DXC Technology Earnings 2020-06-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _____________ to ____________
Commission File No.: 001-38033
 | DXC TECHNOLOGY COMPANY |
(Exact name of registrant as specified in its charter) | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||
, | ||||||
(Address of principal executive offices) | (Zip Code) | |||||
Registrant's telephone number, including area code: (703 ) 245-9675
Securities registered pursuant to Section 12(b) of the Act: | ||||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||
Securities registered pursuant to Section 12(g) of the Act: None | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x | Accelerated Filer | o | ||||||
Non-accelerated Filer | o | Smaller reporting company | ||||||
Emerging growth company | ||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
TABLE OF CONTENTS
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PART I
ITEM 1. FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements
Page | |
1
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended | ||||||||
(in millions, except per-share amounts) | June 30, 2020 | June 30, 2019 | ||||||
Revenues | $ | $ | ||||||
Costs of services (excludes depreciation and amortization and restructuring costs) | ||||||||
Selling, general, and administrative (excludes depreciation and amortization and restructuring costs) | ||||||||
Depreciation and amortization | ||||||||
Restructuring costs | ||||||||
Interest expense | ||||||||
Interest income | ( | ) | ( | ) | ||||
Other income, net | ( | ) | ( | ) | ||||
Total costs and expenses | ||||||||
(Loss) income before income taxes | ( | ) | ||||||
Income tax (benefit) expense | ( | ) | ||||||
Net (loss) income | ( | ) | ||||||
Less: net income attributable to non-controlling interest, net of tax | ||||||||
Net (loss) income attributable to DXC common stockholders | $ | ( | ) | $ | ||||
(Loss) income per common share: | ||||||||
Basic | $ | ( | ) | $ | ||||
Diluted | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
Three Months Ended | ||||||||||
(in millions) | June 30, 2020 | June 30, 2019 | ||||||||
Net (loss) income | $ | ( | ) | $ | ||||||
Other comprehensive income (loss), net of taxes: | ||||||||||
Foreign currency translation adjustments, net of tax benefit of $7 and $12 | ( | ) | ( | ) | ||||||
Cash flow hedges adjustments, net of tax expense of $3 and $0 | ||||||||||
Available-for-sale securities, net of tax expense of $0 and $1 | ||||||||||
Pension and other post-retirement benefit plans, net of tax: | ||||||||||
Amortization of prior service cost, net of tax benefit of $1 and $0 | ( | ) | ( | ) | ||||||
Pension and other post-retirement benefit plans, net of tax | ( | ) | ( | ) | ||||||
Other comprehensive income (loss), net of taxes | ( | ) | ||||||||
Comprehensive (loss) income | ( | ) | ||||||||
Less: comprehensive income (loss) attributable to non-controlling interest | ( | ) | ||||||||
Comprehensive (loss) income attributable to DXC common stockholders | $ | ( | ) | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
As of | ||||||||
(in millions, except per-share and share amounts) | June 30, 2020 | March 31, 2020 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables and contract assets, net of allowance of $104 and $74 | ||||||||
Prepaid expenses | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Intangible assets, net of accumulated amortization of $4,627 and $4,347 | ||||||||
Operating right-of-use assets, net | ||||||||
Goodwill | ||||||||
Deferred income taxes, net | ||||||||
Property and equipment, net of accumulated depreciation of $4,072 and $3,818 | ||||||||
Other assets | ||||||||
Total Assets | $ | $ | ||||||
LIABILITIES and EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt and current maturities of long-term debt | ||||||||
Accounts payable | ||||||||
Accrued payroll and related costs | ||||||||
Current operating lease liabilities | ||||||||
Accrued expenses and other current liabilities | ||||||||
Deferred revenue and advance contract payments | ||||||||
Income taxes payable | ||||||||
Total current liabilities | ||||||||
Long-term debt, net of current maturities | ||||||||
Non-current deferred revenue | ||||||||
Non-current operating lease liabilities | ||||||||
Non-current income tax liabilities and deferred tax liabilities | ||||||||
Other long-term liabilities | ||||||||
Total Liabilities | ||||||||
Commitments and contingencies | ||||||||
DXC stockholders’ equity: | ||||||||
Preferred stock, par value $.01 per share, 1,000,000 shares authorized, none issued as of June 30, 2020 and March 31, 2020 | ||||||||
Common stock, par value $.01 per share, 750,000,000 shares authorized, 256,382,532 issued as of June 30, 2020 and 255,674,040 issued as of March 31, 2020 | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Treasury stock, at cost, 2,291,790 and 2,148,708 shares as of June 30, 2020 and March 31, 2020 | ( | ) | ( | ) | ||||
Total DXC stockholders’ equity | ||||||||
Non-controlling interest in subsidiaries | ||||||||
Total Equity | ||||||||
Total Liabilities and Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended | ||||||||
(in millions) | June 30, 2020 | June 30, 2019 | ||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | ( | ) | $ | ||||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | ||||||||
Operating right-of-use expense | ||||||||
Pension & other post-employment benefits, actuarial & settlement losses | ||||||||
Share-based compensation | ||||||||
Loss (gain) on dispositions | ( | ) | ||||||
Provision for losses on accounts receivable | ( | ) | ||||||
Unrealized foreign currency exchange gain | ( | ) | ( | ) | ||||
Other non-cash charges, net | ( | ) | ||||||
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | ||||||||
Increase in assets | ( | ) | ( | ) | ||||
Decrease in operating lease liability | ( | ) | ( | ) | ||||
Decrease in other liabilities | ( | ) | ( | ) | ||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | ( | ) | ( | ) | ||||
Payments for transition and transformation contract costs | ( | ) | ( | ) | ||||
Software purchased and developed | ( | ) | ( | ) | ||||
Payments for acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
Cash collections related to deferred purchase price receivable | ||||||||
Proceeds from sale of assets | ||||||||
Short-term investing | ( | ) | ||||||
Other investing activities, net | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings of commercial paper | ||||||||
Repayments of commercial paper | ( | ) | ( | ) | ||||
Borrowings under lines of credit | ||||||||
Repayment of borrowings under lines of credit | ( | ) | ||||||
Borrowings on long-term debt, net of discount | ||||||||
Principal payments on long-term debt | ( | ) | ( | ) | ||||
Payments on finance leases and borrowings for asset financing | ( | ) | ( | ) | ||||
Proceeds from stock options and other common stock transactions | ||||||||
Taxes paid related to net share settlements of share-based compensation awards | ( | ) | ( | ) | ||||
Repurchase of common stock and advance payment for accelerated share repurchase | ( | ) | ||||||
Dividend payments | ( | ) | ( | ) | ||||
Other financing activities, net | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents at beginning of year | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock (1) | Total DXC Equity | Non- Controlling Interest | Total Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||
Cumulative effect of adopting ASU 2016-13 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Net loss | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Other comprehensive income | ( | ) | |||||||||||||||||||||||||
Share-based compensation expense | |||||||||||||||||||||||||||
Acquisition of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Stock option exercises and other common stock transactions | |||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||
Three Months Ended June 30, 2019 | |||||||||||||||||||||||||||
(in millions, except shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total DXC Equity | Non- Controlling Interest | Total Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||
Net income | |||||||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
Share-based compensation expense | |||||||||||||||||||||||||||
Acquisition of treasury stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Share repurchase program | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Stock option exercises and other common stock transactions | |||||||||||||||||||||||||||
Dividends declared ($0.21 per share) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||
(1) 2,291,790 treasury shares as of June 30, 2020.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Summary of Significant Accounting Policies
Business
DXC Technology Company ("DXC," the "Company," "we," "us," or "our") helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. With decades of driving innovation, the world’s largest companies trust DXC to deploy its enterprise technology stack to deliver new levels of performance, competitiveness and customer experiences.
HHS Sale
On March 9, 2020, DXC entered into a definitive agreement to sell (the “HHS Sale”) its U.S. State and Local Health and Human Services business (the “HHS Business”) to Veritas Capital Fund Management, L.L.C. for $5.0 billion in cash. The HHS Business is an end-to-end provider of technology-enabled, mission critical solutions that are fundamental to the administration and operations of health programs throughout the United States. The transaction is expected to close by September 2020, but no later than December 2020, subject to the satisfaction of certain closing conditions. Following the transaction close, DXC will retain its remaining healthcare practice, servicing customers across the healthcare continuum, including payers, providers and life sciences firms.
Luxoft Acquisition
On June 14, 2019, DXC completed its acquisition of Luxoft Holding, Inc. ("Luxoft"), a global digital strategy and software engineering firm (the "Luxoft Acquisition"). The acquisition builds on DXC’s unique value proposition as an end-to-end, mainstream IT and digital services market leader, and strengthens the Company’s ability to design and deploy transformative digital solutions for clients at scale. See Note 3 - "Acquisitions" for further information.
Basis of Presentation
In order to make this report easier to read, DXC refers throughout to (i) the interim unaudited Condensed Consolidated Financial Statements as the “financial statements,” (ii) the Condensed Consolidated Statements of Operations as the “statements of operations,” (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income as the "statements of comprehensive income," (iv) the Condensed Consolidated Balance Sheets as the “balance sheets,” and (v) the Condensed Consolidated Statements of Cash Flows as the “statements of cash flows.” In addition, references throughout to numbered “Notes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.
The accompanying financial statements include the accounts of DXC, its consolidated subsidiaries, and those business entities in which DXC maintains a controlling interest. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Other investments are accounted for by the cost method. Non-controlling interests are presented as a separate component within equity in the balance sheets. Net earnings attributable to the non-controlling interests are presented separately in the statements of operations and comprehensive income attributable to non-controlling interests are presented separately in the statements of comprehensive income. All intercompany transactions and balances have been eliminated.
The financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports and accounting principles generally accepted in the United States ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020 ("fiscal 2020").
7
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Use of Estimates
The preparation of financial statements in conformity with GAAP, requires the Company's management to make estimates and assumptions that affect amounts reported in the financial statements. The Company bases its estimates on assumptions regarding historical experience, currently available information and anticipated developments that it believes are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. The severity, magnitude and duration, as well as the economic consequences of the coronavirus disease 2019 ("COVID-19") pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods. In the opinion of the Company's management, the accompanying financial statements of DXC contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.
Allowance for Credit Losses
Effective April 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” using the modified retrospective method. Refer to Note 2 - "Recent Accounting Pronouncements" and Note 5 - "Receivables" for further discussion of the impact of adoption and other required disclosures. The amendments in this update changed the guidance for credit losses to an expected loss model rather than an incurred loss model. Financial assets subject to impairment under an expected credit loss model include billed and unbilled receivables, other receivables, and contract assets. Certain off-balance sheet arrangements, such as financial guarantees associated with receivables securitization facilities, are also subject to the guidance of ASU 2016-13.
Under an expected credit loss model, the Company immediately recognizes an estimate of credit losses expected to occur over the remaining life of financial assets that are in the scope of ASU 2016-13. DXC considers all available relevant information when estimating expected credit losses, including past events, current market conditions and forecasts and their implications for expected credit losses.
8
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 2 - Recent Accounting Pronouncements
During the three months ended June 30, 2020, DXC adopted the following Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board:
Date Issued and ASU | Date Adopted and Method | Description | Impact |
June 2016 ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” | April 1, 2020 Modified Retrospective | This update requires the measurement and recognition of expected credit losses using the current expected credit loss model for financial assets held at amortized cost, which includes the Company’s trade accounts receivable, certain financial instruments and contract assets. It replaces the existing incurred loss impairment model with an expected loss methodology. The recorded credit losses are adjusted each period for changes in expected lifetime credit losses. The standard requires a cumulative effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. | The Company adopted this standard using the modified retrospective approach and recorded an immaterial cumulative effect adjustment in retained earnings as of April 1, 2020. |
August 2018 ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" | April 1, 2020 Prospective | This update helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively. | The Company adopted this standard using the prospective method and determined that the adoption of ASU 2018-15 had no material impact to its condensed consolidated financial statements. |
The following ASUs were recently issued but have not yet been adopted by DXC:
Date Issued and ASU | DXC Effective Date | Description | Impact |
December 2019 ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" | Fiscal 2022 | This update is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Early adoption of this update is permitted. | The Company is currently evaluating the potential impact this standard may have on its financial statements in future reporting periods. |
Other recently issued ASUs effective after June 30, 2020 are not expected to have a material effect on DXC's consolidated financial statements.
9
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 3 - Acquisitions
Fiscal 2020 Acquisitions
Luxoft Acquisition
On June 14, 2019, DXC completed the acquisition of Luxoft, a digital service provider whose offerings encompass strategic consulting, custom software development services, and digital solution engineering for total consideration of $2.0 billion. The acquisition will combine Luxoft’s digital engineering capabilities with DXC’s expertise in IT modernization and integration. The purchase agreement (“Merger Agreement”) was entered into by DXC and Luxoft on January 6, 2019 and the transaction was closed on June 14, 2019 (the "acquisition date.")
The transaction between DXC and Luxoft is an acquisition, with DXC as the acquirer and Luxoft as the acquiree, based on the fact that DXC acquired 100 % of the equity interests and voting rights in Luxoft, and that DXC is the entity that transferred the cash consideration.
The Company's allocation of the purchase price to the assets acquired and liabilities assumed as of the Luxoft acquisition date is as follows:
(in millions) | Fair Value | |||
Cash and cash equivalents | $ | |||
Accounts receivable | ||||
Other current assets | ||||
Total current assets | ||||
Property and equipment | ||||
Intangible assets | ||||
Other assets | ||||
Total assets acquired | ||||
Accounts payable, accrued payroll, accrued expenses, and other current liabilities | ( | ) | ||
Deferred revenue | ( | ) | ||
Long-term deferred tax liabilities and income tax payable | ( | ) | ||
Other liabilities | ( | ) | ||
Total liabilities assumed | ( | ) | ||
Net identifiable assets acquired | ||||
Goodwill | ||||
Total consideration transferred | $ | |||
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. The goodwill recognized with the acquisition was attributable to the synergies expected to be achieved by combining the businesses of DXC and Luxoft, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The total goodwill arising from the acquisition was allocated to Global Business Services ("GBS") and is not deductible for tax purposes. See Note 10 - "Goodwill."
10
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The Company valued current assets and liabilities using existing carrying values as an estimate of the approximate fair value of those items at the acquisition date except for certain contract receivables for which the Company determined fair value based on a cost plus margin approach. The Company valued acquired property and equipment using predominately the direct capitalization method of the income approach and in certain specific cases, the Company determined that the net book value represents the fair value. The Company valued customer relationships using the multi-period excess earnings method under the income approach and valued trade names and developed technology using a relief from royalty method under the income approach. The Company determined that the net book value of the purchased software represents the fair value.
Below are the estimated useful lives of the acquired intangibles:
Estimated Useful Lives (Years) | ||
Customer related intangibles | ||
Trade names | ||
Developed technology | ||
Third-party purchased software | ||
The Company valued deferred tax liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.
Note 4 - Earnings (Loss) per Share
Basic earnings (loss) per share ("EPS") is computed using the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the incremental shares issuable upon the assumed exercise of stock options and equity awards. The following table reflects the calculation of basic and diluted EPS:
Three Months Ended | ||||||||
(in millions, except per-share amounts) | June 30, 2020 | June 30, 2019 | ||||||
Net (loss) income attributable to DXC common shareholders: | $ | ( | ) | $ | ||||
Common share information: | ||||||||
Weighted average common shares outstanding for basic EPS | ||||||||
Dilutive effect of stock options and equity awards | ||||||||
Weighted average common shares outstanding for diluted EPS | ||||||||
(Loss) Earnings per share: | ||||||||
Basic | $ | ( | ) | $ | ||||
Diluted | $ | ( | ) | $ | ||||
Certain share-based equity awards were excluded from the computation of dilutive EPS because inclusion of these awards would have had an anti-dilutive effect. The number of awards excluded were as follows:
Three Months Ended | ||||||
June 30, 2020(1) | June 30, 2019 | |||||
Stock Options | ||||||
Restricted Stock Units | ||||||
Performance Stock Units | ||||||
11
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Note 5 - Receivables
Receivables Facility
The Company has an accounts receivable sales facility (as amended, restated, supplemented or otherwise modified as of June 30, 2020, the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers") for the sale of commercial accounts receivable in the United States. Under the Receivables Facility, certain of the Company's subsidiaries (the "Sellers") sell accounts receivable to DXC Receivables LLC ("Receivables SPV"), a wholly owned bankruptcy-remote entity, in a true sale. Receivables SPV subsequently sells certain of the receivables in their entirety to the Purchasers pursuant to a receivables purchase agreement. The financial obligations of Receivables SPV to the Purchasers under the Receivables Facility are limited to the assets it owns and non-recourse to the Company. Sales of receivables by Receivables SPV occur continuously and are settled on a monthly basis. During the first quarter of fiscal 2021, Receivables SPV amended the Receivables Facility (the "Amendment") to decrease the facility limit from $750 million to $600 million and extend the termination date to August 19, 2020. Under the terms of the Receivables Facility, there is no longer any deferred purchase price ("DPP") for receivables as the entire purchase price is paid in cash when the receivables are sold to the Purchasers. Prior to the Amendment, DPPs were realized by Receivables SPV upon the ultimate collection of the underlying receivables sold to the Purchasers. Cash receipts on the DPP were classified as cash flows from investing activities.
The amount available under the Receivables Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after deducting excess concentrations. As of June 30, 2020, the total availability under the Receivables Facility was $324 million, and the amount sold to the Purchasers was $403 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $79 million liability within accounts payable because the amount of cash proceeds received by the Company under the Receivables Facility was more than the total availability. The Receivables Facility is scheduled to terminate on August 19, 2020, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Company uses the proceeds from the sale of receivables under the Receivables Facility for general corporate purposes.
The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
While the Company guarantees certain non-financial performance obligations of the Sellers, the Purchasers bear customer credit risk associated with the receivables sold under the Receivables Facility and have recourse in the event of credit-related customer non-payment solely to the assets of the Receivables SPV.
The following table is a reconciliation of the beginning and ending balance of the DPP:
(in millions) | As of and for the Three Months Ended | |||
June 30, 2019 | ||||
Beginning balance | $ | |||
Transfers of receivables | ||||
Collections | ( | ) | ||
Change in funding availability | ||||
Ending balance | $ | |||
12
DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
Milano Receivables Facility
On June 5, 2020, the Company entered into an accounts receivable securitization facility (the "Milano Facility") with certain unaffiliated financial institutions (the "Milano Purchasers") for the sale of commercial accounts receivable related to Medicaid Management Information Systems ("MMiS") contracts in the United States. The Milano Facility is scheduled to terminate on June 4, 2021, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Milano Facility has a facility limit of $275 million. Under the Milano Facility, certain of the Company's subsidiaries (the "Milano Sellers") sell MMiS accounts receivable to Milano Receivables Funding LLC ("Milano Receivables SPV"), a wholly owned bankruptcy-remote entity, in a true sale. Milano Receivables SPV subsequently sells the receivables in their entirety to the Milano Purchasers pursuant to a receivables purchase agreement. The financial obligations of Milano Receivables SPV to the Milano Purchasers under the Milano Facility are limited to the assets it owns and non-recourse to the Company. Sales of MMiS receivables by Milano Receivables SPV occur continuously and are settled on a monthly basis.
The amount available under the Milano Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after deducting excess concentrations. As of June 30, 2020, the total availability under the Milano Facility was approximately $251 million, and the amount sold to the Milano Purchasers was $263 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $12 million liability within accounts payable because the amount of cash proceeds received by the Company under the Milano Facility was more than the total availability. The Company uses the proceeds from the sale of receivables under the Milano Facility for general corporate purposes.
The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
While the Company guarantees certain non-financial performance obligations of the Milano Sellers, the Milano Purchasers bear customer credit risk associated with the receivables sold under the Milano Facility and have recourse in the event of credit-related customer non-payment solely to the assets of the Milano Receivables SPV.
German Receivables Facility
On October 1, 2019, the Company executed an accounts receivable securitization facility (as amended, restated, supplemented or otherwise modified as of June 30, 2020, the "DE Receivables Facility") with certain unaffiliated financial institutions (the "DE Purchasers") for the sale of commercial accounts receivable in Germany. The DE Receivables Facility has a facility limit of €200 million (approximately $225 million as of June 30, 2020). Under the DE Receivables Facility, certain subsidiaries of the Company organized in Germany (the "DE Sellers") sell accounts receivable to DXC ARFacility Designated Activity Company ("DE Receivables SPV"), a trust-owned bankruptcy-remote entity, in a true sale. Pursuant to a receivables purchase agreement, DE Receivables SPV subsequently sells the receivables to the DE Purchasers in return for payments of capital. Sales of receivables by DE Receivables SPV occur continuously and are settled on a monthly basis. During the first quarter of fiscal 2021, DE Receivables SPV amended the DE Receivables Facility. Under the terms of the DE Receivables Facility, there is no longer any DPP for receivables as the entire purchase price is paid in cash when the receivables are sold to the DE Purchasers. Prior to the Amendment, DPPs were realized by DE Receivables SPV upon the ultimate collection of the underlying receivables sold to the DE Purchasers. Cash receipts on the DPPs were classified as cash flows from investing activities. The DPP balance was $102 million before the Amendment was executed. Upon execution of the Amendment, the Purchasers extinguished the DPP balance and returned title to the applicable underlying receivables to DE Receivables SPV. The DPP extinguishment was classified as a non-cash investing activity, please refer to Note 18 - "Cash Flows."
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DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
The amount available under the DE Receivables Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after deducting excess concentrations. As of June 30, 2020, the total availability under the DE Receivables Facility was approximately $116 million, and the amount sold to the DE Purchasers was $123 million, which was derecognized from the Company's balance sheet. As of June 30, 2020, the Company recorded a $7 million liability within accounts payable because the amount of cash proceeds received by the Company under the DE Receivables Facility was more than the total availability. The DE Receivables Facility is scheduled to terminate on September 30, 2020, but provides for one or more optional one-year extensions, if agreed to by the DE Purchasers. The Company uses the proceeds from DE Receivables SPV's sale of receivables under the DE Receivables Facility for general corporate purposes.
The fair value of the sold receivables approximated book value due to the short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
Certain obligations of DE Sellers under the DE Receivables Facility and certain DXC subsidiaries located in Germany, as initial servicers, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the DE Purchasers. However, the performance guaranty does not cover DE Receivables SPV’s obligations to pay yield, fees or invested amounts to the administrative agent or any of the DE Purchasers.
The following table is a reconciliation of the beginning and ending balances of the DPP:
(in millions) | As of June 30, 2020 | |||
Beginning balance | $ | |||
Transfers of receivables | ||||
Collections | ( | ) | ||
Change in funding availability | ||||
Facility amendments | ( | ) | ||
Ending balance | $ | |||
Allowance for Doubtful Accounts
The Company calculates expected credit losses for trade accounts receivable based on historical credit loss rates for each aging category as adjusted for the current market conditions and forecasts about future economic conditions. The following table presents the activity in the allowance for doubtful accounts for trade accounts receivable:
(in millions) | As of and for the Three Months Ended | |||
June 30, 2020 | ||||
Beginning balance | $ | |||
Impact of adoption of the Credit Loss Standard | ||||
Provisions for expected credit losses | ||||
Write-offs charged against the allowance | ( | ) | ||
Ending balance | $ | |||
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DXC TECHNOLOGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued