amortization expense were as follows: Three Months Ended (in millions) June 30, 2022 June 30, 2021 Intangible assets amortization $ 199 $ 215 Transition and transformation contract cost amortization (1) 52 49 Total amortization expense $ 251 $ 264 (1) Transaction and transformation contract costs are included within other assets on the balance sheet. Estimated future amortization related to intangible assets as of June 30, 2022 is as follows: Fiscal Year (in millions) Remainder of 2023 $ 600 2024 $ 666 2025 $ 564 2026 $ 520 2027 $ 383 Thereafter $ 384 Note 9 – Goodwill The following table summarizes the changes in the carrying amount of goodwill, by segment, as of June 30, 2022. (in millions) GBS GIS Total Balance as of March 31, 2022, net $ 617 $ — $ 617 Divestitures ( 9 ) — ( 9 ) Assets held for sale ( 3 ) — ( 3 ) Foreign currency translation ( 23 ) — ( 23 ) Balance as of June 30, 2022, net $ 582 $ — $ 582 Goodwill, gross 5,072 5,066 10,138 Accumulated impairment losses ( 4,490 ) ( 5,066 ) ( 9,556 ) Balance as of June 30, 2022, net $ 582 $ — $ 582 The adjustments for divestitures and assets held for sale are described in Note 2 - "Divestitures." The foreign currency translation amount reflects the impact of currency movements on non-U.S. dollar-denominated goodwill balances. 17 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 10 – Debt The following is a summary of the Company’s debt: (in millions) Interest Rates Fiscal Year Maturities June 30, 2022 (1) March 31, 2022 (1) Short-term debt and current maturities of long-term debt Commercial paper (2) ( 0.40 )% - ( 0.08 )% 2023 $ 392 $ 362 Current maturities of long-term debt Various 2023 - 2024 245 249 Current maturities of finance lease liabilities 0.23 % - 13.84 % 2023 - 2024 267 289 Short-term debt and current maturities of long-term debt $ 904 $ 900 Long-term debt, net of current maturities € 650 million Senior notes 1.75 % 2026 677 720 $ 700 million Senior notes 1.80 % 2027 695 694 € 750 million Senior notes 0.45 % 2028 779 828 $ 650 million Senior notes 2.375 % 2029 645 644 € 600 million Senior notes 0.95 % 2032 621 661 Finance lease liabilities 0.23 % - 13.84 % 2023 - 2027 588 643 Borrowings for assets acquired under long-term financing 0.00 % - 6.78 % 2023 - 2027 313 344 Mandatorily redeemable preferred stock outstanding 6.00 % 2023 63 63 Other borrowings Various 2023 - 2024 5 6 Long-term debt 4,386 4,603 Less: current maturities 512 538 Long-term debt, net of current maturities $ 3,874 $ 4,065 (1) The carrying amounts of the senior notes as of June 30, 2022 and March 31, 2022, include the remaining principal outstanding of $ 3,442 million and $ 3,575 million, respectively, net of total unamortized debt (discounts) and premiums, and deferred debt issuance costs of $( 25 ) million and $( 28 ) million respectively. (2) At DXC’s option, DXC can borrow up to a maximum of € 1 billion or its equivalent in €, £, and $. The estimated fair value of the Company’s long-term debt, excluding finance lease liabilities, was $ 3.3 billion and $ 3.7 billion as of June 30, 2022 and March 31, 2022, respectively, compared with carrying value of $ 3.8 billion and $ 4.0 billion as of June 30, 2022 and March 31, 2022, respectively . 18 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 11 – Revenue Revenue Recognition The following table presents DXC’s revenues disaggregated by geography, based on the location of incorporation of the DXC entity providing the related goods or services: Three Months Ended (in millions) June 30, 2022 June 30, 2021 United States $ 1,131 $ 1,209 United Kingdom 473 602 Other Europe 1,138 1,305 Australia 391 401 Other International 574 624 Total Revenues $ 3,707 $ 4,141 The revenue by geography pertains to both of the Company’s reportable segments. Refer to Note 18 – “Segment Information” for the Company’s segment disclosures. Remaining Performance Obligations As of June 30, 2022, approximately $ 20 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 32 % of these remaining performance obligations in fiscal 2023, with the remainder of the balance recognized thereafter. Contract Balances The following table provides information about the balances of the Company’s trade receivables and contract assets and contract liabilities: As of (in millions) Balance Sheet Line Item June 30, 2022 March 31, 2022 Trade receivables, net Receivables and contract assets, net of allowance for doubtful accounts $ 2,484 $ 2,694 Contract assets Receivables and contract assets, net of allowance for doubtful accounts $ 368 $ 371 Contract liabilities Deferred revenue and advance contract payments and Non-current deferred revenue $ 1,744 $ 1,915 Change in contract liabilities were as follows: Three Months Ended (in millions) June 30, 2022 June 30, 2021 Balance, beginning of period $ 1,915 $ 1,701 Deferred revenue 612 609 Recognition of deferred revenue ( 684 ) ( 668 ) Currency translation adjustment ( 87 ) 6 Other ( 12 ) ( 18 ) Balance, end of period $ 1,744 $ 1,630 19 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 12 – Restructuring Costs The composition of restructuring liabilities by financial statement line item is as follows: As of (in millions) June 30, 2022 March 31, 2022 Accrued expenses and other current liabilities $ 84 $ 113 Other long-term liabilities 29 39 Total $ 113 $ 152 Summary of Restructuring Plans Fiscal 2023 Plan During fiscal 2023, management approved global cost savings initiatives designed to better align the Company’s workforce and facility structures (the “Fiscal 2023 Plan ” ) . Restructuring Liability Reconciliations by Plan Restructuring Liability as of March 31, 2022 Costs Expensed, Net of Reversals Costs Not Affecting Restructuring Liability (1) Cash Paid Other (2) Restructuring Liability as of June 30, 2022 Fiscal 2023 Plan Workforce Reductions $ — $ 15 $ ( 1 ) $ ( 4 ) $ ( 1 ) $ 9 Facilities Costs — 9 ( 9 ) — — — — 24 ( 10 ) ( 4 ) ( 1 ) 9 Fiscal 2022 Plan Workforce Reductions $ 84 $ 1 $ ( 2 ) $ ( 28 ) $ ( 4 ) $ 51 Facilities Costs 1 8 ( 5 ) ( 3 ) — 1 85 9 ( 7 ) ( 31 ) ( 4 ) 52 Fiscal 2021 Plan Workforce Reductions $ 33 $ ( 1 ) $ — $ ( 6 ) $ ( 2 ) $ 24 Facilities Costs 1 — — ( 1 ) — — 34 ( 1 ) — ( 7 ) ( 2 ) 24 Other Prior Year Plans Workforce Reductions $ 10 $ 1 $ — $ ( 5 ) $ ( 1 ) $ 5 Facilities Costs 2 — — — — 2 12 1 — ( 5 ) ( 1 ) 7 Acquired Liabilities Workforce Reductions $ 21 $ — $ — $ ( 1 ) $ 1 $ 21 Facilities Costs — — — — — — 21 — — ( 1 ) 1 21 Total $ 152 $ 33 $ ( 17 ) $ ( 48 ) $ ( 7 ) $ 113 (1) Pension benefit augmentations recorded as a pension liability, asset impairments and restructuring costs associated with right-of-use assets. (2) Foreign currency translation adjustments. Included in restructuring costs for the three months ended June 30, 2022 is $ 5 million related to amortization of the right-of-use asset and interest expense for leased facilities that we have vacated but are being actively marketed for sublease or we are in negotiations with the landlord to potentially terminate or modify those leases. 20 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 13 – Pension and Other Benefit Plans Defined Benefit Plans The components of net periodic pension income were: Three Months Ended (in millions) June 30, 2022 June 30, 2021 Service cost $ 19 $ 23 Interest cost 67 52 Expected return on assets ( 132 ) ( 147 ) Amortization of prior service costs ( 2 ) ( 2 ) Net periodic pension income $ ( 48 ) $ ( 74 ) The service cost component of net periodic pension income is presented in costs of services and selling, general and administrative and the other components of net periodic pension income are presented in other income, net. Note 14 – Income Taxes The Company’s effective tax rate (“ETR”) was 15.6 % and 33.5 % for the three months ended June 30, 2022 and June 30, 2021, respectively. For the three months ended June 30, 2022, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income and base erosion payments, and a decrease in uncertain tax positions due to statute of limitation expirations. For the three months ended June 30, 2021, the primary drivers of the ETR were the global mix of income, gain on sale of the HPS business, and tax rate changes in non-U.S. jurisdictions. The majority of our global unremitted foreign earnings have been taxed or would be exempt from U.S. tax upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The following earnings are considered indefinitely reinvested: approximately $ 467 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and our accumulated earnings in India as of March 31, 2021. A portion of these indefinitely reinvested earnings may be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position based on its future strategy and cash needs. In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for tax liabilities arising prior to the HPES Merger, and DXC is liable to HPE for income tax receivables it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a $ 27 million tax indemnification receivable related to uncertain tax positions, a $ 68 million tax indemnification receivable related to other tax payables, and a $ 112 million tax indemnification payable related to other tax receivables. In connection with the spin-off of the Company’s former U.S. public sector business (the “USPS Separation”), the Company entered into a tax matters agreement with Perspecta Inc. (including its successors and permitted assigns, “Perspecta”). The Company generally will be responsible for tax liabilities arising prior to the USPS Separation, and Perspecta is liable to the Company for income tax receivables related to pre-spin-off periods. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE pursuant to the tax matters agreement between the Company and HPE. The Company remains liable to HPE for tax receivables transferred to Perspecta related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a $ 59 million tax indemnification receivable from Perspecta related to other tax payables and a $ 15 million tax indemnification payable to Perspecta related to income tax and other tax receivables. In connection with the sale of the HPS business, the Company entered into a tax matters agreement with Dedalus. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the sale of the HPS business. 21 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The Internal Revenue Service (the “IRS”) has examined, or is examining, the Company’s federal income tax returns for fiscal 2008 through the tax year ended October 31, 2018. With respect to CSC’s fiscal 2008 through 2017 federal tax returns, the Company participated in settlement negotiations with the IRS Office of Appeals. The IRS examined several issues for these tax years that resulted in various audit adjustments. The Company and the IRS Office of Appeals have settled various audit adjustments, and we disagree with the IRS’ disallowance of certain losses and deductions resulting from restructuring costs and tax planning strategies in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and are challenging them in the IRS Office of Appeals or the U.S. Tax Court, these matters are not fully reserved and would result in a federal and state tax expense of approximately $ 462 million (including estimated interest and penalties) for the unreserved portion of these items and related cash cost if we do not prevail. We have received notices of deficiency with respect to fiscal 2009, 2010, 2011 and 2013 and have timely filed petitions with the U.S. Tax Court. We do not expect the U.S. Tax Court matters to be resolved in the next 12 months. The Company’s fiscal years 2009, 2010, 2011 and 2013 are in the U.S. Tax Court, and consequently these years will remain open until such proceedings have concluded. The statute of limitations on assessments related to a refund claim for fiscal year 2012 is open through February 28, 2025. The Company has agreed to extend the statute of limitations generally for fiscal years 2014 through fiscal 2017 to February 28, 2023, and for the tax years ended October 31, 2017 and October 31, 2018 to September 30, 2023. The statute of limitations is also open on assessments related to certain refund claims for fiscal years 2014 to 2017 through August 15, 2023. The Company expects to reach resolution with regard to disagreed items for fiscal years 2009 through 2013 no earlier than fiscal 2025, and to reach resolution for fiscal years 2014 through 2017 no earlier than fiscal 2024. The Company may settle certain other tax examinations for different amounts than the Company has accrued as uncertain tax positions. Consequently, the Company may need to accrue and ultimately pay additional amounts or pay lower amounts than previously estimated and accrued when positions are settled in the future. For the three months ended June 30, 2022, the Company’s liability for uncertain tax positions decreased by $ 44 million (excluding interest and penalties and related tax attributes) primarily due to income tax audit settlements and statute of limitation expirations. The Company believes the outcomes that are reasonably possible within the next 12 months to result in a reduction in its liability for uncertain tax positions, excluding interest, penalties, and tax carryforwards, would be approximately $ 5 million. Note 15 – Stockholders’ Equity Share Repurchases The details of shares repurchased during the three months ended June 30, 2022 and June 30, 2021 are shown below: Fiscal 2023 Fiscal 2022 Fiscal Period Number of Shares Repurchased Average Price Per Share Amount (in millions) Number of Shares Repurchased Average Price Per Share Amount (in millions) 1st Quarter Open market purchases 8,850,912 $ 30.09 $ 266 1,750,000 $ 38.52 $ 67 Total 8,850,912 $ 30.09 $ 266 1,750,000 $ 38.52 $ 67 22 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Accumulated Other Comprehensive Loss The following table shows the changes in accumulated other comprehensive loss, net of taxes: (in millions) Foreign Currency Translation Adjustments Cash Flow Hedges Pension and Other Post-retirement Benefit Plans Accumulated Other Comprehensive Loss Balance at March 31, 2022 $ ( 651 ) $ 10 $ 256 $ ( 385 ) Other comprehensive loss before reclassifications ( 176 ) 4 — ( 172 ) Amounts reclassified from accumulated other comprehensive loss — ( 4 ) ( 2 ) ( 6 ) Balance at June 30, 2022 $ ( 827 ) $ 10 $ 254 $ ( 563 ) (in millions) Foreign Currency Translation Adjustments Cash Flow Hedges Pension and Other Post-retirement Benefit Plans Accumulated Other Comprehensive Loss Balance at March 31, 2021 $ ( 554 ) $ ( 1 ) $ 253 $ ( 302 ) Other comprehensive loss before reclassifications ( 35 ) ( 1 ) — ( 36 ) Amounts reclassified from accumulated other comprehensive loss (1) ( 86 ) — ( 2 ) ( 88 ) Balance at June 30, 2021 $ ( 675 ) $ ( 2 ) $ 251 $ ( 426 ) (1) Includes net cumulative foreign currency translation losses of $ 86 million upon sale of foreign entities primarily related to the HPS business divestiture. See Note 2 – “Divestitures” for additional information. Note 16 – Stock Incentive Plans Restricted Stock Units and Performance-Based Restricted Stock Units Restricted stock units ("RSUs") represent the right to receive one share of DXC common stock upon a future settlement date, subject to vesting and other terms and conditions of the award, plus any dividend equivalents accrued during the award period. The Company also grants performance-based restricted stock units (“PSUs”), which generally vest over a three year period. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified market- and performance-based criteria over the three-year vesting period. The fair value of RSUs and performance-based PSUs is based on the Company’s common stock closing price on the grant date. For PSUs with a market-based condition, DXC uses a Monte Carlo simulation model to value the grants. Employee Equity Plan Director Equity Plan Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Outstanding as of March 31, 2022 7,477,126 $ 35.89 156,722 $ 36.18 Granted 3,206,094 $ 38.87 1,800 $ 29.63 Settled ( 1,704,601 ) $ 34.76 — $ — Canceled/Forfeited ( 482,991 ) $ 40.48 — $ — Outstanding as of June 30, 2022 8,495,628 $ 36.90 158,522 $ 36.11 23 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Share-Based Compensation Three Months Ended (in millions) June 30, 2022 June 30, 2021 Total share-based compensation cost $ 28 $ 25 Related income tax benefit $ 3 $ 3 Note 17 – Cash Flows Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows: Three Months Ended (in millions) June 30, 2022 June 30, 2021 Cash paid for: Interest $ 22 $ 65 Taxes on income, net of refunds (1) $ 53 $ 52 Non-cash activities: Operating: ROU assets obtained in exchange for lease, net (2) $ 55 $ 52 Prepaid assets acquired under long-term financing $ 34 $ 111 Investing: Capital expenditures in accounts payable and accrued expenses $ 8 $ 1 Capital expenditures through finance lease obligations $ 26 $ 71 Assets acquired under long-term financing $ 2 $ 35 Financing: Shares repurchased but not settled in cash $ — $ 19 (1) Income tax refunds were $ 13 million and $ 14 million for the three months ended June 30, 2022 and June 30, 2021, respectively. (2) Net of $ 338 million and $ 242 million in lease modifications and terminations for the three months ended .June 30, 2022 and June 30, 2021, respectively. 24 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 18 – Segment Information DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industries and geographic regions. As a result, and in accordance with accounting standards, operating segments are organized by the type of services provided. DXC's chief operating decision maker ("CODM"), the chief executive officer, obtains, reviews, and manages the Company’s financial performance based on these segments. The CODM uses these results, in part, to evaluate the performance of, and allocate resources to, each of the segments. Global Business Services (“GBS”) GBS provides innovative technology solutions that help our customers address key business challenges and accelerate transformations tailored to each customer’s industry and specific objectives. GBS offerings include: • Analytics and Engineering. Our portfolio of analytics services and extensive partner ecosystem help customers gain rapid insights, automate operations, and accelerate their transformation journeys. We provide software engineering, consulting, and data analytics solutions that enable businesses to run and manage their mission-critical functions, transform their operations, and develop new ways of doing business. • Applications . We help simplify, modernize, and accelerate mission-critical applications that support business agility and growth through our Applications services. We are the engineers that enable our customers to take advantage of the latest digital platforms with both customized and pre-packaged applications, ensure resiliency, launch new products and enter new markets with minimal disruption. We help customers define, execute and manage their enterprise applications strategy . • Insurance Software and Business Process Services. We partner with insurance clients, to modernize and run IT systems, provide proprietary modular insurance software and platforms, and operate the full spectrum of insurance business process services. We also help operate and continuously improve bank cards, payment and lending processes and operations, and customer experience operations. We administer 13 million insurance policies and contracts, and manage 250 million customer interactions each year across industries. Global Infrastructure Services (“GIS”) GIS provides a portfolio of technology offerings that deliver predictable outcomes and measurable results while reducing business risk and operational costs for customers. GIS offerings include: • Security. Our Security services help customers assess risk and proactively address all facets of the security environment, from threat intelligence to compliance. We leverage proven methodologies, intelligent automation and industry-leading partners to tailor security solutions to customers’ unique business needs. Our experts weave cyber resilience into IT security, operations and culture. Whether migrating to the cloud, protecting data with a Zero Trust strategy or managing a security operations center, our Security services enable our customers to focus on their business. • Cloud Infrastructure and IT Outsourcing (“ITO”) . We enable customers to do Cloud Right™, making the right investments at the right time and on the right platforms. We orchestrate hybrid cloud and multicloud environments, ensuring private and public clouds, servers and mainframes operate effectively together. We provide companies with tailored plans for cloud migration and optimization to enable successful transformation. We leverage our deep expertise in legacy IT and drive innovation with reliable, secure, mission-critical IT Outsourcing services – from compute and data center, to storage and backup, to network, to mainframe and to business continuity – providing a clear path to modernization. • Modern Workplace. Our Modern Workplace services put the employee experience first, helping them achieve new levels of productivity, engagement and collaboration while working seamlessly and securely on any device. Organizations are empowered to deliver a consumer-like experience, centralize IT management and support services, and improve the total cost of ownership. 25 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Segment Measures The following table summarizes operating results regularly provided to the CODM by reportable segment and a reconciliation to the financial statements: (in millions) GBS GIS Total Reportable Segments All Other Totals Three Months Ended June 30, 2022 Revenues $ 1,758 $ 1,949 $ 3,707 $ — $ 3,707 Segment profit $ 210 $ 127 $ 337 $ ( 78 ) $ 259 Depreciation and amortization (1) $ 41 $ 218 $ 259 $ 26 $ 285 Three Months Ended June 30, 2021 Revenues $ 1,887 $ 2,254 $ 4,141 $ — $ 4,141 Segment profit $ 272 $ 131 $ 403 $ ( 71 ) $ 332 Depreciation and amortization (1) $ 40 $ 246 $ 286 $ 27 $ 313 (1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $ 104 million and $ 109 million for the three months ended June 30, 2022 and June 30, 2021, respectively . Reconciliation of Reportable Segment Profit to Consolidated Total The Company's management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenues less cost of services, segment selling, general and administrative, depreciation and amortization, and other income (excluding the movement in foreign currency exchange rates on DXC's foreign currency denominated assets and liabilities and the related economic hedges). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, pension and OPEB actuarial and settlement gains and losses, restructuring costs, transaction, separation, and integration-related costs and amortization of acquired intangible assets. Three Months Ended (in millions) June 30, 2022 June 30, 2021 Profit Total profit for reportable segments $ 337 $ 403 All other loss ( 78 ) ( 71 ) Subtotal $ 259 $ 332 Interest income 20 20 Interest expense ( 37 ) ( 62 ) Restructuring costs ( 33 ) ( 67 ) Transaction, separation and integration-related costs ( 2 ) ( 9 ) Amortization of acquired intangible assets ( 104 ) ( 109 ) Merger related indemnification ( 10 ) — Gains on dispositions 29 347 Debt extinguishment costs — ( 28 ) Income before income taxes $ 122 $ 424 Management does not use total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment and therefore, total assets by segment are not disclosed. 26 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 19 – Commitments and Contingencies Commitments Minimum purchase commitments as of June 30, 2022 were as follows: Fiscal year Minimum Purchase Commitment (in millions) Remainder of 2023 $ 614 2024 399 2025 256 2026 246 2027 23 Total $ 1,538 Contingencies Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise: On August 18, 2016, this purported class and collective action was filed in the U.S. District Court for the Northern District of California, against HP and HPE alleging violations of the federal Age Discrimination in Employment Act (“ADEA”) and California state law, in connection with workforce reductions that occurred in or after August 2012 in California, and in or after as early as December 2014 in other U.S. locations. Former business units of HPE now owned by the Company, and former business units of the Company now owned by Peraton (formerly Perspecta), may be proportionately liable for any recovery by plaintiffs in this matter. In December 2020, Plaintiffs filed a motion for preliminary certification of the collective action, which Defendants opposed. In April 2021, the court granted Plaintiffs’ motion for preliminary certification and lifted the previously imposed stay of the action. In November 2021, notice was sent to putative members of the ADEA collectives regarding participation in the case. In February 2022, the notice period closed. The litigation is currently in discovery. Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company: On March 22, 2016, Oracle filed a complaint against HPE in the U.S. District Court for the Northern District of California, alleging copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. The litigation relates in part to former business units of HPE that are now owned by the Company. The Company may be required to indemnify HPE for a portion of any recovery by Oracle in the litigation related to these business units. Oracle’s claims arise primarily out of HPE’s prior relationship with a third-party maintenance provider named Terix Computer Company, Inc. (“Terix”). Oracle claims that Terix infringed its copyrights while acting as HPE’s subcontractor for certain customers of HPE’s multivendor support business. Oracle claims that HPE is liable for vicarious and contributory infringement arising from the alleged actions of Terix and for direct infringement arising from HPE’s own alleged conduct. On January 29, 2019, the court granted HPE’s motion for summary judgment and denied Oracle’s motion for summary judgment, resolving the matter in HPE’s favor. Oracle appealed the judgment to the U.S. Court of Appeals for the Ninth Circuit. In August 2020, the court granted Oracle’s appeal in part. The case was then remanded to the District Court for further proceedings. In January 2021, the District Court entered a scheduling order that provided for summary judgment briefing to be completed by May 2021 and a trial date in November 2021. In June 2021, the Court issued a decision denying HPE’s motion for summary judgment and granting Oracle’s motion for summary judgment on various HPE defenses. In November 2021, the court issued an order continuing the trial to May 2022. A jury trial was held in May - June 2022, after which a jury awarded Oracle $ 30 million in damages. A final judgment has yet to be entered, pending the resolution of certain post-trial motions the parties will be filing in July - November 2022. 27 DXC TECHNOLOGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) In re DXC Technology Company Securities Litigation: Previously disclosed securities litigation matters have been dismissed, with one case remaining, in the Superior Court of the State of California. On August 20, 2019, a purported class action lawsuit was filed in the Superior Court of the State of California, County of Santa Clara, against the Company, directors of the Company, and a former officer of the Company, among other defendants. The action asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s prospects and expected performance. The putative class of plaintiffs includes all persons who acquired shares of the Company’s common stock pursuant to the offering documents filed with the Securities and Exchange Commission in connection with the April 2017 transaction that formed DXC. The State of California action had been stayed pending the outcome of the substantially similar federal action filed in the United States District Court for the Northern District of California. The federal action was dismissed with prejudice in December 2021. Thereafter, the state court lifted the stay and entered an order permitting additional briefing by the parties. In March 2022, Plaintiffs filed an amended complaint. In April 2022, the Company moved to dismiss the amended complaint. A hearing on the Company’s motion to dismiss is scheduled for August 2022. The Company believes that the final remaining lawsuit described above is also without merit, and intends to vigorously defend it. Tax Examinations: The Company is under IRS examination in the U.S. on its federal income tax returns for certain fiscal years and is in disagreement with the IRS on certain of our tax positions. For more detail, see Note 14 – “Income Taxes” for further information. SEC Matter: In December 2019, the Company received a request for voluntary production of information in connection with an informal investigation by the U.S. Securities and Exchange Commission. The current focus of the investigation is the Company’s historical reporting related to its non-GAAP adjustment for “transaction, separation, and integration-related costs,” including whether the disclosure the Company previously used to describe the non-GAAP adjustment was sufficiently broad to cover certain expenses the Company included as transaction, separation, and integration-related costs. The non-GAAP costs at issue primarily consist of expenses associated with the business combination that formed DXC in 2017. The Company has cooperated fully with the SEC’s informal investigation, and the new management team appointed beginning in September of 2019 has proactively clarified and expanded the disclosure of the Company’s non-GAAP transaction, separation, and integration-related costs. In addition, the new management team significantly reduced the transaction, separation, and integration-related costs. The Company intends to continue its voluntary cooperation with the SEC while seeking to resolve the matter. In addition to the matters noted above, the Company is currently subject in the normal course of business to various claims and contingencies arising from, among other things, disputes with customers, vendors, employees, contract counterparties and other parties, as well as securities matters, environmental matters, matters concerning the licensing and use of intellectual property, and inquiries and investigations by regulatory authorities and government agencies. Some of these disputes involve or may involve litigation. The financial statements reflect the treatment of claims and contingencies based on management’s view of the expected outcome. DXC consults with outside legal counsel on issues related to litigation and regulatory compliance and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Although the outcome of these and other matters cannot be predicted with certainty, and the impact of the final resolution of these and other matters on the Company’s results of operations in a particular subsequent reporting period could be material and adverse, management does not believe based on information currently available to the Company, that the resolution of any of the matters currently pending against the Company will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due. Unless otherwise noted, the Company is unable to determine at this time a reasonable estimate of a possible loss or range of losses associated with the foregoing disclosed contingent matters. 28 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS All statements and assumptions contained in this Quarterly Report on Form 10-Q and in the documents incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements.” Forward-looking statements often include words such as “anticipates,” “believes,” “estimates,” “expects,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target,” and “will” and words and terms of similar substance in discussions of future operating or financial performance. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. Forward-looking statements include, among other things, statements with respect to our future financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, divestitures, competitive position, growth opportunities, share repurchases, dividend payments, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. Furthermore, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by the coronavirus disease 2019 (“COVID-19”) crisis and the impact of varying private and governmental responses that affect our customers, employees, vendors and the economies and communities where they operate. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to: • the uncertainty of the magnitude, duration, geographic reach of the COVID-19 crisis, its impact on the global economy and the impact of current and potential travel restrictions, stay-at-home orders, vaccine mandates and economic restrictions implemented to address the crisis; • our inability to succeed in our strategic objectives; • the risk of liability or damage to our reputation resulting from security incidents, including breaches, and cyber-attacks to our systems and networks and those of our business partners, insider threats, disclosure of sensitive data or failure to comply with data protection laws and regulations in a rapidly evolving regulatory environment; in each case, whether deliberate or accidental; • our inability to develop and expand our service offerings to address emerging business demands and technological trends, including our inability to sell differentiated services amongst our offerings; • our inability to compete in certain markets and expand our capacity in certain offshore locations and risks associated with such offshore locations such as Russia’s recent invasion of Ukraine; • failure to maintain our credit rating and ability to manage working capital, refinance and raise additional capital for future needs; • our indebtedness; • the competitive pressures faced by our business; • our inability to accurately estimate the cost of services, and the completion timeline of contracts; • execution risks by us and our suppliers, customers, and partners; • the risks associated with natural disasters; • our inability to retain and hire key personnel and maintain relationships with key partners; • the risks associated with prolonged periods of inflation; • the risks associated with our international operations, such as risks related to currency exchange rates and the withdrawal of U.K. from the European Union on January 31, 2020; • our inability to comply with governmental regulations or the adoption of new laws or regulations, including social and environmental responsibility regulations, policies and provisions; • our inability to achieve the expected benefits of our restructuring plans; • inadvertent infringement of third-party intellectual property rights or our inability to protect our own intellectual property assets; • our inability to procure third-party licenses required for the operation of our products and service offerings; • risks associated with disruption of our supply chain; • our inability to maintain effective internal control over financial reporting; • potential losses due to asset impairment charges; • our inability to pay dividends or repurchase shares of our common stock; • pending investigations, claims and disputes and any adverse impact on our profitability and liquidity; 29 • disruptions in the credit markets, including disruptions that reduce our customers’ access to credit and increase the costs to our customers of obtaining credit; • our failure to bid on projects effectively; • financial difficulties of our customers and our inability to collect receivables; • our inability to maintain and grow our customer relationships over time and to comply with customer contracts or government contracting regulations or requirements; • our inability to succeed in our strategic transactions; • changes in tax laws and any adverse impact on our effective tax rate; • risks following the merger of Computer Sciences Corporation (“CSC”) and Enterprise Services business of Hewlett Packard Enterprise Company’s (“HPES”) businesses, including anticipated tax treatment, unforeseen liabilities, and future capital expenditures; • risks following the spin-off of our former U.S. Public Sector business (the “USPS”) and its related mergers with Vencore Holding Corp. and KeyPoint Government Solutions in June 2018 to form Perspecta Inc, (including its successors and permitted assigns, “Perspecta”), which was acquired by Peraton in May 2021; and • the other factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 and subsequent SEC filings, including Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. 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 report or to reflect the occurrence of unanticipated events, except as required by law. 30