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EX-32.2 - EXHIBIT 32.2 - DXC Technology Codxc0930201810-qex322.htm
EX-32.1 - EXHIBIT 32.1 - DXC Technology Codxc0930201810-qex321.htm
EX-31.2 - EXHIBIT 31.2 - DXC Technology Codxc0930201810-qex312.htm
EX-31.1 - EXHIBIT 31.1 - DXC Technology Codxc0930201810-qex311.htm
EX-10.9 - EXHIBIT 10.9 - DXC Technology Coa109dxcamendmentno4.htm
EX-10.2 - EXHIBIT 10.2 - DXC Technology Coexhibit102dxcseveranceplan.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
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
downloada05.jpg
DXC TECHNOLOGY COMPANY
 
(Exact name of Registrant as specified in its charter)
 
Nevada
61-1800317
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1775 Tysons Boulevard
 
Tysons, Virginia
22102
(Address of principal executive offices)
(zip code)
 
 
Registrant's telephone number, including area code: (703) 245-9675

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.

Large Accelerated Filer     x                Accelerated Filer o

Non-accelerated Filer o

Smaller reporting company o                Emerging growth company o

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).    o Yes  x   No

280,113,621 shares of common stock, par value $0.01 per share, were outstanding on October 31, 2018.



TABLE OF CONTENTS






PART I

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Financial Statements
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 




1


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
 
Three Months Ended
 
Six Months Ended
(in millions, except per-share amounts)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Revenues
 
$
5,013

 
$
5,453

 
$
10,295

 
$
10,689

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
3,518

 
3,870

 
7,385

 
8,179

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
569

 
644

 
1,009

 
1,037

Depreciation and amortization
 
484

 
482

 
955

 
824

Restructuring costs
 
157

 
188

 
342

 
375

Interest expense
 
83

 
73

 
168

 
147

Interest income
 
(33
)
 
(16
)
 
(65
)
 
(32
)
Other income, net
 
(97
)
 
(72
)
 
(191
)
 
(216
)
Total costs and expenses
 
4,681

 
5,169

 
9,603

 
10,314

 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
332

 
284

 
692

 
375

Income tax expense
 
73

 
79

 
202

 
62

Income from continuing operations
 
259

 
205

 
490

 
313

Income from discontinued operations, net of taxes
 

 
60

 
35

 
125

Net income
 
259

 
265

 
525

 
438

Less: net (loss) income attributable to non-controlling interest, net of tax
 
(3
)
 
9

 
4

 
23

Net income attributable to DXC common stockholders
 
$
262

 
$
256

 
$
521

 
$
415

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.93

 
$
0.69

 
$
1.72

 
$
1.02

Discontinued operations
 

 
0.21

 
0.12

 
0.44

 
 
$
0.93

 
$
0.90

 
$
1.84

 
$
1.46

Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.92

 
$
0.67

 
$
1.69

 
$
1.00

Discontinued operations
 

 
0.21

 
0.12

 
0.43

 
 
$
0.92

 
$
0.88

 
$
1.81

 
$
1.43

 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.19

 
$
0.18

 
$
0.38

 
$
0.36



The accompanying notes are an integral part of these condensed consolidated financial statements.





2



DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 
 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
259

 
$
265

 
$
525

 
$
438

Other comprehensive (loss) income, net of taxes:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax (1)
 
(66
)
 
(45
)
 
(408
)
 
109

 
Cash flow hedges adjustments, net of tax (2)
 
2

 
(2
)
 
(30
)
 
(5
)
 
Available-for-sale securities, net of tax
 

 

 
(1
)
 

 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost, net of tax (3)
 
(5
)
 
(3
)
 
(6
)
 
(7
)
 
Pension and other post-retirement benefit plans, net of tax
 
(5
)
 
(3
)
 
(6
)
 
(7
)
Other comprehensive (loss) income, net of taxes
 
(69
)
 
(50
)
 
(445
)
 
97

Comprehensive income
 
190

 
215

 
80

 
535

 
Less: comprehensive (loss) income attributable to non-controlling interest
 
(2
)
 
36

 
(1
)
 
28

Comprehensive income attributable to DXC common stockholders
 
$
192

 
$
179

 
$
81

 
$
507

        

(1) Tax expense related to foreign currency translation adjustments was $5 and $2 for the three and six months ended September 30, 2017, respectively.
(2) Tax benefit related to cash flow hedge adjustments was $17 and $10 for the three and six months ended September 30, 2018, respectively, and $3 and $3 for the three and six months ended September 30, 2017, respectively.
(3) Tax benefit related to amortization of prior service costs was $1 and $1 for the three and six months ended September 30, 2018, respectively, and $2 and $2 for the three and six months ended September 30, 2017, respectively.



The accompanying notes are an integral part of these condensed consolidated financial statements.



3


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
As of
(in millions, except per-share and share amounts)
 
September 30, 2018
 
March 31, 2018
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,780

 
$
2,593

Receivables and contract assets, net of allowance for doubtful accounts of $62 and $40
 
4,928

 
5,481

Prepaid expenses
 
630

 
496

Other current assets
 
477

 
469

Assets of discontinued operations
 

 
581

Total current assets
 
8,815

 
9,620

 
 
 
 
 
Intangible assets, net of accumulated amortization of $3,788 and $3,369
 
6,602

 
7,179

Goodwill
 
7,417

 
7,619

Deferred income taxes, net
 
326

 
373

Property and equipment, net of accumulated depreciation of $3,615 and $3,686
 
3,281

 
3,363

Other assets
 
2,441

 
2,404

Assets of discontinued operations - non-current
 

 
3,363

Total Assets
 
$
28,882

 
$
33,921

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
1,618

 
$
1,918

Accounts payable
 
1,358

 
1,513

Accrued payroll and related costs
 
734

 
744

Accrued expenses and other current liabilities
 
3,268

 
3,120

Deferred revenue and advance contract payments
 
1,442

 
1,641

Income taxes payable
 
94

 
127

Liabilities of discontinued operations
 

 
789

Total current liabilities
 
8,514

 
9,852

 
 
 
 
 
Long-term debt, net of current maturities
 
5,409

 
6,092

Non-current deferred revenue
 
301

 
795

Non-current income tax liabilities and deferred tax liabilities
 
1,219

 
1,166

Other long-term liabilities
 
1,602

 
1,723

Liabilities of discontinued operations - long-term
 

 
456

Total Liabilities
 
17,045

 
20,084

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $.01 per share, authorized 1,000,000 shares, none issued as of September 30, 2018 and March 31, 2018
 

 

Common stock, par value $.01 per share, authorized 750,000,000 shares, issued 282,519,184 as of September 30, 2018 and 286,393,147 as of March 31, 2018
 
3

 
3

Additional paid-in capital
 
11,848

 
12,210

Retained earnings
 
136

 
1,301

Accumulated other comprehensive (loss) income
 
(382
)
 
58

Treasury stock, at cost, 1,241,024 and 1,016,947 shares as of September 30, 2018 and March 31, 2018
 
(105
)
 
(85
)
Total DXC stockholders’ equity
 
11,500

 
13,487

Non-controlling interest in subsidiaries
 
337

 
350

Total Equity
 
11,837

 
13,837

Total Liabilities and Equity
 
$
28,882

 
$
33,921


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


DXC TECHNOLOGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
525

 
$
438

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,002

 
904

Share-based compensation
 
41

 
58

Gain on dispositions
 
(65
)
 

Unrealized foreign currency exchange (gains) losses
 
(12
)
 
4

Other non-cash charges, net
 
(18
)
 
15

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
(Increase) decrease in assets
 
(447
)
 
45

(Decrease) increase in liabilities
 
(141
)
 
46

Net cash provided by operating activities
 
885

 
1,510

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(133
)
 
(123
)
Payments for transition and transformation contract costs
 
(183
)
 
(176
)
Software purchased and developed
 
(125
)
 
(86
)
Cash acquired through Merger
 

 
974

Payments for acquisitions, net of cash acquired
 
(43
)
 
(152
)
Business dispositions
 
(65
)
 

Deferred purchase price receivable
 
409

 
33

Proceeds from sale of assets
 
57

 
20

Other investing activities, net
 
(1
)
 
6

Net cash (used in) provided by investing activities
 
(84
)
 
496

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings of commercial paper
 
1,158

 
1,182

Repayments of commercial paper
 
(1,158
)
 
(1,067
)
Repayment of borrowings under lines of credit
 

 
(335
)
Borrowings on long-term debt, net of discount
 
483

 
615

Principal payments on long-term debt
 
(2,036
)
 
(1,109
)
Payments on capital leases and borrowings for asset financing
 
(475
)
 
(443
)
Borrowings for USPS spin transaction
 
1,114

 

Proceeds from bond issuance
 
753

 
647

Proceeds from stock options and other common stock transactions
 
36

 
92

Taxes paid related to net share settlements of share-based compensation awards
 
(20
)
 
(66
)
Repurchase of common stock
 
(447
)
 
(66
)
Dividend payments
 
(105
)
 
(72
)
Other financing activities, net
 
11

 
1

Net cash used in financing activities
 
(686
)
 
(621
)
Effect of exchange rate changes on cash and cash equivalents
 
(64
)
 
49

Net increase in cash and cash equivalents
 
51

 
1,434

Cash and cash equivalents at beginning of year
 
2,729

 
1,268

Cash and cash equivalents at end of period
 
$
2,780

 
$
2,702

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)
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock (2)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Balance at March 31, 2018
286,393

 
$
3

$
12,210

$
1,301

$
58

$
(85
)
$
13,487

$
350

$
13,837

Cumulative effect of adopting the new revenue standard


 




114





114



114

Net Income
 
 
 
 
521

 
 
521

4

525

Other comprehensive loss
 
 
 
 
 
(440
)
 
(440
)
(5
)
(445
)
Share-based compensation expense
 
 
 
40

 
 
 
40

 
40

Acquisition of treasury stock
 
 
 
 
 
 
(20
)
(20
)
 
(20
)
Share repurchase program
(5,228
)
 


(251
)
(200
)
 
 
(451
)
 
(451
)
Stock option exercises and other common stock transactions
1,354

 


26

 
 

26

 
26

Dividends declared
 
 
 
 
(109
)
 
 
(109
)
 
(109
)
Non-controlling interest distributions and other
 
 
 
 


 
 

(12
)
(12
)
Divestiture of USPS
 
 
 
(177
)
(1,491
)


 
(1,668
)


(1,668
)
Balance at September 30, 2018
282,519

 
$
3

$
11,848

$
136

$
(382
)
$
(105
)
$
11,500

$
337

$
11,837

 
 
 
 
 
 
 
 
 
 
 
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
(Accumulated Deficit) Retained Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Balance at March 31, 2017
141,299

 
$
1

$
2,219

$
(170
)
$
(162
)
$

$
1,888

$
278

$
2,166

Business acquired in purchase, net of issuance costs(1)
141,741

 
2

9,848

 
 
 
9,850

61

9,911

Net income
 
 
 
 
415

 
 
415

23

438

Other comprehensive income
 
 
 
 
 
92

 
92

5

97

Share-based compensation expense
 
 
 
57

 
 
 
57

 
57

Acquisition of treasury stock
 
 
 
 
 
 
(61
)
(61
)
 
(61
)
Share repurchase program
(842
)
 


(36
)
(30
)
 
 
(66
)
 
(66
)
Stock option exercises and other common stock transactions
3,745

 


70

 
 
 
70

 
70

Dividends declared
 
 
 
 
(105
)
 
 
(105
)
 
(105
)
Balance at September 30, 2017
285,943

 
$
3

$
12,158

$
110

$
(70
)
$
(61
)
$
12,140

$
367

$
12,507


(1) See Note 3 - "Acquisitions"
(2) 1,241,024 treasury shares as of September 30, 2018



The accompanying notes are an integral part of these condensed consolidated financial statements.

6



DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 - Summary of Significant Accounting Policies

Business

DXC Technology Company ("DXC" or the "Company") is a world leading independent, end-to-end IT services company, serving nearly 6,000 private and public-sector clients from a diverse array of industries across 70 countries. The company's technology independence, global talent and extensive partner network deliver transformative digital offerings and solutions that help clients harness the power of innovation to thrive on change.

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 Statement of Comprehensive 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. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation.

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 for the fiscal year ended March 31, 2018 ("fiscal 2018") included in Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2018.

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. 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 shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019 ("fiscal 2019").


7

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Separation of USPS

On May 31, 2018, DXC completed the separation of its U.S. Public Sector business ("USPS") (the "Separation"), and combination with Vencore Holding Corp. ("Vencore") and KeyPoint Government Solutions ("Keypoint") (the "Mergers") to form Perspecta Inc. ("Perspecta"), an independent public company (collectively, the "USPS Separation and Mergers"). Under the terms of the separation agreements, on May 31, 2018, stockholders who held DXC common stock at the close of business on May 25, 2018 (the “Record Date”), received a distribution of one share of Perspecta common stock for every two shares of DXC common stock held as of the Record Date (the "Distribution"). See Note 4 - "Divestitures" for more information.

As a result of the Separation, the statements of operations, balance sheets, and related financial information reflect USPS's operations, assets and liabilities as discontinued operations for all periods presented. The cash flows of USPS have not been segregated and are included in the statements of cash flows for all periods presented. In addition, USPS is no longer a reportable segment. DXC's reportable segments are Global Business Services ("GBS") and Global Infrastructure Services ("GIS").

Revenue Recognition

Effective April 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. Refer to Note 2 - “Recent Accounting Pronouncements” and Note 12 - “Revenue” for further discussion of the impact of adoption and other required disclosures. The Company’s accounting policy related to the new revenue standard is summarized below.

The Company's primary service offerings are information technology outsourcing, other professional services, or a combination thereof. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

DXC determines revenue recognition through the five-step model as follows:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation

DXC's IT outsourcing arrangements typically reflect a single performance obligation that comprises a series of distinct services which are substantially the same and provided over a period of time using the same measure of progress. Revenue derived from these arrangements is recognized over time based upon the level of services delivered in the distinct periods in which they are provided using an input method based on time increments. DXC's contracts often include upfront fees billed for activities to familiarize DXC with the client's operations, take control over their administration and operation, and adapt them to DXC's solutions. Upfront fees are generally recognized ratably over the contract period, which approximates the manner in which the services are provided. These activities typically do not qualify as performance obligations, and the related revenues are allocated to the relevant performance obligations and recognized ratably over time as the performance obligation is satisfied during the period in which DXC provides the related service, which is typically the life of the contract. Software transactions that include multiple performance obligations are described below.

For contracts with multiple performance obligations, DXC allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.

The transaction price of a contract is determined based on fixed and variable consideration. Variable consideration related to the Company’s IT outsourcing offerings often include volume-based pricing that are allocated to the distinct days of the services to which the variable consideration pertains. However, in certain cases, estimates of variable consideration,

8

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


including penalties, contingent milestone payments and rebates are necessary. The Company only includes estimates of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. These judgments involve consideration of historical and expected experience with the customer and other similar customers, and the facts and circumstances specific to the arrangement.

The Company generally provides its services under time and materials contracts, unit price contracts, fixed-price contracts, and software contracts for which revenue is recognized in the following manner:

Time and materials contracts. Revenue is recognized over time at agreed-upon billing rates when services are provided.

Unit-price contracts. Revenue is recognized over time based on unit metrics multiplied by the agreed upon contract unit price or when services are delivered.

Fixed-price contracts. For certain fixed-price contracts, revenue is recognized over time using a method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method (referred to as the percentage-of-completion cost-to-cost method). Under the percentage-of-completion cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion. A performance obligation's estimate at completion includes all direct costs such as materials, labor, subcontractor costs, overhead, and a ratable portion of general and administrative costs. If output or input measures are not available or cannot be reasonably estimated, revenue is deferred until progress can be measured and costs are not deferred unless they meet the criteria for capitalization. Under the percentage-of-completion cost-to-cost method, progress towards completion is measured based on either achievement of specified contract milestones, costs incurred as a proportion of estimated total costs, or other measures of progress when appropriate. Profit in a given period is reported at the estimated profit margin to be achieved on the overall contract.

Software contracts. Certain of DXC's arrangements involve the sale of DXC proprietary software, post contract customer support, and other software-related services. The standalone selling price generally is determined for each performance obligation using an adjusted market assessment approach based on the price charged where each deliverable is sold separately. In certain limited cases (typically for software licenses) when the historical selling price is highly variable, the residual approach is used. This approach allocates revenue to the performance obligation equal to the difference between the total transaction price and the observable standalone selling prices for the other performance obligations. Revenue from distinct software licenses is recognized at a point in time when the customer can first use the software license. If significant customization is required, software revenue is recognized as the related software customization services are performed in accordance with the percentage-of-completion method described above. Revenue for post contract customer support and other software services is recognized over time as those services are provided.

Practical Expedients and Exemptions

DXC does not adjust the promised amount of consideration for the effects of a significant financing component when the period between when DXC transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

In addition, the Company reports revenue net of any revenue-based taxes assessed by a governmental authority that are imposed on and concurrent with specific revenue-producing transactions, such as sales taxes and value-added taxes.

Contract Balances

The timing of revenue recognition, billings and cash collections results in accounts receivable (billed receivables, unbilled receivables and contract assets) and deferred revenue and advance contract payments (contract liabilities) on the Company's balance sheets. In arrangements that contain an element of customized software solutions, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g. monthly) or upon achievement of certain contractual milestones. Generally, billing occurs subsequent to revenue recognition, sometimes resulting in contract assets if the related billing is conditional upon more than just the passage of time. However, the Company sometimes receives advances or deposits from our customers, before revenue is recognized, which results in the generation of contract liabilities. Payment terms vary by type of product or service being

9

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


provided as well as by customer, although the term between invoicing and when payment is due is generally an insignificant period of time.

Costs to Obtain a Contract

Certain sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The majority of sales commissions are paid based on the achievement of quota-based targets. These costs are deferred and amortized on a straight-line basis over an average period of benefit determined to be five years. The Company determined the period of benefit considering the length of its customer contracts, its technology and other factors. The period of benefit approximates the average stated contract terms, excluding expected future renewals, because sales commissions are paid upon contract renewal in a manner commensurate with the initial commissions. Some commission payments are not capitalized because they are expensed during the fiscal year as the related revenue is recognized. Capitalized sales commissions costs are classified within other assets and amortized in selling, general and administrative expenses.

Costs to Fulfill a Contract

Certain contract setup costs incurred upon initiation or renewal of an outsourcing contract that generate or enhance resources to be used in satisfying future performance obligations are capitalized when they are deemed recoverable. Judgment is applied to assess whether contract setup costs are capitalizable. Costs that generate or enhance resources often pertain to activities that enhance the capabilities of the services, improve customer experience and establish a more effective and efficient IT environment. The Company recognizes these transition and transformation contract costs as intangible assets, which are amortized over the respective contract life.

Note 2 - Recent Accounting Pronouncements

Effective April 1, 2018, 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
May 2014


ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)"


April 1, 2018 Modified-retrospective
The core principle of this update, and the subsequent amendments, is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which DXC expects to be entitled in exchange for those goods or services. The guidance also addresses the timing of recognition of certain costs incurred to obtain or fulfill a customer contract. Further, it requires the disclosure of sufficient information to enable readers of DXC’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and information regarding significant judgments and changes in judgments made. This update provides two methods of adoption: full retrospective and modified retrospective. Under the full retrospective method, the standard would be applied to all periods presented with previously disclosed periods restated under the new guidance. Under the modified retrospective method, prior periods would not be restated but rather a cumulative catch-up adjustment would be recorded on the adoption date.

                                                              
The Company adopted this standard using the modified retrospective method. The Company has applied the standard to only those contracts that were not completed at the adoption date. The adoption resulted in the following impacts.

The Company recorded a net increase to opening retained earnings, net of income taxes, of approximately $114 million as of April 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of certain sales commissions of approximately $158 million offset by a reduction in income tax assets and liabilities of approximately $40 million. In addition, the Company has recorded a reduction in contract liabilities of approximately $381 million and other current assets and other assets of $385 million, primarily related to the net down of certain long-term contract asset and contract liability balances and the change in timing of revenue and costs recognized related to our software contracts.
                                                                    Refer to Note 12 - “Revenue” for further discussion of the impact of adoption and other required disclosures.
 


10

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


March 2017

ASU 2017-07 “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"
April 1, 2018 Retrospective
This update is intended to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost in an entity's financial statements by requiring the service cost component be disaggregated from other components of net benefit costs and presented in the same line item or items as other compensation costs for the employees. Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. This update must be applied retrospectively.
DXC reclassified non-service cost components of net periodic pension (income) expense from "costs of services" and "selling, general and administrative" to "other income, net" in the statements of operations for the three and six months ended September 30, 2017. The aggregate service cost component of net periodic pension income remaining in "costs of services" and "selling, general and administrative" is $34 million and $66 million, for the three and six months ended September 30, 2017, respectively.

August 2016

ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"
April 1, 2018 Retrospective
This update addressed eight cash flow classification issues that have created diversity in practice, providing definitive guidance on classification of certain cash receipts and payments. This update must be adopted retrospectively for all periods presented but may be applied prospectively if retrospective application would be impracticable
ASU 2016-15 requires the company to classify cash receipts related to its beneficial interests in securitization transactions, which is the deferred purchase price (the “DPP”) recorded in connection with the Company's Receivables Securitization Facility, within investing activities in its statements of cash flows. The Company adopted ASU 2016-15 effective April 1, 2018, and retrospectively adjusted prior fiscal periods, using each month’s transactional activity as the unit of account in determining the portions of transferred trade receivables as operating activities and investing activities. The Company is evaluating whether a change is necessary in the unit of account used in determining the portions of transferred trade receivables pertaining to operating activities and investing activities to approximate each day’s transactional activity. The Company is unable to estimate the impact of such change for the current period and may revise its presentation of cash receipts related to the DPP in its next Quarterly Report and reflect the change on a retrospective basis to all periods presented, if practicable. See Note 6 - "Sale of Receivables" for more information about the Receivables Securitization Facility.

November 2016

ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force")
April 1, 2018 Retrospective
This update requires that amounts described as restricted cash or restricted cash equivalents must be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update must be applied retrospectively.

DXC reclassified restricted cash to beginning-of-period and end-of-period cash and cash equivalents on the statement of cash flows.

See Note 21 - "Reconciliation of Previously Reported Amounts to Recast Financial Statements" for the financial statement impact of the adoption of these ASU's.

11

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The following ASUs were recently issued but have not yet been adopted by DXC:
Date Issued and ASU
DXC Effective Date
Description
Impact
February 2016

ASU 2016-02 "Leases (Topic 842)"


Fiscal 2020
This update is intended to increase transparency and comparability among organizations by recognizing virtually all lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. Early adoption of this update is permitted. This update must be adopted using a modified retrospective transition at the beginning of the earliest period presented or at the adoption date recognizing a cumulative adjustment to the opening balance of retained earnings in the period of adoption and provides for certain practical expedients.
DXC is currently evaluating the effect the adoption of this standard will have on its existing accounting policies and the financial statements in future reporting periods. The Company expects there will be a material increase in assets and liabilities on its balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities for lease obligations that are currently classified as operating leases. The Company is in the process of implementing changes to its systems, processes and controls, including the implementation of a lease accounting software solution to comply with the new standard.
DXC expects to adopt certain transition expedients permitted under Topic 842, as follows:


DXC expects to adopt this standard on a modified retrospective basis beginning on the adoption date, with comparative period disclosures following ASC 840 requirements. DXC does not expect to reassess lease determination, lease classification or indirect cost capitalization for leases that commenced prior to the adoption date. DXC does not expect to recognize on the balance sheet leases that both (a) have a ‘lease term’ of 12 months or less and (b) do not contain a ‘reasonably certain’ purchase option.
                                                                
 

Other recently issued ASUs effective after September 30, 2018 are not expected to have a material effect on DXC's consolidated financial statements.

Note 3 - Acquisitions

Fiscal 2018 Acquisitions

HPES Merger

On April 1, 2017, Computer Sciences Corporation ("CSC"), Hewlett Packard Enterprise Company (“HPE”), Everett SpinCo, Inc. (“Everett”), and New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett (“Merger Sub”), completed the strategic combination of CSC with the Enterprise Services business of HPE to form DXC (the "HPES Merger"). The combination was accomplished through a series of transactions that included the transfer by HPE of its Enterprise Services business, HPES, to Everett, and spin-off by HPE of Everett on March 31, 2017, and the merger of Merger Sub with and into CSC on April 1, 2017. At the time of the HPES Merger, Everett was renamed DXC, and as a result of the HPES Merger, CSC became a direct wholly owned subsidiary of DXC. DXC common stock began regular-way trading on the New York Stock Exchange on April 3, 2017. The strategic combination of the two complementary businesses was to create a versatile global technology services business, well positioned to innovate, compete and serve clients in a rapidly changing marketplace.

The transaction involving HPES and CSC was a reverse merger acquisition, in which DXC was considered the legal acquirer of the business and CSC was considered the accounting acquirer. While purchase consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer, CSC did not issue any consideration in the HPES Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the HPES Merger. DXC issued a total of 141,298,797 shares of DXC common stock to CSC stockholders, representing approximately 49.9% of the outstanding shares of DXC common stock immediately following the HPES Merger.


12

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Under the acquisition method of accounting, total consideration exchanged was:
(in millions)
 
Amount
Fair value of purchase consideration received by HPE stockholders(1) 
 
$
9,782

Fair value of HPES options assumed by CSC(2)
 
68

Total consideration transferred
 
$
9,850

        

(1) 
Represents the fair value of consideration received by HPE stockholders to give them 50.1% ownership in the combined company. The fair value of the purchase consideration transferred was based on a total of 141,865,656 shares of DXC common stock distributed to HPE stockholders as of the close of business on the record date (141,741,712 after the effect of 123,944 cancelled shares) at CSC's closing price of $69.01 per share on March 31, 2017.
(2) 
Represents the fair value of certain stock-based awards of HPES employees that were unexercised on March 31, 2017, which were converted to DXC stock-based awards.

The purchase price allocation for the HPES Merger was finalized during the fourth quarter of fiscal 2018. The Company's allocation of the purchase price to the assets acquired and liabilities assumed as of the HPES Merger date is as follows:
(in millions)
 
Fair Value
Cash and cash equivalents
 
$
938

Accounts receivable(1)
 
4,102

Other current assets
 
530

Total current assets
 
5,570

Property and equipment
 
2,581

Intangible assets
 
6,384

Other assets
 
1,571

Total assets acquired
 
16,106

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(4,605
)
Deferred revenue
 
(1,315
)
Long-term debt, net of current maturities
 
(4,806
)
Long-term deferred tax liabilities and income tax payable
 
(1,550
)
Other liabilities
 
(1,322
)
Total liabilities assumed
 
(13,598
)
Net identifiable assets acquired
 
2,508

Add: Fair value of non-controlling interests
 
(50
)
Goodwill
 
7,392

Total estimated consideration transferred
 
$
9,850

        

(1) Includes aggregate adjustments of $203 million received from HPE in accordance with the provisions of the Separation Agreement.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the HPES Merger date. The goodwill recognized with the HPES Merger was attributable to the synergies expected to be achieved by combining the businesses of CSC and HPES, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The goodwill arising from the HPES Merger was allocated to the Company's reportable segments as $2.8 billion to the GBS segment, $2.6 billion to the GIS segment and $2.0 billion to the USPS segment. The goodwill is not deductible for tax purposes. 

Subsequent to the HPES Merger, the Company divested USPS which was acquired in the HPES Merger. See Note 4 - "Divestitures" for additional information about the divestiture of USPS.




13

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Tribridge Acquisition

On July 1, 2017, DXC acquired all of the outstanding capital stock of Tribridge Holdings LLC, an independent integrator of Microsoft Dynamics 365, for total consideration of $152 million. The acquisition includes the Tribridge affiliate company, Concerto Cloud Services LLC. The combination of Tribridge with DXC expands DXC’s Microsoft Dynamics 365 global systems integration business.

The purchase price is allocated to assets acquired and liabilities assumed based upon determination of fair values at the date of acquisition as follows: $32 million to current assets, $4 million to property and equipment, $62 million to intangible assets other than goodwill, $24 million to current liabilities and $78 million to goodwill. The goodwill is primarily associated with the Company's GBS segment and is tax deductible. The amortizable lives associated with the intangible assets acquired includes customer relationships which have a 12-year estimated useful life.

Note 4 - Divestitures

Separation of USPS

On May 31, 2018, DXC completed the USPS Separation and Mergers to form Perspecta, an independent public company.

Implementation of the Separation and DXC's post-Separation relationship with Perspecta is governed by several agreements, including the following:

a Separation and Distribution Agreement;
an Employee Matters Agreement;
a Tax Matters Agreement;
an Intellectual Property Matters Agreement;
a Transition Services Agreement;
a Real Estate Matters Agreement; and,
a Non-US Agency Agreement.

These agreements provide for the allocation of assets, employees, liabilities and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between DXC and Perspecta attributable to periods prior to, at and after the Separation. In addition, DXC and Perspecta have service and commercial contracts that generally extend through fiscal 2023.

Pursuant to the Separation and Distribution Agreement, immediately prior to the Separation Perspecta made a net cash payment of $984 million to DXC, which reflects transaction consideration of $1,050 million less $66 million in principal amount of debt that was outstanding at a subsidiary of Perspecta. Perspecta financed the payment through borrowings under a new senior secured term loan facility.

J. Michael Lawrie serves as DXC's Chairman and Chief Executive Officer and Paul N. Saleh serves as DXC's Chief Financial Officer. Effective as of the Separation, Mr. Lawrie also serves as Chairman of Perspecta and Mr. Saleh also serves as a Director of Perspecta. Due to Mr. Lawrie's and Mr. Saleh's leadership positions at DXC and Perspecta, Perspecta is considered a related party under ASC 850 "Related Party Disclosures" for periods subsequent to the Separation. Transactions with Perspecta were immaterial to the Company's financial statements for the three and six months ended September 30, 2018 and balances due to and from Perspecta were immaterial to the Company's balance sheet as of September 30, 2018.

14

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



The following is a summary of the assets and liabilities distributed as part of the Separation of USPS on May 31, 2018:

 
 
As of
(in millions)
 
May 31, 2018
Assets:
 
 
Cash and cash equivalents
 
$
95

Receivables, net
 
458

Prepaid expenses
 
82

Other current assets
 
35

Total current assets of discontinued operations
 
670

Intangible assets, net
 
882

Goodwill
 
2,029

Property and equipment, net
 
294

Other assets
 
157

Total non-current assets of discontinued operations
 
3,362

Total assets
 
$
4,032

 
 
 
Liabilities:
 
 
Short-term debt and current maturities of long-term debt
 
$
161

Accounts payable
 
165

Accrued payroll and related costs
 
17

Accrued expenses and other current liabilities
 
358

Deferred revenue and advance contract payments
 
53

Income tax payable
 
18

Total current liabilities of discontinued operations
 
772

Long-term debt, net of current maturities
 
1,320

Non-current deferred revenue
 
5

Non-current income tax liabilities and deferred tax liabilities
 
196

Other long-term liabilities
 
71

Total long-term liabilities of discontinued operations
 
1,592

Total liabilities
 
$
2,364




15

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following is a summary of the assets and liabilities of USPS that have been classified as assets and liabilities of discontinued operations:

 
 
As of
(in millions)
 
March 31, 2018
Assets:
 
 
Cash and cash equivalents
 
$
68

Receivables, net
 
432

Prepaid expenses
 
75

Other current assets
 
6

Total current assets of discontinued operations
 
581

Intangible assets, net
 
912

Goodwill
 
2,033

Property and equipment, net
 
283

Other assets
 
135

Total non-current assets of discontinued operations
 
3,363

Total assets
 
$
3,944

 
 
 
Liabilities:
 
 
Short-term debt and current maturities of long-term debt
 
$
155

Accounts payable
 
195

Accrued payroll and related costs
 
22

Accrued expenses and other current liabilities
 
346

Deferred revenue and advance contract payments
 
53

Income tax payable
 
18

Total current liabilities of discontinued operations
 
789

Long-term debt, net of current maturities
 
214

Non-current deferred revenue
 
7

Non-current income tax liabilities and deferred tax liabilities
 
163

Other long-term liabilities
 
72

Total long-term liabilities of discontinued operations
 
456

Total liabilities
 
$
1,245




16

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following is a summary of the operating results of USPS which have been reflected within income from discontinued operations, net of tax:

 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2017
 
September 30, 2018(1)
 
September 30, 2017
Revenue
 
$
710

 
$
431

 
$
1,387

 
 
 
 
 
 
 
Costs of services
 
509

 
311

 
1,045

Selling, general and administrative
 
34

 
50

 
57

Depreciation and amortization
 
55

 
33

 
74

Restructuring costs
 
4

 
1

 
7

Interest expense
 
5

 
8

 
7

Other income, net
 

 
(25
)
 

Total costs and expenses
 
607

 
378

 
1,190

Total income from discontinued operations, before income taxes
 
103

 
53

 
197

Income tax expense
 
43

 
18

 
72

Total income from discontinued operations
 
$
60

 
$
35

 
$
125

        

(1) Results for the six months ended September 30, 2018 reflect operations through the Separation date of May 31, 2018, not the full
six-month period as shown for prior periods.

There was no gain or loss on disposition recognized as a result of the Separation.

The following selected financial information of USPS is included in the statements of cash flows:
 
 
Six Months Ended
(in millions)
 
September 30, 2018(1)
 
September 30, 2017
Depreciation
 
$
16

 
$
39

Amortization
 
$
17

 
$
35

Capital expenditures
 
$

 
$
(5
)
Significant operating non-cash items:
 
 
 
 
Gain on dispositions
 
$
24

 
$

        

(1)Results for the six months ended September 30, 2018 reflect cash flows through the Separation date of May 31, 2018, not the full six-month
period as shown for prior periods.


17

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 5 - Earnings per Share

Basic 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
 
Six Months Ended
(in millions, except per-share amounts)

September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income attributable to DXC common shareholders:
 
 
 
 
 
 
 
 
From continuing operations
 
$
262

 
$
196

 
$
486

 
$
290

From discontinued operations
 
$

 
$
60

 
$
35

 
$
125

 
 
 
 
 
 
 
 
 
Common share information:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
281.37

 
284.87

 
282.89

 
284.35

Dilutive effect of stock options and equity awards
 
4.41

 
4.42

 
4.64

 
5.03

Weighted average common shares outstanding for diluted EPS
 
285.78

 
289.29

 
287.53

 
289.38

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.93

 
$
0.69

 
$
1.72

 
$
1.02

Discontinued operations
 
$

 
$
0.21

 
$
0.12

 
$
0.44

Total
 
$
0.93

 
$
0.90

 
$
1.84

 
$
1.46

 
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.92

 
$
0.67

 
$
1.69

 
$
1.00

Discontinued operations
 
$

 
$
0.21

 
$
0.12

 
$
0.43

Total
 
$
0.92

 
$
0.88

 
$
1.81

 
$
1.43


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
 
Six Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Stock Options
 

 
32,060

 

 
41,327

RSUs
 
1,419

 
20,718

 
713

 
36,387

PSUs
 

 
2,844

 

 
1,430


Note 6 - Sale of Receivables

Receivables Securitization Facility

The Company has a $600 million accounts receivable securitization facility (as amended or supplemented to date, 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, the Company and certain of its subsidiaries (the "Sellers") sell billed and unbilled accounts receivable to DXC Receivables LLC ("DXC Receivables"), a wholly owned bankruptcy-remote entity. DXC Receivables in turn sells such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. Sales of receivables by DXC Receivables occur continuously and are

18

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


settled on a monthly basis. The proceeds from the sale of these receivables comprise a combination of cash and a deferred purchase price receivable ("DPP"). The DPP is realized by the Company upon the ultimate collection of the underlying receivables sold to the Purchasers. 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 September 30, 2018, the total availability under the Receivables Facility was approximately $498 million and the drawn amount was $455 million. As of September 30, 2018, the Company recorded a $43 million receivable within receivables and contract assets, net because the amount of cash proceeds received by the Company under the Receivables were less than the total availability. The Receivables Facility terminates on August 21, 2019, but provides for one or more optional one-year extensions, if agreed to by the Purchasers. The Company uses the proceeds from receivables sales under the Receivables Facility for general corporate purposes.

The Company has no retained interests in the transferred receivables, other than collection and administrative services and its right to the DPP. The DPP is included in receivables at fair value on the balance sheets and was $540 million and $233 million as of September 30, 2018 and March 31, 2018, respectively. On August 22, 2018, the Company amended the Receivables Facility to include additional Sellers and increase the facility limit from $250 million to $600 million. On September 24, 2018, the Company amended the Receivables Facility with the Purchasers and pursuant to this amendment, the Company repurchased certain of its subsidiaries receivables which resulted in a reduction in the DPP of $376 million which is presented as cash inflow from investing activities with a corresponding increase in trade receivables which is included as a cash outflow from operations.

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.

The Company’s risk of loss following the transfer of accounts receivable under the Receivables Facility is limited to the DPP outstanding and any short-falls in collections for specified non-credit related reasons after sale. Payment of the DPP is not subject to significant risks other than delinquencies and credit losses on accounts receivable sold under the Receivables Facility.

Certain obligations of sellers under the Receivables Facility and DXC, as initial servicer, are guaranteed by the Company under a performance guaranty, made in favor of an administrative agent on behalf of the Purchasers. However, the performance guaranty does not cover DXC Receivables’ obligations to pay yield, fees or invested amounts to the administrative agent or any of the Purchasers.

The following table is a reconciliation of the beginning and ending balances of the DPP:
 
 
As of and for the Three Months Ended
 
As of and for the Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Beginning balance
 
$
207

 
$
242

 
$
233

 
$
252

Transfers of receivables
 
2,122

 
606

 
2,651

 
1,154

Collections
 
(1,378
)
 
(579
)
 
(1,900
)
 
(1,124
)
Facility amendments
 
(442
)
 

 
(442
)
 

Fair value adjustment
 
31

 
3

 
(2
)
 
(10
)
Ending balance
 
$
540

 
$
272

 
$
540

 
$
272


Federal Receivables Sales Facility

Since July 14, 2017, the Company has given a parent guaranty in connection with a federal receivables sales facility with certain financial institutions, under which certain subsidiaries of the Company previously sold eligible federal government obligor receivables, including billed and certain unbilled receivables. In connection with the Separation, the sellers and servicers of the receivables sold under the Federal Receivables Sales Facility were divested and, effective May 31, 2018, the parent guaranty was terminated.


19

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


The following table reflects activity of the Federal Receivables Sales Facility, prior to the Separation:
(in millions)
 
For the
Six Months Ended
September 30, 2018
(1)
Transfers of receivables
 
$
464

Collections
 
$
521

Operating cash flow effect
 
$
(57
)
        

(1) Results for the six months ended September 30, 2018 reflect operations through the Separation date of May 31, 2018, not the full six-month period.


Note 7 - Fair Value

Fair Value Measurements on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding pension assets and derivative assets and liabilities. See Note 8 - "Derivative Instruments" for information about the fair value of our derivative assets and liabilities. There were no transfers between any of the levels during the periods presented.
 
 
 
 
Fair Value Hierarchy
(in millions)
 
September 30, 2018
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
77

 
$
77

 
$

 
$

Time deposits(1)
 
89

 
89

 

 

Other debt securities (2)
 
54

 

 
49

 
5

Deferred purchase price receivable
 
540

 

 

 
540

Total assets
 
$
760

 
$
166

 
$
49

 
$
545



 
 
March 31, 2018
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
84

 
$
84

 
$

 
$

Time deposits (1)
 
114

 
114

 

 

Other debt securities (2)
 
59

 

 
53

 
6

Deferred purchase price receivable
 
233

 

 

 
233

Total assets
 
$
490

 
$
198

 
$
53

 
$
239

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
5

 
$

 
$

 
$
5

Total liabilities
 
$
5

 
$

 
$

 
$
5

        

(1) Cost basis approximated fair value due to the short period of time to maturity.
(2) Other debt securities include available-for-sale investments with Level 2 inputs that have a cost basis of $40 million and $42 million, and unrealized gains of $9 million and $11 million, as of September 30, 2018 and March 31, 2018, respectively.

The fair value of money market funds, money market deposit accounts, and time deposits, reported as cash and cash equivalents, are based on quoted market prices or amounts payable on demand at the reporting date. The fair value of

20

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


other debt securities, included in other long-term assets, is based on actual market prices. Fair value of the DPP, included in receivables, net, is determined by calculating the expected amount of cash to be received and is principally based on unobservable inputs consisting primarily of the face amount of the receivables adjusted for anticipated credit losses. The fair value of contingent consideration, presented in other liabilities, is based on contractually defined targets of financial performance and other considerations.

Other Fair Value Disclosures

The carrying amounts of the Company’s financial instruments with short-term maturities, primarily accounts receivable, accounts payable, short-term debt, and financial liabilities included in other accrued liabilities, are deemed to approximate their market values. If measured at fair value, these financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.

The Company estimates the fair value of its long-term debt, primarily by using quoted prices obtained from third party providers such as Bloomberg, and by using an expected present value technique that is based on observable market inputs for instruments with similar terms currently available to the Company. The estimated fair value of the Company's long-term debt, excluding capitalized lease liabilities, was $5.0 billion and $6.0 billion as of September 30, 2018 and March 31, 2018, respectively, as compared with carrying value of $5.0 billion and $5.9 billion as of September 30, 2018 and March 31, 2018, respectively. If measured at fair value, long-term debt, excluding capitalized lease liabilities would be classified in Level 1 or Level 2 of the fair value hierarchy.

Non-financial assets such as goodwill, tangible assets, intangible assets and other contract related long-lived assets are recorded at fair value in the period they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the fiscal periods covered by this report.

Note 8 - Derivative Instruments

In the normal course of business, the Company is exposed to interest rate and foreign exchange rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward and option contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. The Company does not use derivative instruments for trading or any speculative purpose.

Derivatives Designated for Hedge Accounting

Cash flow hedges

During the six months ended September 30, 2018, the Company terminated certain interest rate swap agreements which had aggregate notional values of $375 million and fair values of $5 million and derecognized the relative derivative asset. The hedge gain of $5 million will be recognized over the remaining original life of the swap against interest expense in the statements of operations. As of September 30, 2018, the Company had no interest rate swap agreements designated as cash flow hedges.

The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce foreign currency risk related to certain Indian Rupee denominated intercompany obligations and forecasted transactions. The notional amount of foreign currency forward contracts designated as cash flow hedges as of September 30, 2018 was $334 million, and the related forecasted transactions extend through February 2020.

For the three and six months ended September 30, 2018 and September 30, 2017, the Company performed an assessment at the inception of the cash flow hedge transactions and determined all critical terms of the hedging instruments and hedged items matched. The Company performs an assessment of critical terms on an on-going basis throughout the hedging period. During the three and six months ended September 30, 2018 and September 30, 2017, the

21

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued


Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of September 30, 2018, $23 million of the existing amount of losses related to the cash flow hedge reported in AOCI is expected to be reclassified into earnings within the next 12 months.

The pre-tax loss on derivatives designated for hedge accounting recognized in other comprehensive loss was $15 million and $40 million for the three and six months ended September 30, 2018, respectively. The pre-tax loss on derivatives designated for hedge accounting recognized in income from continuing operations was $5 million for three and six months ended September 30, 2018.

Derivatives not Designated for Hedge Accounting

The derivative instruments not designated as hedges for purposes of hedge accounting include interest rate swap agreements and certain short-term foreign currency forward contracts. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

Interest rate swap agreements

During the three months ended September 30, 2018, the Company elected to de-designate its interest rate swap agreements. The Company derecognized the related derivative asset and recognized the amount in earnings. The notional amount of interest rate swap agreements outstanding as of September 30, 2018 was $241 million. Gains on interest rate swap agreements not designated for hedge accounting and the recognition of the derivative asset in earnings were not material for the three and six months ended September 30, 2018.

Foreign currency forward contracts

The Company manages the exposure to fluctuations in foreign currencies by using foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts, and forecasted transactions. The notional amount of the foreign currency forward contracts outstanding as of September 30, 2018 was $2.8 billion. Losses on foreign currency forward contracts not designated for hedge accounting, recognized within other income, net, were $11 million and $43 million during the three and six months ended September 30, 2018, respectively, and $77 million and $114 million during the three and six months ended September 30, 2017, respectively.

Fair Value of Derivative Instruments

All derivatives are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables present the fair values of derivative instruments included in the balance sheets:
 
 
Derivative Assets
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2018
 
March 31, 2018
Derivatives designated for hedge accounting:
 
 
Interest rate swaps
 
Other assets
 
$

 
$
6

Foreign currency forward contracts
 
Other current assets
 

 
14

Total fair value of derivatives designated for hedge accounting
 
$

 
$
20

 
 
 
Derivatives not designated for hedge accounting:
 
 
Foreign currency forward contracts
 
Other current assets
 
$
4

 
$
4

Total fair value of derivatives not designated for hedge accounting
 
$
4

 
$
4


22

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2018
 
March 31, 2018
Derivatives designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
27

 
$
3

Total fair value of derivatives designated for hedge accounting:
 
$
27

 
$
3

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
13

 
$
6

Total fair value of derivatives not designated for hedge accounting
 
$
13

 
$
6


The fair value of foreign currency forward contracts represents the estimated amount required to settle the contracts using current market exchange rates and is based on the period-end foreign currency exchange rates and forward points which are classified as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves which are classified as Level 2 inputs.

Other risks

The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty's obligations exceed the obligations of the Company with that counterparty. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. As of September 30, 2018, the maximum amount of loss that the Company could incur was not material. The Company also enters into enforceable master netting arrangements with some of its counterparties. However, for financial reporting purposes, it is the Company's policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements.

Note 9 - Intangible Assets
 
 
As of September 30, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,555

 
$
1,996

 
$
1,559

Transition and transformation contract costs
 
1,464

 
873

 
591

Customer related intangible assets
 
5,294

 
898

 
4,396

Other intangible assets
 
77

 
21

 
56

Total intangible assets
 
$
10,390

 
$
3,788

 
$
6,602

 
 
As of March 31, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,484

 
$
1,918

 
$
1,566

Transition and transformation contract costs
 
1,569

 
766

 
803

Customer related intangible assets
 
5,405

 
666

 
4,739

Other intangible assets
 
90

 
19

 
71

Total intangible assets
 
$
10,548

 
$
3,369

 
$
7,179


23

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Total intangible assets amortization was $296 million and $285 million for three months ended September 30, 2018 and September 30, 2017, respectively, and included amortization of contract cost premiums recorded as reductions of revenue of $9 million and $3 million, respectively.

Total intangible assets amortization was $583 million and $479 million for the six months ended September 30, 2018 and September 30, 2017, respectively, and included amortization of contract cost premiums recorded as reductions of revenue of $14 million and $6 million, respectively.

Estimated future amortization related to intangible assets as of September 30, 2018 is as follows:
Fiscal Year
 
(in millions)

Remainder of 2019
 
$
614

2020
 
$
1,079

2021
 
$
972

2022
 
$
813

2023
 
$
734


Note 10 - Goodwill

The following table summarizes the changes in the carrying amount of goodwill, by segment, as of September 30, 2018.
(in millions)
 
GBS
 
GIS
 
Total
Balance as of March 31, 2018, net
 
$
4,531

 
$
3,088

 
$
7,619

Acquisitions
 
42

 

 
42

Divestitures
 
(12
)
 

 
(12
)
Foreign currency translation
 
(151
)
 
(81
)
 
(232
)
Balance as of September 30, 2018, net
 
$
4,410

 
$
3,007

 
$
7,417


As a result of the Separation of USPS on May 31, 2018, USPS is no longer a reportable segment.

The foreign currency translation amounts reflect the impact of currency movements on non-U.S. dollar-denominated goodwill balances.

Goodwill Impairment Analyses

The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For the Company’s annual goodwill impairment assessment as of July 1, 2018 the Company chose to bypass the initial qualitative assessment and proceeded directly to the first step of the impairment test for all reporting units. Based on the results of the first step of the impairment test, the Company concluded that the fair value of each reporting unit exceeded its carrying value and therefore the second step of the goodwill impairment test was not required. 

As of September 30, 2018, the Company assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying amount and require goodwill to be tested for impairment. The Company determined that there have been no such indicators and therefore, it was unnecessary to perform an interim goodwill impairment test as of September 30, 2018.



24

DXC TECHNOLOGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued



Note 11 - Debt

The following is a summary of the Company's debt:
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
September 30, 2018
 
March 31, 2018
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Euro-denominated commercial paper(1)
 
(0.1)% - 0.02%(2)
 
2019
 
$
813

 
$
863

Current maturities of long-term debt
 
Various
 
2019 - 2020
 
229

 
439

Current maturities of capitalized lease liabilities
 
1.0% - 12.0%
 
2019 - 2020
 
576

 
616

Short-term debt and current maturities of long-term debt
 
 
 
 
 
$
1,618

 
$
1,918

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities