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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-02-02 · 136 added, 237 removed, 206 unchanged (64% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 first quarter of fiscal 2024 and our financial condition as of June 30, 2023.

The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes.

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• 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.

The following discussion includes a comparison of our results of operations and liquidity and capital resources for the first quarters of fiscal 2024 and fiscal 2023.

References are made throughout to the numbered Notes to the Condensed Consolidated Financial Statements (“Notes”) in this Quarterly Report on Form 10-Q.

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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

Our revenues by geography and operating segment are provided below:

Key metrics for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 are included below.

We have presented organic revenue and diluted earnings per share on a non-GAAP basis.

For more information, see “Non-GAAP Financial Measures”.

• Revenues of $3.4 billion, down 7.0% compared to prior year period, and down 3.6% on an organic basis;

• Diluted earnings per share of $0.17, compared to $0.43 in the first quarter of fiscal 2023;

adjusted diluted earnings per share of $0.63, compared to $0.75 in the first quarter of fiscal 2023, a decrease of 16.0%;

• Q1 FY24 operating cash flow of $127 million, less capital expenditures of $202 million, resulted in free cash flow of $(75) million;

• Returned $280 million to shareholders through share repurchases.

Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Revenues across operating segments and geographies 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)

(in millions) June 30, 2023 June 30, 2022 Percentage Change Constant Currency

June 30, 2023 (1)

Percentage Change in Constant Currency (1)

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United States $ 1,002 $ 1,131 (11.4) % $ 1,002 (11.4) %

United Kingdom 1,394 1,749 (20.3) % 1,597 (8.7) %

465 473 (1.7) % 466 (1.5) %

Other Europe 1,064 1,138 (6.5) % 1,045 (8.2) %

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Total Revenues $ 3,446 $ 3,707 (7.0) % $ 3,474 (6.3) %

Operating Segments

Reportable Segments

GBS $ 1,703 $ 1,758 (3.1) % $ 1,718 (2.3) %

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For more information, see "Non-GAAP Financial Measures."

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.

For the first quarter of fiscal 2024, our total revenue was $3.4 billion, a decrease of $0.3 billion or 7.0%, compared to the same period a year ago.

The 7.0% decrease against the comparative period includes a 0.7% unfavorable foreign currency exchange rate impact, a 2.7% decline in revenue from the disposition of certain businesses, and a 3.6% decline in organic revenue.

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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.

dollar against the 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, 2023.

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.

For the first quarter of fiscal 2024, GBS revenue was $1.7 billion, a decrease of $55 million or 3.1% compared to the same period a year ago.The 3.1% decrease against the comparative period includes a 0.8% unfavorable foreign currency exchange rate impact and a 5.6% decline in revenue from the disposition of certain businesses, partially offset by 3.3% organic revenue growth from additional services provided to new and existing customers.

GBS accounts for 49.4% of total revenue, an increase of 2.0% against the comparative period.

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.

For the first quarter of fiscal 2024, GIS revenue was $1.7 billion, a decrease of $206 million or 10.6% compared to the same period a year ago.

The 10.6% decrease against the comparative period includes a 0.7% unfavorable foreign currency exchange rate impact, and a 9.9% decline in organic revenue from project completions, early terminations, and lower resale revenue.

GIS accounts for 50.6% of total revenue, a decrease of 2.0% against the comparative period.

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)

Dollar Amount

Three Months Ended June 30, Change

(in millions)

2023 2022 Dollar Percent

Costs of services (excludes depreciation and amortization and restructuring costs)

$ 2,719 $ 2,930 $ (211) (7.2) %

Selling, general and administrative (excludes depreciation and amortization and restructuring costs) 327 349 (22) (6.3) %

Depreciation and amortization 344 389 (45) (11.6) %

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Interest income (49) (20) (29) 145.0 %

Debt extinguishment costs — 2 (2) (100.0) — 311 (311) (100.0)

Loss (gain) on disposition of businesses 5 (29) 34 (117.2) %

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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 .

Costs of services, excluding depreciation and amortization and restructuring costs (“COS”), were $2.7 billion for the first quarter of fiscal 2024, a decrease of $211 million compared to a year ago.

The $211 million decrease was primarily due to a favorable foreign currency exchange rate impact of $23 million, a decrease in costs from lower revenue levels, and a reduction in professional services and contractor-related expenses from our cost optimization efforts.

Gross margin (Revenues less COS as a percentage of revenue) was 21.1% and 21.0% for the first quarter of fiscal 2024 and 2023, respectively.

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.

Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs (“SG&A”), was $327 million for the first quarter of fiscal 2024, a decrease of $22 million compared to a year ago.

During the first quarter of fiscal 2024, SG&A as a percentage of revenues was 9.5%, an increase of 10 basis points against the comparative period.

The $22 million decrease in SG&A expenses was primarily driven by reductions in professional services and vendor-related expenses, partially offset by increases in payroll and related expenses.

In the first quarter of fiscal 2024 and fiscal 2023, there was a merger-related indemnification expense of $11 million and $10 million, respectively.

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.

Depreciation expense was $113 million for the first quarter of fiscal 2024, a decrease of $25 million compared to a year ago.

The decrease in depreciation expense was primarily due to lower average net property and equipment balances.

Amortization expense was $231 million for the first quarter of fiscal 2024, a decrease of $20 million compared to a year ago.

The decrease in amortization expense was primarily due to a decrease in software amortization and a reduction in transition and transformation contract cost amortization due to contract completions.

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.

During fiscal 2024, management approved global cost savings initiatives designed to better align our facilities and data centers.

Total restructuring costs recorded, net of reversals, was $20 million for the first quarter of fiscal 2024, a decrease of $13 million compared to a year ago.

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.

For the first quarter of fiscal 2024 and fiscal 2023, net interest expense (interest expense less interest income) was $17 million, respectively.

Net interest expense was flat against the comparative period primarily due to increases in interest expense from securitization and commercial paper expense offset by higher income from cash deposits, both of which are driven by higher interest rates globally.

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.

During the first quarter of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses that resulted in a loss of $5 million and a gain of $38 million, respectively.

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.

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

The components of other income, net for the first quarter of fiscal 2024 and 2023 were as follows:

Three Months Ended

(in millions) June 30, 2023 June 30, 2022 Dollar Change

Non-service cost components of net periodic pension income $ (37) $ (67) $ 30

Foreign currency (gain) loss (8) 3 (11) 10

Gain on sales of assets (28) (4) (72) (62)

Other (gain) loss (2) 3 — 42

Foreign currency gain (8) (2) (6)

Gain on sale of assets (21) (38) 17

Other loss 2 3 (1)

Total $ (64) $ (104) $ 40

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.

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.

Other income, net, was $64 million and $104 million during the first quarter of fiscal 2024 and fiscal 2023, respectively, a change of $40 million compared to a year ago that was primarily due to:

• net periodic pension income decreased by $30 million primarily due to changes in expected returns on assets and other actuarial assumptions.

• foreign currency gains increased by $6 million primarily due to movements of exchange rates on our foreign currency-denominated assets and liabilities, related hedges including forward contracts to manage our exposure to economic risk, and the cost of our hedging program.

• a $17 million decrease in gains from sales of assets.

Our effective tax rate (“ETR”) was 46.2% and 15.6% for the first quarter of fiscal 2024 and the first quarter of fiscal 2023, respectively.

For the first quarter of fiscal 2024, the primary drivers of the ETR were the global mix of income, U.S.

tax on foreign income, and a decrease in uncertain tax positions due to an income tax audit settlement.

For the first quarter of fiscal 2023, 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.

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.

Diluted EPS for the first quarter of fiscal 2024 was $0.17, compared to $0.43 in the first quarter of fiscal 2023.

The decrease in earnings per share was primarily due to a decrease of $66 million in net income attributable to DXC common stockholders, partially offset by a lower weighted average common shares outstanding.

Diluted EPS for the first quarter of fiscal 2024 includes $0.07 per share of restructuring costs, $0.32 per share of amortization of acquired intangible assets, $0.02 per share of net losses on dispositions, $0.03 per share of impairment losses, and $0.01 per share of tax adjustments.

Diluted EPS for the first quarter of fiscal 2023 includes $0.11 per share of restructuring costs, $0.01 per share of transaction, separation and integration-related costs, $0.34 per share of amortization of acquired intangible assets, $0.16 per share of net gains on dispositions, and $0.03 per share of merger related indemnification costs.

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.

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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.

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, thereby providing comparisons of operating performance from period to period of the business that we have owned during both 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.

Organic revenue is calculated as constant currency revenue excluding the impact of mergers, acquisitions or similar transactions until the one-year anniversary of the transaction and excluding revenues of divestitures during the reporting period.

This approach is used for all results where the functional currency is not the U.S.

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.

dollars and the effects of acquisitions and divestitures in both periods presented.

Free cash flow represents cash flow from operations, less capital expenditures.

