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 2024 and our financial condition as of December 31, 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 third quarters and first nine months 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 third quarter of fiscal 2024 compared to the third 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 4.7% compared to prior year period, and down 4.5% on an organic basis; • Diluted earnings per share of $0.81, compared to $0.25 in the third quarter of fiscal 2023; adjusted diluted earnings per share of $0.87, compared to $0.95 in the third quarter of fiscal 2023, a decrease of 8.4%; • For the first nine months of fiscal 2024, operating cash flow of $1,081 million, less capital expenditures of $480 million, resulted in free cash flow of $601 million; • Returned $252 million to shareholders through share repurchases in the third quarter of fiscal 2024. 33 Results of Operations for the Third Quarter and First Nine Months of Fiscal 2024 and Fiscal 2023 Revenues Our revenue by geography and operating segment are provided below: Three Months Ended Three Months Ended (in millions) December 31, 2023 December 31, 2022 Percentage Change Constant Currency December 31, 2023 (1) Percentage Change in Constant Currency (1) Geographic Market United States $ 967 $ 1,054 (8.3) % $ 967 (8.3) % U.K. 465 469 (0.9) % 438 (6.6) % Other Europe 1,075 1,119 (3.9) % 1,028 (8.1) % Australia 297 343 (13.4) % 300 (12.5) % Other International 595 581 2.4 % 604 4.0 % Total Revenues $ 3,399 $ 3,566 (4.7) % $ 3,337 (6.4) % Operating Segments GBS $ 1,696 $ 1,738 (2.4) % $ 1,672 (3.8) % GIS 1,703 1,828 (6.8) % 1,665 (8.9) % Total Revenues $ 3,399 $ 3,566 (4.7) % $ 3,337 (6.4) % Nine Months Ended Nine Months Ended (in millions) December 31, 2023 December 31, 2022 Percentage Change Constant Currency December 31, 2023 (1) Percentage Change in Constant Currency (1) Geographic Market United States $ 2,971 $ 3,278 (9.4) % $ 2,971 (9.4) % U.K. 1,390 1,394 (0.3) % 1,331 (4.5) % Other Europe 3,190 3,321 (3.9) % 3,065 (7.7) % Australia 969 1,105 (12.3) % 1,009 (8.7) % Other International 1,761 1,741 1.1 % 1,803 3.6 % Total Revenues $ 10,281 $ 10,839 (5.1) % $ 10,179 (6.1) % Operating Segments GBS $ 5,108 $ 5,209 (1.9) % $ 5,073 (2.6) % GIS 5,173 5,630 (8.1) % 5,106 (9.3) % Total Revenues $ 10,281 $ 10,839 (5.1) % $ 10,179 (6.1) % (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." 34 For the third quarter of fiscal 2024, our total revenue was $3.4 billion, a decrease of $167 million or 4.7%, compared to the same period a year ago. The 4.7% decrease against the comparative period includes a 1.7% favorable foreign currency exchange rate impact, a 1.9% decline in revenue from the disposition of certain businesses, and a 4.5% 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 2024, our total revenue was $10.3 billion, a decrease of $558 million or 5.1%, as compared to the same period a year ago. The 5.1% decrease against the comparative period includes a 1.0% favorable foreign currency exchange rate impact, a 2.2% decline in revenue from the disposition of certain businesses, and a 3.9% decline in organic revenue. The favorable foreign currency exchange rate impact is primarily driven by the weakening of the U.S. dollar against the Euro and British Pound. 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 2024, GBS revenue was $1.7 billion, a decrease of $42 million or 2.4%, as compared to the same period a year ago. The 2.4% decrease against the comparative period includes a 4.1% decline in revenue from the disposition of certain businesses, partially offset by 0.3% organic revenue growth and a 1.4% favorable foreign currency exchange rate impact. For the first nine months of fiscal 2024, GBS revenue was $5.1 billion, a decrease of $101 million or 1.9%, as compared to the same period a year ago. The 1.9% decrease against the comparative period includes a 4.6% decline in revenue from the disposition of certain businesses, partially offset by 2.0% organic revenue growth from additional services provided to new and existing customers, and a 0.7% favorable foreign currency exchange rate impact. Global Infrastructure Services For the third quarter of fiscal 2024, our GIS revenue was $1.7 billion, a decrease of $125 million or 6.8%, as compared to the same period a year ago. The 6.8% decrease against the comparative period includes a 8.9% decline in organic revenue from project completions and lower resale revenue, partially offset by a 2.1% favorable foreign currency exchange rate impact. For the first nine months of fiscal 2024, our GIS revenue was $5.2 billion, a decrease of $457 million or 8.1%, as compared to the same period a year ago. The 8.1% decrease against the comparative period includes a 9.3% decline in organic revenue from project completions and lower resale revenue, partially offset by a 1.2% favorable foreign currency exchange rate impact. 35 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) 2023 2022 Dollar Percent 2023 2022 Dollar Percent Costs of services $ 2,636 $ 2,799 $ (163) (5.8) % $ 7,988 $ 8,504 $ (516) (6.1) % Selling, general and administrative 294 315 (21) (6.7) % 949 988 (39) (3.9) % Depreciation and amortization 350 375 (25) (6.7) % 1,055 1,144 (89) (7.8) % Restructuring costs 36 49 (13) (26.5) % 91 135 (44) (32.6) % Interest expense 78 56 22 39.3 % 222 137 85 62.0 % Interest income (56) (41) (15) 36.6 % (158) (89) (69) 77.5 % (Gain) loss on disposition of businesses (103) 9 (112) NM (1) (96) 12 (108) NM (1) Other income, net (48) (98) 50 (51.0) % (188) (270) 82 (30.4) % Total Costs and Expenses $ 3,187 $ 3,464 $ (277) (8.0) % $ 9,863 $ 10,561 $ (698) (6.6) % (1) NM - Calculation is not meaningful Costs of Services Costs of services, excluding depreciation and amortization and restructuring costs (“COS”), were $2.6 billion and $8.0 billion for the third quarter and first nine months of fiscal 2024, respectively, a decrease of $163 million and $516 million, respectively, as compared to the same periods of the prior fiscal year. The decrease in expenses against both comparative periods was primarily due to a decrease in costs from lower revenue levels and a reduction in professional services and contractor-related expenses from our cost optimization efforts, partially offset by a $9 million severance expense in the third quarter of fiscal 2024 related to the departure of the Company’s prior Chief Executive Officer and an unfavorable foreign currency exchange rate impact of $45 million and $74 million, respectively, for the third quarter and first nine months of fiscal 2024. Gross margin (Revenues less COS as a percentage of revenue) was 22.4% and 22.3% for the third quarter and first nine months of fiscal 2024, respectively, an increase of 0.9% and 0.8% against the comparative period. Selling, General and Administrative Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs (“SG&A”), was $294 million and $949 million for the third quarter and first nine months of fiscal 2024, respectively, a decrease of $21 million and $39 million, respectively, as compared to the same periods of the prior fiscal year. For the third quarter of fiscal 2024, the $21 million decrease in expenses against the comparative period was primarily due to an $11 million charge for merger-related indemnification expenses and a $9 million expense for an arbitration loss in the third quarter of fiscal 2023, and a reduction in professional services and other vendor-related expenses in the third quarter of fiscal 2024, partially offset by a $7 million unfavorable foreign currency exchange rate impact. For the first nine months of fiscal 2024, the $39 million decrease in expenses against the comparative period was primarily due to a $9 million expense for an arbitration loss and an $8 million expense for the SEC Matter in the first nine months of fiscal 2023, lower merger related indemnification expenses, lower transaction, separation and integration-related (“TSI”) costs, and reduced professional services and other vendor-related expenses in the first nine months of fiscal 2024, partially offset by a $7 million unfavorable foreign currency exchange rate impact. 36 Depreciation and Amortization Depreciation expense was $105 million and $330 million for the third quarter and first nine months of fiscal 2024, respectively, a decrease of $18 million and $60 million, respectively, as compared to the same periods of the prior fiscal year. The decrease in depreciation expense against both comparative periods was primarily due to lower average net property and equipment balances. Amortization expense was $245 million and $725 million for the third quarter and first nine months of fiscal 2024, respectively, a decrease of $7 million and $29 million, respectively, as compared to the same periods of the prior fiscal year. The decrease in amortization expense against both comparative periods was primarily due to lower software amortization. Restructuring Costs During fiscal 2024, management approved global cost savings initiatives designed to better align our workforce, facility and data center requirements. During the third quarter and first nine months of fiscal 2024, total restructuring costs recorded, net of reversals, were $36 million and $91 million, respectively, a decrease of $13 million and $44 million, 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 Net interest expense (interest expense less interest income) was $22 million and $64 million for the third quarter and first nine months of fiscal 2024, respectively, an increase of $7 million and $16 million as compared to both periods of the prior fiscal year. The increase in net interest expense against both comparative periods was primarily due to higher interest rates globally that increased interest expense from securitization and commercial paper borrowings. (Gain) Loss on Disposition of Businesses During the first nine months of fiscal 2024 and fiscal 2023, the Company sold insignificant businesses and made adjustments to estimated amounts from prior years’ dispositions that resulted in a gain of $96 million and loss of $12 million, respectively. 37 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, and other miscellaneous gains and losses. Three Months Ended Nine Months Ended (in millions) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Non-service cost components of net periodic pension income $ (35) $ (60) $ (108) $ (187) Foreign currency loss (gain) 5 (8) (4) (11) Gain on sale of assets (14) (28) (41) (72) Other gain (4) (2) (35) — Total $ (48) $ (98) $ (188) $ (270) Other income, net, was $48 million for the third quarter of fiscal 2024, a decrease of $50 million against the comparative period. Other income, net, was $188 million for the first nine months of fiscal 2024, a decrease of $82 million against the comparative period. The change against the comparative period was primarily due to: • net periodic pension income decreased by $25 million and $79 million primarily due to changes in expected returns on assets and other actuarial assumptions. • foreign currency gains decreased by $13 million and $7 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 decrease in gains from sales of assets of $14 million and $31 million; and • an increase in other gains of $2 million and $35 million, primarily from the sale of a strategic investment in the second quarter of fiscal 2024. Taxes Our effective tax rate (“ETR”) was 34.0% and 40.2% for the three months ended December 31, 2023 and December 31, 2022, respectively, and 32.8% and 30.9% for the nine months ended December 31, 2023 and December 31, 2022, respectively. For the three months ended December 31, 2023, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, and the foreign tax credit. For the nine months ended December 31, 2023, the primary drivers of the ETR were the global mix of income, U.S. tax on foreign income, a decrease in valuation allowances on deferred tax assets, and the foreign tax credit. 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. Net loss attributable to non-controlling interest The net loss attributable to non-controlling interest, net of tax, was $16 million and $10 million for the third quarter and first nine months of fiscal 2024, respectively, a change of $18 million and $14 million as compared to both periods of the prior fiscal year. The change against both comparative periods is primarily due to an adjustment to prior period amounts recognized in the third quarter of fiscal 2024. 38 Earnings Per Share Diluted EPS for the third quarter and first nine months of fiscal 2024 was $0.81 and $1.43, respectively, an increase of $0.56 and $0.63, respectively, as compared to the same periods of the prior fiscal year. The increase in diluted EPS against both comparative periods was primarily due to increases in net income attributable to DXC common stockholders and lower weighted average share counts from the Company’s share repurchases. Diluted EPS for the third quarter of fiscal 2024 includes $0.16 per share of restructuring costs, $0.01 per share of transaction, separation and integration-related costs, $0.39 per share of amortization of acquired intangible assets, $(0.49) per share of net gains on dispositions, $0.01 per share of merger related indemnification costs, and $(0.03) per share of tax adjustments. Diluted EPS for the first nine months of fiscal 2024 includes $0.36 per share of restructuring costs, $0.02 per share of transaction, separation and integration-related costs, $1.05 per share of amortization of acquired intangible assets, $(0.55) per share of net gains on dispositions, $0.01 per share of merger related indemnification costs, $0.04 per share of impairment losses, and $(0.18) per share of tax adjustments. 39 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. 40 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 Dollar Amount Three Months Ended December 31, Change Nine Months Ended December 31, Change (in millions) 2023 2022 Dollar Percent 2023 2022 Dollar Percent Income before income taxes $ 212 $ 102 $ 110 107.8 % $ 418 $ 278 $ 140 50.4 % Non-GAAP income before income taxes $ 236 $ 294 $ (58) (19.7) % $ 669 $ 789 $ (120) (15.2) % Net income $ 140 $ 61 $ 79 129.5 % $ 281 $ 192 $ 89 46.4 % Adjusted EBIT $ 258 $ 309 $ (51) (16.5) % $ 733 $ 837 $ (104) (12.4) % 41 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. • 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 – in fiscal 2024, primarily represents the Company’s current estimate of potential liability to HPE for a tax related indemnification; and in fiscal 2023, represents the Company’s then 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. These obligations are related to the HPES merger. • SEC Matter - represents the Company’s 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. • Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities. (1) • Arbitration loss - reflects a loss arising from an arbitration decision in the third quarter of fiscal 2023. • 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 nine months of fiscal 2024, the Company sold insignificant businesses and a strategic investment and made adjustments to estimated amounts from prior years’ dispositions that resulted in a net gain of $132 million. During the first nine months of fiscal 2023, the Company sold insignificant businesses that resulted in a net loss of $12 million. (2) Impairment losses on dispositions for the first nine months of fiscal 2024 include $5 million of charges associated with certain strategic investments accounted for within Other income, net. Impairment losses on dispositions for the first nine months of fiscal 2024 included $4 million of Net income attributable to non-controlling interest, net of tax. 42 A reconciliation of reported results to non-GAAP results is as follows: Three Months Ended December 31, 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 Tax Adjustment Non-GAAP Results Income before income taxes $ 212 $ 36 $ 2 $ 88 $ 2 $ (104) $ — $ 236 Income tax expense 72 5 — 13 — (10) 5 85 Net income 140 31 2 75 2 (94) (5) 151 Less: net loss attributable to non-controlling interest, net of tax (16) — — — — — — (16) Net income attributable to DXC common stockholders $ 156 $ 31 $ 2 $ 75 $ 2 $ (94) $ (5) $ 167 Effective Tax Rate 34.0 % 36.0 % Basic EPS $ 0.82 $ 0.16 $ 0.01 $ 0.39 $ 0.01 $ (0.49) $ (0.03) $ 0.88 Diluted EPS $ 0.81 $ 0.16 $ 0.01 $ 0.39 $ 0.01 $ (0.49) $ (0.03) $ 0.87 Weighted average common shares outstanding for: Basic EPS 190.31 190.31 190.31 190.31 190.31 190.31 190.31 190.31 Diluted EPS 191.93 191.93 191.93 191.93 191.93 191.93 191.93 191.93 Nine Months Ended December 31, 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 Adjustment Non-GAAP Results Income before income taxes $ 418 $ 91 $ 6 $ 266 $ 15 $ (132) $ 5 $ — $ 669 Income tax expense 137 18 1 53 12 (20) 1 37 239 Net income 281 73 5 213 3 (112) 4 (37) 430 Less: net loss attributable to non-controlling interest, net of tax (10) — — — — — (4) — (14) Net income attributable to DXC common stockholders $ 291 $ 73 $ 5 $ 213 $ 3 $ (112) $ 8 $ (37) $ 444 Effective Tax Rate 32.8 % 35.7 % Basic EPS $ 1.45 $ 0.36 $ 0.02 $ 1.06 $ 0.01 $ (0.56) $ 0.04 $ (0.18) $ 2.21 Diluted EPS $ 1.43 $ 0.36 $ 0.02 $ 1.05 $ 0.01 $ (0.55) $ 0.04 $ (0.18) $ 2.18 Weighted average common shares outstanding for: Basic EPS 200.68 200.68 200.68 200.68 200.68 200.68 200.68 200.68 200.68 Diluted EPS 203.55 203.55 203.55 203.55 203.55 203.55 203.55 203.55 203.55 43 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 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 192 107 10 243 31 (12) 7 1 579 Less: net income attributable to non-controlling interest, net of tax 4 — — — — — — — 4 Net income 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 44 Reconciliations of revenue growth to organic revenue growth are as follows: Three Months Ended Nine Months Ended (in millions) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Total revenue growth (4.7) % (12.8) % (5.1) % (11.6) % Foreign currency (1.7) % 6.6 % (1.0) % 6.6 % Acquisition and divestitures 1.9 % 2.4 % 2.2 % 2.4 % Organic revenue growth (4.5) % (3.8) % (3.9) % (2.6) % GBS revenue growth (2.4) % (10.7) % (1.9) % (8.7) % Foreign currency (1.4) % 6.4 % (0.7) % 6.6 % Acquisition and divestitures 4.1 % 4.5 % 4.6 % 4.2 % GBS organic revenue growth 0.3 % 0.2 % 2.0 % 2.1 % GIS revenue growth (6.8) % (14.7) % (8.1) % (14.1) % Foreign currency (2.1) % 6.7 % (1.2) % 6.7 % Acquisition and divestitures — % 0.6 % — % 0.6 % GIS organic revenue growth (8.9) % (7.4) % (9.3) % (6.8) % Reconciliations of net income to adjusted EBIT are as follows: Three Months Ended Nine Months Ended (in millions) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Net income $ 140 $ 61 $ 281 $ 192 Income tax expense 72 41 137 86 Interest income (56) (41) (158) (89) Interest expense 78 56 222 137 EBIT 234 117 482 326 Restructuring costs 36 49 91 135 Transaction, separation and integration-related costs 2 6 6 12 Amortization of acquired intangible assets 88 100 266 305 Merger related indemnification 2 11 15 21 SEC Matter — — — 8 (Gains) losses on dispositions (104) 9 (132) 12 Arbitration loss — 9 — 9 Impairment losses — 8 5 8 Pension and OPEB actuarial and settlement losses — — — 1 Adjusted EBIT $ 258 $ 309 $ 733 $ 837 45 Liquidity and Capital Resources Cash and Cash Equivalents and Cash Flows As of December 31, 2023, our cash and cash equivalents (“cash”) were $1.7 billion, of which $1.0 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 $0.2 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 $0.1 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, 2023 December 31, 2022 Change Net cash provided by (used in): Operating activities $ 1,081 $ 1,000 $ 81 Investing activities (367) (299) (68) Financing activities (877) (693) (184) Effect of exchange rate changes on cash and cash equivalents (4) (95) 91 Cash classified within current assets held for sale — (494) 494 Net decrease in cash and cash equivalents $ (167) $ (581) $ 414 Cash and cash equivalents at beginning of year 1,858 2,672 Cash and cash equivalents at the end of period $ 1,691 $ 2,091 Operating cash flow Net cash provided by operating activities was $1,081 million and $1,000 million, respectively, during the first nine months of fiscal 2024 and fiscal 2023, reflecting a year-over-year increase of $81 million. The increase was primarily due to: • a $272 million favorable change in working capital primarily from improvements in our cash conversion cycle; partially offset by • a decrease in net income, net of adjustments of $191 million. The following table contains certain key working capital metrics: Three Months Ended December 31, 2023 December 31, 2022 Days of sales outstanding in accounts receivable 65 69 Days of purchases outstanding in accounts payable (63) (54) Cash conversion cycle 2 15 46 Investing cash flow Net cash used in investing activities was $367 million and $299 million, respectively, during the first nine months of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $68 million. The change against the comparative period was primarily due to: • a decrease in proceeds from sales of assets and business dispositions of $95 million and $21 million, respectively; and • a decrease in cash flows from other net investing activities of $4 million; partially offset by • a $52 million decrease in capital expenditures. Financing cash flow Net cash used in financing activities was $877 million and $693 million, respectively, during the first nine months of fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $184 million. The change against the comparative period was primarily due to: • a $450 million increase in cash used for share repurchase activity and related taxes paid on net share settlements; partially offset by • a $200 million increase in cash inflows from commercial paper borrowings, net of repayments and other financing activities; and • a $66 million decrease in payments on capital leases and borrowings for asset financings, as the Company continues reducing the volume of these financing arrangements. Debt Financing The following table summarizes our total debt: As of (in millions) December 31, 2023 March 31, 2023 Short-term debt and current maturities of long-term debt $ 661 $ 500 Long-term debt, net of current maturities 3,880 3,900 Total debt $ 4,541 $ 4,400 The $141 million increase in total debt during the first nine months of fiscal 2024 was primarily attributable to the increase in borrowings of commercial paper and 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 December 31, 2023 and December 31, 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. 47 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, term loans, and bonds. In addition, we currently utilize, and 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 $4.9 billion as of December 31, 2023, includes $1.7 billion of cash and cash equivalents and $3.2 billion of available borrowings under our revolving credit facility. On November 1, 2023, the Company extended the term and increased its available borrowings under our revolving credit facility to $3.2 billion. Share Repurchases See Note 15 – “Stockholders’ Equity.” Dividends To maintain our financial flexibility, we continue to suspend payment of quarterly dividends for fiscal 2024. 48 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 as of December 31, 2023, 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 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, 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.”