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 2023 and our financial condition as of December 31, 2022. 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 • Critical Accounting Estimates The following discussion includes a comparison of our results of operations and liquidity and capital resources for the third quarter and first nine months of fiscal 2023 and fiscal 2022. References are made throughout to the numbered Notes to the Condensed Consolidated Financial Statements (“Notes”) in this Quarterly Report on Form 10-Q. Background DXC 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 to drive new levels of performance, competitiveness, and customer experience across their IT estates. 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 clients. Results of Operations The following table sets forth certain financial data for the third quarter and first nine months of fiscal 2023 and fiscal 2022: Three Months Ended Nine Months Ended (In millions, except per-share amounts) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Revenues $ 3,566 $ 4,089 $ 10,839 $ 12,257 Income before income taxes 102 166 278 342 Income tax expense 41 64 86 145 Net income $ 61 $ 102 $ 192 $ 197 Diluted earnings per share $ 0.25 $ 0.38 $ 0.80 $ 0.73 37 Revenues Our revenues by geography and operating segment are provided below: Three Months Ended Three Months Ended (in millions) December 31, 2022 December 31, 2021 Percentage Change Constant Currency December 31, 2022 (1) Percentage Change in Constant Currency (1) Geographic Market United States $ 1,054 $ 1,168 (9.8) % $ 1,054 (9.8) % United Kingdom 469 578 (18.9) % 539 (6.7) % Other Europe 1,119 1,319 (15.2) % 1,227 (7.0) % Australia 343 376 (8.8) % 380 1.1 % Other International 581 648 (10.3) % 635 (2.0) % Total Revenues $ 3,566 $ 4,089 (12.8) % $ 3,835 (6.2) % Operating Segments GBS $ 1,738 $ 1,946 (10.7) % $ 1,863 (4.3) % GIS 1,828 2,143 (14.7) % 1,972 (8.0) % Total Revenues $ 3,566 $ 4,089 (12.8) % $ 3,835 (6.2) % Nine Months Ended Nine Months Ended (in millions) December 31, 2022 December 31, 2021 Percentage Change Constant Currency December 31, 2022 (1) Percentage Change in Constant Currency (1) Geographic Market United States $ 3,278 $ 3,570 (8.2) % $ 3,278 (8.2) % United Kingdom 1,394 1,749 (20.3) % 1,597 (8.7) % Other Europe 3,321 3,878 (14.4) % 3,698 (4.6) % Australia 1,105 1,172 (5.7) % 1,201 2.5 % Other International 1,741 1,888 (7.8) % 1,876 (0.6) % Total Revenues $ 10,839 $ 12,257 (11.6) % $ 11,650 (5.0) % Operating Segments GBS $ 5,209 $ 5,706 (8.7) % $ 5,584 (2.1) % GIS 5,630 6,551 (14.1) % 6,066 (7.4) % Total Revenues $ 10,839 $ 12,257 (11.6) % $ 11,650 (5.0) % (1) 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. For more information, see "Non-GAAP Financial Measures." 38 For the third quarter of fiscal 2023, our total revenue was $3.6 billion, a decrease of $523 million or 12.8%, as compared to the same period a year ago. The 12.8% decrease against the comparative period includes a 6.6% unfavorable foreign currency exchange rate impact, a 2.4% decline in revenue from the disposition of certain businesses, and a 3.8% decline in organic revenue. Organic revenue growth is a non-GAAP measure. For more information, see "Non-GAAP Financial Measures." For the first nine months of fiscal 2023, our total revenue was $10.8 billion, a decrease of $1,418 million or 11.6%, as compared to the same period a year ago. The 11.6% decrease against the comparative period includes a 6.6% unfavorable foreign currency exchange rate impact, a 2.4% decline in revenue from the disposition of certain businesses, and a 2.6% decline in organic revenue. The unfavorable foreign currency exchange rate impact is primarily driven by the strengthening of the U.S. dollar against the British Pound, Euro, and Australian Dollar. 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, 2022. Global Business Services For the third quarter of fiscal 2023, GBS revenue was $1.7 billion, a decrease of $208 million or 10.7%, as compared to the same period a year ago. The 10.7% decrease against the comparative period includes a 6.4% unfavorable foreign currency exchange rate impact and a 4.5% decline in revenue from the disposition of certain businesses, partially offset by 0.2% organic revenue growth from additional services provided to new and existing customers. For the first nine months of fiscal 2023, GBS revenue was $5.2 billion, a decrease of $497 million or 8.7%, as compared to the same period a year ago. The 8.7% decrease