Free cash flow is utilized by our management, investors, and analysts to evaluate cash available to pay debt, repurchase shares, and provide further investment in the business.

There are limitations to the use of the non-GAAP financial measures presented in this report.

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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

Dollar Amount

Three Months Ended June 30, Change

(in millions) 2023 2022 Dollar Percent

Income before income taxes $ 78 $ 122 $ (44) (36.1) %

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• 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.

• Transaction, separation and integration-related (“TSI”) costs – includes costs related to integration, separation, planning, financing and advisory fees and other similar charges associated with mergers, acquisitions, strategic investments, joint ventures, and dispositions and other similar transactions incurred within one year of such transactions closing, except for costs associated with related disputes, which may arise more than one year after closing.

• 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.

and HPE litigation, and the Company’s final liability to HPE on the Oracle v.

HPE litigation;

both obligations pursuant to HPES merger.

• 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.

• Merger related indemnification - in fiscal 2024, represents the Company’s current estimate of potential liability to HPE for a tax related indemnification;

and in fiscal 2023, represents the Company’s estimate of potential liability to HPE for indemnification following the outcome of the Oracle v.

HPE litigation in June 2022.

These obligations are related to the HPES merger.

• Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities.

• 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.

• 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.

• Impairment losses – non-cash charges associated with the permanent reduction in the value of the Company’s assets (e.g., impairment of goodwill and other long-term assets including fixed assets and impairments to deferred tax assets for discrete changes in valuation allowances).

Future discrete reversals of valuation allowances are likewise excluded.

• 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).

(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.

Hewlett Packard Enterprise Company;

and Forsyth, et al.

and Hewlett Packard Enterprise .

(3) See Note 19 – “Commitments and Contingencies,” SEC Matter .

(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.

(1) During the first quarter of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses that resulted in a loss of $5 million and a gain of $38 million, respectively.

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.

(2) Impairment losses for the first quarter of fiscal 2024 include a $3 million and $4 million impairment charge associated with two strategic investments accounted for within Other income, net and Net income attributable to non-controlling interest, net of tax, respectively.

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

Assets Merger Related Indemnification and Arbitration Loss Gains and Losses on Dispositions Impairment Losses Non-GAAP

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

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

Assets Merger Related Indemnification, Arbitration Loss, and SEC Matter Gains and

Dispositions Impairment Losses Pension and OPEB Actuarial and Settlement Gains and Losses Non-GAAP

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

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

Three Months Ended December 31, 2021

Three Months Ended June 30, 2023

(in millions, except per-share amounts) As

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Integration-Related Costs Amortization

Assets Gains and Losses on Dispositions Debt

Extinguishment

Costs Pension and OPEB Actuarial and Settlement Losses Tax Adjustment Non-GAAP

Assets Merger Related

Indemnification Gains and

Dispositions Impairment Losses Tax

Adjustments Non-GAAP

Income before income taxes $ 78 $ 20 $ 1 $ 89 $ 11 $ 5 $ 3 $ — $ 207

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Diluted EPS 213.75 213.75 213.75 213.75 213.75 213.75 213.75 213.75 213.75

Nine Months Ended December 31, 2021

Three Months Ended June 30, 2022

(in millions, except per-share amounts) As

3 unchanged sentences

Integration-Related Costs Amortization

Assets Gains and

Dispositions Impairment Losses Debt

Extinguishment

Costs Pension and OPEB Actuarial and Settlement Losses Tax Adjustment Non-GAAP

Assets Merger Related

Indemnification Gains and

Dispositions Non-GAAP

Income before income taxes $ 122 $ 33 $ 2 $ 104 $ 10 $ (29) $ 242

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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

Three Months Ended

June 30, 2023 June 30, 2022

Total revenue growth (7.0) % (10.5) %

Foreign currency 0.7 % 5.8 %

Acquisitions and divestitures 2.4 % 2.2 % 2.4 % 7.6 %

Acquisition and divestitures 2.7 % 2.1 %

Organic revenue growth (3.6) % (2.6) %

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Foreign currency 0.8 % 5.9 %

Acquisitions and divestitures 4.5 % 4.4 % 4.2 % 15.5 %

Acquisition and divestitures 5.6 % 3.7 %

GBS organic revenue growth 3.3 % 2.8 %

1 unchanged sentence

Foreign currency 0.7 % 5.8 %

Acquisitions and divestitures 0.6 % 0.3 % 0.6 % 0.5 %

Acquisition and divestitures — % 0.5 %

GIS organic revenue growth (9.9) % (7.2) %

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

Three Months Ended

(in millions) June 30, 2023 June 30, 2022

Net income $ 42 $ 103

2 unchanged sentences

Interest expense 66 37

EBIT 117 189 326 452

Restructuring costs 20 33

2 unchanged sentences

Merger related indemnification 11 10

SEC Matter — — 8 —

Losses (gains) on dispositions 9 4 12 (343)

Arbitration loss 9 — 9 —

Loss (gain) on disposition of businesses 5 (29)

Impairment losses 3 —

Debt extinguishment costs — 2 — 311

Pension and OPEB actuarial and settlement losses — 7 1 7

Adjusted EBIT $ 224 $ 259

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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 June 30, 2023, our cash and cash equivalents (“cash”) were $1.6 billion, of which $0.8 billion was held outside of the U.S.

As of March 31, 2023, our cash was $1.9 billion, of which $0.7 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.

We maintain various multi-currency, multi-entity, cross-border, physical and notional cash and 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.

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The following table summarizes our cash flow activity:

Nine Months Ended

(in millions) December 31, 2022 December 31, 2021 Change

Three Months Ended

(in millions) June 30, 2023 June 30, 2022 Change

Net cash provided by (used in):

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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.

Net cash provided by operating activities was $127 million and $163 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year decrease of $36 million.

The decrease was primarily due to:

• a decrease in net income, net of adjustments of $109 million.

• a $73 million favorable change in working capital during the first quarter of fiscal 2024 compared to the first quarter fiscal 2023 primarily from improvements in our cash collection cycle.

The following table contains certain key working capital metrics:

Three Months Ended

December 31, 2022 December 31, 2021

June 30, 2023 June 30, 2022

Days of sales outstanding in accounts receivable 68 70

2 unchanged sentences

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.

Net cash used in investing activities was $199 million and $192 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $7 million.

The change was primarily due to:

• a $29 million year-over-year decrease in cash outflows from business dispositions.

• a $27 million year-over-year increase in capital expenditures primarily from software purchased and developed.

• a $9 million year-over-year decrease in cash flows from other net investing activities.

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.

Net cash used in financing activities was $210 million and $394 million, respectively, during the first quarters of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $184 million.

The lower net cash used in financing activities was primarily due to:

• a $28 million decrease in payments on capital leases and borrowings for asset financings, as the Company continues reducing the volume of these financing arrangements.

• a $188 million increase in cash inflows from commercial paper borrowings, net of repayments.

• $35 million of higher cash outflows from increased share repurchase activity and related taxes paid on net share settlements.

Debt Financing

The following table summarizes our total debt:

(in millions) December 31, 2022 March 31, 2022

(in millions) June 30, 2023 March 31, 2023 Change

Short-term debt and current maturities of long-term debt $ 694 $ 500 $ 194

1 unchanged sentence

Total debt $ 4,585 $ 4,400 $ 185

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.

The $185 million increase in total debt during the first quarter of fiscal 2024 was primarily attributable to the increase in borrowings of commercial paper and an unfavorable foreign currency exchange rate of U.S.

dollar against the Euro, partially offset by decreases in finance leases and borrowings for asset financing attributable to payments exceeding additions.

We were in compliance with all financial covenants associated with our borrowings as of June 30, 2023 and June 30, 2022.

Our credit ratings are as follows:

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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, 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 debt financing, including the issuance of capital market debt instruments such as commercial paper, and bonds.

In addition, we currently utilize, and will further utilize accounts receivables, sales facilities, and 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.

Our exposure to operational liquidity risk is primarily from long-term contracts that 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.

Our total liquidity of $5.1 billion as of June 30, 2023, includes $1.6 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 USD Term Loan.

Share Repurchases

2 unchanged sentences

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.

In the normal course of business, we are a 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.

1 unchanged sentence

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, 2023, 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.”

Cash Commitments

There have been no material changes, outside the ordinary course of business, to our cash commitments since March 31, 2023.

For further information see “Cash Commitments” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023

For our minimum purchase cash commitments in connection with our long-term purchase agreements with certain software, hardware, telecommunication, and other service providers, see Note 19 – “Commitments and Contingencies.”

Critical Accounting Estimates

6 unchanged sentences

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.”

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.

During the three months ended June 30, 2023, there were no changes to our critical accounting policies and estimates from those described in our fiscal 2023 Annual Report on Form 10-K except as mentioned in Note 1 – “Summary of Significant Accounting Policies.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis