EX-99.1 3 dxcfy1810-krecast.htm EXHIBIT 99.1 Exhibit
Exhibit 99.1


Explanatory Note

DXC Technology Company (“DXC” or the "Company") is filing this Exhibit 99.1 to its Current Report on Form 8-K ("Current Report") to recast certain financial information included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2018 (the "Fiscal 2018 10-K"), which was filed with the Securities and Exchange Commission (the "SEC") on May 29, 2018, to reflect the separation of the Company's U.S. Public Sector business ("USPS") and the retrospective application of certain accounting standard updates that were adopted by the Company during the first quarter of fiscal 2019.

As previously disclosed, on May 31, 2018, the Company completed the separation of USPS (the “USPS Separation”) and the combination of USPS with Vencore Holding Corp. and KeyPoint Government Solutions to form Perspecta Inc., an independent public company. As a result of the USPS Separation, USPS is accounted for as a discontinued operation in this Exhibit 99.1 to the Company's Current Report. 

The Company also adopted certain accounting standard updates that require retrospective application effective April 1, 2018. The Company adopted Accounting Standards Update 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” ("ASU 2017-07"), Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” ("ASU 2016-15") and ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force" ("ASU 2016-18"). See Note 1 - "Summary of Significant Accounting Policies" and Note 21 - "Reconciliation of Previously Reported Amounts to Recast Financial Statements" for more information about the adoption of these accounting standard updates.

The information included in this Exhibit 99.1 to the Company's Current Report is presented in connection with the reporting changes described above and to update the Company's named executive officers and does not otherwise amend or restate the Company's audited consolidated financial statements that were included in its Fiscal 2018 10-K. This Exhibit 99.1 to the Company's Current Report does not reflect events occurring after the Company filed the Fiscal 2018 10-K and does not modify or update the disclosures therein in any way, other than to reflect the reporting changes described above. Therefore, this Exhibit 99.1 to the Company's Current Report should be read in conjunction with the Company's other filings made with the SEC, including, and subsequent to the date of, the Fiscal 2018 10-K. 

The Company has revised the following portions of the Fiscal 2018 10-K to reflect the retrospective revisions that have been made as a result of the reporting changes described above:

Item 1. Business
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements and assumptions contained in this Exhibit 99.1 to our Current Report and in the documents incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements.” Forward-looking statements often include words such as “anticipates,” “believes,” “estimates,” “expects,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target” and “will” and words and terms of similar substance in discussions of future operating or financial performance. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. Forward-looking statements include, among other things, statements with respect to our financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, divestitures, competitive position, growth opportunities, share repurchases, dividend payments, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made.The factors described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and under similar headings in our subsequent Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Exhibit 99.1 to our Current Report or presented elsewhere by our management from time to time. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law.





1



Throughout this Exhibit 99.1 to the Company's Current Report, we refer to DXC Technology Company, together with its consolidated subsidiaries, as “we,” “us,” “our,” “DXC,” or the “Company.” In order to make this report easier to read, we also refer throughout to (i) our Consolidated Financial Statements as our “Financial Statements,” (ii) our Consolidated Statements of Operations as our “Statements of Operations,” (iii) our Consolidated Balance Sheets as our “Balance Sheets” and (iv) our Consolidated Statements of Cash Flows as our “Statements of Cash Flows.” In addition, references throughout to numbered “Notes” refer to the numbered Notes to our Financial Statements that we include in the Financial Statements section of this Exhibit 99.1.

PART I


ITEM 1. BUSINESS

Overview

DXC, a Nevada corporation, is a world's 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.

Businesses in today's complex and demanding business environment are increasingly seeking to integrate digital technology into every aspect of their business resulting in fundamental changes to how they operate and deliver value to their customers. We work with our clients to solve challenges in ways that maximize opportunity and minimize business risk. Our world-class talent becomes part of our clients’ teams, innovating with them, putting the right technology to work for their organizations and leading them through accelerating change to deliver new outcomes for their business.

Our business strategy is supported by a framework that focuses on the following three pillars:

Help clients advance their digital transformations by decreasing IT infrastructure costs and reinvesting in innovation;
Invest in our people to nurture next-generation skills and leadership development; and
Deliver value by achieving results for our clients and stakeholders.

History and Development

DXC was formed on April 1, 2017, when 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 (“HPES”). The combination was accomplished through a series of transactions that included the transfer by HPE of HPES to Everett, spin-off by HPE of Everett on March 31, 2017, and the merger of Merger Sub with and into CSC on April 1, 2017 (the “HPES Merger”). 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 under the symbol “DXC” on the New York Stock Exchange on April 3, 2017. See Note 2 - "Acquisitions" for more information.

USPS Separation and Mergers

On May 31, 2018, we completed the separation of our U.S. Public Sector business ("USPS") (the "USPS 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 3 - "Divestitures" for more information.




2


Acquisitions and Divestitures

In addition to the HPES Merger, during fiscal 2018 we completed the acquisition of Tribridge Holdings LLC ("Tribridge"), an independent integrator of Microsoft Dynamics 365. The acquisition includes the Tribridge affiliate company, Concerto Cloud Services LLC. The combination of Tribridge with DXC extended our leadership in the Microsoft Dynamics 365 global systems integration business.

Segments and Services

As a result of the USPS Separation, USPS is no longer a reportable segment. Our reportable segments are Global Business Services ("GBS") and Global Infrastructure Services ("GIS").

Global Business Services

GBS provides innovative technology solutions that help our clients address key business challenges and accelerate digital transformations tailored to each client’s industry and specific objectives. GBS offerings include:

Enterprise, Cloud Applications and Consulting. We provide industry, business process systems integration and technical delivery experience to maximize value from enterprise application portfolios. We also help clients accelerate their digital transformations and business results with industry, business, technology and complex integration services.
Application Services. Our comprehensive services help clients modernize, develop, test and manage their applications.
Analytics. Our portfolio of analytics services and robust partner ecosystem helps clients gain rapid insights and accelerate their digital transformation journeys.
Business Process Services. We provide seamless digital integration and optimization of front and back office processes, including our Agile Process Automation approach.
Industry Software and Solutions. Our industry-specific solutions enable businesses to quickly integrate technology, transform their operations and develop new ways of doing business. Our vertical-specific IP includes insurance, healthcare and life sciences, travel and transportation, and banking and capital markets solutions.

Global Infrastructure Services

GIS provides a portfolio of offerings that deliver predictable outcomes and measurable results, while reducing business risk and operational costs for clients. GIS offerings include:

Cloud and Platform Services. We help clients maximize their private cloud, public cloud and legacy infrastructures, as well as securely manage their hybrid environments.
Workplace and Mobility. Our workplace, mobility and Internet of Things ("IoT") services provide a consumer-like experience with enterprise security and instant connectivity for our clients.
Security. Our security solutions help predict attacks, proactively respond to threats, ensure compliance and protect data, applications, infrastructure and endpoints.

During fiscal 2018 our revenues mix by segment was 42.6% for GBS and 57.4% for GIS.

See Note 18 - "Segment and Geographic Information" for additional information related to our reportable segments, including the disclosure of segment revenues, segment profit and financial information by geographic area.

Sales and Marketing

We market and sell our services directly to clients through our direct sales force, operating out of sales offices around the world. Our clients include commercial businesses of many sizes and in many industries and public sector enterprises. No individual customer exceeded 10% of our consolidated revenues for fiscal 2018, 2017 or 2016.


3


For fiscal 2018, the distribution of our revenues across geographies was as follows:

chart-2b766bdeae1d58b6b8ea01.jpg

For a discussion of risks associated with our foreign operations, see Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

Seasonality

General economic conditions have an impact on our business and financial results. The markets in which we sell our products, services and solutions occasionally experience weak economic conditions that may negatively affect sales. We also experience some seasonal trends in the sale of our services. For example, contract awards are often tied to the timing of our clients' fiscal year-ends, and we also experience seasonality related to our own fiscal year-end selling activities.

Competition

The IT and professional services markets in which we compete are highly competitive and are not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those we offer. In addition, the increased importance of offshore labor centers has brought several foreign-based firms into competition with us.

Our competitors include:

large multinational enterprises that offer some or all of the services and solutions that we do;
smaller companies that offer focused services and solutions similar to those that we offer;
offshore service providers in lower-cost locations, particularly in India, that sell directly to end-users;
solution or service providers that compete with us in a specific industry segment or service area; and
in-house functions of corporations that use their own resources, rather than engage an outside IT services provider.


4


The principal methods of competition in the markets for our solutions and services include:

vision and strategic advisory ability;
digital services capabilities;
performance and reliability;
responsiveness to client needs;
competitive pricing of services;
technical and industry expertise;
reputation and experience;
quality of solutions and services; and
financial stability and strong corporate governance.

Our ability to obtain new business and retain existing business is dependent upon the following:

technology, industry and systems know-how with an independent perspective on the best client solutions across software, hardware, and service providers;
ability to offer improved strategic frameworks and technical solutions;
investments in our digital services and solutions;
focus on responsiveness to customer needs, quality of services and competitive prices;
successful management of our relationships with leading strategic and solution partners in hardware, networking, cloud, applications and software;
project management experience and capabilities;
end-to-end spectrum of IT and professional services we provide; and
financial stability and strong corporate governance.

Intellectual Property

We rely on a combination of trade secrets, patents, copyrights, and trademarks, as well as contractual protections, to protect our business interests. While our technical services and products are not generally dependent upon patent protection, we do selectively seek patent protection for certain inventions likely to be incorporated into products and services or where obtaining such proprietary rights will improve our competitive position.

As our patent portfolio has been built over time, the remaining terms of the individual patents across the patent portfolio vary. We believe that our patents and patent applications are important for maintaining the competitive differentiation of our solutions and services and enhancing our freedom of action to sell solutions and services in markets in which we choose to participate. No single patent is in itself essential to our company as a whole or to any business segment.

Additionally, we own or have rights to various trademarks, logos, service marks, and trade names that are used in the operation of our business. We also own or have the rights to copyrights that protect the content of our products and other proprietary materials.

In addition to developing our intellectual property portfolio, we license intellectual property rights from third parties as we deem appropriate. We have also granted and plan to continue to grant to others licenses under our intellectual property rights when we consider these arrangements to be in our interest. These license arrangements include a number of cross-licenses with third parties.

Environmental Regulation

Our operations are subject to regulation under various federal, state, local, and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the clean-up of contaminated sites. Environmental costs and accruals are presently not material to our operations, cash flows or financial position, and we do not currently anticipate material capital expenditures for environmental control facilities. However, we could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if we were to violate or become liable under environmental laws, or if new environmental legislation is passed which impacts our business.


5


Employees

As of March 31, 2018, we employed approximately 150,000 employees and had offices and operations in 70 countries.

Available Information

We use our corporate website, www.dxc.technology, as a routine channel for distribution of important information, including detailed company information, financial news, SEC filings, Annual Reports, historical stock information and links to a recent earnings call webcast. DXC’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and the Proxy Statements for our Annual Meetings of Stockholders are made available, free of charge, on our corporate website as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Our corporate governance guidelines, Board of Directors' committee charters (including the charters of the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee) and code of ethics entitled "Code of Business Conduct" are also available on our website. The information on our website is not incorporated by reference into, and is not a part of, this report. 

Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC, 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

6


Executive Officers of the Registrant

Name
 
Age
 
Year First Elected as Officer
 
Term as an Officer
 
Position Held With the Registrant as of the filing date
 
Family Relationship
J. Michael Lawrie
 
64
 
2017
 
Indefinite
 
Chairman, President and Chief Executive Officer
 
None
Paul N. Saleh
 
61
 
2017
 
Indefinite
 
Executive Vice President and Chief Financial Officer
 
None
William L. Deckelman, Jr.
 
60
 
2017
 
Indefinite
 
Executive Vice President, General Counsel and Secretary
 
None
Joanne Mason
 
50
 
2017
 
Indefinite
 
Executive Vice President and Chief Human Resources Officer
 
None
Neil A. Manna
 
55
 
2017
 
Indefinite
 
Senior Vice President, Corporate Controller and
Principal Accounting Officer
 
None

Business Experience of Executive Officers

J. Michael Lawrie has served as Chairman, President and Chief Executive Officer of DXC and as a member of the Board of Directors of DXC since the completion of the HPES Merger. Mr. Lawrie previously served as Chairman, President and Chief Executive Officer of CSC. Mr. Lawrie joined CSC as President and Chief Executive Officer on March 19, 2012, and as a member of its Board of Directors in February 2012. On December 15, 2015, Mr. Lawrie was appointed chairman of the CSC Board of Directors. Prior to joining CSC, he served as the Chief Executive Officer of U.K.-based Misys plc, a leading global IT solutions provider to the financial services industry, from November 2006 to March 2012. Mr. Lawrie also served as the Executive Chairman of Allscripts-Misys Healthcare Solutions, Inc., from October 2008 to August 2010. From 2005 to 2006, Mr. Lawrie was a general partner with ValueAct Capital, a San Francisco-based private investment firm. He also served as Chief Executive Officer of Siebel Systems, Inc., an international software and solutions company, from 2004 to 2005. Mr. Lawrie also spent 27 years with IBM where he rose to Senior Vice President and Group Executive, responsible for sales and distribution of all IBM products and services worldwide. From 1998 to 2001, Mr. Lawrie was General Manager for IBM’s business in Europe, the Middle East and Africa, which included operations in 124 countries and 90,000 employees. Prior to that, Mr. Lawrie served as General Manager of Industries for IBM’s business operations in Asia Pacific, based in Tokyo. Mr. Lawrie is a Trustee of Drexel University, Philadelphia. We believe Mr. Lawrie’s knowledge of the IT solutions industry and many years of experience as the Chief Executive Officer of DXC and CSC make him well-qualified to serve as a member of our board of directors.

Paul N. Saleh has served as Executive Vice President and Chief Financial Officer of DXC since the completion of the HPES Merger. Mr. Saleh previously served as executive vice president and Chief Financial Officer of CSC. Mr. Saleh joined CSC as Vice President and Chief Financial Officer on May 23, 2012. Prior to joining CSC, Mr. Saleh served as the Chief Financial Officer of Gannett Co. from 2010 to 2012. Prior to his tenure at Gannett Co., from 2008 to 2010, Mr. Saleh was a Managing Partner at Menza Partners, an operational and financial advisory group focusing on media, telecommunications and technology industries. Prior to that, he served as Chief Financial Officer of Sprint Nextel Communications from 2001 to 2007 and as Interim Chief Executive Officer of Sprint Nextel until 2008. He served as Senior Vice President and Chief Financial Officer of Walt Disney International where he also held various other senior positions from 1997 to 2001.

William L. Deckelman, Jr. has served as Executive Vice President, General Counsel and Secretary of DXC since the completion of the HPES Merger. Mr. Deckelman previously served as Executive Vice President and General Counsel of CSC. Mr. Deckelman joined CSC in January 2008 and served as Vice President, General Counsel and Secretary from 2008 to 2012, and as Executive Vice President and General Counsel from 2012 to August 2014. Prior to joining CSC, Mr. Deckelman served as Executive Vice President and General Counsel of Affiliated Computer Services Inc. from 2000 to 2008, and served as a director from 2000 to 2003, holding various executive positions there since 1989.



7


Joanne Mason has served as Executive Vice President and Chief Human Resources Officer of DXC since the completion of the HPES Merger. Ms. Mason served as Chief Human Resource Officer and Vice President of CSC since March 2015. Ms. Mason joined CSC in March 2012 as Chief of Staff and Head of Change Management and Execution Office. Prior to joining CSC, from October 2006 to March 2012, Ms. Mason served as Chief of Staff and Operation Director at Misys plc. Ms. Mason previously served in various management roles at Zouk Capital from 2004 to 2006, Lendlease Group from 2002 to 2004 and Energis Communications Ltd. from 1999 to 2002.

Neil A. Manna has served as Senior Vice President, Corporate Controller and Principal Accounting Officer of DXC since the completion of the HPES Merger. Mr. Manna previously served as Principal Accounting Officer, Vice President and Controller of CSC. Mr. Manna joined CSC on June 7, 2016. Prior to joining CSC, he served as the Chief Accounting Officer and Senior Vice President of CA, Inc. from December 2008 to June 3, 2016. He served as Principal Accounting Officer and Vice President of Worldwide Accounting for RealNetworks, Inc. from July 2007 to November 2008. He served as the Chief Financial Officer of TimePlus Systems, LLC (formerly TimePlus, Inc.) from November 2005 to April 2007. From February 2000 to October 2005, he served as a Director of Finance for the Payroll Division of Intuit and Controller of Employee Matters, Inc. From July 1990 to February 2000 he served as the Principal Accounting Officer, Vice President of Finance, Controller and Treasurer of CHI Energy, Inc. He is a Certified Public Accountant and holds a Bachelor’s degree in Accounting and a Master’s degree in Business Administration.



8


ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)

The following table sets forth our selected consolidated historical financial data as of the dates and for the periods indicated. Our selected consolidated financial data set forth below as of March 31, 2018 and 2017 and for the fiscal years ended March 31, 2018, March 31, 2017, and April 1, 2016 have been derived from the audited consolidated financial statements included elsewhere herein. Our selected consolidated financial data set forth below as of April 1, 2016, April 3, 2015, and March 28, 2014 and for the fiscal years ended April 3, 2015, and March 28, 2014 are derived from our consolidated financial statements not included elsewhere herein. Our selected consolidated financial information for fiscal 2018, 2017 and 2016 should be read in conjunction with the financial statements and notes and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this Exhibit 99.1 to our Current Report.

Statement of Operations Data:
 
 
Fiscal Years Ended
(in millions, except per-share amounts)
 
2018 (1)(2)
 
2017 (3)
 
2016 (4)
 
2015 (5)
 
2014 (6)
Revenues
 
$
21,733

 
$
7,607

 
$
7,106

 
$
8,117

 
$
8,899

Income (loss) from continuing operations, before taxes
 
1,304

 
(174
)
 
10

 
(671
)
 
694

Income tax (benefit) expense
 
(242
)
 
(74
)
 
(62
)
 
(464
)
 
174

Income (loss) from continuing operations, net of taxes
 
1,546

 
(100
)
 
72

 
(207
)
 
520

Income from discontinued operations, net of taxes
 
236

 

 
191

 
224

 
448

Net income (loss) attributable to DXC common stockholders
 
1,751

 
(123
)
 
251

 
2

 
947

Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
5.32

 
$
(0.88
)
 
$
0.51

 
$
(1.45
)
 
$
3.52

Discontinued operations
 
0.83

 

 
1.31

 
1.46
 
2.89

 
 
$
6.15

 
$
(0.88
)
 
$
1.82

 
$
0.01

 
$
6.41

Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
5.23

 
$
(0.88
)
 
$
0.50

 
$
(1.45
)
 
$
3.45

Discontinued operations
 
0.81

 

 
1.28

 
1.46
 
2.83

 
 
$
6.04

 
$
(0.88
)
 
$
1.78

 
$
0.01

 
$
6.28

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.93

 
140.39

 
138.28

 
142.56

 
147.65

Diluted EPS
 
289.77

 
140.39

 
141.33

 
142.56

 
150.76

 
 
 
 
 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.72

 
$
0.56

 
$
2.99

 
$
0.92

 
$
0.80



9


Balance Sheet Data:
 
 
As of
(in millions)
 
March 31, 2018(1)(2)
 
March 31, 2017
 
April 1, 2016
 
April 3, 2015
 
March 28, 2014
Cash and cash equivalents
 
$
2,593

 
$
1,268

 
$
1,181

 
$
2,079

 
$
2,425

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
33,921

 
8,663

 
7,736

 
10,221

 
11,361

 
 
 
 
 
 
 
 
 
 
 
Debt
 
 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
$
6,092

 
$
2,225

 
$
1,934

 
$
1,635

 
$
2,207

Short-term debt and current maturities of long-term debt
 
1,918

 
738

 
710

 
883

 
681

Total Debt
 
$
8,010

 
$
2,963

 
$
2,644

 
$
2,518

 
$
2,888

 
 
 
 
 
 
 
 
 
 
 
Total equity
 
$
13,837

 
$
2,166

 
$
2,032

 
$
2,965

 
$
3,950

Net debt-to-total capitalization (7)
 
24.8
%
 
33.0
%
 
31.3
%
 
8.0
%
 
6.8
%
        

(1) Fiscal 2018 financial results are not directly comparable to periods ending prior to April 1, 2017 which reflect CSC's financial results before the HPES Merger on April 1, 2017. See Note 1 - "Summary of Significant Accounting Policies". Additionally, fiscal 2018 net income attributable to DXC common stockholders and earnings per common share were impacted by the Tax Cuts and Jobs Act. See Note 11 - "Income Taxes" for further details.
(2) Fiscal 2018 financial results have been adjusted to present the results of USPS as discontinued operations as a result of the divestiture of USPS during the first quarter of fiscal 2019.
(3) Fiscal 2017 included $238 million of restructuring costs.
(4) Fiscal 2016 included $95 million of debt extinguishment costs.
(5) Fiscal 2015 included $256 million of restructuring costs and $197 million of SEC settlement related charges.
(6) Fiscal 2014 included $74 million of restructuring costs.
(7) Net debt-to-total capitalization is a non-GAAP measure used by management to assess our ability to service our debts using only our cash and cash equivalents. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Liquidity and Capital Resources" for additional information.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The purpose of the MD&A is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the fiscal year ended March 31, 2018 and our financial condition as of March 31, 2018. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and notes.

The MD&A is organized in the following sections:

Background
Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations
Critical Accounting Policies and Estimates

Background

DXC was formed by the combination of CSC and HPES on April 1, 2017. We are a world's 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. Our 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.

We generate revenue by offering a wide range of information technology services and solutions primarily in North America, Europe, Asia and Australia. We operate through two segments: GBS and GIS. We market and sell our services directly to clients through our direct sales force operating out of sales offices around the world. Our clients include commercial businesses of many sizes and in many industries and public sector enterprises.

USPS Separation

On May 31, 2018, we completed the USPS Separation, and combination of USPS with Vencore and KeyPoint to form Perspecta, an independent public company. As a result of the USPS Separation, the statements of operations, balances 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.

Results of Operations

In connection with the HPES Merger, CSC was deemed the accounting acquirer of HPES for accounting purposes under GAAP, therefore, CSC is considered DXC's predecessor and the historical financial statements of CSC prior to April 1, 2017, are reflected herein as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017 do not include the financial results of HPES, and therefore, are not directly comparable. Additionally, CSC used to report its results based on a fiscal year convention that comprises four thirteen-week quarters. However, effective April 1, 2017, DXC's fiscal year was modified to end on March 31 of each year with each quarter ending on the last calendar day.




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The following table sets forth certain financial data for fiscal 2018, 2017 and 2016:
 
 
Fiscal Years Ended
(In millions, except per-share amounts)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
 
 
 
 
 
 
 
Revenues
 
$
21,733

 
$
7,607

 
$
7,106

 
 
 
 
 
 
 
Income (loss) from continuing operations, before taxes
 
1,304

 
(174
)
 
10

Income tax benefit
 
(242
)
 
(74
)
 
(62
)
Income (loss) from continuing operations
 
1,546

 
(100
)
 
72

Income from discontinued operations, net of taxes
 
236

 

 
191

Net income (loss)
 
$
1,782

 
$
(100
)
 
$
263

 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
Continuing operations
 
$
5.23

 
$
(0.88
)
 
$
0.50

Discontinued operations
 
0.81

 

 
1.28

 
 
$
6.04

 
$
(0.88
)
 
$
1.78


Fiscal 2018 Highlights

During fiscal 2018, we surpassed our first year HPES Merger integration milestones, delivering over $1 billion of year one cost take-out. The additional savings were primarily driven by workforce optimization actions including the acceleration of management reductions and the global deployment of our automation program, Bionix. These ongoing cost actions address both internal labor, as well as third party contractors. We further enhanced our workforce management processes to cost-effectively deliver existing business while staffing the required labor for new business. We also executed on several initiatives to optimize non-labor spend, including ongoing rate negotiations, vendor consolidation, demand management, reductions in maintenance expense and rationalization of facilities.

Fiscal 2018 financial highlights include the following:

Fiscal 2018 revenues were $21,733 million.
Fiscal 2018 income from continuing operations and diluted EPS from continuing operations were $1,546 million and $5.23, respectively, including the cumulative impact of certain items of $441 million, or $1.52 per share, reflecting restructuring costs, transaction, separation and integration-related costs, amortization of acquired intangible assets, pension and other post-retirement benefit ("OPEB") actuarial and settlement gains and a tax adjustment related to U.S. tax reform.
Our cash and cash equivalents were $2,593 million at March 31, 2018.
We generated $3,105 million of cash from operations during fiscal 2018, including the cash generated from USPS operations.
The Company returned $311 million to shareholders in the form of common stock dividends and share repurchases during fiscal 2018.


12


Revenues

Fiscal 2018 compared with fiscal 2017
 
 
Fiscal Years Ended
 
 
 
 
(in millions)
 
March 31, 2018
 
March 31, 2017
 
Change
 
Percentage Change (NM)
GBS
 
$
9,254

 
$
4,173

 
$
5,081

 
GIS
 
12,479

 
3,434

 
9,045

 
Total Revenues
 
$
21,733


$
7,607

 
$
14,126

 
        

(NM) Calculation is not meaningful.

The increase in revenues for fiscal 2018 compared with fiscal 2017 was driven by the HPES Merger.

As a global company, over 63% of our fiscal 2018 revenues were earned internationally. As a result, the comparison of revenues denominated in currencies other than the U.S. dollar from period to period is impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. Constant currency revenues are a non-GAAP measure calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. The table below summarizes our constant currency revenues for the fiscal year ended March 31, 2018 compared to revenues for the fiscal year ended March 31, 2017:
 
 
Fiscal Years Ended
 
 
 
 
(in millions)
 
Constant Currency March 31, 2018(1)
 
March 31, 2017
 
Change
 
Percentage Change (NM)
GBS
 
$
9,093

 
$
4,173

 
$
4,920

 
GIS
 
12,249

 
3,434

 
8,815

 
Total Revenues
 
$
21,342


$
7,607

 
$
13,735

 
        

(NM) Calculation is not meaningful.
(1) Fiscal 2018 revenues are presented at constant currency and include purchase price accounting adjustments of $(24) million and $(98) million for GBS and GIS, respectively. See Note 2 - "Acquisitions."

Our Digital revenue cuts across both of our reporting segments and includes Enterprise, Cloud Applications and Consulting, Cloud, Analytics and Security. Digital revenue grew year-over-year, reflecting our clients’ accelerating shift to Digital. During fiscal 2018, we also formed a new digital business team to jointly develop digital transformations with our clients, leveraging assets from across the company and our partnerships.

Our GBS segment revenues were $9.3 billion for fiscal 2018, representing an increase of $5.1 billion over fiscal 2017. The revenue growth is attributed to the HPES Merger.

Our GIS segment revenues were $12.5 billion for fiscal 2018, representing an increase of $9.0 billion over fiscal 2017. The revenue growth is attributed to the HPES Merger.

During fiscal 2018, GBS and GIS had contract awards of $10.2 billion and $11.6 billion, respectively.


13


Fiscal 2017 compared with fiscal 2016
 
 
Fiscal Years Ended
 
 
 
 
(in millions)
 
March 31, 2017
 
April 1, 2016
 
Change
 
Percentage Change
GBS
 
$
4,173

 
$
3,637

 
$
536

 
14.7%
GIS
 
3,434

 
3,469

 
(35
)
 
(1.0)%
Total Revenues
 
$
7,607


$
7,106

 
$
501

 
7.1%

Our fiscal 2017 revenues increased $501 million as compared with fiscal 2016. The increase was due to growth in our GBS segment and revenues from our recent acquisitions. The increase in fiscal 2017 revenues was partially offset by a decrease in revenues of $317 million caused by contracts that concluded or were renewed at lower rates and a $221 million adverse impact of foreign currency movement due to the strengthening of the U.S. dollar against the British pound.

The table below summarizes our constant currency revenues for the fiscal year ended March 31, 2017 compared to the fiscal year ended April 1, 2016:
 
 
Fiscal Years Ended
 
 
 
 
(in millions)
 
March 31, 2017(1)
 
April 1, 2016
 
Change
 
Percentage Change
GBS
 
$
4,291

 
$
3,637

 
$
654

 
18.0%
GIS
 
3,537

 
3,469

 
68

 
2.0%
Total Revenues
 
$
7,828

 
$
7,106

 
$
722

 
10.2%
        

(1) Fiscal 2017 revenues are presented at constant currency. Constant currency revenues is a non-GAAP measure and is
further described above in the section “Fiscal 2018 compared with fiscal 2017.”

Global Business Services

The $654 million, or 18.0%, constant currency increase for fiscal 2017 as compared to fiscal 2016 was driven by growth in next generation business processing services offerings, as well as contributions from our recent acquisitions, primarily within our Digital Applications business and our IS&S business where we continue to prioritize the development of our digital capabilities. Digital Applications, our enterprise, cloud applications and consulting business, increased over 38% in constant currency and IS&S increased over 26% in constant currency when compared to prior fiscal year. The increase was largely due to revenues from our recent acquisitions which we continue to integrate into our existing business and new business revenues increased $249 million. These increases were partially offset by a $274 million decrease in revenues from contracts that concluded and a $131 million decline from contracts renewed at lower rates.

Global Infrastructure Services

GIS segment constant currency revenues for fiscal 2017 increased $68 million, or 2.0%, as compared to fiscal 2016. The increase was primarily due to an increase of $243 million in revenues from new business and an increase in revenues contributed from our recent acquisitions. In addition, we recognized incremental revenues of $43 million under our GIS segment's portion of the IP matters agreement (see Note 3 - "Divestitures"). These increases were partially offset by decreases in revenues of $335 million from contracts that concluded, $89 million from contracts renewed with scope changes and $23 million due to price-downs. We continued to take actions to mitigate the secular headwinds facing our traditional IT outsourcing business and focus GIS on the next generation digital needs of our clients.

During fiscal 2017, GBS and GIS had contract awards of $4.9 billion and $3.7 billion, respectively, as compared to fiscal 2016 contract awards of $4.3 billion and $4.3 billion.


14


Costs and Expenses

Our total costs and expenses were as follows:
 
 
Fiscal Years Ended
 
Percentage of Revenues
(in millions)
 
March 31, 2018
 
March 31, 2017(1)
 
April 1, 2016(1)
 
2018
 
2017(1)
 
2016(1)
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
16,317

 
$
5,549

 
$
5,160

 
75.0
 %
 
72.9
 %
 
72.7
%
Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
1,890

 
1,282

 
1,058

 
8.7

 
16.9

 
14.9

Depreciation and amortization
 
1,795

 
647

 
658

 
8.3

 
8.5

 
9.3

Restructuring costs
 
789

 
238

 
23

 
3.6

 
3.1

 
0.3

Interest expense, net
 
231

 
82

 
85

 
1.1

 
1.1

 
1.2

Debt extinguishment costs
 

 

 
95

 

 

 
1.3

Other (income) expense, net
 
(593
)
 
(17
)
 
17

 
(2.7
)
 
(0.2
)
 
0.2

Total costs and expenses
 
$
20,429

 
$
7,781

 
$
7,096

 
94.0
 %
 
102.3
 %
 
99.9
%
        

(1) Fiscal 2017 and 2016 costs and expenses are for CSC only and therefore are not directly comparable to fiscal 2018 costs and
expenses.

During fiscal 2018, we took actions to optimize our workforce, extract greater supply chain efficiencies and rationalize our real estate footprint. We reduced our labor base by approximately 13% through a combination of automation, best shoring and pyramid correction. We also rebalanced our skill mix, including the addition of more than 18,000 new employees and the ongoing retraining of the existing workforce. In real estate, we restructured over four million square feet of space during fiscal 2018.

Costs of Services

Fiscal 2018 compared with fiscal 2017

Cost of services excluding depreciation and amortization and restructuring costs ("COS") was $16.3 billion for fiscal 2018 as compared to $5.5 billion for fiscal 2017. The increase in COS was driven by the HPES Merger and was partially offset by reduction in costs associated with our labor base and real estate.

Fiscal 2017 compared with fiscal 2016

COS as a percentage of revenues remained consistent year over year. The $389 million increase in COS was largely related to our acquisitions and a $31 million gain on the sale of certain intangible assets in our GIS segment during fiscal 2016 not present in the current fiscal year. This increase was offset by management's ongoing cost reduction initiatives. The amount of restructuring charges, net of reversals, excluded from COS was $219 million and $7 million for fiscal 2017 and 2016, respectively.

Selling, General and Administrative

Fiscal 2018 compared with fiscal 2017

Selling, general and administrative expense excluding depreciation and amortization and restructuring costs ("SG&A") was $1.9 billion for fiscal 2018 as compared to $1.3 billion for fiscal 2017. The increase in SG&A was driven by the HPES Merger. Integration, separation and transaction-related costs were $359 million during fiscal 2018, as compared to $305 million during fiscal 2017.


15


Fiscal 2017 compared with fiscal 2016
 
SG&A as a percentage of revenues increased 2.0% to 16.9% for fiscal 2017 from 14.9% for fiscal 2016. The increase was due to transaction and integration costs of $305 million associated with our recent acquisitions and the HPES Merger and a non-recurring settlement recovery of $16 million recorded as a reduction of SG&A during fiscal 2016, not present in the current fiscal year. These increases were partially offset by higher revenues. The amount of restructuring charges, net of adjustments, excluded from SG&A was $19 million and $16 million for fiscal 2017 and 2016, respectively.

Depreciation and Amortization

Fiscal 2018 compared with fiscal 2017

Depreciation and amortization expense ("D&A") was $1.8 billion for fiscal 2018 as compared to $0.6 billion for fiscal 2017. The increase in D&A was attributed to acquired property and equipment and intangible assets associated with the HPES Merger.

Fiscal 2017 compared with fiscal 2016

D&A as a percentage of revenues decreased less than 1% to 8.5% for fiscal 2017 from 9.3% for fiscal 2016 due to an increase in revenues for the GBS segment and lower D&A within the GIS segment as a result of reduced capital expenditures from contract terminations, as well as a continued focus on capital efficiency. The decrease in the D&A ratio was partially offset by an increase in amortization related to acquisitions, primarily within the GBS segment.

Restructuring Costs

Restructuring costs represent severance related to workforce optimization programs and expense associated with facilities and data center rationalization.

During fiscal 2018, 2017 and 2016 we initiated certain restructuring actions across our segments. The fiscal 2018 restructuring initiatives are intended to reduce our core structure and related operating costs, improve our competitiveness, and facilitate the achievement of acceptable and sustainable profitability following our recent acquisitions and the HPES Merger.

Total restructuring costs recorded, net of reversals, during fiscal 2018, 2017 and 2016 were $789 million, $238 million and $23 million, respectively. The net amounts recorded included $13 million, $6 million and $7 million of pension benefit augmentations for fiscal 2018, 2017 and 2016, respectively, owed to certain employees under legal or contractual obligations. These augmentations will be paid as part of normal pension distributions over several years.

See Note 19 - "Restructuring Costs" for additional information about our restructuring actions.

Interest Expense and Interest Income

Fiscal 2018 compared with fiscal 2017

Interest expense for fiscal 2018 was $320 million as compared to $117 million in fiscal 2017. The year-over-year increase in interest expense includes interest expense associated with debt acquired in connection with the HPES Merger.

Interest income for fiscal 2018 was $89 million as compared to $35 million in fiscal 2017. The year-over-year increase in interest income was due to higher cash balances during fiscal 2018 as compared to the prior fiscal year.

Fiscal 2017 compared with fiscal 2016

Interest expense for fiscal 2017 was $117 million as compared to $123 million in fiscal 2016. The year-over-year decrease in interest expense was due to the fourth quarter fiscal 2016 redemption of our 6.50% term notes and lower interest rates on our existing debt.


16


Interest income for fiscal 2017 was $35 million as compared to $38 million in fiscal 2016. The decrease in interest income was due to lower average deposit balances in our money market funds and money market deposit accounts during fiscal 2017 as compared to the prior fiscal year.

Debt Extinguishment Costs

During fiscal 2016, CSC redeemed all outstanding 6.50% term notes due March 2018 at par plus redemption premiums related to a make-whole provision and accrued interest. Debt extinguishment costs of $95 million for fiscal 2016 consists primarily of redemption premiums. There were no debt extinguishment costs recorded in fiscal 2018 or fiscal 2017.

Other (Income) Expense, Net

Other (income) expense, net consists of non-service cost components of net periodic pension (income) expense, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses.

The components of other (income) expense, net for fiscal 2018, fiscal 2017, and fiscal 2016 are as follows:

 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Non-service cost components of net periodic pension (income) expense
 
$
(509
)
 
$
(7
)
 
$
26

Foreign currency gain
 
(71
)
 
(8
)
 
(1
)
Other gain
 
(13
)
 
(2
)
 
(8
)
Totals
 
$
(593
)
 
$
(17
)
 
$
17



Fiscal 2018 compared with fiscal 2017

The $576 million increase in other (income) expense, net for fiscal 2018 was due to a $502 million increase in income from non-service cost components of net periodic pension income attributed to increases in expected return on plan assets and actuarial and settlement gains associated with our defined benefit pension plans, and an increase in foreign currency gain related to a change in the functional currency of a European holding company.

Fiscal 2017 compared with fiscal 2016

The $34 million year-over-year increase in other (income) expense, net was due to a $33 million year-over-year increase in income from non-service cost components of net periodic pension income attributed to a decrease in actuarial and settlement losses associated with our defined benefit pension plans, and the benefit of favorable movements in foreign currency exchange rates used to fair value our foreign currency forward contracts and the related foreign currency denominated assets and liabilities partially offset by a $6 million gain on sale of certain assets during fiscal 2016 not present in fiscal 2017.

Taxes

Our effective tax rate ("ETR") on income (loss) from continuing operations, before taxes for fiscal 2018, 2017 and 2016 was (18.6)%, (42.5)% and (620.0)%, respectively. A reconciliation of the differences between the U.S. federal statutory rate and the ETR, as well as other information about our income tax provision, is provided in Note 11 - "Income Taxes."

In fiscal 2018, the ETR was primarily impacted by the effects of the Act:

The release of a deferred tax liability relating to the outside basis difference of foreign subsidiaries which increased the income tax benefit and decreased the ETR by $554 million and 42.5%, respectively.
The accrual of the one-time transition tax on estimated unremitted foreign earnings which decreased the income tax benefit and increased the ETR by $361 million and 27.7%, respectively.

17


The remeasurement of deferred tax assets and liabilities as a result of the Act, which increased the income tax benefit and decreased the ETR by $338 million and 25.9%, respectively.

In fiscal 2017, the ETR was primarily impacted by:
A change in the valuation allowance that primarily consists of an aggregate income tax detriment for the increase in the valuation allowances on tax attributes primarily in the U.S., Germany and Luxembourg, which decreased the overall income tax benefit and decreased the ETR by $135 million and 78%, respectively. Offset by an aggregate income tax benefit related to the release of valuation allowances on tax attributes primarily in the U.K., Denmark and Japan, which increased the overall income tax benefit and increased the ETR by $75 million and 43.0%, respectively.
An income tax detriment for transaction costs incurred that are not deductible for tax purposes, which resulted in a decrease to the overall tax benefit and decreased the ETR by $21 million and 12.1%, respectively.
An income tax benefit from excess tax benefits realized from employee share-based payment awards, which resulted in an increase in the overall income tax benefit and increased the ETR by $20 million and 11.3%, respectively.

In fiscal 2016, the ETR was primarily impacted by:
The adoption of a new accounting standard on excess tax benefits realized from share options vested or exercised. This increased the overall income tax benefit and the ETR by $23 million and 230%, respectively.
An increase in the overall valuation allowance primarily due to the NPS Separation related to state net operating losses and state tax credits. This decreased the overall income tax benefit and ETR by $27 million and 270%, respectively.
The release of a liability for uncertain tax positions following the closure of the U.K. tax audit for fiscal 2010 to 2012. This increased the income tax benefit by $58 million and increased the ETR by 580%.
Adjustments to uncertain tax positions in the U.S. that increased the overall income tax benefit by $24 million and increased the ETR by 240%, respectively.

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2016. With respect to CSC's fiscal 2008 through 2010 federal tax returns, we previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. We have an agreement in principle with the IRS Office of Appeals as to some but not all of these adjustments. We have agreed to extend the statute of limitations associated with this audit through April 30, 2019. In addition, during the first quarter of fiscal 2018, we received a Revenue Agent’s Report with proposed adjustments to CSC's fiscal 2011 through 2013 federal returns. We have filed a protest of certain of these adjustments to the IRS Office of Appeals. The IRS is also examining CSC's fiscal 2014 through 2016 federal income tax returns. We have not received any adjustments for this cycle. We continue to believe that our tax positions are more-likely-than-not sustainable and that we will ultimately prevail.

In addition, we may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than we have accrued as uncertain tax positions. We may need to accrue and ultimately pay additional amounts for tax positions that previously met a more-likely-than-not standard if such positions are not upheld. Conversely, we could settle positions by payment with the tax authorities for amounts lower than those that have been accrued or extinguish a position through payment. We believe the outcomes that are reasonably possible within the next twelve months may result in a reduction in liability for uncertain tax positions of $17 million to $19 million, excluding interest, penalties, and tax carry-forwards.

Income from Discontinued Operations

During the first quarter of fiscal 2019, we completed the divestiture of USPS and during the third quarter of fiscal 2016 we completed the divestiture of CSRA. Income from discontinued operations, net of taxes, for fiscal 2018, reflects the divestiture of USPS and, for fiscal 2016, reflects the divestiture of CSRA. There were no discontinued operations in fiscal 2017.


18


Earnings (Loss) Per Share

Fiscal 2018 compared with fiscal 2017

Diluted EPS from continuing operations for fiscal 2018 was $5.23, an increase of $6.11 per share compared with the prior fiscal year. The increase was due to an increase of $1,646 million in income from continuing operations, partially offset by an increase in weighted average common shares outstanding for diluted EPS attributable to capital restructuring associated with the HPES Merger.

Diluted EPS from continuing operations for fiscal 2018 includes $2.72 per share of restructuring costs, $1.24 per share of transaction, separation and integration-related costs, $1.82 per share of amortization of acquired intangible assets, $(0.76) per share of pension and OPEB actuarial and settlement gains, and $(3.50) per share reflecting the estimated non-recurring benefit of the Act.

Fiscal 2017 compared with fiscal 2016

Diluted EPS from continuing operations in fiscal 2017 decreased $1.38 per share to $(0.88) per share primarily due to $403 million of transaction and integration related costs during fiscal 2017 for the HPES Merger and other acquisitions. In addition, restructuring costs increased $215 million as compared to the same period in the prior year. These decreases were partially offset by the non-recurrence of fiscal 2016 debt extinguishment costs of $95 million.

Total diluted EPS for fiscal 2017 decreased $2.66 per share due to the reasons mentioned above for EPS from continuing operations and the lack of discontinued operations associated with the NPS Separation during fiscal 2017.


19


Non-GAAP Financial Measures

We present non-GAAP financial measures of performance which are derived from the statements of operations of DXC. These non-GAAP financial measures include earnings before interest and taxes ("EBIT"), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income and non-GAAP EPS.

We present these non-GAAP financial measures to provide investors with meaningful supplemental financial information, in addition to the financial information presented on a GAAP basis. These non-GAAP financial measures exclude certain items from GAAP results that DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures provide investors supplemental information about the financial performance of DXC exclusive of the impacts of corporate wide strategic decisions. DXC management believes that adjusting for these items provides investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period. DXC management believes the non-GAAP measures provided are also considered important measures by financial analysts covering DXC as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS.

There are limitations to the use of the non-GAAP financial measures presented in this report. One of the limitations is that they do not reflect complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Additionally, other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes between companies.

Non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:
(in millions)
 
Fiscal Year Ended March 31, 2018
Income from continuing operations, before taxes
 
$
1,304

Non-GAAP income from continuing operations, before taxes
 
$
2,758

Net income
 
$
1,782

Adjusted EBIT
 
$
2,989


Reconciliation of Non-GAAP Financial Measures

Our non-GAAP adjustments include:
Restructuring - reflects costs, net of reversals, related to workforce optimization and real estate charges.
Transaction, separation and integration-related costs - reflects costs related to integration planning, financing, and advisory fees associated with the HPES Merger and other acquisitions and costs related to the USPS Separation.
Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business combinations.
Pension and OPEB actuarial and settlement gains and losses - reflects pension and OPEB actuarial and settlement gains and losses.
Certain overhead costs - reflects certain fiscal 2017 HPE costs allocated to HPES that are expected to be largely eliminated on a prospective basis.
Tax adjustment - reflects the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017 for fiscal 2018 and the application of an approximate 28% tax rate for fiscal 2018, which is within the targeted effective tax rate range for that period.





20


A reconciliation of reported results to non-GAAP results is as follows:
 
 
Fiscal Year Ended March 31, 2018
(in millions, except per-share amounts)
 
As Reported
 
Restructuring Costs
 
Transaction, Separation and Integration-Related Costs
 
Amortization of Acquired Intangible Assets
 
Pension and OPEB Actuarial and Settlement Gains
 
Tax Adjustment
 
Non-GAAP Results
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
16,317

 
$

 
$

 
$

 
$

 
$

 
$
16,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
1,890

 

 
(359
)
 

 

 

 
1,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations, before taxes
 
1,304

 
789

 
359

 
526

 
(220
)
 

 
2,758

Income tax (benefit) expense
 
(242
)
 

 

 

 

 
1,013

 
771

Income from continuing operations
 
1,546

 
789

 
359

 
526

 
(220
)
 
(1,013
)
 
1,987

Income from discontinued operations, net of taxes
 
236

 

 

 

 

 

 
236

Net income
 
1,782

 
789

 
359

 
526

 
(220
)
 
(1,013
)
 
2,223

Less: net income attributable to non-controlling interest, net of tax
 
31

 

 

 

 

 

 
31

Net income attributable to DXC common stockholders
 
$
1,751

 
$
789

 
$
359

 
$
526

 
$
(220
)
 
$
(1,013
)
 
$
2,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
(18.6
)%
 
 
 
 
 
 
 
 
 
 
 
28.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
$
5.32

 
$
2.77

 
$
1.26

 
$
1.85

 
$
(0.77
)
 
$
(3.56
)
 
$
6.86

Diluted EPS from continuing operations
 
$
5.23

 
$
2.72

 
$
1.24

 
$
1.82

 
$
(0.76
)
 
$
(3.50
)
 
$
6.75

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
284.93

 
284.93

 
284.93

 
284.93

 
284.93

 
284.93

 
284.93

Diluted EPS
 
289.77

 
289.77

 
289.77

 
289.77

 
289.77

 
289.77

 
289.77

        

* The net periodic pension cost within income from continuing operations includes $371 million of actual return on plan assets, whereas the net periodic pension cost within non-GAAP income from continuing operations includes $(534) million of expected long-term return on pension assets of defined benefit plans subject to interim remeasurement.
















21


A reconciliations of net income to adjusted EBIT is as follows:
(in millions)
 
Fiscal Year Ended March 31, 2018
Net income
 
$
1,782

Income from discontinued operations, net of taxes
 
(236
)
Income tax benefit
 
(242
)
Interest income
 
(89
)
Interest expense
 
320

EBIT
 
1,535

Restructuring costs
 
789

Transaction, separation and integration-related costs
 
359

Amortization of acquired intangible assets
 
526

Pension and OPEB actuarial and settlement gains
 
(220
)
Adjusted EBIT
 
$
2,989



22


Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of March 31, 2018, our cash and cash equivalents ("cash") were $2.6 billion, of which $1.0 billion was held outside of the United States. A substantial portion of funds can be returned to the U.S. from funds advanced previously to finance our foreign acquisition initiatives. As a result of the Tax Cuts and Jobs Act of 2017, and after the mandatory one-time income inclusion (deemed repatriation) of the historically untaxed earnings of our foreign subsidiaries, we expect a significant portion of the cash held by our foreign subsidiaries will no longer be subject to U.S. income tax consequences upon a subsequent repatriation to the United States. However, a portion of this cash may still be subject to foreign and state income tax consequences upon future remittance. Therefore, if additional funds held outside the U.S. are needed for our operations in the United States, we plan to repatriate these funds. Based on a preliminary analysis, we have recorded a provisional estimate for foreign withholding taxes, state taxes, and India dividend distribution tax of $99 million as described in Note 11 - "Income Taxes". We have changed our permanent reinvestment assertion on our foreign subsidiaries and will no longer consider current and accumulated earnings for all non-U.S. subsidiaries permanently reinvested, except for current year and future Indian earnings.

Cash and cash equivalents increased $1.3 billion during fiscal 2018 to $2.6 billion, primarily due to growth in our business. The cash flows of USPS have not been segregated and are included in the statements of cash flows for the fiscal year ended March 31, 2018. The following table summarizes our cash flow activity:
 
 
Fiscal Year Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Net cash provided by operating activities
 
$
3,105

 
$
837

 
$
802

Net cash provided by (used in) investing activities
 
181

 
(783
)
 
(1,180
)
Net cash (used in) provided by financing activities
 
(1,890
)
 
93

 
(485
)
Effect of exchange rate changes on cash and cash equivalents
 
65

 
(60
)
 
(57
)
Net increase (decrease) in cash and cash equivalents
 
1,461

 
87

 
(920
)
Cash and cash equivalents at beginning of year
 
1,268

 
1,181

 
2,101

Cash and cash equivalents at the end of period
 
$
2,729

 
$
1,268

 
$
1,181


Operating cash flow

Net cash provided by operating activities during fiscal 2018 was $3,105 million as compared to $837 million during fiscal 2017. The increase of $2,268 million was predominately due to an increase in net income of $1,882 million. The increase in cash provided by operating activities during fiscal 2018 was partially offset by additional deferred tax adjustments to operating activities of $842 million and an increase in the gain on pension and other post-employment benefits of $307 million.

Net cash provided by operating activities during fiscal 2017 increased $35 million as compared to fiscal 2016. The increase was due to an increase in trade payables of $411 million, an decrease in net accounts receivable of $64 million, $32 million less restructuring charges compared to fiscal 2016 and a cash outflow of $190 million for SEC settlement paid in fiscal 2016 with no comparative outflow for the current year. In addition, payments received from CSRA under the amended IP matters agreement increased $35 million. The increase in operating cash flows was partially offset by a $189 million increase in payments for transaction and integration-related costs and a $545 million decrease in net income adjusted for non-cash transactions from fiscal 2016.

Investing cash flow

Net cash provided by (used in) investing activities during fiscal 2018 was $181 million as compared to $(783) million for fiscal 2017. The increase was predominantly due to net cash provided by acquisitions of $735 million during fiscal 2018, compared with cash paid for acquisitions of $434 million during fiscal 2017. The increase in net cash provided by (used in) investing activities was partially offset by an increase in cash payments for outsourcing contract costs of $227 million and software purchases of $71 million.


23


Net cash used in investing activities during fiscal 2017 decreased $397 million to $783 million. This decrease was driven by a decline of $120 million spent on acquisitions and a decline in capital expenditures of $150 million and and an increase in cash received for the deferred purchase price receivable of $141 million, with no similar inflow for the prior period.

Financing cash flow

Net cash used by financing activities during fiscal 2018 was $1,890 million, as compared to $93 million provided by financing activities during fiscal 2017. The $1,983 million increase in net cash used by financing activities was primarily due to a decrease in credit facility draws, net of repayments of $868 million, additional payments on capitalized lease obligations of $915 million, additional payments on long-term debt obligations of $1,379 million and $132 million in payments for repurchases of common stock. These cash outflows were partially offset by draws on long-term debt of $462 million and cash proceeds from bond issuance of $989 million.

Net cash provided by financing activities during fiscal 2017 was $93 million, as compared to cash used of $485 million during fiscal 2016. The decline was due primarily to certain fiscal 2016 cash outflows that did not re-occur during fiscal 2017, including a $350 million repayment of our 2.5% term notes, a $313 million special cash dividend paid as part of the NPS Separation, a $95 million payment for the early extinguishment of debt and payments of $73 million for treasury stock that occurred during fiscal 2016. These declines of cash used in financing activities were partially offset by a $254 million payment of acquired debt from the acquisition of Xchanging and $85 million in net proceeds from the structured sale of our U.K. campus.

Capital Resources

See Note 20 - "Commitments and Contingencies" for a discussion of the general purpose of guarantees and commitments. The anticipated sources of funds to fulfill such commitments are listed below and under the subheading "Liquidity."

The following table summarizes out total debt:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Short-term debt and current maturities of long-term debt
 
$
1,918

 
$
738

Long-term debt, net of current maturities
 
6,092

 
2,225

Total debt
 
$
8,010

 
$
2,963


The $5.0 billion increase in total debt during fiscal 2018 was attributed primarily to debt assumed in connection with the HPES Merger.

The maturity chart below summarizes the future maturities of long-term debt principal for fiscal years subsequent to March 31, 2018 and excludes maturities of borrowings for assets acquired under long-term financing and capitalized lease liabilities.



24


chart-5281e561d86c59e7b6da01.jpg

During fiscal 2018, we increased commitments under our revolving credit facility to $3.8 billion from $3.0 billion pre-HPES Merger and completed a senior bond offering in an aggregate principal amount of $650 million due 2021, the proceeds of which were used to retire the outstanding USD term loan due 2021. Additionally, we entered into an unsecured €400 million term loan agreement maturing during May 2018, which was subsequently replaced by long-term debt maturing in fiscal 2020, and we entered into amendments to our existing AUD term loan to increase total borrowings to AUD $275 million. We also issued £250 million of senior notes maturing in 2025. The proceeds from these borrowings were used to make prepayments to term loans maturing in 2022 and fully repay the borrowings under revolving credit facilities.
 
During fiscal 2018, we completed a debt exchange offer whereby $234 million principal amount of the $300 million Senior Notes (the “EDS Notes”) were tendered to DXC in exchange for a like principal amount of DXC notes with identical maturity and interest rate. As of March 31, 2018, DXC held approximately $234 million principal amount of the EDS Notes that were tendered, and which are eliminated upon financial statement consolidation, while the remaining $66 million principal amount of the EDS Notes outstanding were held by public noteholders. Subsequent to March 31, 2018, DXC extinguished $234 million principal amount of EDS Notes that it held. The $66 million principal amount of EDS Notes that remained outstanding are included in liabilities of discontinued operations.

We were in compliance with all financial covenants associated with our borrowings as of March 31, 2018 and March 31, 2017. For more information on our debt, see Note 12 - "Debt".


25


The following table summarizes our capitalization ratios:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Total debt
 
$
8,010

 
$
2,963

Cash and cash equivalents
 
2,593

 
1,268

Net debt(1)
 
$
5,417

 
$
1,695

 
 
 
 
 
Total debt
 
$
8,010

 
$
2,963

Equity
 
13,837

 
2,166

Total capitalization
 
$
21,847

 
$
5,129

 
 
 
 
 
Debt-to-total capitalization
 
36.7
%
 
57.8
%
Net debt-to-total capitalization(1)
 
24.8
%
 
33.0
%
        

(1) Net debt and Net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone.

The decrease in net debt-to-total capitalization was primarily due to a $3.7 billion increase in net debt and a $11.7 billion increase in equity, which were primarily a result of the HPES Merger.

As of March 31, 2018, our credit ratings were as follows:
Rating Agency
 
Rating
 
Outlook
 
Short Term Ratings
Fitch
 
BBB+
 
Stable
 
F-2
Moody's
 
Baa2
 
Stable
 
P-2
S&P
 
BBB
 
Negative
 
-

Liquidity

We expect our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our normal operating requirements for the next 12 months. We expect to continue to use cash generated by operations as a primary source of liquidity; however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to draw on our multi-currency revolving credit facility or raise capital through the issuance of capital market debt instruments such as commercial paper, term loans and bonds. However, there can be no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future.

Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.

26



The following table summarizes our total liquidity:

 
 
As of
(in millions)
 
March 31, 2018
Cash and cash equivalents
 
$
2,593

Available borrowings under our revolving credit facility
 
3,810

Total liquidity 
 
$
6,403


Share Repurchases

During fiscal 2018, our Board of Directors authorized the repurchase of up to $2.0 billion of our common stock. This program became effective on April 3, 2017 and no end date was established. During fiscal 2018, we repurchased 1,537,782 shares of our common stock at an aggregate cost of $137 million.

Dividends

During fiscal 2018 the Board of Directors of DXC declared aggregate cash dividends to our stockholders of $0.72 per share, or approximately $209 million. Future dividends are subject to customary board review and approval prior to declaration.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to arrangements that include guarantees, the receivables securitization facility, receivables sales arrangements and financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in balance sheets. See Note 5 - "Receivables" and Note 20 - "Commitments and Contingencies" for additional information regarding these off-balance sheet arrangements.
 

27


Contractual Obligations
 
Our contractual obligations as of March 31, 2018 were as follows:
(in millions)
 
Less than
1 year
 
2-3 years
 
4-5 years
 
More than
5 years
 
Total
Debt (1)
 
$
439

 
$
1,964

 
$
1,801

 
$
1,638

 
$
5,842

Capitalized lease liabilities
 
616

 
517

 
102

 

 
1,235

Operating Leases
 
667

 
787

 
378

 
751

 
2,583

Purchase Obligations(2)
 
1,946

 
2,303

 
439

 
54

 
4,742

U.S. Tax Reform - Transition Tax (3)
 
29

 
58

 
58

 
216

 
361

Interest and preferred dividend payments(4)
 
195

 
365

 
227

 
277

 
1,064

Total(5)
 
$
3,892

 
$
5,994

 
$
3,005

 
$
2,936

 
$
15,827

        

(1) Amounts represent scheduled principal payments of long-term debt and mandatory redemption of preferred stock of a consolidated subsidiary.
(2) Includes long-term purchase agreements with certain software, hardware, telecommunication and other service providers and exclude agreements that are cancelable without penalty. If we do not meet the specified service minimums, we may have an obligation to pay the service provider a portion of or the entire shortfall.
(3) The calculated amount for transition tax is payable over eight years; 8% of net tax liability in each of years 1-5, 15% in year 6, 20% in year 7, and 25% in year 8. This amount has been calculated provisionally under SAB 118 and is subject to change in future periods. See Note 11 - "Income Taxes" for additional information about the transition tax and for the estimated liability related to unrecognized tax benefits, which has been omitted from this table.
(4) Amounts represent scheduled interest payments on long-term debt and scheduled dividend payments associated with the mandatorily redeemable preferred stock of a consolidated subsidiary excluding contingent dividends associated with the participation and variable appreciation premium features.
(5) See Note 13 - "Pension and Other Benefit Plans" for the estimated liability related to estimated future benefit payments under our Pension and OPEB plans that have been omitted from this table.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider the following policies to be critical because of their complexity and the high degree of judgment involved in implementing them: revenue recognition, income taxes, business combinations, defined benefit plans and valuation of assets. We have discussed the selection of our critical accounting policies and the effect of estimates with the audit committee of our board of directors.

Revenue Recognition

Most of our revenues are recognized based on objective criteria and do not require significant estimates that may change over time. However, some arrangements are subject to specific accounting guidance that may require significant estimates, including contracts which include multiple-element deliverables.

Multiple-element arrangements

Many of our contracts require us to provide a range of services or elements to our customers, which may include a combination of services, products or both. As a result, significant judgment may be required to determine the appropriate accounting, including whether the elements specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, when considered appropriate, how the total revenues should be allocated among the elements and the timing of revenue recognition for each element. If vendor specific objective evidence is not available, allocation of total contract consideration to each element requires estimating the fair value or selling price of each element based on third party evidence or management's best estimate of selling price for the

28


deliverables when third party evidence ("TPE") is not available. TPE is established by considering our competitors' prices for comparable product and service offerings in the market in which we operate. When we conclude that comparable products or services are sold by competitors to similarly situated customers, we consult available information sources such as published list prices, quoted market prices and industry reports to estimate TPE. We establish a best estimate of selling price consistent with our existing pricing practices involving a cost-plus-reasonable-margin methodology as well as comparison of the margins to those realized on recent contracts for similar products or services in that market. Once the total revenues have been allocated to the various contract elements, revenues for each element are recognized based on the relevant revenue recognition method for the services performed or elements delivered if the revenue recognition criteria have been met. Estimates of total revenues at contract inception often differ materially from actual revenues due to volume differences, changes in technology or other factors which may not be foreseen at inception.

Income Taxes

We are subject to income taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, analyzing our income tax reserves, the determination of the likelihood of recoverability of deferred tax assets and adjustment of valuation allowances accordingly. In addition, our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. For example, we are currently undergoing IRS audits for CSC's fiscal 2008 through 2016 U.S. Federal tax returns.

As a global enterprise, our ETR is affected by many factors, including our global mix of earnings among countries with differing statutory tax rates, the extent to which our non-U.S. earnings are indefinitely reinvested outside the U.S, changes in the valuation allowance for deferred tax assets, changes in tax regulations, acquisitions, dispositions and the tax characteristics of our income. We cannot predict what our ETR will be in the future because there is uncertainty regarding these factors.

As a result of the HPES Merger and changes in U.S. cash requirements, a deferred tax liability of $542 million was recorded for U.S. income taxes based on the estimated historical taxable earnings of the HPES foreign subsidiaries. In addition, we recorded an estimated liability of $50 million for India DDT tax based on estimated historical taxable earnings of the HPES India subsidiary. These liabilities were recorded as part of acquisition accounting.

As a result of the Tax Cuts and Jobs Act (the "Act"), we have changed our ASC 740-30 assertion with respect to the remaining CSC foreign subsidiaries and no longer consider current and accumulated earnings for all non-U.S. subsidiaries permanently reinvested, except for current year Indian earnings. The deferred tax liability relating to HPES foreign subsidiaries of $554 million has been released and our estimated liability for India DDT was increased by $30 million to $80 million to include estimated historical taxable earnings for CSC Indian subsidiaries. For those subsidiaries from which we were able to make a reasonable estimate of the tax effects of our change in assertion, we have recorded a provisional estimate for withholding taxes, state taxes, and India DDT of $12 million, $7 million and $80 million, respectively. For those subsidiaries which we were not able to make a reasonable estimate, we have not recorded any deferred taxes. We will record the tax effects of any change in our prior assertion with respect to these subsidiaries and disclose any unrecognized deferred tax liability for temporary differences related to our foreign subsidiaries, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018.

Considerations impacting the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. In determining whether the deferred tax assets are realizable, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations. We recorded a valuation allowance against deferred tax assets of approximately $1.4 billion as of March 31, 2018 due to uncertainties related to the ability to utilize these assets. However, valuation allowances are subject to change in future reporting periods due to changes in various factors.

Changes in tax laws, such as the Act or changes in tax laws resulting from the Organization for Economic Co-operation and Development’s multi-jurisdictional plan of action to address “base erosion and profit shifting” could impact our effective tax rate. The calculation of our tax liabilities involves uncertainties in the application of complex changing tax regulations. As discussed in Note 11 - "Income Taxes", for example, the Act provides provisions that limit interest expense, provide for immediate expensing of qualified assets, further limits executive compensation deductions, generally eliminates Federal tax on foreign dividend distributions, subjects certain payments from U.S. corporations to foreign

29


related parties to additional taxes, places restrictions or eliminates certain exclusions, deductions and credits and generally broadens the tax base. Further guidance for these provisions is forthcoming and the laws are subject to change in future periods.

The Finance Act of 2012 (the "2012 Finance Act") was signed into law in India on May 28, 2012. The 2012 Finance Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized and challenged in the Indian courts; however, there is no assurance that such a challenge will be successful. We have engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations involving Indian companies. The Indian tax authorities may seek to apply the provisions of the 2012 Finance Act to these prior transactions and seek to tax us directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. We believe that the 2012 Finance Act does not apply to these prior acquisitions and that we have strong defenses against any claims that might be raised by the Indian tax authorities.

The U.K. Finance (No 2) Act 2017 was passed into law on 16 November 2017, enacting measures deferred from the Finance Act 2017-19. The legislation imposes, with effect from 1 April 2017, restrictions on the utilization of prior period losses against current period profits and limitations on interest deductions. We do not expect there to be a material impact on our financial statements as a result of this legislation.

Business Combinations

We account for the acquisition of a business using the acquisition method of accounting, which requires us to estimate the fair values of the assets acquired and liabilities assumed. This includes acquired intangible assets such as customer-related intangibles, the liabilities assumed and contingent consideration, if any. Liabilities assumed may include litigation and other contingency reserves existing at the time of acquisition and require judgment in ascertaining the related fair values. Independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities. Such appraisals are based on significant estimates provided by us, such as forecasted revenues or profits utilized in determining the fair value of contract-related acquired intangible assets or liabilities. Significant changes in assumptions and estimates subsequent to completing the allocation of the purchase price to the assets and liabilities acquired, as well as differences in actual and estimated results, could result in material impacts to our financial results. Adjustments to the fair value of contingent consideration are recorded in earnings. Additional information related to the acquisition date fair value of acquired assets and liabilities obtained during the allocation period, not to exceed one year, may result in changes to the recorded values of acquired assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.

Defined Benefit Plans
 
The computation of our pension and other post-retirement benefit costs and obligations is dependent on various assumptions. Inherent in the application of the actuarial methods are key assumptions, including discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases and medical cost trend rates. Our management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on observable inputs for similar assets or on significant unobservable inputs if not available. Two of the most significant assumptions are the expected long-term rate of return on plan assets and the discount rate. Our weighted average rates used were:
 
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Discount rates
 
2.5
%
 
3.1
%
 
3.0
%
Expected long-term rates of return on assets
 
4.9
%
 
6.3
%
 
6.3
%

The assumption for the expected long-term rate of return on plan assets is impacted by the expected asset mix of the plan; judgments regarding the correlation between historical excess returns and future excess returns and expected investment expenses. The discount rate assumption is based on current market rates for high-quality, fixed income debt instruments with maturities similar to the expected duration of the benefit payment period. The following table provides the

30


impact changes in the weighted-average assumptions would have had on our net periodic pension benefits and settlement and contractual termination charges for fiscal 2018:
(in millions)
 
Change
 
Approximate Change in Net Periodic Pension Expense
 
Approximate Change in Settlement, Contractual Termination, and Mark-to-Market Charges
Expected long-term return on plan assets
 
0.5%
 
$
(54
)
 
$
57

Expected long-term return on plan assets
 
(0.5)%
 
$
54

 
$
(57
)
 
 
 
 
 
 
 
Discount rate
 
0.5%
 
$
12

 
$
(1,082
)
Discount rate
 
(0.5)%
 
$
(24
)
 
$
1,136


Valuation of Assets

We review long-lived ("assets, intangible assets, and goodwill") for impairment in accordance with our accounting policy disclosed in Note 1 - Summary of Significant Accounting Policies. Assessing the fair value of assets involves significant estimates and assumptions including estimation of future cash flows, the timing of such cash flows, and discount rates reflecting the risk inherent in projecting future cash flows. The valuation of long-lived and intangible assets involves management estimates about future values and remaining useful lives of assets, particularly purchased intangible assets. These estimates are subjective and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and forecasts.

Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities, and goodwill to reporting units and determination of the fair value of each reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions include a significant change in the business climate, established business plans, operating performance indicators or competition which could materially affect the determination of fair value for each reporting unit.

We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. The discount rate used in an income approach is based on our weighted-average cost of capital and may be adjusted for the relevant risks associated with business-specific characteristics and any uncertainty related to a reporting unit's ability to execute on the projected future cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

31


 
 
 
 
 
Page
 
 
 




32


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
DXC Technology Company
Tysons, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of DXC Technology Company and subsidiaries (the "Company") as of March 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity, for each of the three years in the period ended March 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 29, 2018 (not presented herein), expressed an unqualified opinion on the Company's internal control over financial reporting.

Emphasis of Matter

As discussed in Note 3 to the financial statements, the accompanying consolidated financial statements have been retrospectively adjusted for discontinued operations. As discussed in Note 21 to the financial statements, the Company has changed its method of accounting for non-service cost components of net periodic pension (income) expense in the consolidated statement of operations and the classification of certain items in the consolidated statement of cash flows in 2018, 2017 and 2016 due to the adoption of ASU 2017-07, ASU 2016-15, and ASU 2016-18.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (SEC) and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/DELOITTE & TOUCHE LLP

McLean, Virginia  
May 29, 2018 (August 15, 2018 as to the effects of discontinued operations discussed in Note 3 and the adoption of ASU 2017-07, ASU 2016-15, and ASU 2016-18 as discussed in Note 21)

We have served as the Company's auditor since at least 1965; however, the specific year has not been determined.


33


DXC TECHNOLOGY COMPANY
CONSOLIDATED BALANCE SHEETS
 
 
As of
(in millions, except per share and share amounts)
 
March 31, 2018 (1)
 
March 31, 2017 (2)
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,593

 
$
1,268

Receivables, net of allowance for doubtful accounts of $40 and $26
 
5,481

 
1,643

Prepaid expenses
 
496

 
223

Other current assets
 
469

 
116

Assets of discontinued operations
 
581

 

Total current assets
 
9,620

 
3,250

 
 
 
 
 
Intangible assets, net of accumulated amortization of $3,369 and $2,293
 
7,179

 
1,794

Goodwill
 
7,619

 
1,855

Deferred income taxes, net
 
373

 
381

Property and equipment, net of accumulated depreciation of $3,686 and $2,816
 
3,363

 
903

Other assets
 
2,404

 
480

Assets of discontinued operations - non-current
 
3,363

 

Total Assets
 
$
33,921

 
$
8,663

 
 
 
 
 
LIABILITIES and EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt and current maturities of long-term debt
 
$
1,918

 
$
738

Accounts payable
 
1,513

 
410

Accrued payroll and related costs
 
744

 
248

Accrued expenses and other current liabilities
 
3,120

 
998

Deferred revenue and advance contract payments
 
1,641

 
518

Income taxes payable
 
127

 
38

Liabilities of discontinued operations
 
789

 

Total current liabilities
 
9,852

 
2,950

 
 
 
 
 
Long-term debt, net of current maturities
 
6,092

 
2,225

Non-current deferred revenue
 
795

 
286

Non-current pension obligations
 
879

 
342

Non-current income tax liabilities and deferred tax liabilities
 
1,166

 
423

Other long-term liabilities
 
844

 
271

Liabilities of discontinued operations - non-current
 
456

 

Total Liabilities
 
20,084

 
6,497

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
DXC stockholders’ equity:
 
 
 
 
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued as of March 31, 2018 and March 31, 2017
 

 

Common stock, par value $0.01 per share; authorized 750,000,000 shares; issued 286,393,147 as of March 31, 2018 and 141,298,797 as of March 31, 2017
 
3

 
1

Additional paid-in capital
 
12,210

 
2,219

Retained earnings (accumulated deficit)
 
1,301

 
(170
)

34


Accumulated other comprehensive income (loss)
 
58

 
(162
)
Treasury stock, at cost, 1,016,947 and 0 shares as of March 31, 2018 and March 31, 2017
 
(85
)
 

Total DXC stockholders’ equity
 
13,487

 
1,888

Non-controlling interest in subsidiaries
 
350

 
278

Total Equity
 
13,837

 
2,166

Total Liabilities and Equity
 
$
33,921

 
$
8,663

         
(1) Fiscal 2018 financial results have been adjusted to present the results of USPS as discontinued operations as a result of the divestiture of USPS
during the first quarter of fiscal 2019.
(2) Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.



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

35


DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Fiscal Years Ended
(in millions, except per-share amounts)
 
March 31, 2018 (1)(2)
 
March 31, 2017 (2)
 
April 1, 2016 (2)
 
 
 
 
 
 
 
Revenues
 
$
21,733

 
$
7,607

 
$
7,106

 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
16,317

 
5,549

 
5,160

Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
1,890

 
1,282

 
1,058

Depreciation and amortization
 
1,795

 
647

 
658

Restructuring costs
 
789

 
238

 
23

Interest expense
 
320

 
117

 
123

Interest income
 
(89
)
 
(35
)
 
(38
)
Debt extinguishment costs
 

 

 
95

Other (income) expense, net
 
(593
)
 
(17
)
 
17

Total costs and expenses
 
20,429

 
7,781

 
7,096

 
 
 
 
 
 
 
Income (loss) from continuing operations, before taxes
 
1,304

 
(174
)
 
10

Income tax benefit
 
(242
)
 
(74
)
 
(62
)
Income (loss) from continuing operations
 
1,546

 
(100
)
 
72

Income from discontinued operations, net of taxes
 
236

 

 
191

Net income (loss)
 
1,782

 
(100
)
 
263

Less: net income attributable to non-controlling interest, net of tax
 
31

 
23

 
12

Net income (loss) attributable to DXC common stockholders
 
$
1,751

 
$
(123
)
 
$
251

 
 
 
 
 
 
 
Income (loss) per common share
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
Continuing operations
 
$
5.32

 
$
(0.88
)
 
$
0.51

Discontinued operations
 
0.83

 

 
1.31

 
 
$
6.15

 
$
(0.88
)
 
$
1.82

Diluted:
 
 
 
 
 
 
Continuing operations
 
$
5.23

 
$
(0.88
)
 
$
0.50

Discontinued operations
 
0.81

 

 
1.28

 
 
$
6.04

 
$
(0.88
)
 
$
1.78

 
 
 
 
 
 
 
Cash dividend per common share
 
$
0.72

 
$
0.56

 
$
2.99


         
(1) Fiscal 2018 financial results have been adjusted to present the results of USPS as discontinued operations as a result of the divestiture of
USPS during the first quarter of fiscal 2019.
(2) Fiscal 2016 through fiscal 2018 have been adjusted to give effect to the retrospective adoption of ASU 2017-07 during the first quarter of fiscal 2019.


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





36


DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


 
 
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
1,782

 
$
(100
)
 
$
263

Other comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense of $75, $5 and $4
 
197

 
(75
)
 
(83
)
 
Cash flow hedges adjustment, net of tax (benefit) expense of $(3), $12 and $0
 
(11
)
 
21

 
1

 
Available-for-sale securities, net of tax expense of $2, $0 and $0
 
9

 

 

 
Pension and other post-retirement benefit plans, net of tax:
 
 
 
 
 
 
 
 
Prior service credit, net of tax expense of $8, $0 and $1
 
38

 

 
2

 
 
Amortization of transition obligation, net of tax expense of $0, $0, and $0
 
1

 
1

 

 
 
Amortization of prior service cost, net of tax benefit of $4, $5 and $10
 
(14
)
 
(12
)
 
(20
)
 
 
Foreign currency exchange loss, net of tax benefit of $0, $1 and $0
 

 
(2
)
 
(1
)
 
Pension and other post-retirement benefit plans, net of tax
 
25

 
(13
)
 
(19
)
Other comprehensive income (loss), net of taxes
 
220

 
(67
)
 
(101
)
Comprehensive income (loss)
 
2,002

 
(167
)
 
162

 
 
Less: comprehensive income attributable to non-controlling interest
 
31

 
7

 
12

Comprehensive income (loss) attributable to DXC common stockholders
 
$
1,971

 
$
(174
)
 
$
150




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



37


DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018 (1)(2)
 
March 31, 2017 (1)
 
April 1, 2016
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
1,782

 
$
(100
)
 
$
263

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
2,014

 
658

 
767

Pension & other post-employment benefits, actuarial & settlement (gains) losses
 
(220
)
 
87

 
92

Share-based compensation
 
93

 
75

 
45

Deferred tax benefit
 
(842
)
 
(92
)
 
(37
)
Loss (gain) on dispositions
 
4

 
6

 
(41
)
Provision for losses on accounts receivable
 
45

 
4

 
6

Unrealized foreign currency exchange losses
 
22

 
24

 
43

Impairment losses and contract write-offs
 
41

 
8

 
2

Debt extinguishment costs
 

 

 
95

Amortization of debt issuance costs and discount (premium)
 
(4
)
 
17

 

Cash surrender value in excess of premiums paid
 
(11
)
 
(7
)
 
(10
)
Other non-cash charges, net
 
4

 

 

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
 
 
Decrease in receivables
 
74

 
193

 
129

Increase in prepaid expenses and other current assets
 
(196
)
 
(29
)
 
(15
)
(Decrease) increase in accounts payable and accruals
 
(96
)
 
54

 
(357
)
SEC settlement related charges
 

 

 
(190
)
Increase (decrease) in income taxes payable and income tax liability
 
303

 
(32
)
 
58

Increase (decrease) in advance contract payments and deferred revenue
 
130

 
(67
)
 
(37
)
Other operating activities, net
 
(38
)
 
38

 
(11
)
Net cash provided by operating activities
 
3,105

 
837

 
802

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Purchases of property and equipment
 
(224
)
 
(246
)
 
(356
)
Payments for outsourcing contract costs
 
(328
)
 
(101
)
 
(101
)
Short-term investing
 

 

 
(70
)
Software purchased and developed
 
(211
)
 
(140
)
 
(184
)
Cash acquired through HPES Merger
 
938

 

 

Payments for acquisitions, net of cash acquired
 
(203
)
 
(434
)
 
(554
)
Business dispositions
 

 
3

 
37

Deferred purchase price receivable
 
147

 
141

 

Proceeds from sale of assets
 
58

 
57

 
61

Other investing activities, net
 
4

 
(63
)
 
(13
)
Net cash provided by (used in) investing activities
 
181

 
(783
)
 
(1,180
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
Borrowings of commercial paper
 
2,413

 
2,191

 
821

Repayments of commercial paper
 
(2,297
)
 
(2,086
)
 
(263
)
Borrowings under lines of credit
 

 
920

 
2,206

Repayment of borrowings under lines of credit
 
(737
)
 
(789
)
 
(1,825
)
Borrowings on long-term debt, net of discount
 
621

 
159

 
928

Principal payments on long-term debt
 
(1,547
)
 
(168
)
 
(1,703
)

38


Payments on capital leases and borrowings for asset financing
 
(1,060
)
 
(145
)
 
(166
)
Proceeds from bond issuance
 
989

 

 

Proceeds from structured sale of facility
 

 
85

 

Proceeds from stock options and other common stock transactions
 
138

 
54

 
82

Taxes paid related to net share settlements of share-based compensation awards
 
(76
)
 
(13
)
 
(48
)
Debt extinguishment costs
 

 

 
(95
)
Repurchase of common stock and advance payment for accelerated share repurchase
 
(132
)
 

 
(73
)
Dividend payments
 
(174
)
 
(78
)
 
(430
)
Borrowings for CSRA spin transaction
 

 

 
1,508

Transfers of cash to CSRA upon Separation
 

 

 
(1,440
)
Other financing activities, net
 
(28
)
 
(37
)
 
13

Net cash (used in) provided by financing activities
 
(1,890
)
 
93

 
(485
)
Effect of exchange rate changes on cash and cash equivalents
 
65

 
(60
)
 
(57
)
Net increase (decrease) in cash and cash equivalents
 
1,461

 
87

 
(920
)
Cash and cash equivalents at beginning of year
 
1,268

 
1,181

 
2,101

Cash and cash equivalents at end of year
 
$
2,729

 
$
1,268

 
$
1,181


             
(1) Fiscal 2017 and fiscal 2018 have been adjusted to give effect to the retrospective adoption of ASU's 2016-15 and 2016-18 during the first quarter of fiscal 2019.
(2) As a result of the USPS Separation, Statements of Operations, Balance Sheets, and related financial information reflect USPS's operations and assets and liabilities as discontinued operations for fiscal 2018. The cash flows and comprehensive income of USPS have not been segregated and are included in the Statements of Cash Flows and Statements of Comprehensive Income (Loss) for fiscal 2018.




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


39


DXC TECHNOLOGY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Reported balance at April 3, 2015
148,374

 
$
148

$
2,286

$
928

$
21

$
(446
)
$
2,937

$
28

$
2,965

Recapitalization adjustment(1)

 
(147
)
147







Recast balance at April 3, 2015
148,374

 
$
1

$
2,433

$
928

$
21

$
(446
)
$
2,937

$
28

$
2,965

Net income
 
 
 
 
251

 
 
251

12

263

Other comprehensive loss
 
 
 
 
 
(101
)
 
(101
)
 
(101
)
Share-based compensation expense
 
 
 
45

 
 
 
45

 
45

Acquisition of treasury stock
 
 
 
 
 
 
(39
)
(39
)
 
(39
)
Share repurchase program (1)
(3,750
)
 

32

(106
)
 
 
(74
)
 
(74
)
Stock option exercises and other common stock transactions (1)
4,123

 

77

 
 
 
77

 
77

Dividends declared
 
 
 
 
(104
)
 
 
(104
)
 
(104
)
Special dividend
 
 
 
 
(317
)
 
 
(317
)
 
(317
)
Capital contributions
 
 
 
 
 
 
 

6

6

Noncontrolling interest distributions and other
 
 
 
 
 
 
 

(9
)
(9
)
Divestiture of NPS
 
 
 
 
(619
)
(31
)
 
(650
)
(30
)
(680
)
Balance at April 1, 2016
148,747

 
$
1

$
2,587

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

        

(1) 
Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.
(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Reported balance at April 1, 2016
148,747

 
$
149

$
2,439

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

Recapitalization adjustment(1)

 
(148
)
148

 
 
 
 
 
 
Recast balance at April 1, 2016
148,747

 
$
1

$
2,587

$
33

$
(111
)
$
(485
)
$
2,025

$
7

$
2,032

Net loss
 
 
 
 
(123
)
 
 
(123
)
23

(100
)
Other comprehensive loss
 
 
 
 
 
(51
)
 
(51
)
(16
)
(67
)
Share-based compensation expense
 
 
 
73

 
 
 
73

 
73

Acquisition of treasury stock
 
 
 
 
 
 
(12
)
(12
)
 
(12
)
Stock option exercises and other common stock transactions (1)
3,185

 
 
56

 
 
 
56

 
56

Dividends declared
 
 
 
 
(80
)
 
 
(80
)
 
(80
)
Noncontrolling interest distributions and other
 
 
 
 
 
 
 

(17
)
(17
)
Noncontrolling interest from acquisition (2)
 
 
 
 
 
 
 

281

281

Balance at March 31, 2017
151,932

 
$
1

$
2,716

$
(170
)
$
(162
)
$
(497
)
$
1,888

$
278

$
2,166

Recapitalization adjustment(1)
(10,633
)
 

(497
)


497




Recast balance at March 31, 2017
141,299

 
$
1

$
2,219

$
(170
)
$
(162
)
$

$
1,888

$
278

$
2,166

        

(1) 
Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.
(2) 
See Note 2 - "Acquisitions"





40


(in millions, except shares in thousands)
Common Stock
Additional
Paid-in Capital
(Accumulated Deficit) Retained Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock (3)
Total
DXC Equity
Non-
Controlling Interest
Total Equity
Shares
 
Amount
Reported balance at Mach 31, 2017
151,932

 
$
152

$
2,565

$
(170
)
$
(162
)
$
(497
)
$
1,888

$
278

$
2,166

Recapitalization adjustment (1)
(10,633
)
 
(151
)
(346
)


497




Recast 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 (2)
141,741

 
2

9,848

 
 
 
9,850

50

9,900

Net income
 
 
 
 
1,751

 
 
1,751

31

1,782

Other comprehensive Income
 
 
 
 
 
220

 
220


220

Share-based compensation expense
 
 
 
92

 
 
 
92

 
92

Acquisition of treasury stock
 
 
 
 
 
 
(85
)
(85
)
 
(85
)
Share repurchase program
(1,538
)
 
 
(66
)
(71
)
 
 
(137
)
 
(137
)
Stock option exercises and other common stock transactions
4,891

 
 
117

 
 
 
117

 
117

Dividends declared
 
 
 
 
(209
)
 
 
(209
)
 
(209
)
Noncontrolling interest distributions and other
 
 
 
 

 
 

(9
)
(9
)
Balance at March 31, 2018
286,393

 
$
3

$
12,210

$
1,301

$
58

$
(85
)
$
13,487

$
350

$
13,837

        

(1) 
Certain prior year amounts were adjusted to retroactively reflect the legal capital of DXC.
(2) 
See Note 2 - "Acquisitions"
(3) 
1,016,947 treasury shares as of March 31, 2018




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

41



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Business

DXC Technology Company ("DXC" or the "Company") is a world's 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.

Merger with HPES

On April 1, 2017, Computer Sciences Corporation ("CSC") completed its previously announced combination with the Enterprise Services business of Hewlett Packard Enterprise Company ("HPES"), which resulted in CSC becoming a wholly owned subsidiary of DXC (the "HPES Merger"). DXC common stock began regular-way trading under the symbol "DXC" on the New York Stock Exchange on April 3, 2017. See Note 2 - "Acquisitions" for further information.

USPS Separation and Mergers

On May 31, 2018, DXC completed the separation of its U.S. Public Sector business ("USPS") (the "USPS Separation"), and combination of USPS 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 3 - "Divestitures" for more information.

Basis of Presentation

In order to make this report easier to read, DXC refers throughout to (i) the Consolidated Financial Statements as the “Financial Statements,” (ii) the Consolidated Statements of Operations as the “Statements of Operations,” (iii) the Consolidated Statement of Comprehensive Income (loss) as the "Statements of Comprehensive Income," (iv) the Consolidated Balance Sheets as the “Balance Sheets,” and (v) the 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 Consolidated Financial Statements, unless otherwise noted.

The accompanying financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for annual reports and accounting principles generally accepted in the United States ("GAAP"). The 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.

In connection with the HPES Merger, CSC was deemed the accounting acquirer of HPES for accounting purposes under GAAP, therefore, CSC is considered DXC's predecessor and the historical financial statements of CSC prior to April 1, 2017, are reflected in this Annual Report on Form 10-K as DXC's historical financial statements. Accordingly, the financial results of DXC as of and for any periods ending prior to April 1, 2017 do not include the financial results of HPES, and therefore, are not directly comparable. Additionally, CSC used to report its results based on a fiscal year convention that comprises four thirteen-week quarters. However, effective April 1, 2017, DXC's fiscal year was modified to end on March 31 of each year with each quarter ending on the last calendar day.


42



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2018, the Company changed its primary segment performance measure to segment profit from the previously reported consolidated segment operating income. See Note 18 - "Segment and Geographic Information" for more information. In addition, DXC effected a recapitalization of its common stock and preferred stock (the “Recapitalization”). The Recapitalization, which converted DXC's historical share price from par value $1.00 per share to par value $0.01 per share, resulted in no change to DXC's total stockholders’ equity or earnings per share.

As a result of the USPS Separation, the consolidated statements of operations, consolidated 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 consolidated statements of cash flows for fiscal 2018. In addition, USPS is no longer a reportable segment. DXC's reportable segments are Global Business Services ("GBS") and Global Infrastructure Services ("GIS").

During fiscal 2016, CSC completed the separation of its U.S. public sector business ("NPS") and combination of NPS with SRA International, Inc. to form a new independent publicly traded Company; CSRA Inc. (the "NPS Separation"). As a result of the NPS Separation, the statement of operations and related financial information reflect NPS's operations as discontinued operations for fiscal 2016. However, the cash flows and comprehensive income of NPS have not been segregated and are included in the statement of cash flows and statement of comprehensive income for fiscal 2016.

Certain prior year amounts have been reclassified to conform to the current year presentation, specifically, within the balance sheets, "prepaid expenses" and "other current assets" previously aggregated within "prepaid expenses and other current assets" have been separately disclosed and, within the statements of operations, "separation costs" have been aggregated within "selling, general and administrative."

Use of Estimates

The preparation of the financial statements in accordance with GAAP requires the Company's management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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. Estimates are used for, but not limited to, contracts accounted for using the percentage-of-completion method, cash flows used in the evaluation of impairment of goodwill and other long-lived assets, reserves for uncertain tax benefits, valuation allowances on deferred tax assets, loss accruals for litigation and obligations related to our pension plans. In the opinion of the Company's management, the accompanying financial statements contain all adjustments necessary, including those of a normal recurring nature, to fairly present the financial statements.

Revenue Recognition

The Company's primary service offerings are information technology outsourcing, other professional services, or a combination thereof. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the client, the sales price is fixed or determinable, and collectability is reasonably assured. For non-software arrangements that include multiple-elements, revenue recognition involves the identification of separate units of accounting after consideration of combining and/or segmenting contracts and allocation of the arrangement consideration to the units of accounting on the basis of their relative selling price.

Revenue under such contracts is recognized based upon the level of services delivered in the periods in which they are provided. These 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. These activities typically do not qualify as separate units of accounting, and the related revenues are deferred until service commencement and recognized ratably over the period of performance during the period in which DXC provides the related service, which is typically the life of the contract. Costs are expensed as incurred, except for direct and incremental set-up costs which are capitalized and amortized on a straight-line basis over the life of the contract, which are described in more detail under the heading of intangible assets below. Software transactions that include multiple elements are described below within Multiple-element software sales.

43



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company generally provides its services under time and materials contracts, unit price contracts, fixed-price contracts, and multiple-element software sales for which revenue is recognized in the following manner:
 
Time and materials contracts - Revenue is recorded at agreed-upon billing rates at the time services are provided.

Unit-price contracts. Revenue is recognized 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 under the percentage-of-completion method as described below; these include certain software development projects and all long-term construction-type contracts. For other fixed-price contracts, revenue is recognized based on the proportion of the services delivered to date as a percentage of the total services to deliver over the contract term. If output or input measures are not available or cannot be reasonably estimated, revenue is recognized ratably over the contract term. Under the percentage-of-completion 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. This method can result in the recognition of unbilled receivables, the deferral of costs as work in process, or deferral of profit on these contracts. Contracts that require estimates at completion using the percentage-of-completion method accounted for approximately 3% of the Company's revenues for fiscal 2018. Management regularly reviews project profitability and underlying estimates. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management. Provisions for estimated losses at completion, if any, are recognized in the period in which the loss becomes evident. The provision includes estimated costs in excess of estimated revenue and any profit margin previously recognized.

Multiple-element software sales. For multiple-element arrangements that involve the sale of DXC proprietary software, post contract customer support, and other software-related services, vendor-specific objective evidence ("VSOE") of fair value is required to allocate and recognize revenue for each element. VSOE of fair value is determined based on the price charged where each deliverable is sold separately. In situations where VSOE of fair value exists for all undelivered elements but not a delivered element (typically the software license element), the residual method is used. This method allocates revenue to the undelivered elements equal to their VSOE value with the remainder allocated to the delivered element. If significant customization is required, and VSOE is available to support accounting for the software as a separate unit of account, software revenue is recognized as the related software customization services are performed in accordance with the percentage-of-completion method described above. In situations where VSOE of fair value does not exist for all of the undelivered software-related elements, revenue is deferred until only one undelivered element remains and then recognized following the pattern of delivery of the final undelivered element.

Pension and Other Benefit Plans

The Company accounts for its pension, other post-retirement benefit ("OPEB"), defined contribution and deferred compensation plans using the guidance of ASC 710 "Compensation - General" and ASC 715 "Compensation - Retirement Benefits". The Company recognizes actuarial gains and losses and changes in fair value of plan assets in earnings at the time of plan remeasurement as a component of net periodic benefit expense. Typically plan remeasurement occurs annually during the fourth quarter of each fiscal year. The remaining components of pension and OPEB expense, primarily current period service and interest costs and expected return on plan assets, are recorded on a quarterly basis.

Inherent in the application of the actuarial methods are key assumptions, including, but not limited to, discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases, and medical cost trend rates. Company management evaluates these assumptions annually and updates assumptions as necessary. The fair value of assets is determined based on the prevailing market prices or estimated fair value of investments when quoted prices are not available.


44



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Software Development Costs

After establishing technological feasibility, and until such time as the software products are available for general release to customers, the Company capitalizes costs incurred to develop commercial software products to be sold, leased or otherwise marketed. Costs incurred to establish technological feasibility are charged to expense as incurred. Enhancements to software products are capitalized where such enhancements extend the life or significantly expand the marketability of the products. Amortization of capitalized software development costs is determined separately for each software product. Annual amortization expense is calculated based on the greater of the ratio of current gross revenues for each product to the total of current and anticipated future gross revenues for the product or the straight-line amortization method over the estimated useful life of the product.

Unamortized capitalized software costs associated with commercial software products are periodically evaluated for impairment on a product-by-product basis by comparing the unamortized balance to the product’s net realizable value. The net realizable value is the estimated future gross revenues from that product reduced by the related estimated future costs. When the unamortized balance exceeds the net realizable value, the unamortized balance is written down to the net realizable value and an impairment charge is recorded.

The Company capitalizes costs incurred to develop internal-use computer software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred in connection with development of upgrades or enhancements that result in additional functionality are also capitalized. Capitalized costs associated with internal-use software are amortized on a straight-line basis over the estimated useful life of the software. Purchased software is capitalized and amortized over the estimated useful life of the software. Internal-use software assets are evaluated for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Share-Based Compensation

Share-based awards are accounted for under the fair value method. The Company provides different forms of share-based compensation to its employees and non-employee directors. This includes stock options and restricted stock units ("RSUs"), including performance-based restricted stock units ("PSUs"). The fair value of the awards is determined on the grant date, based on the Company's closing stock price. For awards settled in shares, the Company recognizes compensation expense based on the grant-date fair value net of estimated forfeitures over the vesting period. For awards settled in cash, the Company recognizes compensation expense based on the fair value at each reporting date net of estimated forfeitures.

The Company uses the Black-Scholes-Merton model to compute the estimated fair value of options granted. This model includes assumptions regarding expected term, risk-free interest rates, expected volatility and dividend yields which are periodically evaluated. The expected term is calculated based on the Company’s historical experience with respect to its stock plan activity and an estimate of when vested and unexercised option shares will be exercised. The expected term of options is based on job tier classifications, which have different historical exercise behavior. The risk-free interest rate is based on the zero-coupon interest rate of U.S. government issued treasury STRIPS with a period commensurate with the expected term of the options.

Expected volatility is based on a blended approach, which uses a two-thirds weighting for historical volatility and one-third weighting for implied volatility. The Company’s historical volatility calculation is based on employee class and historical closing prices of the Company's peer group, in order to better align this factor with the expected terms of the stock options. DXC’s implied stock price volatility is derived from the price of exchange traded options on DXC’s stock with the longest remaining contractual term. Implied volatility is a prospective, forward looking measure representing market participants’ expectations of DXC's future stock price volatility. The dividend yield assumption is based on the respective fiscal year dividend payouts. Forfeitures are estimated based on historical experience.

Business Combinations

Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's statements of operations. For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as income or expense. Acquisition-related expenses and post-acquisition integration costs are recognized separately from the business combination and are expensed as incurred.

Goodwill Impairment Analysis

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. A significant amount of judgment is involved in determining whether an event indicating impairment has occurred between annual testing dates. Such indicators include: a significant decline in expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the disposal of a significant component of a reporting unit and the testing for recoverability of a significant asset group within a reporting unit.

The Company follows GAAP-prescribed rules when determining if goodwill has been impaired. Initially, an assessment of qualitative factors is conducted in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative analysis, which is commonly referred to as step zero under ASC Topic 350 "Goodwill and Other Intangible Assets", considers all relevant factors specific to the reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.

If the Company determines that it is not more likely that the carrying amount for a reporting unit is less than its fair value, then the subsequent two-step goodwill impairment testing process is not required. If the Company determines that it is more likely than not that the carrying amount for a reporting unit is greater than its fair value, then it proceeds with the subsequent two-step process.

The Company has the option to bypass the initial qualitative assessment stage and proceed directly to perform step one of the two-step process. Step one of the process compares each reporting unit’s fair value to its carrying value. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if a reporting unit’s fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is determined and allocated to the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in order to calculate the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.

When the Company performs step one of the two-step test for a reporting unit, it estimates the fair value of the reporting unit using both the income approach and the market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to present value using a discount rate. Cash flow projections are based on management's estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate is based on the specific risk characteristics of each reporting unit, the weighted-average cost of capital and its underlying forecasts. The market approach estimates fair value by applying performance-metric multiples to the reporting unit's prior and expected operating performance. The multiples are derived from comparable publicly traded companies that have operating and investment characteristics similar to those of the reporting unit. If the fair value of the reporting unit derived using one approach is significantly different from the fair value estimate using the other approach, the Company reevaluates its assumptions used in the two models.

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assumptions are modified as considered appropriate under the circumstances until the two models yield similar and reasonable results. The fair values determined by the market approach and income approach, as described above, are weighted to determine the fair value for each reporting unit. The weighting ascribed to the market approach fair value assigned to each reporting unit is influenced by two primary factors: 1) the number of comparable publicly traded companies used in the market approach, and 2) the similarity of the operating and investment characteristics of the reporting units to the comparable publicly traded companies used in the market approach.

If DXC performs a step one analysis for all of its reporting units in conjunction with its annual goodwill testing, it also compares the sum of all of its reporting units’ fair values to the Company's market capitalization (per-share stock price multiplied by the number of shares outstanding) and calculates an implied control premium (the excess of the sum of the reporting units’ fair values over the market capitalization). The Company evaluates the reasonableness of the control premium by comparing it to control premiums derived from recent comparable business combinations. If the implied control premium is not reasonable in light of the comparable business combinations, the Company reevaluates its fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions. As a result, when DXC’s stock price and thus market capitalization is low relative to the sum of the estimated fair value of its reporting units, this reevaluation can result in reductions to the estimated fair values for the reporting units.

Fair Value

The Company applies fair value accounting for its financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The objective of a fair value measurement is to estimate the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal market for that asset or liability, or in the absence of the principal market, the most advantageous market.

Assets and liabilities subject to fair value measurement disclosures are required to be classified according to a three-level fair value hierarchy with respect to the inputs used to determine fair value. The level in which an asset or liability is disclosed within the fair value hierarchy is based on the lowest level input that is significant to the related fair value measurement in its entirety. The levels of input are defined as follows:
 Level 1:
Quoted prices unadjusted for identical assets or liabilities in an active market.
Level 2:
Quoted prices for similar assets or liabilities in an active market, quoted prices for identical similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3:
Unobservable inputs that reflect the entity's own assumptions which market participants would use in pricing the asset or liability.

Receivables

The Company records receivables at their face amounts less an allowance for doubtful accounts. Receivables consist of amounts billed and currently due from customers, amounts earned but unbilled (including contracts measured under the percentage-of-completion method of accounting), amounts retained by the customer until the completion of a specified contract, negotiation of contract modification and claims. Unbilled recoverable amounts under contracts in progress generally become billable upon achievement of project milestones or upon acceptance by the customer.

Allowances for uncollectible billed trade receivables are estimated based on a combination of write-off history, aging analysis and any known collectability issues. Unbilled amounts under contracts in progress that are recoverable do not have an allowance for credit losses. Adjustments to unbilled amounts under contracts in progress related to credit quality, should they occur, would be recorded as a reduction of revenues.

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DXC uses receivables securitization facilities or receivables sales facilities in the normal course of business as part of managing its cash flows. The Company accounts for receivables sold under these facilities as a sale of financial assets pursuant to ASC 860 “Transfers and Servicing” and derecognizes these receivables, as well as the related allowances, from its balance sheets. Generally, the fair value of the sold receivables approximates the book value due to the short-term nature and, as a result, no gain or loss on sale of receivables is recorded. Under the receivables securitization facility, the deferred purchase price receivable is recorded at fair value, which is determined by calculating the expected amount of cash to be received based on unobservable inputs consisting of the face amount of the receivables adjusted for anticipated credit losses.

The Company reflects cash flows related to receivables facilities as operating activities in its statements of cash flows because the cash received upon both the sale and collection of the receivables is not subject to significant interest rate risk given the short-term nature of the Company’s trade receivables.

Property and Equipment

Property and equipment, which includes assets under capital leases, are stated at cost less accumulated depreciation. Depreciation is computed predominantly on a straight-line basis over the estimated useful lives of the assets or the remaining lease term, whichever is shorter. The estimated useful lives of DXC's property and equipment are as follows:
Buildings
Up to 40 years
Computers and related equipment
4 to 5 years
Furniture and other equipment
3 to 15 years
Leasehold improvements
Shorter of lease term or useful life up to 20 years

Intangible Assets

The Company's estimated useful lives for finite-lived intangibles are shown in the table below:
Software
2 to 10 years
Outsourcing contract costs
Contract life, excluding option years
Customer related intangibles
Expected customer service life
Acquired contract related intangibles
Contract life and first contract renewal, where applicable

Software is amortized using predominately the straight-line method. Costs of outsourcing contracts, including costs incurred for bid and proposal activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed on a straight-line basis over the contract life. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or transition activities and can be separated into two principal categories: contract premiums and transition/set-up costs. Contract premiums represent amounts paid to customers in excess of the fair value of assets acquired and are amortized as a reduction to revenues. Transition/set-up costs are primarily associated with assuming control over a customer's IT operations and transforming them pursuant to contract specifications. Acquired contract related and customer related intangible assets are amortized in proportion to the estimated undiscounted cash flows projected over the estimated life of the asset or on a straight-line basis if such cash flows cannot be reliably estimated.

Impairment of Long-Lived Assets and Finite-Lived Intangible Assets

Long-lived assets such as property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount of such assets to the estimated future net cash flows. If estimated future net cash flows are less than the carrying amount of such assets, an expense is recorded in the amount required to reduce the carrying amount of such assets to fair value. Fair value is determined based on a discounted cash flow approach or, when available and appropriate,

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

comparable market values. Long-lived assets to be disposed of are reported at the lower of their carrying amount or their fair value less costs to sell.

Income Taxes

The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, using statutory tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the results of operations in the period that includes the related enactment date.

A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision during the period in which the change occurred. In determining whether a valuation allowance is warranted, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations. The Company recognizes uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination. Uncertain tax positions are measured based on the probabilities that the uncertain tax position will be realized upon final settlement.

All tax-related cash flows resulting from excess tax benefits related to the settlement of share-based awards are classified as cash flows from operating activities and cash paid by directly withholding shares for tax withholding purposes is classified as a financing activity in the statements of cash flows.

Cash and Cash Equivalents

The Company considers investments with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of time deposits, money market funds and money market deposit accounts with a number of institutions that have high credit ratings.

Foreign Currency

The local currency of the Company's foreign affiliates is generally their functional currency. Accordingly, the assets and liabilities of the foreign affiliates are translated from their respective functional currency to U.S. dollars using fiscal year-end exchange rates, income and expense accounts are translated at the average rates in effect during the fiscal year and equity accounts are translated at historical rates. The resulting translation adjustment is reported in the statements of comprehensive income and recorded as part of accumulated other comprehensive income ("AOCI").

Derivative Instruments

The Company designates certain derivative instruments as hedges for purposes of hedge accounting, as defined under ASC 815 “Derivatives and Hedging.” For such derivative instruments, the Company documents its risk management objectives and strategy for undertaking hedging transactions, as well as all relationships between hedging and hedged risks. The Company's derivative instruments designated for hedge accounting consist mainly of interest rate swaps and foreign currency forward and option contracts. Changes in the fair value measurements of these derivative instruments are reflected as adjustments to other comprehensive income and subsequently reclassified into earnings in the period during which the hedged transactions occurred. Any ineffectiveness or excluded portion of a designated hedge is recognized in earnings.


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The derivative instruments not designated as hedges for purposes of hedge accounting include total return swaps and certain short-term foreign currency forward contracts. These instruments are recorded at their respective fair values and the change in their value is reported in current period earnings. The Company does not use derivative instruments for trading or speculative purpose. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item. All cash flows associated with the Company's derivative instruments are classified as operating activities in the statements of cash flows.

Recently Adopted Accounting Pronouncements
 
During fiscal 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
October 2016

ASU 2016-17 Consolidation (Topic 810): Interests held through Related Parties that are under Common Control

April 1, 2017 Retrospectively
This update alters how a decision maker considers indirect interests in a variable interest entity ("VIE") held through an entity under common control and simplifies that analysis to require consideration of only an entity’s proportionate indirect interest in a VIE held through a common control party.
The adoption of this update did not have a material impact on our financial statements.

Accounting Pronouncements Adopted April 1, 2018

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 approximately certain sales commissions of $158 million offset by a reduction in deferred tax and income tax 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.
 
 

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 twelve months ended March 31, 2018, March 31, 2017 and April 1, 2016, respectively. The service cost component of net periodic pension (income) expense remaining in "costs of services" and "selling, general and administrative" is $121 million, $23 million and $25 million for the twelve months ended March 31, 2018, March 31, 2017 and April 1, 2016, 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 during the three months ended June 30, 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 intends to evaluate 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 5 - "Receivables" for more information about the Receivables Securitization Facility.


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. $68 million of restricted cash is included within assets of discontinued operations in the Company's balance sheet as of March 31, 2018.

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


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Pronouncements:

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 and provides for certain practical expedients.
DXC is currently evaluating the effect the adoption will have on its existing accounting policies and the financial statements in future reporting periods, but expects there will be an increase in assets and liabilities on its balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be significant.
May 2017

ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”
Fiscal 2019
This update provides clarity as to what changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. This ASU is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date.


DXC will consider the impact that this update may have on future stock-based payment award modifications should they occur.

August 2017

ASU 2017-12, “Derivatives and Hedging (Topic 815)”

Fiscal 2020

This update was issued to improve the financial reporting of hedge relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain improvements to simplify the application of hedge accounting. This update must be adopted by applying the standard to existing hedge instruments at the adoption date and early adoption is permitted.


DXC is currently evaluating the effect the adoption of this update will have on its financial statements.

June 2016

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”

Fiscal 2021

This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update must be adopted using a prospective transition approach for debt securities for which an other-than-temporary impairment has been recognized before the effective date


DXC is currently evaluating its trade receivables and financial arrangements for the potential impact this update may have on its financial statements in future reporting periods.


Other recently issued ASUs effective after March 31, 2018 are not expected to have a material effect on DXC's financial statements.


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Acquisitions

Fiscal 2018 Acquisitions

HPES Merger

On April 1, 2017, 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 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 is a reverse merger acquisition, in which DXC is considered the legal acquirer of the business and CSC is 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.

The reverse merger is deemed a capital transaction and the net assets of CSC (the accounting acquirer) are carried forward to DXC (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of CSC, which are recorded at historical cost. The equity of the Company is the historical equity of CSC, retroactively restated to reflect the number of shares issued by DXC in the transaction.

In connection with the HPES Merger, the Company entered into a number of agreements with HPE including the following:

Information Technology Services Agreement. The Company and HPE have entered into an Agreement pursuant to which the Company will provide information technology services to HPE. This agreement terminates on the fifth anniversary of its effective date, unless earlier terminated by the parties in accordance with its terms.

Preferred Vendor Agreements. The Company and HPE have entered into Preferred Vendor Agreements, pursuant to which HPE and Micro Focus International, the acquirer of HPE's software business, will: (1) make available to DXC for purchase hardware products sold by HPE and technology services provided by HPE and (2) make available to DXC for purchase and license software products sold or licensed by HPE and Micro Focus, and technology (including SaaS), support, professional and other services provided by HPE and Micro Focus.

Certain other additional agreements were entered into, including a Separation and Distribution Agreement, as amended (the "HPE Separation Agreement"), an employee matters agreement, a tax matters agreement, a transition services agreement, an intellectual property matters agreement, and certain real estate related agreements.

Subsequent to the HPES Merger, HPE settled certain obligations as required under the HPE Separation Agreement. In accordance with the provisions of the agreement, a calculation was performed to make certain adjustments required to complete the separation and standup of legacy HPES and achieve accurate cut off for intercompany transactions with its former parent. The aggregate adjustment to settle the obligations was $203 million.

In May 2016, CSC, HPE and DXC (f/k/a Everett Spinco, Inc.) entered into an agreement and plan of merger, as amended (the “Merger Agreement”), and HPE and DXC entered into the HPE Separation Agreement, in each case relating to the

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

combination of HPES and CSC. At the time the Merger Agreement and the HPE Separation Agreement were executed, HPES was a party to several thousand leases with Hewlett-Packard Financial Services that were classified as capital leases. Under the terms of the HPE Separation Agreement the balance of long-term capital leases for which HPES would be liable at the time of the spin-off was not to exceed $250 million. The HPE Separation Agreement provided HPE an opportunity to modify the terms of the long-term leases to reduce the balance classified as capital leases. Between late May 2016 and the end of March 2017, Hewlett-Packard Financial Services entered into lease amendments that purported to modify most of the leases between HPES and Hewlett-Packard Financial Services in a manner that would cause those leases to be classified as operating leases.

After the closing of the HPES Merger, the Company began assessing the terms of the leases (including the amendments described above). During the second quarter of fiscal 2018, the Company concluded that the long-term capital leases that were amended by Hewlett-Packard Financial Services did not satisfy the requirements for classification as operating leases and as a result should be classified as capital leases as of the closing of the spin-off. Accordingly, as part of the process of determining fair value of these leases as of April 1, 2017, the Company recorded a lease liability of $1.0 billion, assets under capital leases of $654 million, and a $371 million increase to goodwill.

The Company is addressing this matter with HPE in a manner consistent with the terms of the HPE Separation Agreement, with any disagreement being treated in a confidential manner under the HPE Separation Agreement, including dispute resolution through executive escalation, mediation and binding arbitration.

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.


54



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 consideration transferred
 
$
9,850

        

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

As of the period ended March 31, 2018, the Company made a number of refinements to the April 1, 2017 purchase price allocation as reported June 30, 2017. These refinements were primarily driven by the Company recording valuation adjustments to certain estimates of fair values which resulted in a decrease in net assets of $638 million. Total assets increased by $1.1 billion, primarily driven by a $137 million increase of accounts receivable; $99 million increase in property and equipment primarily arising from the recognition of $424 million of fixed assets under capital lease, offset by a $318 million reduction in the fair value of assets related to data centers and land; and a $1.3 billion increase in the fair value assessment for customer relationships offset by a $440 million decrease related to developed technology fair value adjustments. Liabilities increased by $1.7 billion primarily driven by an increase in capital lease obligations of $1.0 billion, a $436 million adjustment to deferred revenue primarily related to a valuation adjustment for outsourcing and other customer contracts taking into account continuing performance obligations, an increase of $106 million of debt, and an increase in long-term tax related liabilities of $192 million.

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 Global Business Services ("GBS") segment, $2.6 billion to the Global Infrastructure Services ("GIS") segment and $2.0 billion to the United States Public Sector ("USPS") segment. The goodwill is not deductible for tax purposes. See Note 10 - "Goodwill."

Current Assets and Liabilities

The Company valued current assets and liabilities, with the exception of the current portion of deferred revenue and capital leases, using existing carrying values as the fair value of those items as of the HPES Merger date.

55



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Property and Equipment

The acquired property and equipment are summarized in the following table:
(in millions)
 
Amount
Land, buildings, and leasehold improvements
 
$
1,470

Computers and related equipment
 
960

Furniture and other equipment
 
47

Construction in progress
 
104

Total
 
$
2,581


The Company valued acquired property and equipment using predominately the market method, and in certain specific cases, the cost method.

Identified Intangible Assets

The acquired identifiable intangible assets are summarized in the following table:
(in millions)
 
Amount
 
Useful Lives (Years)
Customer relationships
 
$
5,277

 
10-13
Developed technology
 
74

 
2-7
Third-party purchased software
 
642

 
2-7
Outsourcing contract costs
 
368

 
Contract life
Other intangible assets
 
23

 
4
Total
 
$
6,384

 
 

The Company valued customer relationships and developed technology using the multi-period excess earnings and relief from royalty methods, respectively. Outsourcing contract costs were recorded at fair value taking into account continuing performance obligation.

Restructuring Liabilities

The Company acquired $325 million of restructuring liabilities in connection with the HPES Merger, of which $255 million relates to workforce reductions and $70 million relates to facilities costs. These restructuring liabilities are expected to be paid out through 2029.

Long-Term Debt

Assumed indebtedness included senior notes in the principal amount of $1.5 billion issued in 2017 and $0.3 billion issued in 1999 for total principal amount of $1.8 billion; a term loan with three tranches all borrowed on March 31, 2017 in an aggregate principal equivalent of $2.0 billion; and capitalized lease liabilities and other debt. Subsequent to the initial purchase price allocation as reported June 30, 2017, there was a fair value assessment of the senior notes and term loans as of the HPES Merger date, which resulted in a purchase accounting adjustment that increased debt by $94 million, including $12 million to eliminate historical deferred debt issuance costs, premiums and discounts. Converted capital leases were recorded on the balance sheet at fair value as of April 1, 2017 resulting in a total capital lease obligation of $1.7 billion. Additionally, the Company completed its fair value assessment of certain other debt with a carrying value of $87 million as of the HPES Merger date, which resulted in a purchase accounting adjustment that increased debt by $12 million.

56



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Deferred Tax Liabilities

The Company valued deferred tax assets and liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.

Defined Benefit Pension Plans

Certain eligible employees, retirees and other former employees of HPES participated in defined benefit pension plans offered by HPE. The plans whose participants were exclusively HPES employees were acquired, while the plans whose participants included both HPES employees and HPE employees were replicated to allow separation of HPES and HPE employees. The resulting separate plans containing only HPES employees were acquired.

HPES pension obligations depend on various assumptions. The Company's actuaries remeasured all of the acquired HPES plan obligations as of March 31, 2017. The following table summarizes the balance sheet impact of the pension plans assumed from HPES as a result of the HPES Merger.
(in millions)
 
Amount
Other assets
 
$
558

Accrued expenses and other current liabilities
 
(13
)
Other long-term liabilities
 
(547
)
Net amount recorded
 
$
(2
)

The following table summarizes the projected benefit obligation, fair value of the plan assets and the funded status assumed from HPES as a result of the HPES Merger.
(in millions)
 
Amount
Projected benefit obligation
 
$
(7,413
)
Fair value of plan assets
 
7,411

Funded status
 
$
(2
)

The following table summarizes the plan asset allocations by asset category for HPES pension plans assumed by the Company as a result of the HPES Merger.
Equity securities
 
22
%
Debt securities(1)
 
72
%
Alternatives
 
5
%
Cash and other
 
1
%
Total
 
100
%
        

(1) Includes liability-driven investments

57



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Unaudited and Pro Forma Results of Operations

Unaudited and pro forma results of operations have not been recast to reflect the USPS Separation.

The Company's statements of operations includes the following revenues and net income attributable to HPES since the HPES Merger date:
(in millions)
 
Fiscal Year Ended March 31, 2018
Revenues
 
$
17,423

Net income
 
$
1,772


The following table provides unaudited pro forma results of operations for the Company for the fiscal year ended March 31, 2017, as if the HPES Merger had been consummated on April 2, 2016, the first day of DXC's fiscal year ended March 31, 2017. These unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. The Company presents these unaudited pro forma results for informational purposes only, and they are not necessarily indicative of what the actual results of operations of DXC would have been if the HPES Merger had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended January 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the twelve months ended March 31, 2017 and of HPES for the twelve months ended January 31, 2017.
(in millions, except per-share amounts)
 
Twelve Months Ended March 31, 2017
Revenues
 
$
25,394

Net loss
 
$
(23
)
Net loss attributable to the Company
 
$
(51
)
 
 
 
Loss per common share:
 
 
Basic
 
$
(0.18
)
Diluted
 
$
(0.18
)

The unaudited pro forma information above is based on events that are (i) directly attributable to the HPES Merger, (ii) factually supportable, and (iii) are expected to have a continuing impact on the results of operations of DXC. Nonrecurring transaction costs associated with the HPES Merger of $26 million for the twelve months ended March 31, 2018 are not included in the unaudited pro forma information above.

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.


58



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal 2017 Acquisitions

Xchanging Acquisition
On May 5, 2016, CSC acquired Xchanging plc ("Xchanging"), a publicly owned company and a provider of technology-enabled business solutions to organizations in global insurance and financial services, healthcare, manufacturing, real estate and the public sector in a step acquisition. Total consideration paid to and on behalf of the Xchanging shareholders of $693 million (or $492 million net of cash acquired). Transaction costs associated with the acquisition of $17 million were included within Selling, general and administrative expenses. The acquisition expanded the Company's market coverage in the global insurance industry and enabled the Company to offer access to a broader, partner-enriched portfolio of services including property and casualty insurance and wealth management business processing services.

The purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair value at date of acquisition as follows: $396 million to current assets, $99 million to non-current assets, $582 million to intangible assets other than goodwill, $267 million to current liabilities, $516 million to long-term liabilities, $680 million to goodwill, and $281 million to non-controlling interest. The goodwill arising from the acquisition was allocated to the Company's reportable segment of $646 million to GBS and $34 million to GIS segments and is not deductible for tax purposes. The amortizable lives associated with the intangible assets acquired includes developed technology, customer relationships and trade names, which have estimated useful lives of 7 to 8, 15 years and 3 to 5 years, respectively.

Fiscal 2016 Acquisitions

UXC Acquisition

On February 26, 2016, CSC acquired all of the outstanding capital stock of UXC Limited ("UXC"), a publicly owned IT services company and a leading provider of enterprise application capabilities, consulting, applications management, professional services, connect infrastructure and health services in Australia, for a total purchase consideration of $289 million (net of cash acquired of $13 million). The acquisition continued the rebalancing of CSC's offering portfolio, strengthening it’s next-generation delivery model, and expanding its client base around the world. Transaction costs associated with the acquisition of $7 million were recorded as Selling, general and administrative expenses.

The purchase price was allocated to assets acquired and liabilities assumed as follows: $125 million to current assets, $37 million to noncurrent assets, $91 million to intangible assets other than goodwill, $153 million to current liabilities, $50 million to long-term liabilities and $252 million to goodwill. The amortizable lives associated with the intangible assets acquired includes customer relationships, which have an estimated useful life of 10 years, and software and trade names, both of which have indefinite lives. The goodwill arising from the acquisition was allocated to both of the Company's reportable segments and was not deductible for tax purposes.

Fixnetix Acquisition

On September 24, 2015, CSC acquired all of the outstanding capital stock of Fixnetix, Limited, a privately held provider of front-office managed trading solutions for capital markets, for total purchase consideration of $112 million. The purchase consideration included cash of $88 million (net of $1 million cash acquired) paid at closing, the estimated fair value of contingent consideration as of the acquisition date of $21 million and $2 million of adjustments to the acquisition final net working capital in the fourth quarter of fiscal 2016. The fair value of the contingent consideration as of March 31, 2018 was zero.

Fruition Acquisition

On September 17, 2015, CSC acquired all of the outstanding capital stock of Fruition Partners, a privately held provider of technology-enabled solutions for the service management sector for cash consideration of $148 million (net of cash acquired of $2 million). The acquisition bolstered the Company's ability to offer enterprise and emerging clients an expanded range of cloud-based service-management solutions to improve their business through organizational efficiency and lower operating costs.


59



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro forma financial information for the acquisitions completed during fiscal 2018, 2017 and 2016, with the exception of the HPES Merger, have not been presented because the acquisitions were neither individually, nor in the aggregate, material to the Company's financial results.

Note 3 - Divestitures

Fiscal 2019 Separation of USPS

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

Implementation of the USPS 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 USPS Separation. In addition, DXC and Perspecta have service and commercial contracts that generally extend through fiscal 2023.

Pursuant to the Separation and Distribution Agreement, 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.






60



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



61



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the operating results of USPS which have been reflected within income from discontinued operations, net of tax:
(in millions)
 
Fiscal Year Ended March 31, 2018
Revenue
 
$
2,823

 
 
 
Costs of services
 
2,104

Selling, general and administrative
 
152

Depreciation and amortization
 
169

Restructuring costs
 
14

Interest expense
 
15

Other expense, net
 
2

Total costs and expenses
 
2,456

Total income from discontinued operations, before income taxes
 
367

Income tax expense
 
131

Total income from discontinued operations
 
$
236


The following selected financial information of USPS is included in the statements of cash flows:
(in millions)
 
Fiscal Year Ended March 31, 2018
Depreciation
 
$
70

Amortization
 
$
99

Capital expenditures
 
$
(18
)

Fiscal 2016 Divestiture of NPS

On November 27, 2015, CSC divested its former NPS segment.The NPS Separation was made pursuant to the terms of a master separation and distribution agreement and several other agreements, including an intellectual property ("IP") agreement. Pursuant to the IP matters agreement, CSC granted CSRA Inc. ("CSRA") perpetual, royalty-free, non-assignable licenses to certain software products, trademarks and workflow and design methodologies for an annual net maintenance fee of $30 million per year for each of the five years following the NPS Separation in exchange for maintenance services. The IP matters agreement was amended in February 2017, pursuant to which CSC assigned to CSRA the IP rights CSRA had previously licensed. In exchange, CSRA paid CSC $65 million and was released from the obligation to pay the annual net maintenance fee. During fiscal 2017 and 2016, the Company recognized total revenues of $125 million and $35 million, respectively, for services rendered to CSRA under the IP matters agreement and various commercial agreements. Included in fiscal 2017 revenues was $20 million of revenues under the IP matters agreement which was recorded as deferred revenue and advance contract payments during fiscal 2016.


62



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the operating results of NPS which were reclassified as discontinued operations:
 
 
Fiscal Year Ended
(in millions)
 
April 1, 2016(1)
Revenues
 
$
2,504

Costs of services
 
1,935

Selling, general and administrative
 
52

Depreciation and amortization
 
90

Restructuring costs
 
1

Separation and merger costs
 
103

Interest expense
 
15

Other income, net
 
(21
)
Income from discontinued operations before income taxes
 
329

Income tax expense
 
(138
)
Income from discontinued operations, net of tax
 
$
191

        

(1) Results for fiscal 2016 reflect NPS's operating results through the NPS Separation date of November 27, 2015.

During the fiscal year ended April 1, 2016 the Company incurred $122 million of costs in connection with the NPS Separation, primarily related to professional fees associated with preparation of regulatory filings and separation activities within finance, tax, legal and information system functions. Income from discontinued operations, net of taxes includes $103 million of these costs, and the remaining amount of $19 million was included within loss from continuing operations.

As a result of the NPS Separation, no gain or loss on disposition was recognized; however, discontinued operations included the results of the fiscal 2016 sale of Welkin Associates Limited, a wholly owned subsidiary in the NPS segment to a strategic investor for consideration of $34 million on which a gain of $22 million was realized. At the time of disposition, the Welkin divestiture did not qualify to be presented as discontinued operations since it did not represent a strategic shift that would have a major effect on CSC's operations or financial results.

The following selected financial information of NPS is included in the statements of cash flows:
 
 
Fiscal Year Ended
(in millions)
 
April 1, 2016(1)
Depreciation
 
$
75

Amortization
 
$
15

Capital expenditures
 
$
(75
)
Significant operating non-cash items:
 
 
     Net gain on disposition of business

 
$
22

Significant investing non-cash items:
 
 
     Capital expenditures through capital lease obligations

 
$

     Capital expenditures in accounts payable
 
$
(7
)
     Disposition of assets
 
$
(8
)
        

(1) Selected financial information for fiscal 2016 reflect cash flows through the NPS Separation date of November 27, 2015.


63



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Earnings Per Share

Basic EPS are computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflect 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:


Fiscal Years Ended
(in millions, except per-share amounts)

March 31, 2018

March 31, 2017

April 1, 2016
 
 
 
 
 
 
 
Net income (loss) attributable to DXC common shareholders:
 
 
 
 
 
 
From continuing operations
 
$
1,515

 
$
(123
)
 
$
71

From discontinued operations
 
236

 

 
180

 
 
$
1,751

 
$
(123
)
 
$
251

Common share information:
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
284.93

 
140.39

 
138.28

Dilutive effect of stock options and equity awards
 
4.84

 

 
3.05

Weighted average common shares outstanding for diluted EPS
 
289.77

 
140.39

 
141.33

 
 
 
 
 
 
 
EPS:
 
 
 
 
 
 
Basic
 
 
 
 
 
 
Continuing operations
 
$
5.32

 
$
(0.88
)
 
$
0.51

Discontinued operations
 
0.83

 

 
1.31

Total
 
$
6.15

 
$
(0.88
)
 
$
1.82

 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
Continuing operations
 
$
5.23

 
$
(0.88
)
 
$
0.50

Discontinued operations
 
0.81

 

 
1.28

Total
 
$
6.04

 
$
(0.88
)
 
$
1.78


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:
 
 
Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Stock Options
 

 
3,317,041

 
2,064,951

RSUs
 
54,637

 
845,315

 
201,581

PSUs
 
96,029

 
1,540,152

 



64



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Receivables

Receivables, net of allowance for doubtful accounts consist of the following:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Billed trade receivables
 
$
3,110

 
$
732

Unbilled receivables
 
1,273

 
402

Other receivables
 
1,098

 
509

Total
 
$
5,481

 
$
1,643


The following table summarizes activity for the allowance for doubtful accounts:
 
 
As of and for Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Beginning balance
 
$
26

 
$
31

 
$
26

     Additions charged to costs and expenses
 
45

 
10

 
6

     Deductions(1)
 
(37
)
 
(13
)
 
(3
)
     Other(2)
 
6

 
(2
)
 
2

Ending balance
 
$
40

 
$
26

 
$
31

        

(1) 
Represents write-offs and recoveries of prior year charges.
(2) 
Includes changes in foreign currency exchange rates and the impact of the AR securitization facility.

Sale of Receivables

Receivables Securitization Facility

On December 21, 2016, CSC established a $250 million accounts receivable securitization facility (the "Receivables Facility") with certain unaffiliated financial institutions (the "Purchasers"). Under the Receivables Facility, the Company and certain of its subsidiaries sell billed and unbilled accounts receivable to CSC Receivables, LLC ("CSC Receivables"), a wholly owned bankruptcy-remote entity. CSC Receivables in turn sells such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. Sales of receivables by CSC Receivables occur continuously and are 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. Total availability under the Receivables Facility was $188 million and $217 million as of March 31, 2018 and March 31, 2017, respectively. The Receivables Facility terminates on September 14, 2018, 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. The fair value of the sold receivables approximated their book value due to their short-term nature, and as a result no gain or loss on sale of receivables was recorded during fiscal 2018 and 2017.


65



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table reflects activity of the Receivables Facility:
 
 
As of and for the Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017 (1)
Cash proceeds received
 
$
188

 
$
223

Deferred purchase price receivable
 
$
233

 
$
252

Liability recorded due to exceeded maximum funding limit
 
$

 
$
6

        

(1) Represents activity from the date the Receivables Facility was established, December 21, 2016, through March 31, 2017.

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 CSC, 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 CSC 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 Fiscal Year Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
Beginning balance
 
$
252

 
$

     Transfers of receivables
 
2,222

 
1,195

Collections
 
(2,225
)
 
(943
)
Fair value adjustment
 
(16
)
 

Ending balance
 
$
233

 
$
252


Federal Receivables Sales Facility

On July 14, 2017, Enterprise Services LLC, a wholly-owned subsidiary of the Company ("Enterprise"), entered into a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with certain financial institutions (the "Financial Institutions"). The Purchase Agreement established a federal government obligor receivables purchase facility (the “Facility”). Concurrently, the Company entered into a guaranty made in favor of the Financial Institutions, that guarantees the obligations of the sellers and servicers of receivables under the Purchase Agreement. The guaranty does not cover any credit losses under the receivables. In connection with the USPS Separation and Mergers, the Company entered into certain amendments to the guaranty whereby the Company can request to terminate its guaranty at the time of the separation of its USPS business. In accordance with the terms of the Purchase Agreement, on January 23, 2018, the Purchase Agreement was amended to increase the facility limit from $200 million to $300 million in funding based on the availability of eligible receivables and the satisfaction of certain conditions.

Under the Facility, the Company sells eligible federal government obligor receivables, including billed and certain unbilled receivables. The Company has no retained interests in the transferred receivables other than collection and administrative functions for the Financial Institutions for a servicing fee. The Facility has a one-year term but may be extended. The Company uses the proceeds from receivables sales under the Facility for general corporate purposes.

The Company accounts for these receivable transfers as sales and derecognizes the sold receivables from its balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature, and as a result no gain or loss on sale on sale of receivables was recorded. The Company estimated that its servicing fee was at fair value and therefore, no servicing asset or liability related to these services was recognized as of March 31, 2018.

66



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In connection with the USPS 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.

The following table reflects activity of the Federal Receivables Sales Facility:
(in millions)
 
As of and for the Fiscal Year Ended March 31, 2018
Transfers of receivables
 
$
2,090

Collections
 
$
1,970

Operating cash flow effect
 
$
120

Restricted cash (1)
 
$
68

Outstanding balance
 
$
188

        

(1) Represents collections not remitted to the Financial Institutions.

Note 6 - 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 13 - "Pension and Other Benefit Plans" and Note Note 7 - "Derivative Instruments" for information about the fair value of our pension assets and derivative assets and liabilities, respectively. There were no transfers between any of the levels during the periods presented.
 
 
 
 
Fair Value Hierarchy
(in millions)
 
As of 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 $42 million and unrealized gains of $11 million.

67



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
As of March 31, 2017
Assets:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds and money market deposit accounts
 
$
406

 
$
406

 
$

 
$

Deferred purchase price receivable
 
252

 

 

 
252

Total assets
 
$
658

 
$
406

 
$

 
$
252

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
7

 
$

 
$

 
$
7

Total Liabilities
 
$
7

 
$

 
$

 
$
7


The fair value of money market funds and money market deposit accounts, and time deposits, reported as cash and cash equivalents, are based on quoted market prices. The fair value of 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 $6.0 billion and $2.2 billion as of March 31, 2018 and March 31, 2017, respectively, as compared with carrying value of $5.9 billion and $2.2 billion as of March 31, 2018 and March 31, 2017, 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.

The Company is subject to counterparty risk in connection with its derivative instruments, see Note 7 - "Derivative Instruments." With respect to its foreign currency derivatives, as of March 31, 2018, there were seven counterparties with concentration of credit risk, and based on gross fair value, the maximum amount of loss that the Company could incur is approximately $9 million.

The primary financial instruments other than derivatives that could subject the Company to concentrations of credit risk are accounts receivable. The Company periodically reviews its accounts receivable and records provisions for doubtful accounts as needed. The Company’s customer base includes Fortune 500 companies and other significant, well-known companies operating in North America, Europe, Asia and Australia. Credit risk with respect to accounts receivable is minimized because of the nature and diversification of the Company’s customer base. The Company’s credit risk could be affected by customers in bankruptcy proceedings; however, because most of these proceedings involve business reorganizations rather than liquidations, and the nature of the Company’s services are often considered essential to the operational continuity of these customers, the Company is generally able to avoid or mitigate significant adverse financial impact in these cases. As of March 31, 2018, and March 31, 2017, no single customer accounted for more than 10% of the Company's accounts receivable balance.

68



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 7 - 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.

Derivatives Designated for Hedge Accounting

Cash flow hedges

The Company uses interest rate swap agreements designated as cash flow hedges to mitigate its exposure to interest rate risk associated with the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converts the debt into fixed interest rate debt. As of March 31, 2018 and March 31, 2017, the Company had interest rate swap agreements with a total notional amount of $635 million and $607 million, respectively.

For the fiscal year ended March 31, 2018, the Company performed both retrospective and prospective hedge effectiveness analyses for these interest rate swaps. The Company applied the long-haul method outlined in ASC 815 “Derivatives and Hedging", to assess retrospective and prospective effectiveness of the interest rate swaps. A quantitative effectiveness analysis assessment of the hedging relationship was performed using regression analysis, and as of March 31, 2018, the Company determined that the hedging relationship was highly effective.

The Company has designated certain foreign currency forward contracts as cash flow hedges to reduce risks related to certain Indian Rupee denominated intercompany obligations and forecasted transactions. The notional amounts of these foreign currency forward contracts as of March 31, 2018 and March 31, 2017 was $634 million and $486 million, respectively. As of March 31, 2018, the related forecasted transactions extend through February 2020.

For the fiscal years ended March 31, 2018 and March 31, 2017, the Company performed an assessment at the inception of these cash flow hedge transactions and determined that 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 fiscal years ended March 31, 2018 and March 31, 2017, the Company had no cash flow hedges for which it was probable that the hedged transaction would not occur. As of March 31, 2018, $15 million of the existing amount of gain reported in AOCI related to these cash flow hedges is expected to be reclassified into earnings within the next 12 months.

The pre-tax impact of gain (loss) on derivative instruments designated for hedge accounting recognized in other comprehensive income and net income was not material for the fiscal years ended March 31, 2018 and March 31, 2017.

Derivatives Not Designated For Hedge Accounting

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

Foreign currency forward contracts

The Company manages the exposure to fluctuations in foreign currencies by using short-term foreign currency forward contracts to hedge certain foreign currency denominated assets and liabilities, including intercompany accounts and loans. The notional amount of the foreign currency forward contracts outstanding as of March 31, 2018 and March 31, 2017 was $3.1 billion and $2.9 billion, respectively.

69



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the pretax amounts impacting income related to foreign currency forward contracts:
 
 
 
 
Fiscal Years Ended
(in millions)
 
Statement of Operations Line Item
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Foreign currency forward contracts
 
Other (income) expense, net
 
$
118

 
$
(84
)
 
$
19


Fair Value of Derivative Instruments

All derivative instruments 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
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
Interest rate swaps
 
Other assets
 
$
6

 
$
5

Foreign currency forward contracts
 
Other current assets
 
14

 
27

Total fair value of derivatives designated for hedge accounting
 
$
20

 
$
32

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

 
$
15

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

 
$
15


 
 
Derivative Liabilities
 
 
 
 
As of
(in millions)
 
Balance Sheet Line Item
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
 
 
Derivatives designated for hedge accounting:
 
 
 
 
Interest rate swaps
 
Other long-term liabilities
 
$

 
$
1

Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
3

 

Total fair value of derivatives designated for hedge accounting:
 
$
3

 
$
1

 
 
 
 
 
 
Derivatives not designated for hedge accounting:
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$
6

 
$
12

Total fair value of derivatives not designated for hedge accounting
 
$
6

 
$
12


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 as Level 2 inputs. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs.

70



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Other risks

The Company is exposed to the risk of losses in the event of non-performance by the counterparties to its derivative contracts. To mitigate counterparty credit risk, the Company regularly reviews its credit exposure and the creditworthiness of the counterparties. 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 with some of its counterparties. The following table provides information about the potential effect of such netting arrangements on the Company's derivative instruments:
 
 
Fair Value as of
 
 
March 31, 2018
 
March 31, 2017
(in millions)
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amount of derivative instruments recognized in the balance sheets
 
$
24

 
$
9

 
$
47

 
$
13

Gross amounts not offset in the balance sheets (1)
 
1

 
2

 
1

 
2

Net amount
 
$
23

 
$
7

 
$
46

 
$
11

_________________

(1) 
These amounts represent the fair value of derivative instruments subject to enforceable master netting arrangements that the Company has elected to not offset. The Company's derivative contracts do not require it to hold or post financial collateral.

Note 8 - Property and Equipment

Property and equipment consisted of the following:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Property and equipment — gross:
 
 
 
 
Land, buildings and leasehold improvements
 
$
2,464

 
$
873

Computers and related equipment
 
4,185

 
2,695

Furniture and other equipment
 
323

 
141

Construction in progress
 
77

 
10

 
 
7,049

 
3,719

Less: accumulated depreciation and amortization
 
3,686

 
2,816

Property and equipment, net
 
$
3,363

 
$
903


Depreciation expense for fiscal 2018, 2017 and 2016 was $709 million, $338 million and $383 million, respectively.


71



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Intangible Assets
 
 
As of March 31, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
3,484

 
$
1,918

 
$
1,566

Outsourcing 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

 
 
 
 
 
As of March 31, 2017
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Software
 
$
2,347

 
$
1,554

 
$
793

Outsourcing contract costs
 
793

 
475

 
318

Customer related intangible assets
 
851

 
248

 
603

Other intangible assets
 
96

 
16

 
80

Total intangible assets
 
$
4,087

 
$
2,293

 
$
1,794


Total intangible assets amortization was $1,127 million, $320 million and $286 million for fiscal 2018, 2017 and 2016, respectively. Total intangible assets amortization included amortization of outsourcing contract cost premiums recorded as reductions of revenues of $41 million, $11 million and $11 million for fiscal 2018, 2017 and 2016, respectively. The increase in net and gross carrying value from fiscal 2017 to 2018 was primarily due to the HPES Merger. See Note 2 - "Acquisitions".

During fiscal 2016, the Company sold certain intangible assets with net book value of zero to a third party and recorded a gain on sale of $31 million as a reduction to GIS segment cost of services. There were no similar sales of intangible assets to a third party during fiscal 2018 and fiscal 2017.

Estimated future amortization related to intangible assets as of March 31, 2018 is as follows:
Fiscal Year
 
(in millions)

2019
 
$
1,119

2020
 
$
1,026

2021
 
$
919

2022
 
$
784

2023
 
$
722



72



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Goodwill

The following tables summarize the changes in the carrying amounts of goodwill, by segment, for the fiscal years ended March 31, 2018 and March 31, 2017, respectively.
(in millions)
 
GBS
 
GIS
 
Total
Goodwill, gross
 
$
2,171

 
$
2,446

 
$
4,617

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of March 31, 2017, net
 
1,470

 
385

 
1,855


 
 
 
 
 
 
Additions
 
2,877

 
2,598

 
5,475

Foreign currency translation
 
184

 
105

 
289

 
 
 
 
 
 
 
Goodwill, gross
 
5,232

 
5,149

 
10,381

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of March 31, 2018, net
 
$
4,531

 
$
3,088

 
$
7,619


(in millions)
 
GBS
 
GIS
 
Total
Goodwill, gross
 
$
1,615

 
$
2,424

 
$
4,039

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of April 1, 2016, net
 
914

 
363

 
1,277

 
 
 
 
 
 
 
Additions
 
655

 
34

 
689

Foreign currency translation
 
(99
)
 
(12
)
 
(111
)
 
 
 
 
 
 
 
Goodwill, gross
 
2,171

 
2,446

 
4,617

Accumulated impairment losses
 
(701
)
 
(2,061
)
 
(2,762
)
Balance as of March 31, 2017, net
 
$
1,470

 
$
385

 
$
1,855


As a result of the USPS Separation on May 31, 2018, as more fully described in Note 3 - "Divestitures", USPS is no longer a reportable segment. The fiscal 2018 and 2017 additions to goodwill were due primarily to the acquisitions described in Note 2 - "Acquisitions". The foreign currency translation amount reflects the impact of currency movements on non-U.S. dollar-denominated goodwill balances.


73



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill Impairment Analyses

Fiscal 2018

The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2017, did not result in an impairment charge. At the end of the fiscal 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 March 31, 2018.

Fiscal 2017

For the Company’s annual goodwill impairment assessment as of July 2, 2016, 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 March 31, 2017, 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 March 31, 2017.

Fiscal 2016

For the Company’s annual goodwill impairment assessment as of July 4, 2015, 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 significantly exceeded its carrying value and therefore the second step of the goodwill impairment test was not required.

Note 11 - Income Taxes

The sources of income (loss) from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the United States, are as follows:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Domestic entities
 
$
454

 
$
(157
)
 
$
(222
)
Entities outside the United States
 
850

 
(17
)
 
232

Total
 
$
1,304

 
$
(174
)
 
$
10


On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act"). The Act makes significant changes to the Internal Revenue Code of 1986 with varying effective dates. The Act reduces the maximum corporate income tax rate to 21% effective as of January 1, 2018, requires companies to pay a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries, broadens the tax base, generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, creates a new limitation on the deductibility of interest expense, limits the deductibility of certain executive compensation, and allows for immediate capital expensing of certain qualified property. It also requires companies to pay minimum taxes on foreign earnings and subjects certain payments from U.S. corporations to foreign related parties to additional taxes. As a fiscal year taxpayer, the Company will not be subject to many of the tax law provisions until fiscal year 2019; however, GAAP requires companies to revalue their deferred tax assets and liabilities with resulting tax effects accounted for in the reporting period of enactment including retroactive effects. Section 15 of the Internal Revenue Code stipulates that the Company's fiscal year ending March 31, 2018, has a weighted corporate U.S. federal income tax rate of 31.5%, which is based on the applicable tax rates before and after the effective date of the Act and the number of days in the Company's federal tax year ending on October 31st.

74



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act in the reporting period of the enactment. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740 "Income Taxes." In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act.

Based on a preliminary assessment of the Act, the Company believes that the most significant impact on the Company’s financial statements are as follows:

Reduction of U.S. federal corporate income tax rate: As discussed above, the Act reduces the corporate tax rate to 21%, effective January 1, 2018. For the period ending December 31, 2017 the Company recorded a deferred income tax discrete benefit of $320 million, resulting in a $320 million decrease in net deferred tax liabilities. Based on calculating the deferred tax balances as of March 31, 2018, we recognized an additional measurement-period adjustment of $18 million, with a corresponding adjustment of $18 million to income tax benefit during the period. The effect of the additional measurement-period adjustment on the fiscal 2018 effective tax rate was not material. The Company has recorded a total provisional deferred income tax benefit of $338 million, resulting in a $338 million decrease in net deferred tax liabilities as of March 31, 2018. Due to the Company’s federal tax year ending October 31, 2018 the Company is required to determine the reversal period of the deferred tax assets and liabilities recorded as of March 31, 2018 to finalize the estimate of the rate reduction. The Company has estimated the reversal based on expected changes in the deferred tax balances. The estimate will be finalized prior to the end of the measurement period when the reversal of the deferred tax assets and liabilities is known.

Deemed Repatriation Transition Tax: The deemed repatriation one-time transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company's foreign subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the federal transition tax in the period of enactment and recorded a provisional income tax expense and related liability of $386 million. Based on revised E&P computations and updated non-US income tax amounts that were calculated during the reporting period, we recognized an additional measurement-period adjustment and reduced the transition tax obligation by $25 million, with a corresponding adjustment of $25 million to income tax benefit during the period. The effect of the measurement-period adjustment on the 2018 effective tax rate was not material. The total transition tax obligation to date of $361 million has been recorded, with a corresponding reduction of $361 million to income tax benefit. The transition tax obligation is payable over up to eight years. The Company is continuing to gather additional information to compute the amount of the transition tax, including further analysis regarding the amount and composition of the Company’s and HPES’s historical foreign earnings and non-US income taxes. HPES also has a federal tax year end of October 31st and therefore the prior year federal tax return has not been finalized.

Permanent reinvestment assertion: Beginning in 2018, the Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax for U.S. corporate shareholders, companies must still account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. For the period ending December 31, 2017 the Company recorded a provisional estimate for those subsidiaries for which we were able to make a reasonable estimate of the tax effects of such repatriation for withholding taxes, state taxes, and India DDT of $8 million, $27 million and $80 million, respectively. Based on actual amounts for the fiscal year, we recognized an additional measurement-period adjustment of $16 million. The effect of the measurement-period adjustment on the fiscal 2018 effective tax rate was not material. For those subsidiaries for which we were able to make a reasonable estimate of the tax effects of such repatriation, we have recorded a total provisional estimate for withholding taxes, state taxes, and India DDT of $12 million, $7 million and $80 million, respectively. The Company needs additional time to analyze the foreign tax rules for all of their foreign subsidiaries. In addition, guidance may be released by various state jurisdictions, which could also impact these estimates.


75



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Executive compensation: As a result of changes made by the Act, starting with compensation paid in fiscal 2019, Section 162(m) will limit us from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers for any fiscal year. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million fiscal year deduction limit if paid to a covered executive. For the period ending December 31, 2017 the Company’s analysis was incomplete and a provisional estimate was not recorded. In the current period the Company recorded a provisional estimate of $2 million for executive compensation impact, which reduced the income tax benefit. The Company is in process of completing an analysis of the binding contract requirement on the various compensation plans to determine the impact of the law change.

Capital expensing: For the period ending December 31, 2017 the Company’s analysis was incomplete and a provisional estimate was not recorded. In the current period the Company recorded a provisional benefit of $87 million based on its intent to fully expense all qualifying expenses. This resulted in a decrease of approximately $87 million to the Company's current income taxes payable and a corresponding increase in its net deferred tax liabilities. The income tax effects for this change in law require further analysis due to the volume of data required to complete the calculations.

The Company's accounting for the following elements of the Act is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.

Global intangible low taxed income (GILTI): The Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder for taxable years of foreign corporations beginning after December 31, 2017. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the
determination of net CFC-tested income.

Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether we expect to have future U.S. inclusions in taxable
income related to GILTI and, if so, what the impact is expected to be for the Company. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on its current structure and estimated future results of global operations, but also its intent and ability to modify its structure and business, the Company is not yet able to reasonably estimate the effect of this provision of the Act in the current reporting period. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made an accounting policy decision.

Base Erosion and Anti-Abuse Tax (BEAT): The Act creates a new minimum tax. For tax years beginning after December 31, 2017, a corporation is potentially subject to tax under the BEAT provision if the federal tax group has sufficient gross receipts and derives a sufficient level of “base erosion tax benefits.” Under the BEAT, a corporation must pay a base erosion minimum tax amount (BEMTA) in addition to its regular tax liability after credits. The BEMTA is generally equal to the excess of (1) a fixed percentage of a corporation’s modified taxable income (taxable income determined without regard to any base erosion tax benefit related to any base erosion payment, and without regard to a portion of its NOL deduction) over (2) its regular tax liability (reduced by certain credits). The fixed percentage is generally 5 percent for taxable years beginning in 2018, 10 percent for years beginning after 2018 and before 2026, and 12.5 percent for years after 2025.


76



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is evaluating the impact of this BEAT provision on our current operating model and considering making modifications to our operating model once additional formal guidance is issued by the US tax authorities that will clarify the ambiguities of the BEAT provision.

Due to anticipated future guidance to be issued by the IRS, interpretation of the changes in tax law and analysis of the information required to complete the calculations, the amounts recorded as a result of the Act in the period are provisional and subject to material changes. The Company will continue to analyze the Act’s impact on its financial statements and adjust the provisional amounts recorded as our analysis is completed, no later than December 2018.

The income tax benefit on income (loss) from continuing operations is comprised of:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Current:
 
 
 
 
 
 
Federal
 
$
392

 
$
(32
)
 
$
(79
)
State
 
16

 
14

 
(22
)
Foreign
 
247

 
36

 
59

 
 
655

 
18

 
(42
)
Deferred:
 
 
 
 
 
 
Federal
 
(899
)
 
(7
)
 
(39
)
State
 
(59
)
 
(1
)
 
48

Foreign
 
61

 
(84
)
 
(29
)
 
 
(897
)
 
(92
)
 
(20
)
Total income tax benefit
 
$
(242
)
 
$
(74
)
 
$
(62
)

The current benefit for fiscal 2018 includes $332 million of non-current transition tax. The current (benefit) expense for fiscal 2018, 2017 and 2016, includes interest and penalties of $2 million, $(9) million and $(4) million, respectively, for uncertain tax positions.

As a result of the HPES Merger and changes in U.S. cash requirements, a deferred tax liability $542 million was recorded for U.S. income taxes based on the estimated historical taxable earnings of the HPES foreign subsidiaries. In addition, the Company recorded an estimated liability of $50 million for India DDT tax based on estimated historical taxable earnings of the HPES India subsidiary. These liabilities were recorded as part of acquisition accounting.

As a result of the Act, the Company changed its permanent reinvestment assertion on the remaining CSC foreign subsidiaries and will no longer consider current and accumulated earnings for all non-U.S. subsidiaries permanently reinvested, except for current year Indian earnings. A deferred tax liability of $554 million has been released and the Company's estimated liability for India DDT was increased by $30 million to $80 million to include estimated historical taxable earnings for CSC Indian subsidiaries. During the current period, the Company distributed $153 million of intercompany dividends incurring and paying $31 million of DDT upon distribution. For those investments from which the Company was not able to make a reasonable estimate, it has not recorded any deferred taxes. The Company will record the tax effects of the change in its assertion with respect to these subsidiaries and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable, in the period that it is first able to make a reasonable estimate, no later than December 2018.

In connection with the HPES Merger, the Company entered into a tax matters agreement with HPE. HPE generally will be responsible for pre-HPES Merger tax liabilities including adjustments made by tax authorities to HPES U.S. and non-U.S. income tax returns. Likewise, DXC is liable to HPE for income tax receivables and refunds which it receives related to pre-HPES Merger periods. Pursuant to the tax matters agreement, the Company recorded a net payable of $27 million due to $110 million of tax indemnification receivable related to uncertain tax positions net of related deferred tax benefits, $75 million of tax indemnification receivable related to other tax payables and $212 million of tax indemnification payable

77



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

related to other tax receivables. Of these amounts, $74 million of indemnification receivables and $162 million of indemnification payables were classified as assets and liabilities of discontinued operations.

In connection with the USPS Separation, the Company entered into a tax matters agreement with Perspecta. Pursuant to the tax matters agreement, the Company generally will be responsible for tax liabilities arising prior to the USPS Separation. Income tax liabilities transferred to Perspecta primarily relate to pre-HPES Merger periods, for which the Company is indemnified by HPE pursuant to the tax matters agreement between the Company and HPE. The Company remains liable to HPE for tax receivables and refunds which it receives from Perspecta related to pre-HPES Merger periods that were transferred to Perspecta. The income tax assets and liabilities that were part of the balances classified as assets and liabilities of discontinued operations includes $60 million of uncertain tax position liabilities, including interest, and income tax receivables of $162 million.

The major elements contributing to the difference between the U.S. federal statutory tax rate of 31.5% and the effective tax rate ("ETR") for continuing operations are as follows:
 
 
Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Statutory rate
 
31.5
 %
 
(35.0
)%
 
35.0
 %
State income tax, net of federal tax
 
2.0

 
(4.0
)
 
(145.7
)
United States Tax Reform
 
(40.6
)
 

 

Change in Indefinite Reinvestment Assertion
 
3.3

 

 

Loss of attributes due to merger
 
5.1

 

 

Change in uncertain tax positions
 
(0.2
)
 
(3.4
)
 
(685.0
)
Foreign tax rate differential
 
(5.7
)
 
(41.1
)
 
(377.4
)
Capitalized transaction costs
 
1.0

 
12.1

 
22.3

Change in valuation allowances
 
(7.7
)
 
34.3

 
743.6

Excess tax benefits for stock compensation
 
(3.0
)
 
(11.3
)
 
(230.0
)
Prepaid tax asset amortization
 
0.3

 
7.1

 
78.8

Income Tax and Foreign Tax Credits
 
(7.6
)
 
(2.0
)
 
(58.0
)
Other items, net
 
3.0

 
0.8

 
(3.6
)
Effective tax rate
 
(18.6
)%
 
(42.5
)%
 
(620.0
)%

In fiscal 2018, the ETR was primarily impacted by the effects of the Act:
The release of a deferred tax liability relating to the outside basis difference of foreign subsidiaries which increased the income tax benefit and decreased the ETR by $554 million and 42.5%, respectively.
The accrual of the one-time transition tax on estimated unremitted foreign earnings which decreased the income tax benefit and increased the ETR by $361 million and 27.7%, respectively.
The remeasurement of deferred tax assets and liabilities as a result of the Act, which increased the income tax benefit and decreased the ETR by $338 million and 25.9%, respectively.

In fiscal 2017, the ETR was primarily impacted by:

A change in the valuation allowance that primarily consists of an aggregate income tax detriment for the increase in the valuation allowances on tax attributes in the United States, Germany and Luxembourg, which decreased the overall income tax benefit and decreased the ETR by $135 million and 78%, respectively. Offset by an income tax benefit from the release of valuation allowances on tax attributes in Denmark, Japan and the United Kingdom which increased the overall income tax benefit and increased the ETR by $75 million and 43%, respectively.
An income tax detriment for transaction costs incurred that are not deductible for tax purposes, which resulted in a decrease to the overall tax benefit and decreased the ETR by $21 million and 12.1%, respectively.

78



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

An income tax benefit from excess tax benefits realized from employee share-based payment awards, which resulted in an increase in the overall income tax benefit and increased the ETR by $20 million and 11.3%, respectively.

In fiscal 2016, the ETR was primarily impacted by:
The early adoption of ASU 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” resulted in a tax benefit from the excess tax benefits realized from share options vested or exercised. This increased the overall income tax benefit and the ETR by $23 million and 230%, respectively.
Local losses on investments in Luxembourg (i) increased the valuation allowance and the ETR by $47 million and 470%, respectively, and (ii) decreased the foreign rate differential and ETR by $47 million and by 470%, respectively.
An increase in the overall valuation allowance primarily due to the divestiture of the Company's former NPS business division, which resulted in an increase in the valuation allowances related to state net operating losses and state tax credits. This decreased the overall income tax benefit and ETR by $27 million and 270%, respectively.
The release of a liability for uncertain tax positions following the closure of the U.K. tax audit for fiscal 2010 to 2012. This increased the overall income tax benefit by $58 million and the ETR by 580%.
The Company recognized adjustments to uncertain tax positions in the United States that increased the overall income tax benefit by $24 million and the ETR by 240%, respectively.

The deferred tax assets (liabilities) were as follows:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Deferred tax assets
 
 
 
 
Employee benefits
 
$
156

 
$
172

Tax loss/credit carryforwards
 
1,665

 
1,307

Accrued interest
 
18

 
16

 Contract accounting
 
134

 
89

Other assets
 
232

 
83

Total deferred tax assets
 
2,205

 
1,667

Valuation allowance
 
(1,440
)
 
(1,094
)
Net deferred tax assets
 
765

 
573

 
 
 
 
 
Deferred tax liabilities
 
 
 
 
Depreciation and amortization
 
(888
)
 
(282
)
Investment basis differences
 
(62
)
 
(103
)
 Other liabilities
 
(94
)
 
(45
)
Total deferred tax liabilities
 
(1,044
)
 
(430
)
 
 
 
 
 
Total net deferred tax assets (liabilities)
 
$
(279
)
 
$
143



79



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax related assets are included in the accompanying balance sheets as follows:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Current:
 
 
 
 
Income tax receivables
 
$
154

 
$
146

 
 
$
154

 
$
146

Non-current:
 
 
 
 
Income taxes receivable and prepaid taxes
 
$
30

 
$
50

Deferred tax assets
 
373

 
381

 
 
$
403

 
$
431

 
 
 
 
 
Total
 
$
557

 
$
577


Income tax related liabilities are included in the accompanying balance sheet as follows:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Current:
 
 
 
 
Liability for uncertain tax positions
 
$
(15
)
 
$
(17
)
Income taxes payable
 
(112
)
 
(21
)
 
 
$
(127
)
 
$
(38
)
Non-current:
 
 
 
 
Deferred taxes

 
(652
)
 
(238
)
Income taxes payable
 
(278
)
 

Liability for uncertain tax positions

 
(236
)
 
(185
)
 
 
$
(1,166
)
 
$
(423
)
 
 
 
 
 
Total
 
$
(1,293
)
 
$
(461
)

Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. A valuation allowance has been recorded against deferred tax assets of approximately $1.4 billion as of March 31, 2018 due to uncertainties related to the ability to utilize these assets. In assessing whether its deferred tax assets are realizable, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. In determining whether the deferred tax assets are realizable, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, taxable income in prior carryback years, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances are evaluated as of the balance sheet date and will be subject to change in each future reporting period as a result of changes in various factors. The net increase in the valuation allowance of $346 million in fiscal 2018, is primarily due to the acquired valuation allowance balances of HPES of $287 million, current year restructuring costs and losses not benefited in non-U.S. jurisdictions including Germany, Denmark, France, and currency translation of $152 million mainly in Luxembourg; reduced by the release of valuation allowances in non-U.S. jurisdictions and certain state income tax carry-forwards and a write-off of state tax capital losses due to expiration. The release of valuation allowances is due to objectively verifiable positive evidence including improved earnings and three years of cumulative profits outweighing the negative evidence.



80



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides information on the Company's various tax carryforwards:
 
 
As of March 31, 2018
 
As of March 31, 2017
(in millions)
 
Total

With No Expiration

With Expiration

Expiration Dates Through
 
Total
 
With No Expiration
 
With Expiration
 
Expiration Dates Through
Net operating loss carryforwards
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$
41

 
$

 
$
41

 
2037
 
$
65

 
$

 
$
65

 
2037
State
 
$
873

 
$

 
$
873

 
2038
 
$
911

 
$

 
$
911

 
2037
Foreign
 
$
6,522

 
$
6,287

 
$
235

 
2038
 
$
4,608

 
$
4,537

 
$
71

 
2036
Tax credit carryforwards
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$

 
$

 
$

 
N/A
 
$
7

 
$

 
$
7

 
2024
State
 
$
28

 
$
7

 
$
21

 
2038
 
$
45

 
$
10

 
$
35

 
2026
Foreign
 
$
21

 
$

 
$
21

 
2020
 
$
10

 
$

 
$
10

 
2020
Capital loss carryforwards
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$

 
$

 
$

 
N/A
 
$

 
$

 
$

 
N/A
State
 
$

 
$

 
$

 
N/A
 
$
289

 
$

 
$
289

 
2018
Foreign
 
$
240

 
$
193

 
$
47

 
2023
 
$
235

 
$
235

 
$

 
N/A

The Company is currently the beneficiary of tax holiday incentives in India and Malaysia, which expire in various fiscal years through 2026. As a result of these tax holiday incentives, the Company recorded an income tax benefit of approximately $5 million, $1 million and $2 million, during fiscal 2018, 2017 and 2016, respectively. The per share effects were $0.02, $0.01 and $0.02, for fiscal 2018, 2017 and 2016, respectively.

The Finance Act of 2012 (the "2012 Finance Act") was signed into law in India on May 28, 2012. The 2012 Finance Act provides for the taxation of indirect foreign investment in India, including on a retroactive basis. The 2012 Finance Act overrides the Vodafone NL ruling by the Supreme Court of India which held that the Indian Tax Authorities cannot assess capital gains taxes on the sale of shares of non-Indian companies that indirectly own shares in an Indian company. The retroactive nature of these changes in law has been strongly criticized and challenged in the Indian courts; however, there is no assurance that such a challenge will be successful. We have engaged in the purchase of shares of foreign companies that indirectly own shares of an Indian company and internal reorganizations involving Indian companies. The Indian tax authorities may seek to apply the provisions of the 2012 Finance Act to these prior transactions and seek to tax us directly or as a withholding agent or representative assessee of the sellers involved in prior acquisitions. We believe that the 2012 Finance Act does not apply to these prior acquisitions and that we have strong defenses against any claims that might be raised by the Indian tax authorities.

The Company accounts for income tax uncertainties in accordance with Income Taxes (ASC 740), which prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of liabilities for uncertain tax positions, interest and penalties.


81



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with ASC 740, the Company’s liability for uncertain tax positions was as follows:
 
 
Fiscal Years Ended
(in millions)

 
March 31, 2018

 
March 31, 2017

Tax
 
$
219

 
$
192

Interest
 
40

 
25

Penalties
 
25

 
11

Net of tax attributes
 
(33
)
 
(26
)
Total
 
$
251

 
$
202


The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Balance at beginning of fiscal year
 
$
192

 
$
180

 
$
304

Gross increases related to prior year tax positions
 
10

 
14

 
21

Gross decreases related to prior year tax positions
 
(12
)
 
(12
)
 
(101
)
Gross increases related to current year tax positions
 
7

 
10

 
7

Settlements and statute of limitation expirations
 
(19
)
 
(7
)
 
(48
)
Acquisitions
 
39

 
6

 
3

Foreign exchange and others
 
2

 
1

 
(6
)
Balance at end of fiscal year
 
$
219

 
$
192

 
$
180


The Company’s liability for uncertain tax positions at March 31, 2018, March 31, 2017 and April 1, 2016, includes $170 million, $149 million and $122 million, respectively, related to amounts that, if recognized, would affect the effective tax rate (excluding related interest and penalties).


82



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes interest accrued related to uncertain tax positions and penalties as a component of income tax expense. During the year ended March 31, 2018, the Company had net increase in interest expense of $2 million ($2 million net of tax) and net increase in accrued expense for penalties of $0.2 million, and as of March 31, 2018, recognized a liability for interest of $40 million ($36 million net of tax) and penalties of $25 million. The increase in liability in FY18 compared to FY17 is mostly related to acquired interest and penalties from the acquisition of HPES. During the year ended March 31, 2017, the Company had a net decrease in interest of $8 million (decrease of $9 million net of tax) and no change in accrued penalties and as of March 31, 2017, has recognized a liability for interest of $25 million ($20 million net of tax) and penalties of $11 million. During the year ended April 1, 2016, the Company had a net increase in interest of $(6) million ($(4) million net of tax) and a net decrease in accrued penalties of $2 million, and as of April 1, 2016, recognized a liability for interest of $33 million ($29 million net of tax) and penalties of $11 million. The following table presents the change in interest and penalties from the previous reported period, as well as the liability at the end of each period presented:
 
 
As of and for the Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
(in millions)

 
Increase (Decrease)
Interest
 
$
2

 
$
(8
)
 
$
(6
)
Interest, net of tax
 
$
2

 
$
(9
)
 
$
(4
)
Accrued penalties
 
$

 
$

 
$
2

Liability for interest
 
$
40

 
$
25

 
$
33

Liability for interest, net of tax
 
$
36

 
$
20

 
$
29

Liability for penalties
 
$
25

 
$
11

 
$
11


The Company is currently under examination in several tax jurisdictions. A summary of the tax years that remain subject to examination in certain of the Company’s major tax jurisdictions are:
Jurisdiction:
 
Tax Years that Remain Subject to Examination
(Fiscal Year Ending):
United States – Federal
 
2008 and forward
United States – Various States
 
2008 and forward
Australia
 
2012 and forward
Canada
 
2010 and forward
France
 
2013 and forward
Germany
 
2010 and forward
India
 
1998 and forward
United Kingdom
 
2013 and forward

The IRS is examining CSC's federal income tax returns for fiscal 2008 through 2016. With respect to CSC's fiscal 2008 through 2010 federal tax returns, the Company previously entered into negotiations for a resolution through settlement with the IRS Office of Appeals. The IRS examined several issues for this audit that resulted in various audit adjustments. The Company and the IRS Office of Appeals have an agreement in principle as to some but not all of these adjustments. The Company has agreed to extend the statute of limitations associated with this audit through April 30, 2019. In addition, during the first quarter of fiscal 2018, the Company received a Revenue Agent’s Report with proposed adjustments to CSC's fiscal 2011 through 2013 federal returns. The Company has filed a protest of certain of these adjustments to the IRS Office of Appeals. The IRS is also examining CSC's fiscal 2014 through 2016 federal income tax returns. The Company has not received any adjustments for this cycle. The Company continues to believe that its tax positions are more-likely-than-not sustainable and that the Company will ultimately prevail.

In addition, the Company may settle certain other tax examinations, have lapses in statutes of limitations, or voluntarily settle income tax positions in negotiated settlements for different amounts than the Company has accrued as uncertain tax positions. The Company may need to accrue and ultimately pay additional amounts for tax positions that previously

83



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

met a more likely than not standard if such positions are not upheld. Conversely, the Company could settle positions with the tax authorities for amounts lower than those that have been accrued or extinguish a position though payment. The Company believes the outcomes which are reasonably possible within the next twelve months may result in a reduction in liability for uncertain tax positions of $17 million to $19 million, excluding interest, penalties, and tax carry-forwards.

Note 12 - Debt

The following is a summary of the Company's debt:
 
 
 
 
 
 
As of
(in millions)
 
Interest Rates
 
Fiscal Year Maturities
 
March 31, 2018
 
March 31, 2017
Short-term debt and current maturities of long-term debt
 
 
 
 
 
 
 
 
Euro-denominated commercial paper(1)
 
(0.1) - 0.02%(2)
 
2019
 
$
863

 
$
646

Current maturities of long-term debt
 
Various
 
2019
 
439

 
55

Current maturities of capitalized lease liabilities
 
0.3% - 6.7%
 
2019
 
616

 
37

Short-term debt and current maturities of long term debt
 
 
 
 
 
$
1,918

 
$
738

 
 
 
 
 
 
 
 
 
Long-term debt, net of current maturities
 
 
 
 
 
 
 
 
GBP term loan
 
1.0% -1.4%(3)
 
2019
 
$
260

 
$
233

EUR term loan
 
1.75%(4)
 
2019
 
493

 

USD term loan
 
1.2% - 2.3%(5)
 
2021
 

 
571

AUD term loan
 
2.9% - 3.1%(6)
 
2022
 
210

 
76

EUR term loan
 
0.9% (7)
 
2022
 
187

 

USD term loan
 
2.2% - 3.1%(8)
 
2022
 
899

 

$500 million Senior notes
 
2.875%
 
2020
 
502

 

$650 million Senior notes
 
2.3% - 3.0%(9)
 
2021
 
646

 

$274 million Senior notes(10)
 
4.45%
 
2023
 
278

 

$171 million Senior notes(10)
 
4.45%
 
2023
 
173

 
453

$500 million Senior notes
 
4.25%
 
2025
 
507

 

£250 million Senior notes
 
2.75%
 
2025
 
346

 

$500 million Senior notes
 
4.75%
 
2028
 
509

 

$234 million Senior notes(11)
 
7.45%
 
2030
 
277

 

Revolving credit facility(12)
 
1.4% - 1.6%
 
2021 - 2023
 

 
678

Lease credit facility
 
1.9% - 2.9%
 
2020 - 2023
 
46

 
60

Capitalized lease liabilities
 
0.3% - 6.7%
 
2019 - 2023
 
1,235

 
104

Borrowings for assets acquired under long-term financing
 
2.3% - 4.0%
 
2019 - 2022
 
405

 
77

Mandatorily redeemable preferred stock outstanding
 
6%
 
2023
 
61

 
61

Other borrowings
 
0.5% - 14.0%
 
2019 - 2037
 
113

 
4

Long-term debt
 
 
 
 
 
7,147

 
2,317

Less: current maturities of long-term debt and capitalized lease liabilities
 
 
 
 
 
1,055

 
92

Long-term debt, net of current maturities
 
 
 
 
 
$
6,092

 
$
2,225

        

84



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) 
During fiscal 2017, DXC increased the maximum size from €500 million to €1 billion.
(2) 
Approximate weighted average interest rate.
(3) Three-month LIBOR rate plus 0.65%.
(4) Three-month EURIBOR rate plus 1.75%.

(5) At DXC's option, the USD term loan bore interest at a variable rate equal to the adjusted LIBOR for a one, two, three, or six month interest period, plus a margin between 0.75% and 1.50% based on a pricing grid consistent with the Company's outstanding revolving credit facility or the greater of the prime rate, the federal funds rate plus 0.50%, or the adjusted LIBOR for a one-month interest period plus 1.00%, in each case plus a margin of up to 0.50%, based on a pricing grid consistent with the revolving credit facility.
(6) Variable interest rate equal to the bank bill swap bid rate for a one, two, three or six-month interest period plus 0.95% - 1.45% based on the published credit ratings of DXC.
(7) At DXC's option, the EUR term loan bears interest at the Eurocurrency Rate for a one, two, three, or six-month interest period, plus a margin of between 0.75% and 1.35%, based on published credit ratings of DXC.
(8) At DXC's option, the USD term loan bears interest at the Eurocurrency Rate for a one, two, three, or six-month interest period, plus a margin of between 1.00% and 1.75% based on published credit ratings of DXC or the Base Rate plus a margin of between 0.00% and 0.75%, based on published credit ratings of DXC.
(9) Three-month LIBOR plus 0.95%.
(10) During fiscal 2018, DXC completed an exchange offer, whereby $274 million aggregate principal amount of CSC notes were tendered in exchange for a like aggregate principal amount of DXC notes with like maturity and interest rate. Upon completion of the exchange, $171 million aggregate principal amount of CSC Notes remained outstanding.
(11) During fiscal 2018, DXC completed an exchange offer whereby $234 million principal amount of the $300 million Senior notes (the "EDS Notes") were tendered in exchange for a like principal amount of DXC notes with like maturity and interest rate. The remaining $66 million principal amount of the EDS Notes outstanding were held by public noteholders and are included in liabilities of discontinued operations.
(12) During fiscal 2018, DXC exercised its option to extend the maturity date and also increased commitments to $3.81 billion, $70 million of which matures in January 2021 and $3.74 billion matures in January 2023.

Senior Notes and Term Loans

Interest on the Company's term loans is payable monthly or quarterly in arrears at the election of the borrower. The Company fully and unconditionally guarantees term loans issued by its 100% owned subsidiaries. Interest on the Company's senior notes is payable semi-annually in arrears, except for interest on the £250 million Senior notes due 2025 which is payable annually in arrears, and interest on the $650 million Senior notes due 2021 which is payable quarterly in arrears. Generally, the Company's notes are redeemable at the Company's discretion at the then-applicable redemption premium plus accrued interest.

On April 3, 2017, as a result of the HPES Merger, financial covenants were amended and CSC was replaced with DXC as the borrower and guarantor to certain outstanding debt including short-term Euro-denominated commercial paper, senior notes and term loans. In connection with the HPES Merger, DXC entered into an unsecured term loan agreement consisting of a $375 million U.S. dollar term loan maturing in 2020, a $1.3 billion U.S. dollar term loan maturing in 2022 and a Euro-equivalent of $315 million EUR term loan maturing in 2022. The U.S. term loan maturing in 2020 and portions of the term loans maturing in 2022 were repaid subsequent to the HPES Merger. DXC assumed pre-existing indebtedness incurred by HPES including 7.45% senior notes due 2030 which were issued at a principal amount of $300 million.

During fiscal 2018, in connection with the HPES Merger, DXC completed an offering of senior notes in an aggregate principal amount of $1.5 billion consisting of 2.875% senior notes due 2020, 4.25% senior notes due 2025 and 4.75% senior notes due 2028. Additionally, DXC issued 2.75% senior notes due 2025 in an aggregate principal of £250 million, the proceeds of which were used to make prepayments to term loans maturing in 2022 and fully repay the borrowings under revolving credit facilities.

Subsequent to March 31, 2018, DXC entered into a senior unsecured term loan credit agreement maturing on May 10, 2019, in an aggregate principal amount of €400 million, the proceeds of which were used to repay the €400 million principal amount outstanding under the EUR term loan due May 12, 2018. The Company has excluded the EUR term loan maturing on May 12, 2018 from short-term debt and current maturities of long term debt.
 
Revolving Credit Facility

In connection with the HPES Merger, the Company entered into several amendments to its revolving credit facility agreement pursuant to which DXC replaced CSC as the principal borrower and as the guarantor of borrowings by subsidiary borrowers. As of March 31, 2018, DXC had no borrowings outstanding under the revolving credit facility.

85



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Capital Lease and Financing Obligations

Capitalized lease liabilities represent obligations due under capital leases for the use of computers and other equipment. The gross amount of assets recorded under capital leases were $3.5 billion with accumulated amortization of $2.3 billion as of March 31, 2018, and $0.7 billion with accumulated amortization of $0.6 billion as of March 31, 2017. The future minimum lease payments required to be made under the capital leases as of March 31, 2018, are as follows:
Fiscal Year
 
(in millions)
2019
 
$
660

2020
 
382

2021
 
171

2022
 
86

2023
 
28

Thereafter
 

Total minimum lease payments
 
1,327

Less: Amount representing interest and executory costs
 
(92
)
Present value of net minimum lease payments
 
1,235

Less: Current maturities of capital lease obligations
 
(616
)
Long-term capitalized lease liabilities
 
$
619


Future Maturities of Long-term Debt

Expected maturities of long-term debt, including borrowings for asset financing but excluding minimum capital lease payments, for fiscal years subsequent to March 31, 2018, are as follows:
Fiscal Year
 
(in millions)
2019
 
$
439

2020
 
1,228

2021
 
753

2022
 
1,301

2023
 
514

Thereafter
 
1,677

Total
 
$
5,912



86



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Pension and Other Benefit Plans

The Company offers a number of pension and OPEB plans, life insurance benefits, deferred compensation and defined contribution plans. Most of the Company's pension plans are not admitting new participants; therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates.

Defined Benefit Plans

The Company sponsors a number of defined benefit and post-retirement medical benefit plans for the benefit of eligible employees. The benefit obligations of the Company's U.S. pension, U.S. OPEB, and non-U.S. OPEB plans represent an insignificant portion of the Company's pension and other post-retirement benefit plans. As a result, the disclosures below include the Company's U.S. and non-U.S. pension plans on a global consolidated basis.

Eligible employees are enrolled in defined benefit pension plans in their country of domicile. The Contributory defined benefit pension plan in the United Kingdom represents the largest plan. In addition, healthcare, dental and life insurance benefits are also provided to certain non-U.S. employees. A significant number of employees outside the United States are covered by government sponsored programs at no direct cost to the Company other than related payroll taxes.

During fiscal 2018, the Company adopted amendments to certain U.K. pension plans which necessitated an interim remeasurement of the plans assets and liabilities as of December 1, 2017. The remeasurement resulted in a net gain of $17 million, comprising a curtailment gain of $40 million and an actuarial loss $23 million. The net gain was recognized within costs of services and selling, general and administrative.

The Company accrued $13 million, $1 million and $6 million, for fiscal 2018, 2017 and 2016, respectively, as additional contractual termination benefits for certain employees are part of the restructuring plans. These amounts are reflected in the projected benefit obligation and in the net periodic pension cost.

Projected Benefit Obligations
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Projected benefit obligation at beginning of year
 
$
3,297

 
$
2,879

Benefit obligation assumed as a result of the HPES merger

 
7,351

 

Service cost
 
121

 
23

Interest cost
 
249

 
82

Plan participants’ contributions
 
16

 
3

Amendments
 
(44
)
 

Business/contract acquisitions/divestitures
 
69

 
313

Contractual termination benefits
 
13

 
1

Settlement/curtailment
 
(65
)
 
(13
)
Actuarial (gain) loss
 
(332
)
 
413

Benefits paid
 
(447
)
 
(120
)
Foreign currency exchange rate changes
 
1,170

 
(283
)
Other
 
(14
)
 
(1
)
Projected benefit obligation at end of year
 
$
11,384

 
$
3,297



87



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the weighted average rates used in the determination of the Company’s benefit obligations:
 
 
Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
Discount rate
 
2.5
%
 
2.5
%
Rates of increase in compensation levels
 
2.0
%
 
2.2
%

Fair Value of Plan Assets and Funded Status
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Fair value of plan assets at beginning of year
 
$
2,998

 
$
2,597

Assets assumed as a result of the HPES merger

 
7,411

 

Actual return on plan assets
 
371

 
483

Employer contribution
 
83

 
123

Plan participants’ contributions
 
16

 
3

Benefits paid
 
(447
)
 
(120
)
Business/contract acquisitions/divestitures
 
(2
)
 
199

Contractual termination benefits
 
4

 
6

Plan settlement
 
(22
)
 
(13
)
Foreign currency exchange rate changes
 
1,176

 
(279
)
Other
 
(14
)
 
(1
)
Fair value of plan assets at end of year
 
$
11,574

 
$
2,998

 
 
 
 
 
Funded status at end of year
 
$
190

 
$
(299
)

During fiscal 2017, the Company, along with the Trustee of CSC Computer Sciences Ltd. Main Pension Scheme (“CSC UK Pension”), the Trustee of the Rebus Pension Scheme (“Xchanging UK Pension”), and a financial institution (the "Institution"), entered into a multi-party arrangement whereby the Company’s corporate campus in Aldershot, U.K. (the "Property") was monetized for approximately $85 million in proceeds net of stamp duties paid. The Company concurrently contributed $85 million to the CSC UK Pension and Xchanging UK Pension plans as a special discretionary employer contribution. The transaction was executed by contributing the Property to a property limited partnership and all such LP interests were contributed to a Jersey Unit Trust owned 1% by the Company and 99% by the Institution.

Under the structured sale transaction, the Company entered into a 15-year master lease arrangement as master tenant, at approximately $4 million rent per year. Under U.S. GAAP, due to the continuing interest of the Company as master tenant, residual profit participation retained by the Company, Xchanging UK Pension and CSC UK Pension, and the Company's ownership of the general partner of the property limited partnership that owns the Property, the structured sale transaction resulted in accounting treatment as a financing transaction. As a consequence, the Property remains accounted for as an asset on the balance sheet of the Company at historical cost basis and accumulated depreciation thereon, with no gain or loss recorded. A corresponding $85 million liability was recorded as other long-term liabilities on the Company's balance sheet.


88



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Selected Information
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Other assets
 
1,118

 
73

Accrued expenses and other current liabilities
 
(28
)
 
(7
)
Non-current pension obligations
 
(879
)
 
(342
)
Other long-term liabilities - OPEB
 
(21
)
 
(23
)
Net amount recorded
 
$
190

 
$
(299
)
 
 
 
 
 
Accumulated benefit obligation
 
$
11,241

 
$
3,262

 
 
Benefit Plans with Projected Benefit Obligation in Excess of Plan Assets
 
Benefit Plans with Accumulated Benefit Obligation in Excess of Plan Assets
(in millions)
 
March 31, 2018
 
March 31, 2017
 
March 31, 2018
 
March 31, 2017
Projected benefit obligation
 
$
2,488

 
$
996

 
$
2,250

 
$
938

Accumulated benefit obligation
 
$
2,363

 
$
963

 
$
2,162

 
$
913

Fair value of plan assets
 
$
1,552

 
$
624

 
$
1,338

 
$
574


Net Periodic Pension Cost
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Service cost
 
$
121

 
$
23

 
$
25

Interest cost
 
249

81

82

 
92

Expected return on assets
 
(534
)
 
(161
)
 
(179
)
Amortization of transition obligation
 
1

 
1

 
1

Amortization of prior service costs
 
(18
)
 
(17
)
 
(19
)
Contractual termination benefit
 
13

 
1

 
6

Settlement/curtailment gain
 
(42
)
 

 
(2
)
Recognition of actuarial (gain) loss
 
(178
)
 
87

 
127

Net periodic pension (income) expense
 
$
(388
)
 
$
16

 
$
51


The service cost component of net periodic pension income is presented in cost of services and selling, general and administrative and the other components of net periodic pension income are presented in other income, net in the Company’s statements of operations. See Note 1 - "Summary of Significant Accounting Policies," for further discussion of the updated guidance related to the presentation of net periodic pension cost.

Estimated prior service credit of $16 million will be amortized from AOCI into net periodic pension cost over the next fiscal year. The weighted-average rates used to determine net periodic pension cost were:
 
 
Fiscal Years Ended
 
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Discount or settlement rates
 
2.5
%
 
3.1
%
 
3.0
%
Expected long-term rates of return on assets
 
4.9
%
 
6.3
%
 
6.3
%
Rates of increase in compensation levels
 
2.7
%
 
2.6
%
 
2.8
%


89



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of amounts in AOCI, before tax effects:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
Prior service cost
 
(298
)
 
(269
)

Estimated Future Contributions and Benefits Payments
(in millions)
 
 
Employer contributions:
 
 
2019
 
$
86

 
 
 
Benefit Payments:
 
 
2019
 
$
299

2020
 
$
298

2021
 
$
314

2022
 
$
380

2023
 
$
353

2024 and thereafter
 
$
2,087


Fair Value of Plan Assets

The tables below set forth the fair value of plan assets by asset category within the fair value hierarchy:
 
 
 
As of March 31, 2018
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity:
 
 
 
 
 
 
 
 
 
Global/International Equity commingled funds
 
$
465

 
$
1,978

 
$

 
$
2,443

 
Global equity mutual funds
 
8

 
333

 

 
341

 
U.S./North American Equity commingled funds
 
3

 
46

 

 
49

Fixed Income:
 
 
 
 
 
 
 
 
 
U.S. Government funds
 

 
1

 

 
1

 
Non-U.S. Government funds
 
2

 
54

 

 
56

 
Fixed income commingled funds
 
3

 
6,092

 

 
6,095

 
Fixed income mutual funds
 
3

 

 

 
3

Alternatives:
 
 
 
 
 
 
 
 
 
Other Alternatives (1)
 
4

 
1,228

 
874

 
2,106

 
Hedge Funds(2)
 

 
2

 

 
2

Other Assets
 
 

 

 
3

 
3

Insurance contracts
 

 
160

 
10

 
170

Cash and cash equivalents
 
300

 
5

 

 
305

Totals
 
$
788

 
$
9,899

 
$
887

 
$
11,574


90



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
 
As of March 31, 2017
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity:
 
 
 
 
 
 
 
 
 
Global/International Equity commingled funds
 
$
1

 
$
710

 
$

 
$
711

 
Global equity mutual funds
 
1

 
251

 

 
252

 
U.S./North American Equity commingled funds
 
1

 
39

 

 
40

Fixed Income:
 
 
 
 
 
 
 
 
 
Non-U.S. Government funds
 

 
3

 

 
3

 
Fixed income commingled funds
 
1

 
991

 

 
992

 
Fixed income mutual funds
 
3

 

 

 
3

Alternatives:
 
 
 
 
 
 
 
 
 
Other Alternatives (1)
 
3

 
412

 
343

 
758

 
Hedge Funds(2)
 

 
1

 

 
1

Insurance contracts
 

 
131

 
5

 
136

Cash equivalents
 
94

 
8

 

 
102

Totals
 
$
104

 
$
2,546

 
$
348

 
$
2,998

        

(1) Represents real estate and other commingled funds consisting mainly of equities, bonds, or commodities.
(2) Represents investments in diversified fund of hedge funds.

Changes in fair value measurements of level 3 investments for the defined benefit plans were as follows:
(in millions)
 
 
Balance as of April 1, 2016
 
$
315

Actual return on plan assets held at the reporting date
 
60

Purchases, sales and settlements
 
9

Changes due to exchange rates
 
(36
)
Balance as of March 31, 2017
 
348

Actual return on plan assets held at the reporting date
 
34

Purchases, sales and settlements
 
443

Changes due to exchange rates
 
62

Balance as of March 31, 2018
 
$
887


Domestic and global equity accounts are categorized as Level 1 if the securities trade on national or international exchanges and are valued at their last reported closing price. Equity assets in commingled funds reporting a net asset value are categorized as Level 2 and valued using broker dealer bids or quotes of securities with similar characteristics.

Fixed income accounts are categorized as Level 1 if traded on a publicly quoted exchange or as level 2 if investments in corporate bonds are primarily investment grade bonds, generally priced using model-based pricing methods that use observable market data as inputs. Broker dealer bids or quotes of securities with similar characteristics may also be used.

Alternative investment fund securities are categorized as Level 1 if held in a mutual fund or in a separate account structure and actively traded through a recognized exchange, or as Level 2 if they are held in commingled or collective account structures and are actively traded. Alternative investment fund securities are classified as Level 3 if they are held in Limited Company or Limited Partnership structures or cannot otherwise be classified as Level 1 or Level 2.

91



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Other assets represent property holdings by certain pension plans. As above, the property holdings represent a master lease arrangement entered into by DXC UK and certain UK pension plans as a financing transaction.

Insurance contracts purchased to cover benefits payable to retirees are valued using the assumptions used to value the projected benefit obligation.

Cash equivalents that have quoted prices in active markets are classified as Level 1. Short-term money market commingled funds are categorized as Level 2 and valued at cost plus accrued interest which approximates fair value.

Plan Asset Allocations
 
 
As of
Asset Category
 
March 31, 2018
 
March 31, 2017
Equity securities
 
25
%
 
33
%
Debt securities
 
53
%
 
33
%
Alternatives
 
18
%
 
25
%
Cash and other
 
4
%
 
9
%
Total
 
100
%
 
100
%

Plan assets are held in a trust that includes commingled funds subject to country specific regulations and invested primarily in commingled funds. For the U.K. pension plans, the Company's largest pension plans by assets and projected liabilities, a target allocation by asset class was developed to achieve their long-term objectives. Asset allocations are monitored closely and investment reviews regarding asset strategy are conducted regularly with internal and external advisors.

The Company’s investment goals and risk management strategy for plan assets evaluates a number of factors, including the time horizon of the plans’ obligations. Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification in order to reduce risk, yet produces a reasonable amount of return on investment over the long term. Sufficient liquidity is maintained to meet benefit obligations as they become due. Third party investment managers are employed to invest assets in both passively-indexed and actively-managed strategies. Equities are primarily invested broadly in domestic and foreign companies across market capitalizations and industries. Fixed income securities are invested broadly, primarily in government treasury, corporate credit, mortgage backed and asset backed investments. Alternative investment allocations are included in selected plans to achieve greater portfolio diversity intended to reduce the overall volatility risk of the plans.

Plan asset risks include longevity, inflation, and other changes in market conditions that could reduce the value of plan assets. Also, a decline in the yield of high quality corporate bonds may adversely affect discount rates resulting in an increase in DXC's pension and other post-retirement obligations. These risks, among others, could cause the plans’ funded status to deteriorate, resulting in an increased reliance on Company contributions. Derivatives are permitted although their current use is limited within traditional funds and broadly allowed within alternative funds. Derivatives are used for inflation risk management and within the liability driven investing strategy. The Company also has investments in insurance contracts to pay plan benefits in certain countries.


92



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Return on Assets

The Company consults with internal and external advisors regarding the expected long-term rate of return on assets. The Company uses various sources in its approach to compute the expected long-term rate of return of the major asset classes expected in each of the plans. DXC utilizes long-term, asset class return assumptions of typically 30 years, which are provided by external advisors. Consideration is also given to the extent active management is employed in each asset class and also to management expenses. A single expected long-term rate of return is calculated for each plan by assessing the plan's expected asset allocation strategy, the benefits of diversification therefrom, historical excess returns from actively managed traditional investments, expected long-term returns for alternative investments and expected investment expenses. The resulting composite rate of return is reviewed by internal and external parties for reasonableness.

Retirement Plan Discount Rate

The U.K. discount rate is based on the yield curve approach using the U.K. Aon Hewitt GBP Single Agency AA Corporates-Only Curve.

Defined Contribution Plans

The Company sponsors defined contribution plans for substantially all U.S. employees and certain foreign employees. The plans allow employees to contribute a portion of their earnings in accordance with specified guidelines. Matching contributions are made annually in January to participants employed on December 31 of the prior year and vest in one year. However, if a participant retires from the Company or dies prior to December 31, the participant will be eligible to receive matching contributions approximately 30 days following separation from service. During fiscal 2018, 2017 and 2016, the Company contributed $245 million, $124 million and $132 million, respectively, to its defined contribution plans. As of March 31, 2018, plan assets included 4,184,335 shares of the Company’s common stock.
 
Deferred Compensation Plans

Effective as of the HPES Merger, DXC assumed sponsorship of the Computer Sciences Corporation Deferred Compensation Plan, which was renamed the “DXC Technology Company Deferred Compensation Plan” (the “DXC DCP”), and adopted the Enterprise Services Executive Deferred Compensation Plan (the “ES DCP”). Both plans are non-qualified deferred compensation plans maintained for a select group of management, highly compensated employees and non-employee directors.

The DXC DCP covers eligible employees who participated in CSC’s Deferred Compensation Plan prior to the HPES Merger. The ES DCP covers eligible employees who participated in the HPE Executive Deferred Compensation Plan prior to the HPES Merger. Both plans allow participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under DXC’s tax-qualified 401(k) plan, the DXC Technology Matched Asset Plan. Neither plan provides for employer contributions. As of April 3, 2017, the ES DCP does not admit new participants.

Certain management and highly compensated employees are eligible to defer all, or a portion of, their regular salary that exceeds the limitation set forth in Internal Revenue Section 401(a)(17) and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. The liability under the plan, which is included in Other long-term liabilities in the Company's balance sheets, amounted to $65 million as of March 31, 2018 and $67 million as of March 31, 2017. The Company’s expense under the Plan totaled $4 million, $5 million and $3 million, for fiscal 2018, 2017 and 2016, respectively.

Note 14 - Stockholders' Equity

Description of Capital Stock

The Company has authorized share capital consisting of 750,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.

93



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Each share of common stock is equal in all respects to every other share of common stock of the Company. Each share of common stock is entitled to one vote per share at each annual or special meeting of stockholders for the election of directors and upon any other matter coming before such meeting. Subject to all the rights of the preferred stock, dividends may be paid to holders of common stock as and when declared by the Board of Directors.

The Company's charter requires that preferred stock must be all of one class but may be issued from time to time in one or more series, each of such series to have such full or limited voting powers, if any, and such designations, preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions as provided in a resolution adopted by the Board of Directors. Each share of preferred stock will rank on a parity with each other share of preferred stock, regardless of series, with respect to the payment of dividends at the respectively designated rates and with respect to the distribution of capital assets according to the amounts to which the shares of the respective series are entitled.

Share Repurchase Program

On April 3, 2017, DXC announced the establishment of a share repurchase program approved by the Board of Directors with an initial authorization of up to $2.0 billion for future repurchases of outstanding shares of DXC common stock. An expiration date has not been established for this repurchase plan.

The shares repurchased are retired immediately and included in the category of authorized but unissued shares. The excess of purchase price over par value of the common shares is allocated between additional paid-in capital and retained earnings.

Shares repurchased, through both open market purchases and accelerated share repurchase ("ASR") arrangements, are shown below:
Fiscal Year
 
Number of shares repurchased
 
Average Price Per Share
 
Amount (In millions)
2018
 
 
 
 
 
 
     Open market purchases
 
1,537,782

 
$89.41
 
$
137

 
 
 
 
 
 
 
2016
 
 
 
 
 
 
     Open market purchases
 
3,587,224

 
$48.28
 
$
173

ASR (1)
 
162,908

 
$0.00
 

     Total
 
3,750,132

 
$46.18
 
$
173

        

(1) 
Reflects shares received during fiscal 2016 as settlement of a fiscal 2015 ASR arrangement.
  
Treasury Stock Transactions

In fiscal 2018, 2017 and 2016 the Company accepted 332,558, 72,231 and 48,416 shares of its common stock, respectively, in lieu of cash in connection with the exercise of stock options. In fiscal 2018, 2017 and 2016, the Company accepted 684,389, 195,201 and 716,999 shares of its common stock, respectively, in lieu of cash in connection with the tax withholdings associated with the release of common stock upon vesting of restricted stock and RSUs. As a result, the Company holds 1,016,947 treasury shares as of March 31, 2018. Treasury shares held before the HPES Merger were extinguished in connection with the HPES Merger.

94



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Dividends
 
 
Dividends Declared
(in millions, except per share amounts)
 
Per Common Share
 
Total
 
Unpaid at Fiscal Year End
Fiscal 2018
 
$
0.72

 
$
209

 
$
51

Fiscal 2017
 
$
0.56

 
$
80

 
$
20

Fiscal 2016(1)
 
$
2.99

 
$
421

 
$
19

        

(1) In connection with the NPS Separation (see Note 3 - "Divestitures"), CSC paid a special cash dividend on November 30, 2015 of $2.25 per share. Payment of the special dividend was made to holders of common stock on the Record Date who received shares of CSRA common stock in the distribution.

Accumulated Other Comprehensive Income (Loss)

The following table shows the changes in accumulated other comprehensive income (loss), net of taxes:
(in millions)
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Available-for-sale Securities
 
Pension and Other Post-retirement Benefit Plans
 
Accumulated Other Comprehensive Income (Loss)
Balance at April 3, 2015
 
$
(316
)
 
$
(2
)
 
$

 
$
339

 
$
21

Current-period other comprehensive (loss) income
 
(83
)
 
1

 

 
1

 
(81
)
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 

 

 

 
(20
)
 
(20
)
Transfer to CSRA
 

 

 

 
(31
)
 
(31
)
Balance at April 1, 2016
 
$
(399
)
 
$
(1
)
 
$

 
$
289

 
$
(111
)
Current-period other comprehensive (loss) income
 
(59
)
 
21

 

 
(2
)
 
(40
)
Amounts reclassified from accumulated other comprehensive loss, net of taxes
 

 

 

 
(11
)
 
(11
)
Balance at March 31, 2017
 
$
(458
)
 
$
20

 
$

 
$
276

 
$
(162
)
Current-period other comprehensive (loss) income
 
197

 
(11
)
 
9

 

 
195

Amounts reclassified from accumulated other comprehensive loss, net of taxes
 

 

 

 
25

 
25

Balance at March 31, 2018
 
$
(261
)
 
$
9

 
$
9

 
$
301

 
$
58


Note 15 - Stock Incentive Plans

Employee Incentives

As a result of the HPES Merger, all outstanding CSC awards of stock options, stock appreciation rights, restricted stock units ("CSC RSUs"), including performance-based restricted stock units, relating to CSC common stock granted under the 2011 Omnibus Incentive Plan, the 2007 Employee Incentive Plan and the 2010 Non-Employee Director Incentive Plan

95



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(the “CSC Equity Incentive Plans”) held by CSC employees and non-employee directors were converted into an adjusted award relating to DXC common shares subject to the same terms and conditions after the HPES Merger as the terms and conditions applicable to such awards prior to the HPES Merger.

Under the terms of the CSC Equity Incentive Plans and the individual award agreements, all unvested equity incentive awards, including all stock options and CSC RSUs held by all participants under the plans, including its named executive officers and directors, are subject to accelerated vesting in whole or in part upon the occurrence of a change in control or upon the participant’s termination of employment on or after the occurrence of a change in control under certain circumstances ("CIC events"). As a result of CIC events triggered by the HPES Merger, approximately 3.6 million of unvested awards vested on April 1, 2017, and as a result, $26 million of incremental stock compensation expense was recognized. CSC options granted in fiscal 2017 vested 33% upon the HPES Merger and the remaining 67% were converted into DXC RSUs based on the accounting value of the options. These RSUs will vest on the second and third anniversaries of the original option grant date. For equity incentive awards granted by HPE under HPE equity incentive plans to HPES employees prior to the HPES Merger, outstanding options (vested and unvested) and unvested RSU awards were converted upon the HPES Merger into economically equivalent DXC option and RSU awards, with terms and conditions substantially the same as the terms of such awards prior to the HPES Merger.

In March 2017, prior to the HPES Merger, the board of directors and shareholders of HPES approved DXC’s 2017 Omnibus Incentive Plan (the “DXC Employee Equity Plan”), DXC’s 2017 Non-Employee Director Incentive Plan (the “DXC Director Equity Plan”) and DXC’s 2017 Share Purchase Plan (“DXC Share Purchase Plan”). The terms of the DXC Employee Equity Plan and DXC Director Equity Plans are substantially similar to the terms of the CSC Equity Incentive Plans. The former allows DXC to grant stock options (including incentive stock options), stock appreciation rights, restricted stock, RSUs and PSUs, and cash awards intended to qualify for the performance-based compensation exemption to the $1 million deduction limit under Section 162(m) of the Internal Revenue Code (collectively the "Awards"). Awards are typically subject to vesting over the 3-year period following the grant date. Vested stock options are generally exercisable for a term of 10 years from the grant date. All of DXC’s employees are eligible for awards under the plan. The Company issues authorized but previously unissued shares upon the granting of stock options and the settlement of RSUs and PSUs.

The Compensation Committee of the Board of Directors (the "Board") has broad authority to grant awards and otherwise administer the DXC Employee Equity Plan. The plan became effective March 30, 2017 and will continue in effect for a period of 10 years thereafter, unless earlier terminated by the Board. The Board has the authority to amend the plan in such respects as it deems desirable, subject to approval of DXC’s stockholders for material modifications.

The DXC Share Purchase Plan allows DXC’s employees located in the United Kingdom to purchase shares of DXC’s common stock at the fair market value of such shares on the applicable purchase date. There were 1,474 shares purchased under this plan during fiscal 2018.

The Board has reserved for issuance shares of DXC common stock, par value $0.01 per share, under each of the plans as detailed below:

 
As of March 31, 2018
 
Reserved for issuance
 
Available for future grants
DXC Employee Equity Plan
34,200,000

 
22,302,423

DXC Director Equity Plan
230,000

 
123,634

DXC Share Purchase Plan
250,000

 
248,526

Total
34,680,000

 
22,674,583






96



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized share-based compensation expense for fiscal 2018, 2017 and 2016 as follows:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Total share-based compensation cost
 
$
93

 
$
75

 
$
46

Related income tax benefit
 
$
21

 
$
25

 
$
17

Total intrinsic value of options exercised
 
$
136

 
$
73

 
$
46

Tax benefits from exercised stock options and awards
 
$
84

 
$
34

 
$
62


The Company uses the Black-Scholes-Merton model in determining the fair value of stock options granted. The weighted average fair values of stock options granted during fiscal 2017 and 2016 were $13.00 and $9.00 per share, respectively. There were no stock options granted during fiscal 2018. In calculating the compensation expense for its stock incentive plans, the Company used the following weighted average assumptions:
 
 
Fiscal Years Ended
 
 
March 31, 2017

 
April 1, 2016

Risk-free interest rate
 
1.60
%
 
1.81
%
Expected volatility
 
29
%
 
31
%
Expected term (in years)
 
6.09

 
6.23

Dividend yield
 
1.56
%
 
1.39
%

As a result of the NPS Separation in the third quarter fiscal 2016, most stock awards issued by the Company were modified, including acceleration of vesting of certain awards and the issuance of new CSRA awards under the basket method, whereby awards granted prior to fiscal 2016 in CSC equity were converted into two awards: an award in an adjusted CSC equity award and a CSRA equity award. In the case of stock options, the number of options and the exercise price were adjusted for the impact of the NPS Separation. The conversions were structured to generally preserve the intrinsic value of the awards immediately prior to the Separation. There was no incremental stock compensation expense recognized as a result of the modification of the awards.


97



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

The Company’s stock options vest one-third annually on each of the first three anniversaries of the grant date. Stock options are generally granted for a term of ten years. Information concerning stock options granted under stock incentive plans was as follows:
 
 
Number
of Option Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding as of April 3, 2015
 
5,556,309

 
$
46.08

 
5.93
 
$
107

Granted
 
1,052,129

 
$
30.70

 
 
 
 
Issued due to NPS Separation modification
 
1,614,465

 
$
28.40

 
 
 
 
Exercised
 
(2,372,109
)
 
$
19.27

 
 
 
$
46

Canceled/Forfeited
 
(434,578
)
 
$
28.59

 
 
 
 
Expired
 
(49,595
)
 
$
20.87

 
 
 
 
Outstanding as of April 1, 2016
 
5,366,621

 
$
24.83

 
7.06
 
$
51

Granted
 
2,450,976

 
$
50.91

 
 
 
 
Exercised
 
(2,544,955
)
 
$
21.84

 
 
 
$
73

Canceled/Forfeited
 
(448,505
)
 
$
36.94

 
 
 
 
Expired
 
(56,741
)
 
$
14.36

 
 
 
 
Outstanding as of March 31, 2017
 
4,767,396

 
$
38.70

 
8.01
 
$
145

Granted
 

 
$

 
 
 
 
HPE options converted to DXC options at HPES Merger
 
2,654,970

 
$
46.56

 
 
 
 
CSC options converted to RSUs due to HPES Merger
 
(1,521,519
)
 
$
51.00

 
 
 
 
Exercised
 
(2,916,045
)
 
$
40.39

 
 
 
$
136

Canceled/Forfeited
 
(14,890
)
 
$
69.52

 
 
 
 
Expired
 
(36,411
)
 
$
36.69

 
 
 
 
Outstanding as of March 31, 2018(1)
 
2,933,501

 
$
32.54

 
5.24
 
$
185

Vested and expected to vest in the future as of March 31, 2018(1)
 
2,930,263

 
$
32.42

 
5.24
 
$
184

Exercisable as of March 31, 2018(1)
 
2,905,801

 
$
32.30

 
5.23
 
$
183

        

(1) The amount of the weighted average fair value per share has been revised to reflect the impact of the USPS Separation.

 
 
As of March 31, 2018
 
 
Options Outstanding
 
Options Exercisable
Range of Option Exercise Price
 
Number
Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
$10.35 - $29.70
 
748,574

 
$
21.74

 
4.05
 
748,574

 
$
21.74

$30.31 - $48.46
 
1,421,166

 
$
36.57

 
5.33
 
1,421,166

 
$
36.57

$49.24 - 86.17
 
763,761

 
$
55.13

 
6.26
 
736,061

 
$
55.03

 
 
2,933,501

 
 
 
 
 
2,905,801

 
 


98



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total fair value of stock options vested during fiscal 2018, 2017 and 2016 was $22 million, $8 million and $13 million, respectively. The cash received from stock options exercised during fiscal 2018, 2017 and 2016 was $98 million, $54 million and $82 million, respectively.

As of March 31, 2018, there was $1 million of unrecognized compensation expense related to unvested stock options, net of expected forfeitures. The cost is expected to be recognized over a weighted-average period of 2.18 years.

Restricted Stock Units

RSUs represent the right to receive one share of DXC common stock upon a future settlement date, subject to vesting and other terms and conditions of the award, plus any dividend equivalents accrued during the award period. In general, if the employee’s status as a full-time employee is terminated prior to the vesting of the RSU grant in full, then the RSU grant is automatically canceled on the termination date and any unvested shares and dividend equivalents are forfeited. Certain executives were awarded service-based "career share" RSUs for which the shares are settled over the 10 anniversaries following the executive's separation from service as a full-time employee, provided the executive complies with certain non-competition covenants during that period.

The Company also grants PSUs, which generally vest over a period of three years. The number of PSUs that ultimately vest is dependent upon the Company’s achievement of certain specified financial performance criteria over a three-year period. If the specified performance criteria are met, awards are settled for shares of DXC common stock and dividend equivalents upon the filing with the SEC of the Annual Report on Form 10-K for the last fiscal year of the performance period. PSU awards include the potential for accelerated vesting of 25% of the shares granted after each of the first and second fiscal years if certain of the Company's performance targets are met early, and are subject to final vesting based on the participant's continued employment through the end of the three-year performance period. Compensation expense during the performance period is estimated at each reporting date using management's expectation of the probable achievement of the specified performance criteria and is adjusted to the extent the expected achievement changes. In the table below, such awards are reflected at the number of shares originally granted.

99



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Information concerning RSUs (including PSUs) granted under the stock incentive plans, was as follows:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of April 3, 2015
2,579,675

 
$
48.70

Granted
3,234,197

 
$
27.97

Issued due to NPS Separation modification

419,160

 
$
29.95

Settled
(1,783,664
)
 
$
28.87

Canceled/Forfeited
(851,369
)
 
$
40.97

Outstanding as of April 1, 2016
3,597,999

 
$
29.25

Granted
1,150,185

 
$
47.70

Settled
(602,467
)
 
$
27.29

Canceled/Forfeited
(434,732
)
 
$
32.86

Outstanding as of March 31, 2017
3,710,985

 
$
34.86

Granted
1,828,667

 
$
82.34

HPE RSUs converted to DXC RSUs due to HPES Merger
95,816

 
$
69.34

Options converted to RSUs due to HPES Merger
609,416

 
$
32.58

Settled
(1,934,446
)
 
$
35.93

Canceled/Forfeited
(324,822
)
 
$
59.34

Outstanding as of March 31, 2018(1)
3,985,616

 
$
47.25

        

(1) The amount of the weighted average fair value per share has been revised to reflect the impact of the USPS Separation.

As of March 31, 2018, there was $136 million of unrecognized compensation expense related to unvested RSUs and PSUs, net of expected forfeitures. The cost is expected to be recognized over a weighted-average period of 2 years.

Non-employee Director Incentives

The Company has one stock incentive plan which authorizes the issuance of stock options, restricted stock and other share-based incentives to non-employee directors upon terms approved by the Company’s Board of Directors. As of March 31, 2018, 123,634 shares of DXC common stock remained available for the grant of future RSUs or other share-based incentives to nonemployee directors.

RSU awards to non-employee directors are granted at a price of $0. For RSU awards granted in fiscal 2014 and thereafter, RSUs vest and settle at the earlier of (i) the one-year anniversary of the grant date, or (ii) the date of the Company's first Annual Meeting of the Stockholders held after the grant date. Alternatively, settlement of the RSU may be deferred per election of the non-employee director. For awards granted in fiscal 2013 and prior, vested RSUs were automatically settled for shares of DXC common stock and dividend equivalents when the non-employee director ceases to be a director of the Company. At the holder’s election, the RSUs may be settled (i) in their entirety, upon the day the holder ceases to be a director, or (ii) in substantially equal amounts upon the first five, ten or fifteen anniversaries of such termination of service.


100



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information concerning RSUs granted to non-employee directors was as follows:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding as of April 3, 2015
143,986

 
$
30.02

Granted
65,188

 
$
31.75

Settled
(107,878
)
 
$
33.11

Canceled/Forfeited
(12,250
)
 
$
33.96

Outstanding as of April 1, 2016
89,046

 
$
27.00

Granted
33,600

 
$
47.35

Settled
(32,080
)
 
$
28.58

Canceled/Forfeited
(4,800
)
 
$
30.31

Outstanding as of March 31, 2017
85,766

 
$
34.19

Granted
22,900

 
$
84.40

Settled
(39,980
)
 
$
45.25

Canceled/Forfeited
(2,300
)
 
$
85.35

Outstanding as of March 31, 2018(1)
66,386

 
$
37.26

        

(1) The amount of the weighted average fair value per share has been revised to reflect the impact of the USPS Separation.



101



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Cash Flows

Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Cash paid for:
 
 
 
 
 
 
Interest
 
$
288

 
$
103

 
$
124

Taxes on income, net of refunds
 
$
376

 
$
63

 
$
65

 
 
 
 
 
 
 
Non-cash activities:
 
 
 
 
 
 
Operating:
 
 
 
 
 
 
  Prepaid assets acquired under long-term financing
 
$
209

 
$

 
$

Investing:
 
 
 
 
 
 
Capital expenditures in accounts payable and accrued expenses
 
$
46

 
$
43

 
$
42

Capital expenditures through capital lease obligations
 
$
664

 
$
52

 
$
47

Assets acquired under long-term financing
 
$
238

 
$
87

 
$
1

Increase in deferred purchase price receivable
 
$
128

 
$
393

 
$

Financing:
 
 
 
 
 
 
Dividends declared but not yet paid
 
$
51

 
$
20

 
$
19

Stock issued for the acquisition of HPES
 
$
9,850

 
$

 
$


Settlement of SEC Investigation

During fiscal 2016, CSC's previously disclosed agreed-upon settlement with the SEC was formally approved by the SEC. The settlement became effective on June 5, 2015 and the Company paid a penalty of $190 million on June 11, 2015. The penalty is reflected within net cash provided by operating activities in the statement of cash flows for the fiscal year ended April 1, 2016.

Note 17 - Other Income/ Expense, Net

The following table summarizes components of other income, net:
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Non-service cost components of net periodic pension (income) expense
 
$
(509
)
 
$
(7
)
 
$
26

Foreign currency gain
 
(71
)
 
(8
)
 
(1
)
Other gain
 
(13
)
 
(2
)
 
(8
)
Totals
 
$
(593
)
 
$
(17
)
 
$
17


Non-service cost components of net periodic pension (income) expense were reclassified from costs of services and selling, general and administrative to other (income) expense, net in the statements of operations upon adoption of ASU 2017-07 “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". See Note 1 - Summary of Significant Accounting Policies and Note 21 - "Reconciliation of Previously Reported Amounts to Recast Financial Statements" for more information.

Foreign currency gain resulted from the movement of foreign currency exchange rates on the Company’s foreign currency denominated assets and liabilities, related hedges including options to manage its exposure to economic risk and the cost of the Company’s hedging program. Other gain during fiscal 2018 consists of investment income and during fiscal 2016 primarily included a $6 million gain on sale of certain assets.

102



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 18 - Segment and Geographic Information

DXC has a matrix form of organization and is managed in several different and overlapping groupings including services, industry and geographic region. As a result, and in accordance with accounting standards, operating segments are organized by the type of services provided. DXC's chief operating decision maker ("CODM"), the chief executive officer, obtains, reviews, and manages the Company’s financial performance based on these segments. The CODM uses these results, in part, to evaluate the performance of, and allocate resources to, each of the segments.

Due to USPS Separation, on May 31, 2018, USPS is no longer a reportable segment and its fiscal 2018 results have been reclassified to discontinued operations, net of taxes. As a result of the HPES Merger, the HPES legacy reportable segments were combined with GBS and GIS. DXC's operating segments are the same as its reportable segments: GBS and GIS. In addition, DXC management changed its primary segment performance measure to segment profit from the previously used consolidated segment operating income. Prior periods presented have been restated to reflect this change. The accounting policies of the reportable segments are the same as those described in Note 1 - “Summary of Significant Accounting Policies.”

Global Business Services

GBS provides innovative technology solutions that help its clients address key business challenges and accelerate digital transformations tailored to each client’s industry and specific objectives. GBS offerings include:

Enterprise, Cloud Applications and Consulting. GBS provides industry, business process systems integration and technical delivery experience to maximize value from enterprise application portfolios. GBS also helps clients accelerate their digital transformations and business results with industry, business, technology and complex integration services.
Application Services. GBS's comprehensive services helps clients modernize, develop, test and manage their applications.
Analytics. GBS's portfolio of analytics services and robust partner ecosystem helps clients gain rapid insights and accelerate their digital transformation journeys.
Business Process Services. GBS provides seamless digital integration and optimization of front and back office processes, including its Agile Process Automation approach.
Industry Software and Solutions. GBS's industry-specific solutions enable businesses to quickly integrate technology, transform their operations and develop new ways of doing business. GBS's vertical-specific IP includes insurance, healthcare and life sciences, travel and transportation, and banking and capital markets solutions.

Global Infrastructure Services

GIS provides a portfolio of offerings that deliver predictable outcomes and measurable results while reducing business risk and operational costs for clients. GIS offerings include:

Cloud and Platform Services. GIS helps clients maximize their private cloud, public cloud and legacy infrastructures, as well as securely manage their hybrid environments.
Workplace and Mobility. GIS's workplace, mobility and Internet of Things ("IoT") services provides a consumer-like experience with enterprise security and instant connectivity for its clients.
Security. GIS's security solutions help predict attacks, proactively respond to threats, ensure compliance and protect data, applications, infrastructure and endpoints.



103



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Measures

The following table summarizes operating results regularly provided to the chief operating decision maker by reportable segment and a reconciliation to the financial statements:
(in millions)
 
GBS
 
GIS
 
Total Reportable Segments
 
All Other
 
Totals
Fiscal Year Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
9,254

 
$
12,479

 
$
21,733

 
$

 
$
21,733

Segment Profit
 
$
1,525

 
$
1,643

 
$
3,168

 
$
(179
)
 
$
2,989

Depreciation and amortization(1)
 
$
99

 
$
1,078

 
$
1,177

 
$
92

 
$
1,269

 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,173

 
$
3,434

 
$
7,607

 
$

 
$
7,607

Segment Profit
 
$
492

 
$
306

 
$
798

 
$
(180
)
 
$
618

Depreciation and amortization(1)
 
$
107

 
$
399

 
$
506

 
$
64

 
$
570

 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended April 1, 2016
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,637

 
$
3,469

 
$
7,106

 
$

 
$
7,106

Segment Profit
 
$
417

 
$
239

 
$
656

 
$
(251
)
 
$
405

Depreciation and amortization(1)
 
$
124

 
$
491

 
$
615

 
$
43

 
$
658

        
     
(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $526 million, $77 million, and $0 million for fiscal 2018, 2017, and 2016, respectively.

Reconciliation of Reportable Segment Profit to Consolidation

The Company's management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenues less segment cost of services, selling, general and administrative, and depreciation and amortization (excluding amortization of acquired intangible assets). The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, pension and OPEB actuarial and settlement gains and losses, restructuring costs, transaction and integration-related costs, amortization of acquired intangible assets and debt extinguishment costs.
 
 
Fiscal Years Ended
(in millions)
 
March 31, 2018
 
March 31, 2017
 
April 1, 2016
Profit
 
 
 
 
 
 
Total profit for reportable segments
 
$
3,168

 
$
798

 
$
656

All other loss
 
(179
)
 
(180
)
 
(251
)
Interest income
 
89

 
35

 
38

Interest expense
 
(320
)
 
(117
)
 
(123
)
Restructuring costs
 
(789
)
 
(238
)
 
(23
)
Pension and OPEB actuarial and settlement gains
 
220

 
(87
)
 
(99
)
Amortization of acquired intangible assets
 
(526
)
 
(77
)
 

Transaction and integration-related costs
 
(359
)
 
(308
)
 
(93
)
Debt extinguishment costs
 

 

 
(95
)
Income (loss) from continuing operations, before taxes
 
$
1,304

 
$
(174
)
 
$
10


104



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Management does not use total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment and therefore, total assets by segment is not disclosed.

Revenues by country are based on the location of the selling business unit. Property and equipment and total assets information is based on the physical location of the assets. Geographic revenues, property and equipment and total assets were as follows:
 
 
Fiscal Year Ended March 31, 2018
(in millions)
 
United States
 
United Kingdom
 
Australia
 
Other Europe
 
Other International
 
Total
Revenues
 
$
8,015

 
$
3,392

 
$
1,694

 
$
5,409

 
$
3,223

 
$
21,733

Property and Equipment, net
 
$
1,270

 
$
535

 
$
191

 
$
465

 
$
902

 
$
3,363

Total Assets
 
$
16,986

 
$
9,756

 
$
591

 
$
4,726

 
$
1,862

 
$
33,921


 
 
Fiscal Year Ended March 31, 2017
 
 
United States
 
United Kingdom
 
Australia
 
Other Europe
 
Other International
 
Total
Revenues
 
$
2,986

 
$
1,482

 
$
921

 
$
1,594

 
$
624

 
$
7,607

Property and Equipment, net
 
$
389

 
$
235

 
$
58

 
$
134

 
$
87

 
$
903

Total Assets
 
$
4,925

 
$
1,019

 
$
978

 
$
358

 
$
1,383

 
$
8,663


 
 
Fiscal Year Ended April 1, 2016
 
 
United States
 
United Kingdom
 
Australia
 
Other Europe
 
Other International
 
Total
Revenues
 
$
3,057

 
$
1,570

 
$
483

 
$
1,474

 
$
522

 
$
7,106

Property and Equipment, net
 
$
466

 
$
244

 
$
63

 
$
157

 
$
95

 
$
1,025

Total Assets
 
$
3,330

 
$
1,053

 
$
703

 
$
1,580

 
$
1,070

 
$
7,736


No single customer exceeded 10% of the Company’s revenues during fiscal 2018, fiscal 2017 or fiscal 2016.

Note 19 - Restructuring Costs

The Company recorded restructuring costs, net of reversals, of $789 million, $238 million and $23 million for fiscal 2018, 2017 and 2016, respectively. The costs recorded during fiscal 2018 were largely the result of implementing the Fiscal 2018 Plan, as described below.

The composition of restructuring liabilities by financial statement line items is as follows:
 
 
As of
(in millions)
 
March 31, 2018
 
March 31, 2017
Accrued expenses and other current liabilities
 
$
367

 
$
171

Other long-term liabilities
 
153

 
6

Total
 
$
520

 
$
177



105



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Restructuring Plans

Fiscal 2018 Plan

In June 2017, management approved a post-HPES Merger restructuring plan to optimize the Company's operations in response to a continuing business contraction (the "Fiscal 2018 Plan"). The additional restructuring initiatives are intended to reduce the company's core structure and related operating costs, improve its competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The Fiscal 2018 Plan focuses mainly on optimizing specific aspects of global workforce, increasing the proportion of work performed in low cost offshore locations and re-balancing the pyramid structure. Additionally, this plan included global facility restructuring, including a global data center restructuring program.

Fiscal 2017 Plan

In May 2016, the Company initiated a restructuring plan to realign the Company's cost structure and resources to take advantage of operational efficiencies following recent acquisitions. During the fourth quarter of Fiscal 2017, the Company expanded the plan to strengthen the Company's competitiveness and to optimize the workforce by increasing work performed in low-cost locations (the "Fiscal 2017 Plan"). Total costs incurred to date under the Fiscal 2017 Plan total $216 million, comprising $207 million in employee severance and $9 million of facilities costs.

Fiscal 2016 Plan

In September 2015, the Company initiated a restructuring plan to optimize utilization of facilities and right-size overhead organizations as a result of CSC's separation of its former NPS segment (the "Fiscal 2016 Plan"). No additional costs are expected to be expensed under this plan. Total costs incurred to date under the Fiscal 2016 Plan total $57 million, comprising $24 million in employee severance and $33 million of facilities costs.

Fiscal 2015 Plan

In June 2014, the Company initiated a restructuring plan to optimize the workforce in high cost markets, particularly in Europe, address the Company's labor pyramid and right shore its labor mix (the "Fiscal 2015 Plan"). No additional costs are expected to be expensed under this plan. Total costs incurred to date under the Fiscal 2015 Plan total $228 million, comprising $220 million in employee severance and $8 million of facilities costs.

Acquired Restructuring Liabilities

As a result of the HPES Merger, DXC acquired restructuring liabilities under restructuring plans that were initiated for HPES under plans approved by the HPE Board of Directors.

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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Restructuring activities, summarized by plan year, were as follows:
 
 
Restructuring Liability as of March 31, 2017
 
Acquired Balance
as of April 1, 2017
 
Costs Expensed,
Net of Reversals
(1)
 
Costs Not Affecting Restructuring Liability(2)
 
Cash Paid
 
Other(3)
 
Restructuring Liability as of March 31, 2018
Fiscal 2018 Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$

 
n/a

 
$
624

 
$
(10
)
 
$
(367
)
 
$
10

 
$
257

Facilities Costs
 

 
n/a

 
202

 
(4
)
 
(102
)
 
2

 
98

Total
 
$

 
n/a

 
$
826

 
$
(14
)
 
$
(469
)
 
$
12

 
$
355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2017 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
155

 
n/a

 
$
(32
)
 
$
(2
)
 
$
(112
)
 
$
10

 
$
19

Facilities Costs
 
6

 
n/a

 

 

 
(5
)
 
2

 
3

Total
 
$
161

 
n/a

 
$
(32
)
 
$
(2
)
 
$
(117
)
 
$
12

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2016 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
8

 
n/a

 
$
(2
)
 
$
1

 
$
(4
)
 
$

 
$
3

Facilities Costs
 
5

 
n/a

 

 

 
(3
)
 

 
2

Total
 
$
13

 
n/a

 
$
(2
)
 
$
1

 
$
(7
)
 
$

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015 Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
3

 
n/a

 
$

 
$

 
$
(2
)
 
$

 
$
1

Facilities Costs
 

 
n/a

 

 

 

 

 

Total
 
$
3

 
n/a

 
$

 
$

 
$
(2
)
 
$

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
n/a

 
$
255

 
$

 
$
(2
)
 
$
(152
)
 
$
9

 
$
110

Facilities Costs
 
n/a

 
70

 
(3
)
 
(3
)
 
(37
)
 

 
27

Total
 
n/a

 
$
325

 
$
(3
)
 
$
(5
)
 
$
(189
)
 
$
9

 
$
137

        

(1) Costs expensed, net of reversals include $34 million, $3 million, and $3 million of costs reversed from the Fiscal 2017 Plan, Fiscal 2016 Plan and Acquired liabilities, respectively.
(2) Pension benefit augmentations recorded as a pension liability and asset impairment.
(3) Foreign currency translation adjustments.


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
 
Restructuring Liability as of April 1, 2016
 
Costs Expensed, Net of Reversals(1)
 
Costs Not Affecting Restructuring Liability(2)
 
Cash Paid
 
Other(3)
 
Restructuring Liability as of March 31, 2017
Fiscal 2017 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$

 
$
239

 
$
(6
)
 
$
(79
)
 
$
1

 
$
155

Facilities Costs
 

 
9

 

 
(3
)
 

 
6

Total
 
$

 
$
248

 
$
(6
)
 
$
(82
)
 
$
1

 
$
161

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2016 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
29

 
$
(3
)
 
$

 
$
(17
)
 
$
(1
)
 
$
8

Facilities Costs
 
30

 
(4
)
 

 
(20
)
 
(1
)
 
5

Total
 
$
59

 
$
(7
)
 
$

 
$
(37
)
 
$
(2
)
 
$
13

 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015 Plan
 
 
 
 
 
 
 
 
 
 
 
 
Workforce Reductions
 
$
29

 
$
(3
)
 
$

 
$
(22
)
 
$
(1
)
 
$
3

Facilities Costs
 

 

 

 

 

 

Total
 
$
29

 
$
(3
)
 
$

 
$
(22
)
 
$
(1
)
 
$
3

        

(1) Costs expensed, net of reversals include $7 million and $3 million of costs reversed from the Fiscal 2016 Plan and Fiscal 2015 Plan, respectively.
(2) Pension benefit augmentations recorded as a pension liability.
(3) Foreign currency translation adjustments.

Note 20 - Commitments and Contingencies

Commitments

The Company has operating leases for the use of certain real estate and equipment. Substantially all operating leases are non-cancelable or cancelable only through payment of penalties. Lease payments are typically based upon the period of the lease but may include payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms. Most real estate leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in utilities and property taxes. Lease rental expense amounted to $797 million, $146 million and $152 million, for the fiscal years ended March 31, 2018, March 31, 2017 and April 1, 2016, respectively.


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Minimum fixed rentals required for the next five years and thereafter under operating leases in effect at March 31, 2018, were as follows:
Fiscal year
 
 
 
 
(in millions)
 
Real Estate
 
Equipment
2019
 
$
358

 
$
309

2020
 
270

 
225

2021
 
217

 
75

2022
 
229

 
7

2023
 
141

 
1

Thereafter
 
751

 

     Minimum fixed rentals
 
1,966

 
617

Less: Sublease rental income
 
(187
)
 

     Totals
 
$
1,779

 
$
617


The Company signed long-term purchase agreements with certain software, hardware, telecommunication and other service providers to obtain favorable pricing and terms for services and products that are necessary for the operations of business activities. Under the terms of these agreements, the Company is contractually committed to purchase specified minimums over periods ranging from 1 to 6 years. If the Company does not meet the specified minimums, the Company would have an obligation to pay the service provider all, or a portion, of the shortfall. Minimum purchase commitments as of March 31, 2018 were as follows:
Fiscal year
 
Minimum Purchase Commitment (1)
(in millions)
 
2019
 
$
1,946

2020
 
1,913

2021
 
390

2022
 
237

2023
 
202

Thereafter
 
54

     Total
 
$
4,742

        

(1) A significant portion of the minimum purchase commitments in fiscal 2019 and 2020 relate to the amounts committed under the HPE
preferred vendor agreements.

In the normal course of business, the Company may provide certain clients with financial performance guarantees, and at times performance letters of credit or surety bonds. In general, the Company would only be liable for the amounts of these guarantees in the event that non-performance by the Company permits termination of the related contract by the Company’s client. The Company believes it is in compliance with its performance obligations under all service contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on its consolidated results of operations or financial position.

The Company also uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations on these policies.


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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the expiration of the Company’s financial guarantees and stand-by letters of credit outstanding as of March 31, 2018:
(in millions)
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021 and Thereafter
 
Totals
Surety bonds
 
$
275

 
$
19

 
$
18

 
$
312

Letters of credit
 
170

 
41

 
313

 
524

Stand-by letters of credit
 
13

 
16

 
7

 
36

Totals
 
$
458

 
$
76

 
$
338

 
$
872


The Company generally indemnifies licensees of its proprietary software products against claims brought by third parties alleging infringement of their intellectual property rights, including rights in patents (with or without geographic limitations), copyrights, trademarks and trade secrets. DXC’s indemnification of its licensees relates to costs arising from court awards, negotiated settlements, and the related legal and internal costs of those licensees. The Company maintains the right, at its own cost, to modify or replace software in order to eliminate any infringement. The Company has not incurred any significant costs related to licensee software indemnification.

Contingencies

Vincent Forcier v. Computer Sciences Corporation and The City of New York: On October 27, 2014, the United States Attorney’s Office for the Southern District of New York and the Attorney General for the State of New York filed complaints-in-intervention on behalf of the United States and the State of New York, respectively, against CSC and The City of New York. This action arose out of a qui tam complaint originally filed under seal in 2012 by Vincent Forcier, a former employee of CSC. The complaints allege that from 2008 to 2012 New York City and CSC, in its role as fiscal agent for New York City’s Early Intervention Program ("EIP"), a federal program that provides services for infants and toddlers with manifest or potential developmental delays, violated the federal and state False Claims Acts and various common law standards by allegedly orchestrating a billing fraud against Medicaid through the misapplication of default billing codes and the failure to exhaust private insurance coverage before submitting claims to Medicaid. The New York Attorney General’s complaint also alleges that New York City and CSC failed to reimburse Medicaid in certain instances where insurance had paid a portion of the claim. The lawsuits seek treble statutory damages, other civil penalties and attorneys’ fees and costs.

On January 26, 2015, CSC and the City of New York moved to dismiss Forcier’s amended qui tam complaint as well as the federal and state complaints-in-intervention. In June 2016, the Court dismissed Forcier’s amended complaint in its entirety. With regard to the complaints-in-intervention, the Court dismissed the federal claims alleging misuse of default diagnosis codes when the provider had entered an invalid code, and the state claims alleging failure to reimburse Medicaid when claims were subsequently paid by private insurance. The Court denied the motions to dismiss with respect to the federal and state claims relating to (i) submission of insurance claims with a code signifying that the patient’s policy ID was unknown, and (ii) submission of claims to Medicaid after the statutory deadline for payment by private insurance had passed, and state common law claims. In accordance with the ruling, the United States and the State of New York each filed amended complaints-in-intervention on September 6, 2016. In addition to reasserting the claims upheld by the Court, the amended complaints assert new claims alleging that the compensation provisions of CSC’s contract with New York City rendered it ineligible to serve as a billing agent under state law. 

On November 9, 2016, CSC filed motions to dismiss the amended complaints in their entirety. On August 10, 2017, the Court granted in part and denied in part the motions to dismiss, allowing the remaining causes of action to proceed. On January 9, 2018, the Company answered the complaints, and asserted a counterclaim against the State of New York on a theory of contribution and indemnification. On January 30, 2018, the State of New York filed a motion to dismiss the Company’s counterclaim. The motion is fully briefed and under consideration by the Court. The Parties participated in a non-binding mediation on November 29, 2017, and settlement discussions are continuing. Commencement of discovery has been deferred by the parties pending settlement negotiations. The Company believes that these claims are without merit and intends to continue to defend itself vigorously.




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DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Strauch Fair Labor Standards Act Collective Action: On July 1, 2014, plaintiffs Joseph Strauch, Timothy Colby, Charles Turner, and Vernon Carre filed an action in the U.S. District Court for the District of Connecticut on behalf of themselves and a putative nationwide collective of CSC system administrators, alleging CSC’s failure to properly classify these employees as non-exempt under the federal Fair Labor Standards Act ("FLSA"). Plaintiffs allege similar state-law Rule 23 class claims pursuant to Connecticut and California statutes, including the Connecticut Minimum Wage Act, the California Unfair Competition Law, California Labor Code, California Wage Order No. 4-2001 and the California Private Attorneys General Act. Plaintiffs claim double overtime damages, liquidated damages, pre- and post-judgment interest, civil penalties, and other state-specific remedies.

In 2015 the Court entered an order granting conditional certification under the FLSA of the collective of over 4,000 system administrators, and notice of the right to participate in the FLSA collective action was mailed to the system administrators. Approximately 1,000 system administrators, prior to the announced deadline, filed consents with the Court to participate in the FLSA collective.

On June 30, 2017, the Court granted Rule 23 certification of a Connecticut state-law class and a California state-law class consisting of professional system administrators and associate professional system administrators. Senior professional system administrators were found not to qualify for Rule 23 certification under the state-law claims. On July 14, 2017, the Company petitioned the Second Circuit Court of Appeals for permission to file an appeal of the Rule 23 decision. That petition was denied on November 21, 2017.

As a result of the Court's findings in its Rule 23 certification order, the parties entered into a stipulation to decertify the senior professional system administrators from the FLSA collective. On August 2, 2017, the Court approved the stipulation, and the FLSA collective action is currently made up of approximately 700 individuals who held the title of associate professional or professional system administrator.

A jury trial commenced on December 11, 2017. On December 20, 2017, the jury returned a verdict in favor of plaintiffs, finding that the Company had misclassified the class of employees as exempt under federal and state laws, and finding that it had done so willfully. The Court will determine damages and address post-trial motions in further proceedings. The Company disagrees with the verdict and intends to continue to defend itself vigorously, including by appealing the verdict and the final judgment of the Court.

Computer Sciences Corporation v. Eric Pulier, et al.: On May 12, 2015, CSC and its wholly owned subsidiary, ServiceMesh Inc. ("SMI"), filed a civil complaint in the Court of Chancery of the State of Delaware against Eric Pulier, the former CEO of SMI, which had been acquired by CSC on November 15, 2013. Following the acquisition, Mr. Pulier signed a retention agreement with SMI pursuant to which he received a grant of restricted stock units of CSC and agreed to be bound by CSC’s rules and policies, including CSC’s Code of Business Conduct. Mr. Pulier resigned from SMI on April 22, 2015 amid allegations that he had engaged in fraudulent transactions with two employees of the Commonwealth Bank of Australia Ltd. (“CBA”). The original complaint against Mr. Pulier asserted claims for fraud, breach of contract and breach of fiduciary duty. In an amended complaint, CSC named TechAdvisors, LLC and Shareholder Representative Services LLC ("SRS") as additional defendants. In ruling on a motion to dismiss filed by Mr. Pulier, the Court dismissed CSC’s claim for breach of the implied covenant of good faith, but allowed substantially all of the remaining claims to proceed. Mr. Pulier asserted counter-claims for breach of contract, fraud, negligent representation, rescission, and violations of the California Blue Sky securities law. With the exception of the claim for breach of his retention agreement, the Court dismissed in whole or in part each of Mr. Pulier’s counterclaims.

On December 17, 2015, CSC entered into a settlement agreement with the majority of the former equityholders of SMI, as well as with SRS acting in its capacity as the agent and attorney-in-fact for the settling equityholders. Pursuant to the settlement agreement, CSC received $16.5 million, which amount was equal to the settling equityholders’ pro rata share of the funds remaining in escrow from the transaction, which was recorded as an offset to selling, general and administrative costs in CSC’s statements of operations for the fiscal year ended March 31, 2016. On February 20, 2017, CSC, SRS and the former equityholders of SMI who remain named defendants entered into a partial settlement agreement by which CSC received payment of some of the funds remaining in escrow.


111



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 20, 2017, the Court granted a motion by the United States for a 90-day stay of discovery pending the completion of a criminal investigation. On September 27, 2017, a grand jury empaneled by the United States District Court for the Central District of California returned an indictment against Pulier, charging him with conspiracy, securities and wire fraud, obstruction of justice, and other violations of federal law (United States v. Eric Pulier, CR 17-599-AB). The Government sought an extension of the stay which the Delaware Court granted on November 3, 2017. The civil action is now stayed pending resolution of the criminal case.

Law enforcement officials in Australia have brought bribery-related charges against the two former CBA employees. One of these has since pled guilty, and in 2016 received a sentence of imprisonment. In 2016, the United States Attorney’s Office for the Central District of California announced similar criminal charges against this same CBA employee for securities fraud and wire fraud. In April 2018 the other former CBA employee was committed to stand trial in the Australian criminal courts. The Company is cooperating with and assisting the Australian and U.S. authorities in their investigations.

On February 17, 2016, Mr. Pulier filed a complaint in Delaware Chancery Court against CSC and its subsidiary - CSC Agility Platform, Inc., formerly known as SMI - seeking advancement of his legal fees and costs. On May 12, 2016, the Court ruled that CSC Agility Platform - as the successor to SMI - is liable for advancing 80% of Mr. Pulier’s fees and costs in the underlying civil action. Mr. Pulier has also filed a complaint for advancement of the legal fees and costs incurred in connection with his defense of criminal investigations by the U.S. Government and other entities. On March 30, 2017, Mr. Pulier filed a motion for judgment on the pleadings in this fee advancement matter. Mr. Pulier's motion for judgment on the pleadings and other advancement-related issues were argued before the Court on August 2, 2017, and, on August 7, 2017, the Court ruled substantially in Mr. Pulier's favor. On January 30, 2018, the Court reduced the Company’s advancement obligation to only 80% of the criminal defense fees and costs sought by Mr. Pulier. In undertakings previously provided to SMI, Mr. Pulier agreed to repay all amounts advanced to him if it should ultimately be determined that he is not entitled to indemnification.

Cisco Systems Inc. and Cisco Systems Capital Corporation v. Hewlett-Packard Co.: On August 24, 2015, Cisco Systems, Inc. (“Cisco”) and Cisco Systems Capital Corporation (“Cisco Capital”) filed an action against Hewlett Packard Co., now known as HP Inc. ("HP") in California Superior Court, Santa Clara County, for declaratory judgment and breach of contract in connection with a contract to utilize Cisco products and services, and to finance the services through Cisco Capital. HP terminated the contract, and the parties dispute the calculation of the proper cancellation credit. On December 18, 2015, Cisco filed an amended complaint that abandoned the claim for breach of contract set forth in the original complaint, and asserted a single cause of action for declaratory relief concerning the proper calculation of the cancellation credit. On January 19, 2016, HP answered the complaint and filed a counterclaim for breach of contract and declaratory judgment. A court-ordered mediation took place on August 30, 2017, and a second on February 13, 2018, but no resolution was achieved. Discovery is completed, and the trial is scheduled to begin on June 11, 2018. DXC is the party in interest in this matter pursuant to the Separation and Distribution Agreement between the then Hewlett-Packard Co. and HPE and the subsequent Separation and Distribution Agreement between HPE and DXC.

Kemper Corporate Services, Inc. v. Computer Sciences Corporation: In October 2015, Kemper Corporate Services, Inc. (“Kemper”) filed a demand for arbitration against CSC with the American Arbitration Association (“AAA”), alleging that CSC breached the terms of a 2009 Master Software License and Services Agreement and related Work Orders (the “Agreement”) by failing to complete a software translation and implementation plan by certain contractual deadlines. Kemper claimed breach of contract, seeking approximately $100 million in damages measured in part by the amount of the fees paid under the contract, as well as pre-judgment interest, and in the alternative claimed rescission of the Agreement. CSC answered the demand for arbitration denying Kemper’s claims and asserting a counterclaim for unpaid invoices for services rendered by CSC.

A single arbitrator conducted an evidentiary hearing on the merits of the claims and counterclaims in April 2017. Oral argument took place on August 28, 2017. On October 2, 2017, the arbitrator issued a partial final award, finding for Kemper on its breach of contract theory, awarding Kemper $84.2 million in compensatory damages plus prejudgment interest, denying Kemper’s claim for rescission as moot, and denying CSC’s counterclaim. Kemper moved on October 10, 2017, in federal district court in Texas to confirm the award. On November 16, 2017, the arbitrator issued a Final Award which reiterated his findings of fact and law, calculated the amount of prejudgment interest, and awarded Kemper its costs of arbitration including reasonable attorneys’ fees and expenses. On December 6, 2017, the Company filed a motion to vacate the award in federal district court in New York. A week later, the New York court stayed the action in deference to

112



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Texas court’s decision as to which venue was more appropriate to address the vacatur arguments. On January 12, 2018, the Company appeared in the Texas action seeking a stay of the confirmation proceedings or a transfer of venue to New York. On March 2, 2018, the Texas court denied the venue transfer motion. The pending vacatur motion was accordingly transferred to the Texas court, and a new memorandum of law in support of the motion was filed in that jurisdiction on March 30, 2018. According to the briefing schedule set by the Court, the motion will be fully submitted by May 29, 2018.

The Company disagrees with the decision of the arbitrator and intends to continue to defend itself vigorously. The Company is also pursuing coverage for the full scope of the award, interest, and legal fees and expenses, under the Company's applicable insurance policies.  

Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise:  This purported class and collective action was filed on August 18, 2016 in the U.S. District Court for the Northern District of California, against HP and HPE alleging violations of the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code. Former business units of HPE now owned by the Company will be proportionately liable for any recovery by plaintiffs in this matter. Plaintiffs filed an amended complaint on December 19, 2016. Plaintiffs seek to certify a nationwide class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a work force reduction (“WFR”) plan on or after December 9, 2014 (deferral states) and April 8, 2015 (non-deferral states), and who were 40 years of age or older at the time of termination. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On January 30, 2017, defendants filed a partial motion to dismiss and a motion to compel arbitration of claims by opt-in plaintiffs who signed releases as part of their WFR packages. On September 20, 2017, the Court denied the partial motion to dismiss without prejudice, but granted defendants’ motions to compel arbitration. Accordingly, the Court has stayed the entire action pending arbitration, and administratively closed the case. Plaintiffs filed a motion for reconsideration as well as a notice of appeal to the Ninth Circuit (which has been denied as premature). The reconsideration motion was denied without oral argument. In that same decision, the Court held that a collective arbitration was permissible. The Company subsequently sought and obtained leave of Court to file a motion for reconsideration arguing that collective arbitration is not permitted under the relevant employee agreements. The Court denied the motion on April 17, 2018, ruling that interpretation of the employee agreements is an issue delegated to the arbitrator. The American Arbitration Association, which was designated to manage the arbitration process, has initiated the process to select an arbitrator to handle a collective arbitration in San Francisco, California. Pursuant to the contract, however, mediation is a precondition to arbitration, and details of such mediation are still under negotiation. 

Voluntary Disclosure of Certain Possible Sanctions Law Violations: On February 2, 2017, CSC submitted an initial notification of voluntary disclosure to the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC") regarding certain possible violations of U.S. sanctions laws pertaining to insurance premium data and claims data processed by two partially-owned joint ventures of Xchanging, which CSC acquired during the first quarter of fiscal 2017. A copy of the disclosure was also provided to Her Majesty’s Treasury Office of Financial Sanctions Implementation in the United Kingdom. The Company’s related internal investigation is continuing, and the Company has undertaken to cooperate with and provide a full report of its findings to OFAC when completed.

In addition to the matters noted above, the Company is currently subject in the normal course of business to various claims and contingencies arising from, among other things, disputes with customers, vendors, employees, contract counterparties and other parties, as well as securities matters, environmental matters, matters concerning the licensing and use of intellectual property, and inquiries and investigations by regulatory authorities and government agencies. Some of these disputes involve or may involve litigation. The financial statements reflect the treatment of claims and contingencies based on management's view of the expected outcome. DXC consults with outside legal counsel on issues related to litigation and regulatory compliance and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Although the outcome of these and other matters cannot be predicted with certainty, and the impact of the final resolution of these and other matters on the Company’s results of operations in a particular subsequent reporting period could be material and adverse, management does not believe based on information currently available to the Company, that the resolution of any of the matters currently pending against the Company will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial

113



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

obligations as they become due. Unless otherwise noted, the Company is unable to determine at this time a reasonable estimate of a possible loss or range of losses associated with the foregoing disclosed contingent matters.

Note 21 - Reconciliation of Previously Reported Amounts to Recast Financial Statements

As described in Note 2 - "Recent Accounting Pronouncements", on April 1, 2018, the Company adopted ASU's 2017-07, 2016-15 and 2016-18. The adoption of these standards requires the Company to recast each prior period presented consistent with the new guidance. As described in Note 3 - "Divestitures", on May 31, 2018, the Company completed the USPS Separation. As a result, the results of operations and financial position of USPS are reflected in the accompanying statements of operations and balance sheets as discontinued operations and each prior period presented has been recast to present USPS as a discontinued operation.

A reconciliation of the amounts previously reported to those as adjusted within the accompanying financial statements is shown in the tables below for selected financial amounts:
 
Consolidated Statements of Operations
 
 
Fiscal Year Ended March 31, 2018
(in millions)
 
As Previously Reported
 
Reclassification of Discontinued Operations
 
Retrospective Adoption of ASU 2017-07
 
As Adjusted
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
17,944

 
$
(2,104
)
 
$
477

 
$
16,317

Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
$
2,010

 
$
(152
)
 
$
32

 
$
1,890

Other income, net
 
$
(82
)
 
$
(2
)
 
$
(509
)
 
$
(593
)
 
 
Fiscal Year Ended March 31, 2017
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2017-07
 
As Adjusted
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
5,545

 
$
4

 
$
5,549

Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
$
1,279

 
$
3

 
$
1,282

Other income, net
 
$
(10
)
 
$
(7
)
 
$
(17
)
 
 
Fiscal Year Ended April 1, 2016
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2017-07
 
As Adjusted
Costs of services (excludes depreciation and amortization and restructuring costs)
 
$
5,185

 
$
(25
)
 
$
5,160

Selling, general and administrative (excludes depreciation and amortization and restructuring costs)
 
$
1,059

 
$
(1
)
 
$
1,058

Other income, net
 
$
(9
)
 
$
26

 
$
17




114



DXC TECHNOLOGY COMPANY - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows
 
 
Fiscal Year Ended March 31, 2018
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2016-15
 
Retrospective Adoption of ASU 2016-18
 
As Adjusted
Net cash provided by operating activities
 
$
3,243

 
$
(147
)
 
$
9

 
$
3,105

Net cash used in investing activities
 
$
(33
)
 
$
147

 
$
67

 
$
181

Cash and cash equivalents at beginning of year
 
$
1,263

 
$

 
$
5

 
$
1,268

Cash and cash equivalents at end of year
 
$
2,648

 
$

 
$
81

 
$
2,729

 
 
Fiscal Year Ended March 31, 2017
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2016-15
 
Retrospective Adoption of ASU 2016-18
 
As Adjusted
Net cash provided by operating activities
 
$
978

 
$
(141
)
 
$

 
$
837

Net cash used in investing activities
 
$
(926
)
 
$
141

 
$
2

 
$
(783
)
Cash and cash equivalents at beginning of year
 
$
1,178

 
$

 
$
3

 
$
1,181

Cash and cash equivalents at end of year
 
$
1,263

 
$

 
$
5

 
$
1,268

 
 
Fiscal Year Ended March 31, 2016
(in millions)
 
As Previously Reported
 
Retrospective Adoption of ASU 2016-15
 
Retrospective Adoption of ASU 2016-18
 
As Adjusted
Net cash provided by operating activities
 
$
802

 
$

 
$

 
$
802

Net cash used in investing activities
 
$
(1,180
)
 
$

 
$

 
$
(1,180
)
Cash and cash equivalents at beginning of year
 
$
2,098

 
$

 
$
3

 
$
2,101

Cash and cash equivalents at end of year
 
$
1,178

 
$

 
$
3

 
$
1,181


Note 22 - Subsequent Events

No events, other than those described in these notes, have occurred that would require recognition or disclosure in the consolidated financial statements.




115

DXC TECHNOLOGY COMPANY

ITEM 8. Supplementary Data

All financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the financial statements or related notes.

Selected Quarterly Financial Data (Unaudited)
 
 
Fiscal 2018
(in millions, except per-share amounts)
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Revenues
 
$
5,236

 
$
5,453

 
$
5,460

 
$
5,584

Costs of services (excludes depreciation and amortization and restructuring costs)
 
4,309

 
3,870

 
4,051

 
4,087

Gross profit

 
$
927

 
$
1,583

 
$
1,409

 
$
1,497

Restructuring costs
 
$
187

 
$
188

 
$
210

 
$
204

Income from continuing operations before taxes
 
$
91

 
$
284

 
$
341

 
$
588

Income from continuing operations, net of taxes
 
$
108

 
$
205

 
$
706

 
$
527

Net income attributable to DXC common shareholders
 
$
159

 
$
256

 
$
776

 
$
560

 
 
 
 
 
 
 
 
 
Earnings per common share(1)
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.33

 
$
0.69

 
$
2.46

 
$
1.83

Discontinued operations
 
$
0.23

 
$
0.21

 
$
0.26

 
$
0.13

Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.33

 
$
0.67

 
$
2.43

 
$
1.80

Discontinued operations
 
$
0.22

 
$
0.21

 
$
0.25

 
$
0.13

 
 

 

 

 

Cash dividend per common share
 
$
0.18

 
$
0.18

 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
 
 
 
Fiscal 2017
(in millions, except per-share amounts)
 
1st Quarter

 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Revenues
 
$
1,930

 
$
1,871

 
$
1,917

 
$
1,889

Costs of services (excludes depreciation and amortization and restructuring costs)
 
1,447

 
1,386

 
1,370

 
1,346

Gross profit
 
$
483

 
$
485

 
$
547

 
$
543

Restructuring costs
 
$
57

 
$
25

 
$
3

 
$
153

Income (loss) from continuing operations before taxes
 
$
(36
)
 
$
(1
)
 
$
50

 
$
(187
)
Income (loss) from continuing operations, net of taxes
 
$
(20
)
 
$
21

 
$
37

 
$
(138
)
Net income (loss) attributable to CSC common shareholders
 
$
(21
)
 
$
15

 
$
31

 
$
(148
)
 
 
 
 
 
 
 
 
 
(Loss) earnings per common share(1)
 
 
 
 
 
 
 
 
Basic
 
$
(0.15
)
 
$
0.11

 
$
0.22

 
$
(1.05
)
Diluted
 
$
(0.15
)
 
$
0.10

 
$
0.21

 
$
(1.05
)
 
 


 


 


 


Cash dividend per common share
 
$
0.14

 
$
0.14

 
$
0.14

 
$
0.14

        

(1) 
Quarterly EPS amounts may not total to the full-year EPS. EPS is calculated based on weighted average shares outstanding for the period. Quarterly weighted average shares may not equal the full-year weighted average shares for the fiscal year.


116