DXC Technology Reports Third Quarter Fiscal 2020 Results

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, constant currency revenues, net debt and net debt-to-total capitalization.

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. Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures allow investors to better understand 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 targets.

Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of operating performance such as the amortization of acquired intangible assets and transaction, separation and integration-related costs.

Incremental amortization of intangible assets acquired through business combinations may result in a significant difference in period over period amortization expense on a GAAP basis. We exclude amortization of certain acquired intangibles assets as these non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Although DXC management excludes amortization of acquired intangible assets, primarily customer related intangible assets from its non-GAAP expenses, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and support revenue generation. Any future transactions may result in a change to the acquired intangible asset balances and associated amortization expense.

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.

Reconciliation of Non-GAAP Financial Measures

DXC's non-GAAP adjustments include:

  • Restructuring costs - 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 separation of USPS.
  • Amortization of acquired intangible assets - reflects amortization of intangible assets acquired through business combinations.
  • Goodwill impairment losses - reflects impairment losses on goodwill.
  • Gain on arbitration award - reflects a gain related to the HPES merger arbitration award.
  • Tax adjustment - for fiscal 2020 periods include the impact of Transition Tax (affecting the three and nine months ended December 31, 2019) and tax entries related to prior restructuring charges (affecting the nine months ended December 31, 2019). Fiscal 2019 periods reflect the estimated non-recurring benefit of the Tax Cuts and Jobs Act of 2017. Income tax expense of other non-GAAP adjustments is computed by applying the jurisdictional tax rate to the pre-tax adjustments on a jurisdictional basis.

EBIT and Adjusted EBIT

A reconciliation of net income (loss) to adjusted EBIT is as follows:

 

 

Three Months Ended

 

Nine Months Ended

(in millions)

 

December 31,

2019

 

December 31,

2018

 

December 31,

2019

 

December 31,

2018

Net income (loss)

 

$

90

 

 

$

466

 

 

$

(1,857

)

 

$

991

 

Income from discontinued operations, net of taxes

 

 

 

 

 

 

 

(35

)

Income tax expense

 

37

 

 

3

 

 

191

 

 

205

 

Interest income

 

(33

)

 

(27

)

 

(130

)

 

(92

)

Interest expense

 

93

 

 

81

 

 

288

 

 

249

 

EBIT

 

187

 

 

523

 

 

(1,508

)

 

1,318

 

Restructuring costs

 

74

 

 

76

 

 

248

 

 

418

 

Transaction, separation, and integration-related costs

 

68

 

 

107

 

 

226

 

 

305

 

Amortization of acquired intangible assets

 

146

 

 

134

 

 

435

 

 

401

 

Goodwill impairment losses

 

53

 

 

 

 

2,940

 

 

 

Gain on arbitration award

 

 

 

 

 

(632

)

 

 

Adjusted EBIT

 

$

528

 

 

$

840

 

 

$

1,709

 

 

$

2,442

 

 

 

 

 

 

 

 

 

 

Adjusted EBIT margin

 

10.5

%

 

16.2

%

 

11.6

%

 

15.8

%

EBIT margin

 

3.7

%

 

10.1

%

 

(10.2

)%

 

8.5

%


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