against the comparative period includes a 6.6% unfavorable foreign currency exchange rate impact and a 4.2% decline in revenue from the disposition of certain businesses, partially offset by 2.1% organic revenue growth from additional services provided to new and existing customers. For the third quarter and first nine months of fiscal 2023, GBS contract awards were $2.1 billion and $5.5 billion, respectively, as compared to $2.5 billion and $6.6 billion, respectively, in the same periods in fiscal 2022. Global Infrastructure Services For the third quarter of fiscal 2023, our GIS revenue was $1.8 billion, a decrease of $315 million or 14.7%, as compared to the same period a year ago. The 14.7% decrease against the comparative period includes a 6.7% unfavorable foreign currency exchange rate impact, 0.6% decline in revenue from the disposition of certain businesses, and a 7.4% decline in organic revenue. For the first nine months of fiscal 2023, our GIS revenue was $5.6 billion, a decrease of $921 million or 14.1%, as compared to the same period a year ago. The 14.1% decrease against the comparative period includes a 6.7% unfavorable foreign currency exchange rate impact, 0.6% decline in revenue from the disposition of certain businesses, and a 6.8% decline in organic revenue. For the third quarter and first nine months of fiscal 2023, GIS contract awards were $2.7 billion and $5.5 billion, respectively, as compared to $2.5 billion and $6.7 billion, respectively, in the same periods in fiscal 2022. 39 Costs and Expenses Our total costs and expenses are provided below: Dollar Amount Dollar Amount Three Months Ended December 31, Change Nine Months Ended December 31, Change (in millions) 2022 2021 Dollar Percent 2022 2021 Dollar Percent Costs of services $ 2,799 $ 3,179 $ (380) (12.0) % $ 8,504 $ 9,522 $ (1,018) (10.7) % Selling, general and administrative 315 340 (25) (7.4) 988 1,093 (105) (9.6) Depreciation and amortization 375 424 (49) (11.6) 1,144 1,294 (150) (11.6) Restructuring costs 49 36 13 36.1 135 248 (113) (45.6) Interest expense 56 38 18 47.4 137 161 (24) (14.9) Interest income (41) (15) (26) 173.3 (89) (51) (38) 74.5 Debt extinguishment costs — 2 (2) (100.0) — 311 (311) (100.0) Loss (gain) on disposition of businesses 9 4 5 125.0 12 (373) 385 (103.2) Other income, net (98) (85) (13) 15.3 (270) (290) 20 (6.9) Total Costs and Expenses $ 3,464 $ 3,923 $ (459) (11.7) % $ 10,561 $ 11,915 $ (1,354) (11.4) % Costs of Services Costs of services, excluding depreciation and amortization and restructuring costs (“COS”), were $2.8 billion and $8.5 billion for the third quarter and first nine months of fiscal 2023, respectively, a decrease of $380 million and $1,018 million, respectively, as compared to the same periods of the prior fiscal year. For the third quarter of fiscal 2023, the $380 million decrease in expenses against the comparative period was primarily due to a favorable foreign currency exchange rate impact of $211 million, a decrease in payroll related expenses due to a combination of lower revenues and our cost optimization efforts, and lower spend on professional services and contractor-related expenses. For the first nine months of fiscal 2023, the $1,018 million decrease in expenses against the comparative period was primarily due to a favorable foreign currency exchange rate impact of $643 million, a decrease in payroll related expenses due to a combination of lower revenues and our cost optimization efforts, and lower spend on professional services and contractor-related expenses. In fiscal 2023, COS as a percentage of revenue increased against the comparative periods and was primarily driven by a decline in revenue exceeding the associated decline in payroll related expenses . Selling, General and Administrative Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs (“SG&A”), was $315 million and $988 million for the third quarter and first nine months of fiscal 2023, respectively, a decrease of $25 million and $105 million, respectively, as compared to the same periods of the prior fiscal year. For the third quarter of fiscal 2023, the $25 million decrease in expenses against the comparative period was primarily due to a favorable foreign currency exchange rate impact of $17 million and lower payroll related expenses, partially offset by an $11 million charge for merger-related indemnification expenses and $9 million for an arbitration loss. For the first nine months of fiscal 2023, the $105 million decrease in expenses against the comparative period was primarily due to a favorable foreign currency exchange rate impact of $54 million, lower payroll related expenses, lower real estate costs and other professional and contractor-related expenses, partially offset by a $21 million charge for merger related indemnification expenses, $9 million for an arbitration loss, and $8 million for the SEC Matter. 40 Depreciation and Amortization Depreciation expense was $123 million and $390 million for the third quarter and first nine months of fiscal 2023, respectively, a decrease of $33 million and $89 million, respectively, as compared to the same periods of the prior fiscal year. The decreases in depreciation expense were primarily due to lower average net property and equipment balances and favorable foreign currency exchange rate impacts of $8 million and $25 million for the third quarter and first nine months of fiscal 2023, respectively. Amortization expense was $252 million and $754 million for the third quarter and first nine months of fiscal 2023, respectively, a decrease of $16 million and $61 million, respectively, as compared to the same periods of the prior fiscal year. The decreases in amortization expense were primarily due to decreases in software amortization, a reduction in transition and transformation contract cost amortization due to contract completions, and favorable foreign currency exchange rate impacts of $12 million and $36 million for the third quarter and first nine months of fiscal 2023, respectively. Restructuring Costs Restructuring costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization. During fiscal 2023, 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 2023, restructuring costs, net of reversals, were $49 million and $135 million, respectively. Restructuring costs increased $13 million during the third quarter of fiscal 2023 and decreased $113 million during the first nine months of fiscal 2023, respectively, as compared to the same periods of the prior fiscal year. See Note 12 – “Restructuring Costs” for additional information about our restructuring actions. Interest Expense and Interest Income For the third quarter of fiscal 2023, interest expense was $56 million and interest income was $41 million, an increase of $18 million and $26 million, respectively, as compared to the same period of the prior fiscal year. The increases in interest expense and interest income against the comparative period were primarily due to the impact of rising global interest rates on our multicurrency cash pools and money market accounts. For the first nine months of fiscal 2023, interest expense was $137 million and interest income was $89 million, a decrease of $24 million and increase of $38 million, respectively, as compared to the same period of the prior fiscal year. The decrease in interest expense against the comparative period was primarily due to a reduction in notes payable and term loans, the Company's refinancing of its high coupon debt in fiscal 2022, and decreases in interest expense from finance leases and borrowings for asset financing. Rising global interest rates on our multicurrency cash pools and money market accounts led to higher interest income against the comparative period. Debt Extinguishment Costs There were no debt extinguishment costs recorded for both the third quarter and first nine months of fiscal 2023. Debt extinguishment costs were $2 million and $311 million for the third quarter and first nine months of fiscal 2022, respectively, for the partial and full redemption of term loans, senior notes, and extinguishment of debt associated with asset financing. 41 Loss (gain) on Disposition of Businesses During the first nine months of fiscal 2023, DXC sold insignificant businesses that resulted in a loss of $12 million. During the first nine months of fiscal 2022, DXC sold its HPS business for approximately $551 million, resulting in a pre-tax gain on sale of $337 million, net of closing costs. DXC also sold certain 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. 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. Three Months Ended Nine Months Ended (in millions) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Non-service cost components of net periodic pension income $ (60) $ (87) $ (187) $ (280) Foreign currency (gain) loss (8) 3 (11) 10 Gain on sales of assets (28) (4) (72) (62) Other (gain) loss (2) 3 — 42 Total $ (98) $ (85) $ (270) $ (290) Other income, net, increased by $13 million and decreased by $20 million for the third quarter and first nine months of fiscal 2023, respectively, as compared to the same periods of the prior fiscal year. For the third quarter of fiscal 2023, the $13 million increase against the comparative period was primarily due to $24 million of additional gains from sales of assets, $11 million of favorable foreign currency hedge-related gains, and a $5 million increase in other gains, partially offset by a $27 million decrease in the non-service cost components of net periodic pension income attributable to changes in expected returns on assets and other actuarial assumptions. For the first nine months of fiscal 2023, the $20 million decrease against the comparative period was primarily due to a $93 million decrease in the non-service cost components of net periodic pension income attributable to changes in expected returns on assets and other actuarial assumptions, partially offset by a $42 million change in other losses primarily from disposition of businesses in the comparative period, $21 million of favorable foreign currency gains, and $10 million of additional gains from sales of assets. 42 Taxes Our effective tax rate (“ETR”) was 40.2% and 38.6% for the three months ended December 31, 2022 and December 31, 2021, respectively, and 30.9% and 42.4% for the nine months ended December 31, 2022 and December 31, 2021, respectively. For the three months ended December 31, 2022, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, a decrease in the base erosion and anti-abuse tax, and an increase in unrecognized tax benefits primarily related to foreign tax credits. For the nine months ended December 31, 2022, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, a decrease in the base erosion and anti-abuse tax, and the tax impact of business divestitures. 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. In the U.S., the Inflation Reduction Act (“Act”) was signed into law on August 16, 2022. We do not currently expect the Act to have a material impact on our Consolidated Financial Statements. 43 Earnings Per Share Diluted EPS for the third quarter and first nine months of fiscal 2023 was $0.25 and $0.80, respectively, a decrease of $0.13 and increase of $0.07, respectively, as compared to the same periods of the prior fiscal year. For the third quarter of fiscal 2023, the decrease in diluted EPS against the comparative period was primarily due to the $39 million decrease in net income attributable to DXC common stockholders, partially offset by the decrease in the weighted average shares of common stock outstanding. Diluted EPS for the third quarter of fiscal 2023 includes $0.17 per share of restructuring costs, $0.02 per share of transaction, separation and integration-related costs, $0.34 per share of amortization of acquired intangible assets, $0.07 per share of merger related indemnification and arbitration loss costs, $0.03 per share of impairment losses, and $0.07 per share of net losses on dispositions. For the first nine months of fiscal 2023, the increase in diluted EPS against the comparative period was primarily due to the decrease in the weighted average shares of common stock outstanding. Diluted EPS for the first nine months of fiscal 2023 includes $0.46 per share of restructuring costs, $0.04 per share of transaction, separation and integration-related costs, $1.04 per share of amortization of acquired intangible assets, $0.13 per share of merger related indemnification, arbitration loss, and SEC matter costs, $0.03 per share of impairment losses, and $0.05 per share of net gains on dispositions. 44 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, non-GAAP EPS, organic revenue growth, 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 income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS, incremental amortization of intangible assets acquired through business combinations, if included, 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 income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS is impairment losses, which, if included, 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 are not expected to occur frequently. Further, assets such as goodwill may be significantly impacted by market conditions outside of management’s control. Selected references are made to revenue growth on an “organic basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates and without the impacts of acquisitions and divestitures from “organic basis” financial results, thereby providing comparisons of operating performance from period to period of the business that we have owned during all periods presented. Organic revenue growth is calculated by dividing the year-over-year change in GAAP revenues attributed to organic growth by the GAAP revenues reported in the prior comparable period. This approach is used for all results where the functional currency is not the U.S. dollar. We believe organic revenue growth 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 and the effects of acquisitions and divestitures in the periods presented. 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—Revenues.” 45 Certain non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include: Dollar Amount Dollar Amount Three Months Ended December 31, Change Nine Months Ended December 31, Change (in millions) 2022 2021 Dollar Percent 2022 2021 Dollar Percent Income before income taxes $ 102 $ 166 $ (64) (38.6) % $ 278 $ 342 $ (64) (18.7) % Non-GAAP income before income taxes $ 294 $ 332 $ (38) (11.4) % $ 789 $ 923 $ (134) (14.5) % Net income $ 61 $ 102 $ (41) (40.2) % $ 192 $ 197 $ (5) (2.5) % Adjusted EBIT $ 309 $ 355 $ (46) (13.0) % $ 837 $ 1,033 $ (196) (19.0) % 46 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. • Pension and OPEB actuarial and settlement gains and losses – pension and OPEB actuarial mark to market adjustments and settlement gains and losses. • Merger related indemnification – represents the Company’s current estimate of potential liability to HPE for indemnification on the Forsyth v. HP Inc. and HPE litigation, and the Company’s final liability to HPE on the Oracle v. HPE litigation; both obligations pursuant to HPES merger. (2) • SEC Matter - represents the Company’s current estimate of potential liability related to a previously disclosed investigation into its historical determination and disclosure of certain “transaction, separation, and integration-related costs” as part of the Company’s non-GAAP adjustments. (3) • Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities. (4) • Arbitration loss - reflects a loss arising from an arbitration decision in the third quarter of fiscal 2023. • Impairment losses – impairment losses on assets classified as long-term on the balance sheet. (5) • 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. (6) • 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). (7) (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 2023 include $6 million of costs incurred in connection with activities related to acquisitions and divestitures. The TSI-Related costs for the first nine months of fiscal 2023 include $12 million of costs incurred in connection with activities related to acquisitions and divestitures. 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 of legal costs; a $14 million credit towards the 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) See Note 19 – “Commitments and Contingencies,” Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company; and Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise . (3) See Note 19 – “Commitments and Contingencies,” SEC Matter . 47 (4) Gains and losses on dispositions for the first nine months of fiscal 2023 include a net loss of $12 million on dispositions related to certain insignificant businesses. 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 partially offset by $13 million of adjustments relating to the sale of the HHS business. (5) Impairment losses on dispositions for the first nine months of fiscal 2023 include an $8 million impairment charge for customer related intangible assets. Impairment losses on dispositions for the first nine months of fiscal 2022 include a $10 million impairment charge of undeployed assets related to TSI-related capitalized costs. (6) Debt extinguishment costs were $2 million and $311 million for the third quarter and first nine months of fiscal 2022, respectively, for the partial and full redemption of term loans, senior notes, and extinguishment of debt associated with asset financing. (7) 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. 48 A reconciliation of reported results to non-GAAP results is as follows: Three Months Ended December 31, 2022 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Merger Related Indemnification and Arbitration Loss Gains and Losses on Dispositions Impairment Losses Non-GAAP Results Income before income taxes $ 102 $ 49 $ 6 $ 100 $ 20 $ 9 $ 8 $ 294 Income tax expense (benefit) 41 10 1 20 4 (7) 1 70 Net income 61 39 5 80 16 16 7 224 Less: net income attributable to non-controlling interest, net of tax 2 — — — — — — 2 Net income attributable to DXC common stockholders $ 59 $ 39 $ 5 $ 80 $ 16 $ 16 $ 7 $ 222 Effective Tax Rate 40.2 % 23.8 % Basic EPS $ 0.26 $ 0.17 $ 0.02 $ 0.35 $ 0.07 $ 0.07 $ 0.03 $ 0.97 Diluted EPS $ 0.25 $ 0.17 $ 0.02 $ 0.34 $ 0.07 $ 0.07 $ 0.03 $ 0.95 Weighted average common shares outstanding for: Basic EPS 229.54 229.54 229.54 229.54 229.54 229.54 229.54 229.54 Diluted EPS 233.00 233.00 233.00 233.00 233.00 233.00 233.00 233.00 Nine Months Ended December 31, 2022 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Merger Related Indemnification, Arbitration Loss, and SEC Matter Gains and Losses on Dispositions Impairment Losses Pension and OPEB Actuarial and Settlement Gains and Losses Non-GAAP Results Income before income taxes $ 278 $ 135 $ 12 $ 305 $ 38 $ 12 $ 8 $ 1 $ 789 Income tax expense 86 28 2 62 7 24 1 — 210 Net income (loss) 192 107 10 243 31 (12) 7 1 579 Less: net income attributable to non-controlling interest, net of tax 4 — — — — — — — 4 Net income (loss) attributable to DXC common stockholders $ 188 $ 107 $ 10 $ 243 $ 31 $ (12) $ 7 $ 1 $ 575 Effective Tax Rate 30.9 % 26.6 % Basic EPS $ 0.82 $ 0.46 $ 0.04 $ 1.05 $ 0.13 $ (0.05) $ 0.03 $ 0.00 $ 2.49 Diluted EPS $ 0.80 $ 0.46 $ 0.04 $ 1.04 $ 0.13 $ (0.05) $ 0.03 $ 0.00 $ 2.45 Weighted average common shares outstanding for: Basic EPS 230.65 230.65 230.65 230.65 230.65 230.65 230.65 230.65 230.65 Diluted EPS 234.38 234.38 234.38 234.38 234.38 234.38 234.38 234.38 234.38 49 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 50 Reconciliations of revenue growth to organic revenue growth are as follows: Three Months Ended Nine Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Total revenue growth (12.8) % (4.6) % (11.6) % (8.1) % Foreign currency 6.6 % 1.0 % 6.6 % (2.1) % Acquisitions and divestitures 2.4 % 2.2 % 2.4 % 7.6 % Organic revenue growth (3.8) % (1.4) % (2.6) % (2.6) % GBS revenue growth (10.7) % 1.3 % (8.7) % (10.0) % Foreign currency 6.4 % 1.3 % 6.6 % (1.5) % Acquisitions and divestitures 4.5 % 4.4 % 4.2 % 15.5 % GBS organic revenue growth 0.2 % 7.0 % 2.1 % 4.0 % GIS revenue growth (14.7) % (9.5) % (14.1) % (6.5) % Foreign currency 6.7 % 0.9 % 6.7 % (2.5) % Acquisitions and divestitures 0.6 % 0.3 % 0.6 % 0.5 % GIS organic revenue growth (7.4) % (8.3) % (6.8) % (8.5) % Reconciliations of net income to adjusted EBIT are as follows: Three Months Ended Nine Months Ended (in millions) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Net income $ 61 $ 102 $ 192 $ 197 Income tax expense 41 64 86 145 Interest income (41) (15) (89) (51) Interest expense 56 38 137 161 EBIT 117 189 326 452 Restructuring costs 49 36 135 248 Transaction, separation and integration-related costs 6 11 12 23 Amortization of acquired intangible assets 100 106 305 325 Merger related indemnification 11 — 21 — SEC Matter — — 8 — Losses (gains) on dispositions 9 4 12 (343) Arbitration loss 9 — 9 — Impairment losses 8 — 8 10 Debt extinguishment costs — 2 — 311 Pension and OPEB actuarial and settlement losses — 7 1 7 Adjusted EBIT $ 309 $ 355 $ 837 $ 1,033 51 Liquidity and Capital Resources Cash and Cash Equivalents and Cash Flows As of December 31, 2022, our cash and cash equivalents (“cash”) were $2.1 billion, of which $0.6 billion was held outside of the U.S. As of March 31, 2022, our cash was $2.7 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 these 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 $0.2 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, 2022 December 31, 2021 Change Net cash provided by (used in): Operating activities $ 1,000 $ 1,230 $ (230) Investing activities (299) 93 (392) Financing activities (693) (1,460) 767 Effect of exchange rate changes on cash and cash equivalents (95) 25 (120) Cash classified within current assets held for sale (494) 63 (557) Net decrease in cash and cash equivalents $ (581) $ (49) $ (532) Cash and cash equivalents at beginning of year 2,672 2,968 Cash and cash equivalents at the end of period $ 2,091 $ 2,919 Operating cash flow Net cash provided by operating activities during the first nine months of fiscal 2023 was $1,000 million as compared to $1,230 million during the comparable period of the prior fiscal year. The decrease of $230 million was primarily due to a decrease in net income, net of adjustments of $242 million, partially offset by a $12 million favorable change in working capital due to lower working capital outflows during the first nine months of fiscal 2023. The following table contains certain key working capital metrics: Three Months Ended December 31, 2022 December 31, 2021 Days of sales outstanding in accounts receivable 69 65 Days of purchases outstanding in accounts payable (54) (40) Cash conversion cycle 15 25 52 Investing cash flow Net cash (used in) provided by investing activities during the first nine months of fiscal 2023 was $(299) million as compared to $93 million during the comparable period of the prior fiscal year. The change of $392 million was primarily due to a decrease in cash from business dispositions of $467 million and proceeds from short-term investing of $24 million incurred only in the comparable period of fiscal 2022. This was partially offset by an increase in proceeds from sale of assets of $70 million and a decrease in capital expenditures of $48 million. Financing cash flow Net cash used in financing activities during the first nine months of fiscal 2023 was $693 million as compared to $1,460 million during the comparable period of the prior fiscal year. The $767 million decrease was primarily due to a decrease in payments on capital leases and borrowings for asset financing of $456 million, payments for debt extinguishment cost of $344 million incurred only in the comparable period of fiscal 2022, an increase in commercial paper borrowings, net of repayments of $32 million, and a decrease in share repurchases of $27 million. This was partially offset by borrowings on long term debt, net of repayments of $65 million incurred only in the comparable period of fiscal 2022. Cash classified within current assets held for sale As of December 31, 2022, $0.5 billion of cash related to the FDB Business was reclassified as assets held for sale. The FDB Business was subsequently sold on January 3, 2023. See Note 2 – “Divestitures” for more information. Capital Resources See Note 19 – “Commitments and Contingencies” for disclosure of certain 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, 2022 March 31, 2022 Short-term debt and current maturities of long-term debt $ 873 $ 900 Long-term debt, net of current maturities 3,850 4,065 Total debt $ 4,723 $ 4,965 For the first nine months of fiscal 2023, approximately 60% of our total debt balance was denominated in foreign currencies. In fiscal 2023, the $0.2 billion decrease in total debt was primarily due to a favorable foreign currency exchange rate impact and decreases in finance lease liabilities and borrowings for asset financing, partially offset by an increase in commercial paper borrowings. We were in compliance with all financial covenants associated with our borrowings as of December 31, 2022 and December 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 For information on the risks of ratings downgrades, see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. 53 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. Our total liquidity of $5.6 billion as of December 31, 2022, includes $2.1 billion of cash and cash equivalents, $3.0 billion of available borrowings under our revolving credit facility, and $500 million of available borrowings under our term loan credit agreement. Share Repurchases See Note 15 – “Stockholders’ Equity” Dividends To maintain our financial flexibility, we continue to suspend payment of quarterly dividends for fiscal 2023. 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 for the fiscal year ended March 31, 2022, other than as disclosed in Note 4 – “Receivables” and Note 19 – “Commitments and Contingencies”. Contractual Obligations There have been no material changes, outside the ordinary course of business, to our contractual obligations since March 31, 2022. 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, 2022. For our minimum purchase commitments as of December 31, 2022, in connection with our long-term purchase agreements with certain software, hardware, telecommunication, and other service providers, see Note 19 – “Commitments and Contingencies.” 54 Critical Accounting 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, 2022, there were no changes to our critical accounting policies and estimates from those described in our fiscal 2022 Annual Report on Form 10-K except as mentioned in Note 1 – “Summary of Significant Accounting Policies.” ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk affecting DXC, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. Our exposure to market risk has not changed materially since March 31, 2022.