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 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. 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 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. 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. Key Metrics 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. 30 Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022 Revenues Revenues across operating segments and geographies are provided below: Three Months Ended Three Months Ended (in millions) June 30, 2023 June 30, 2022 Percentage Change Constant Currency June 30, 2023 (1) Percentage Change in Constant Currency (1) Geographic Market United States $ 1,002 $ 1,131 (11.4) % $ 1,002 (11.4) % U.K. 465 473 (1.7) % 466 (1.5) % Other Europe 1,064 1,138 (6.5) % 1,045 (8.2) % Australia 342 391 (12.5) % 365 (6.6) % Other International 573 574 (0.2) % 596 3.8 % Total Revenues $ 3,446 $ 3,707 (7.0) % $ 3,474 (6.3) % Reportable Segments GBS $ 1,703 $ 1,758 (3.1) % $ 1,718 (2.3) % GIS 1,743 1,949 (10.6) % 1,756 (9.9) % Total Revenues $ 3,446 $ 3,707 (7.0) % $ 3,474 (6.3) % (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." 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. Organic revenue growth is a non-GAAP measure. For more information, see "Non-GAAP Financial Measures". The unfavorable foreign currency exchange rate impact is primarily driven by the strengthening of the U.S. 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 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 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. 31 Costs and Expenses Our total costs and expenses are provided below: 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) % Restructuring costs 20 33 (13) (39.4) % Interest expense 66 37 29 78.4 % Interest income (49) (20) (29) 145.0 % Loss (gain) on disposition of businesses 5 (29) 34 (117.2) % Other income, net (64) (104) 40 (38.5) % Total costs and expenses $ 3,368 $ 3,585 $ (217) (6.1) % Costs of Services 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 $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 $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. 32 Restructuring Costs 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 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 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. 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 (8) (2) (6) Gain on sale of assets (21) (38) 17 Other loss 2 3 (1) Total $ (64) $ (104) $ 40 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. 33 Taxes 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 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. 34 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, constant currency revenues, and free cash flow. 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, 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. 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 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. 35 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.” Certain non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include: Dollar Amount Three Months Ended June 30, Change (in millions) 2023 2022 Dollar Percent Income before income taxes $ 78 $ 122 $ (44) (36.1) % Non-GAAP income before income taxes $ 207 $ 242 $ (35) (14.5) % Net income $ 42 $ 103 $ (61) (59.2) % Adjusted EBIT $ 224 $ 259 $ (35) (13.5) % 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, 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. • 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. (1) • 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. (2) • 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) 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. 36 A reconciliation of reported results to non-GAAP results is as follows: Three Months Ended June 30, 2023 (in millions, except per-share amounts) As Reported Restructuring Costs Transaction, Separation and Integration-Related Costs Amortization of Acquired Intangible Assets Merger Related Indemnification Gains and Losses on Dispositions Impairment Losses Tax Adjustments Non-GAAP Results Income before income taxes $ 78 $ 20 $ 1 $ 89 $ 11 $ 5 $ 3 $ — $ 207 Income tax expense 36 5 — 21 11 — 1 (3) 71 Net income 42 15 1 68 — 5 2 3 136 Less: net income attributable to non-controlling interest, net of tax 6 — — — — — (4) — 2 Net income attributable to DXC common stockholders $ 36 $ 15 $ 1 $ 68 $ — $ 5 $ 6 $ 3 $ 134 Effective Tax Rate 46.2 % 34.3 % Basic EPS $ 0.17 $ 0.07 $ — $ 0.32 $ — $ 0.02 $ 0.03 $ 0.01 $ 0.64 Diluted EPS $ 0.17 $ 0.07 $ — $ 0.32 $ — $ 0.02 $ 0.03 $ 0.01 $ 0.63 Weighted average common shares outstanding for: Basic EPS 210.11 210.11 210.11 210.11 210.11 210.11 210.11 210.11 210.11 Diluted EPS 213.75 213.75 213.75 213.75 213.75 213.75 213.75 213.75 213.75 Three Months Ended June 30, 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 Gains and Losses on Dispositions Non-GAAP Results Income before income taxes $ 122 $ 33 $ 2 $ 104 $ 10 $ (29) $ 242 Income tax expense 19 8 — 24 2 9 62 Net income 103 25 2 80 8 (38) 180 Less: net income attributable to non-controlling interest, net of tax 1 — — — — — 1 Net income attributable to DXC common stockholders $ 102 $ 25 $ 2 $ 80 $ 8 $ (38) $ 179 Effective Tax Rate 15.6 % 25.6 % Basic EPS $ 0.44 $ 0.11 $ 0.01 $ 0.34 $ 0.03 $ (0.16) $ 0.77 Diluted EPS $ 0.43 $ 0.11 $ 0.01 $ 0.34 $ 0.03 $ (0.16) $ 0.75 Weighted average common shares outstanding for: Basic EPS 232.48 232.48 232.48 232.48 232.48 232.48 232.48 Diluted EPS 237.38 237.38 237.38 237.38 237.38 237.38 237.38 37 Reconciliations of revenue growth to organic revenue growth are as follows: Three Months Ended June 30, 2023 June 30, 2022 Total revenue growth (7.0) % (10.5) % Foreign currency 0.7 % 5.8 % Acquisition and divestitures 2.7 % 2.1 % Organic revenue growth (3.6) % (2.6) % GBS revenue growth (3.1) % (6.8) % Foreign currency 0.8 % 5.9 % Acquisition and divestitures 5.6 % 3.7 % GBS organic revenue growth 3.3 % 2.8 % GIS revenue growth (10.6) % (13.5) % Foreign currency 0.7 % 5.8 % 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 (in millions) June 30, 2023 June 30, 2022 Net income $ 42 $ 103 Income tax expense 36 19 Interest income (49) (20) Interest expense 66 37 EBIT 95 139 Restructuring costs 20 33 Transaction, separation and integration-related costs 1 2 Amortization of acquired intangible assets 89 104 Merger related indemnification 11 10 Loss (gain) on disposition of businesses 5 (29) Impairment losses 3 — Adjusted EBIT $ 224 $ 259 38 Liquidity and Capital Resources Cash and Cash Equivalents and Cash Flows 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 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. 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: Three Months Ended (in millions) June 30, 2023 June 30, 2022 Change Net cash provided by (used in): Operating activities $ 127 $ 163 $ (36) Investing activities (199) (192) (7) Financing activities (210) (394) 184 Effect of exchange rate changes on cash and cash equivalents — (50) 50 Cash classified within current assets held for sale — 10 (10) Net decrease in cash and cash equivalents $ (282) $ (463) $ 181 Cash and cash equivalents at beginning of year 1,858 2,672 Cash and cash equivalents at the end of period $ 1,576 $ 2,209 Operating cash flow 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: As of June 30, 2023 June 30, 2022 Days of sales outstanding in accounts receivable 68 70 Days of purchases outstanding in accounts payable (48) (48) Cash conversion cycle 20 22 39 Investing cash flow 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 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: As of (in millions) June 30, 2023 March 31, 2023 Change Short-term debt and current maturities of long-term debt $ 694 $ 500 $ 194 Long-term debt, net of current maturities 3,891 3,900 (9) Total debt $ 4,585 $ 4,400 $ 185 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: 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, 2023. 40 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 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 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 $5.1 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 See Note 15 – “Stockholders’ Equity.” Dividends To maintain our financial flexibility we continue to suspend payment of quarterly dividends for fiscal 2024. Off-Balance Sheet Arrangements 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. 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, 2023, other than as disclosed in Note 4 – “Receivables” and 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.” 41 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 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.”