# DXC Technology Co (DXC) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DXC Technology Co's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1688568/000168856824000032/dxc-20240331.htm
Accession: 0001688568-24-000032
Filing date: 2024-05-17
Report date: 2024-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DXC/
All MD&A years: /company/DXC/mda/
Previous year: /company/DXC/mda/fy2023/ (FY 2023)
Next year: /company/DXC/mda/fy2025/ (FY 2025)

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

Introduction

The purpose of the Management's Discussion and Analysis (“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, 2024 and our financial condition as of March 31, 2024. 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

•Critical Accounting Estimates

The following discussion includes a comparison of our results of operations and liquidity and capital resources for fiscal 2024 and fiscal 2023. A comparison of our results of operations and liquidity and capital resources for fiscal 2023 and fiscal 2022 may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” on Form 10-K filed with the Securities and Exchange Commission on May 19, 2023.

Background

DXC helps global companies run their mission critical systems and operations while modernizing IT, optimizing data architectures, and ensuring security and scalability across public, private and hybrid clouds. The world’s largest companies and public sector organizations trust DXC to deploy services to drive new levels of performance, competitiveness, and customer experience across their IT estates.

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

Key Metrics

Key metrics for fiscal 2024 compared to fiscal 2023 are included below. We have presented organic revenue and diluted earnings per share on a non-GAAP basis. For more information see “Non-GAAP Financial Measures.”

•Revenues of $13.67 billion, down 5.3% compared to prior year period, and down 4.1% on an organic basis;

•Diluted earnings (loss) per share of $0.46, compared to $(2.48) in fiscal 2023; adjusted diluted earnings per share of $3.13, compared to $3.47 in fiscal 2023, a decrease of 9.8%;

•Operating cash flow of $1,361 million, less capital expenditures of $605 million, resulted in free cash flow of $756 million;

•Returned $883 million to shareholders through share repurchases in fiscal 2024.

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Results of Operations

The following table provides financial data for fiscal 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended"],["(In millions, except per-share amounts)","","March 31, 2024","","March 31, 2023"],["Revenues","","$","13,667","","","$","14,430"],["Income (loss) before income taxes","","109","","","(885)"],["Income tax expense (benefit)","","23","","","(319)"],["Net income (loss)","","$","86","","","$","(566)"],["Diluted income (loss) per common share:","","$","0.46","","","$","(2.48)"]]
[[/GREPCENT_TABLE]]

Revenues

Our revenues by geography and operating segments are provided below:

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended","","","","Fiscal Year Ended"],["(in millions)","","March 31, 2024","","March 31, 2023","","Percentage Change","","Constant Currency March 31, 2024(1)","","Percentage Change in Constant Currency(1)"],["Geographic Market"],["United States","","$","3,909","","","$","4,320","","","(9.5)","%","","$","3,909","","","(9.5)","%"],["United Kingdom","","1,881","","","1,883","","","(0.1)","%","","1,802","","","(4.3)","%"],["Other Europe","","4,267","","","4,429","","","(3.7)","%","","4,130","","","(6.8)","%"],["Australia","","1,261","","","1,449","","","(13.0)","%","","1,312","","","(9.5)","%"],["Other International","","2,349","","","2,349","","","\u2014","%","","2,418","","","2.9","%"],["Total Revenues","","$","13,667","","","$","14,430","","","(5.3)","%","","$","13,571","","","(6.0)","%"],["Reportable Segments"],["GBS","","$","6,820","","","$","6,960","","","(2.0)","%","","$","6,796","","","(2.4)","%"],["GIS","","6,847","","","7,470","","","(8.3)","%","","6,775","","","(9.3)","%"],["Total Revenues","","$","13,667","","","$","14,430","","","(5.3)","%","","$","13,571","","","(6.0)","%"]]
[[/GREPCENT_TABLE]]

(1) Constant currency revenues are a non-GAAP measure calculated by translating current period activity into U.S. dollars using the comparable prior period’s currency conversion rates. This information is consistent with how management views our revenues and evaluates our operating performance and trends. For more information, see "Non-GAAP Financial Measures."

Total revenue for fiscal 2024 was $13.7 billion, a decrease of $763 million or 5.3%, compared to the prior fiscal year. The 5.3% decrease against the comparative period includes a 0.7% favorable foreign currency exchange rate impact, a 1.9% decline in revenue from the disposition of certain businesses, and a 4.1% decline in organic revenue. Organic revenue growth is a non-GAAP measure. For more information, see "Non-GAAP Financial Measures."

The favorable foreign currency exchange rate impact is primarily driven by the weakening of the U.S. dollar against the British Pound and Euro.

For a discussion of risks associated with our foreign operations, see Part I, Item 1A - "Risk Factors."

Global Business Services

GBS revenues were $6.8 billion for fiscal 2024, a decrease of $140 million or 2.0% compared to fiscal 2023. The 2.0% decrease against the comparative period includes a 3.8% decline in revenue from the disposition of certain businesses,

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partially offset by 1.4% organic revenue growth from additional services provided to new and existing customers and a 0.4% favorable foreign currency exchange rate impact.

Global Infrastructure Services

GIS revenues were $6.8 billion for fiscal 2024, a decrease of $623 million or 8.3% compared to fiscal 2023. The 8.3% decrease against the comparative period includes a 1.0% favorable foreign currency exchange rate impact offset by a 9.3% decline in organic revenue from project completions, early terminations, and lower resale revenue.

Costs and Expenses

Our total costs and expenses were as follows:

[[GREPCENT_TABLE]]
[["","","Dollar Amount"],["","","Fiscal Years Ended","","Change"],["(in millions)","","March 31, 2024","","March 31, 2023","","Dollar","","Percent"],["Costs of services (excludes depreciation and amortization and restructuring costs)","","$","10,576","","","$","11,246","","","$","(670)","","","(6.0)","%"],["Selling, general and administrative (excludes depreciation and amortization and restructuring costs)","","1,244","","","1,375","","","(131)","","","(9.5)"],["Depreciation and amortization","","1,404","","","1,519","","","(115)","","","(7.6)"],["Restructuring costs","","111","","","216","","","(105)","","","(48.6)"],["Interest expense","","298","","","200","","","98","","","49.0"],["Interest income","","(214)","","","(135)","","","(79)","","","58.5"],["Gain on disposition of businesses","","(79)","","","(190)","","","111","","","(58.4)"],["Other expense (income), net","","218","","","1,084","","","(866)","","","(79.9)"],["Total costs and expenses","","$","13,558","","","$","15,315","","","$","(1,757)","","","(11.5)","%"]]
[[/GREPCENT_TABLE]]

Costs of Services

Costs of services, excluding depreciation and amortization and restructuring costs ("COS"), were $10.6 billion for fiscal 2024, a decrease of $670 million compared to the prior fiscal year.

The $670 million decrease in expenses against the prior fiscal year was primarily due to a reduction in labor costs from lower revenue levels and a reduction in professional services and contractor-related expenses from our cost optimization efforts, partially offset by a $9 million severance expense in the third quarter of fiscal 2024 related to the departure of the Company’s prior Chief Executive Officer and an unfavorable foreign currency exchange rate impact of $64 million.

Gross margin (Revenues less COS as a percentage of revenue) was 22.6% for fiscal 2024, an increase of 50 basis points against the prior fiscal year.

Selling, General and Administrative

Selling, general and administrative expense, excluding depreciation and amortization and restructuring costs ("SG&A"), was $1.2 billion for fiscal 2024, a decrease of $131 million compared to the prior fiscal year.

The $131 million decrease in expenses against the prior fiscal year was primarily due to a reduction of $30 million in costs related to merger related indemnification expenses, a decrease of $9 million in transaction, separation and integration-related (“TSI”) costs, and lower professional services and other vendor-related expenses in fiscal 2024. In addition, the prior year included a $29 million expense for arbitration-related losses and an $8 million expense for the SEC Matter. These decreases in expense were partially offset by a $5 million unfavorable foreign currency exchange rate impact.

SG&A as a percentage of revenue was 9.1% for fiscal 2024, a favorable decrease of 40 basis points against the prior fiscal year.

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Depreciation and Amortization

Depreciation expense was $433 million for fiscal 2024, a decrease of $86 million compared to the prior fiscal year. The decrease in depreciation expense was primarily due to lower average net property and equipment balances.

Amortization expense was $971 million for fiscal 2024, a decrease of $29 million compared to the prior fiscal year. The decrease in amortization expense was primarily due to lower software amortization and customer related intangible amortization, partially offset by an increase in transition and transformation contract cost amortization.

Restructuring Costs

During fiscal 2024, management approved global cost savings initiatives designed to better align our workforce, facility and data center requirements. Total restructuring costs recorded, net of reversals, during fiscal 2024 were $111 million, a decrease of $105 million compared to the prior fiscal year, primarily from a reduction in workforce-related expenses.

See Note 12 - "Restructuring Costs" for additional information about our restructuring actions.

Interest Expense and Interest Income

For fiscal 2024, net interest expense (interest expense less interest income) was $84 million, an increase of $19 million as compared to the prior fiscal year.

The increase in net interest expense against the comparative period was primarily due to higher interest rates globally that increased interest expense from securitization and commercial paper borrowings.

Gain on Disposition of Businesses

During fiscal 2024, the Company sold insignificant businesses and a strategic investment, and made adjustments to estimated amounts from prior years' dispositions that resulted in a net gain of $79 million.

During fiscal 2023, the Company had a net gain of $190 million from the disposition of certain businesses, including a pre-tax gain of $215 million from the sale of its FDB business, partially offset by a loss of $25 million from the sale of certain insignificant businesses.

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Other Expense (Income), Net

Other expense (income), net comprises non-service cost components of net periodic pension income, pension and OPEB actuarial and settlement losses, movement in foreign currency exchange rates on our foreign currency denominated assets and liabilities and the related economic hedges, gains on sales of assets, and other miscellaneous gains and losses.

The components of other expense (income), net for fiscal 2024 and 2023 were as follows:

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended"],["(in millions)","","March 31, 2024","","March 31, 2023","","Dollar Change"],["Non-service cost components of net periodic pension (income) expense","","$","(145)","","","$","(251)","","","$","106"],["Pension and OPEB actuarial and settlement losses (gains)","","445","","","1,431","","","(986)"],["Foreign currency (gain) loss","","(7)","","","(15)","","","8"],["Gain on sale of assets","","(40)","","","(90)","","","50"],["Other (gain) loss","","(35)","","","9","","","(44)"],["Total","","$","218","","","$","1,084","","","$","(866)"]]
[[/GREPCENT_TABLE]]

Other expense (income), net, was $218 million in fiscal 2024, a decrease of $866 million against the prior fiscal year. The change against the prior fiscal year was primarily due to:

•net periodic pension income decreased by $106 million primarily due to changes in expected returns on assets and other actuarial assumptions;

•pension and OPEB actuarial and settlement losses decreased by $986 million from mark-to-market adjustments and other settlement gains and losses;

•foreign currency gains decreased $8 million primarily due to movements of exchange rates on our foreign currency-denominated assets and liabilities, related hedges including forward contracts to manage our exposure to economic risk, and the cost of our hedging program;

•a decrease in gains from sales of assets of $50 million; and

•an increase in other gains of $44 million, primarily from the sale of a strategic investment in fiscal 2024 and an impairment loss recorded in fiscal 2023.

Taxes

Our effective tax rate ("ETR") on income (loss) from continuing operations, before taxes, for fiscal 2024 and 2023 was 21.1% and (36.0)%, 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 14 - "Income Taxes."

In fiscal 2024, the ETR was primarily impacted by:

•Changes in foreign jurisdictional losses that decreased the ETR by $160 million and 146.8%, respectively, with an offsetting increase in the ETR due to an increase in the valuation allowance of the same amount.

•Income tax and foreign tax credits, which decreased income tax expense and decreased the ETR by $101 million and 92.7%, respectively, offset by tax expense on U.S. international tax inclusions, which increased tax expense and increased the ETR by $39 million and 35.8%, respectively.

•Foreign withholding taxes, which increased income tax expense and increased the ETR by $64 million and 58.7%, respectively.

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In fiscal 2023, the ETR was primarily impacted by:

•A reduction in base erosion and transition taxes, which increased income tax benefit and decreased the ETR by $81 million and 9.1%, respectively.

•Income tax and foreign tax credits, which increased income tax benefit and decreased the ETR by $71 million and 8.0%, respectively, offset by tax expense on U.S. international tax inclusions which decreased tax benefit and increased the ETR by $51 million and 5.8%, respectively.

•Non-taxable gains and losses on business divestitures, which increased income tax benefit and decreased the ETR by $67 million and 7.6%, respectively.

The Internal Revenue Service (the “IRS”) has examined, or is examining, the Company’s federal income tax returns for fiscal 2009 through the tax year ended October 31, 2018. With respect to CSC’s fiscal 2009 through 2017 federal tax returns, the Company participated in settlement negotiations with the IRS Office of Appeals. The IRS examined several issues for these tax years that resulted in various audit adjustments. The Company and the IRS Office of Appeals have settled various audit adjustments, and we disagree with the IRS’ disallowance of certain losses and deductions resulting from restructuring costs, foreign exchange losses, and a third-party financing transaction in previous years. As we believe we will ultimately prevail on the technical merits of the disagreed items and are challenging them in the U.S. Tax Court, these matters are not fully reserved and would result in incremental federal and state tax expense of approximately $507 million (including estimated interest and penalties) for the unreserved portion of these items and cash tax payments of approximately $582 million, if we do not prevail. We have received notices of deficiency with respect to fiscal 2009, 2010, 2011 and 2013 and have timely filed petitions with the U.S. Tax Court. During fiscal 2024, some of these cases were dismissed, but the dismissals were procedural in nature only and do not impact the Company’s potential liability for the aforementioned fiscal years. We expect court proceedings to progress during calendar year 2024 that may result in resolution of some or all of the litigation matters by the end of fiscal year 2025.

During the third quarter of fiscal 2024, the Company determined there were inadvertent omissions on previously filed tax returns related to gain recognition agreements and certain related tax forms and disclosures. The Company notified the IRS in December of 2023 and filed for relief under Treas. Reg. Sec. 1.367(a)-8(p) in January 2024 to correct the issue.

The Company’s fiscal years 2009, 2010, and 2013 are in the U.S. Tax Court, and consequently these years will remain open until such proceedings have concluded. The statute of limitations on assessments related to a refund claim for fiscal year 2012 is open through February 28, 2025. The Company has agreed to extend the statute of limitations for fiscal and tax return years 2014 through 2021 to December 31, 2025. The Company expects to reach resolution for fiscal and tax return years 2009 through 2021 no earlier than the end of fiscal year 2026, except fiscal year 2012 for which the statute closes in fiscal year 2025, and potentially the years subject to litigation which may be resolved in fiscal year 2025.

The Company may settle certain other tax examinations for different amounts than the Company has accrued as uncertain tax positions. Consequently, the Company may need to accrue and ultimately pay additional amounts or pay lower amounts than previously estimated and accrued when positions are settled in the future. The Company believes the outcomes that are reasonably possible within the next 12 months to result in a reduction in its liability for uncertain tax positions, excluding interest, penalties, and tax carryforwards, would be approximately $17 million.

Earnings Per Share (EPS)

Diluted EPS for fiscal 2024 was $0.46, an increase of $2.94 compared to the prior fiscal year. The increase in diluted EPS against the prior fiscal year was primarily due to an increase in net income attributable to DXC common stockholders and a lower weighted average share count from the Company’s share repurchases.

Diluted EPS for fiscal 2024 includes $0.44 per share of restructuring costs, $0.03 per share of transaction, separation and integration-related costs, $1.40 per share of amortization of acquired intangible assets, $0.01 per share of merger-related indemnification, $0.04 per share of impairment losses, $1.68 per share of pension and OPEB actuarial and settlement losses, $(0.45) per share of net gains on dispositions, and $(0.49) per share of tax adjustments primarily relating to tax adjustments to impair or recognize certain deferred tax assets and adjustments for changes in tax legislation.

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Non-GAAP Financial Measures

We present non-GAAP financial measures of performance which are derived from the statements of operations of DXC. These non-GAAP financial measures include earnings before interest and taxes (“EBIT”), adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, non-GAAP EPS, organic revenue growth, constant currency revenues, and free cash flow.

We believe EBIT, adjusted EBIT, non-GAAP income before income taxes, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS provide investors with useful supplemental information about our operating performance after excluding certain categories of expenses.

We believe constant currency revenues provides investors with useful supplemental information about our revenues after excluding the effect of currency exchange rate fluctuations for currencies other than U.S. dollars in the periods presented. See below for a description of the methodology we use to present constant currency revenues.

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

Another category of expenses excluded from adjusted EBIT, non-GAAP income before income tax, non-GAAP net income, non-GAAP net income attributable to DXC common stockholders, and non-GAAP EPS is impairment losses, which, if included, may result in a significant difference in period-over-period expense on a GAAP basis. We exclude impairment losses as these non-cash amounts reflect generally an acceleration of what would be multiple periods of expense and are not expected to occur frequently. Further, assets such as goodwill may be significantly impacted by market conditions outside of management’s control.

Selected references are made to revenue growth on an “organic basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates and without the impacts of acquisitions and divestitures, thereby providing comparisons of operating performance from period to period of the business that we have owned during both periods presented. Organic revenue growth is calculated by dividing the year-over-year change in GAAP revenues attributed to organic growth by the GAAP revenues reported in the prior comparable period. Organic revenue is calculated as constant currency revenue excluding the impact of mergers, acquisitions or similar transactions until the one-year anniversary of the transaction and excluding revenues of divestitures during the reporting period. This approach is used for all results where the functional currency is not the U.S. dollar. We believe organic revenue growth provides investors with useful supplemental information about our revenues after excluding the effect of currency exchange rate fluctuations for currencies other than U.S. dollars and the effects of acquisitions and divestitures in both periods presented.

Free cash flow represents cash flow from operations, less capital expenditures. Free cash flow is utilized by our management, investors, and analysts to evaluate cash available to pay debt, repurchase shares, and provide further investment in the business.

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There are limitations to the use of the non-GAAP financial measures presented in this report. One of the limitations is that they do not reflect complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Additionally, other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes between companies. Selected references are made on a “constant currency basis” so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a “constant currency basis” are non-GAAP measures calculated by translating current period activity into U.S. Dollars using the comparable prior period’s currency conversion rates. This approach is used for all results where the functional currency is not the U.S. Dollar. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Revenues.”

Certain non-GAAP financial measures and the respective most directly comparable financial measures calculated and presented in accordance with GAAP include:

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[[/GREPCENT_TABLE]]

(1)The dollar and percent change for the Income (loss) before income taxes and Net income (loss) includes the Pension and OPEB actuarial and settlement gains and losses that were $445 million and $1,431 million for the fiscal years ended March 31, 2024 and March 31, 2023, respectively.

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Reconciliation of Non-GAAP Financial Measures

Our non-GAAP adjustments include:

•Restructuring costs – includes costs, net of reversals, related to workforce and real estate optimization and other similar charges.

•Transaction, separation and integration-related (“TSI”) costs – includes costs related to integration, separation, planning, financing and advisory fees and other similar charges associated with mergers, acquisitions, strategic investments, joint ventures, and dispositions and other similar transactions incurred within one year of such transactions closing, except for costs associated with related disputes, which may arise more than one year after closing.

•Amortization of acquired intangible assets – includes amortization of intangible assets acquired through business combinations.

•Pension and OPEB actuarial and settlement gains and losses – pension and OPEB actuarial mark to market adjustments and settlement gains and losses.

•Merger related indemnification – in fiscal 2024, primarily represents the Company’s current estimate of potential liability to HPE for tax related indemnifications; and in fiscal 2023, represents the Company’s then current estimate of potential liability to HPE for tax related indemnifications; indemnification on the Forsyth v. HP Inc. and HPE litigation; and the Company’s final liability to HPE on the Oracle v. HPE litigation. These obligations are related to the HPES merger.

•SEC Matter - represents the Company’s liability related to a previously disclosed investigation into its historical determination and disclosure of certain “transaction, separation, and integration-related costs” as part of the Company’s non-GAAP adjustments.

•Gains and losses on dispositions – gains and losses related to dispositions of businesses, strategic assets and interests in less than wholly-owned entities.(1)

•Arbitration loss - reflects losses arising from arbitration decisions in the third and fourth quarters of fiscal 2023.

•Impairment losses – non-cash charges associated with the permanent reduction in the value of the Company’s assets (e.g., impairment of goodwill and other long-term assets including fixed assets and impairments to deferred tax assets for discrete changes in valuation allowances). Future discrete reversals of valuation allowances are likewise excluded.(2)

•Tax adjustments – discrete tax adjustments to impair or recognize certain deferred tax assets, adjustments for changes in tax legislation, and adjustments to transition tax. Income tax expense (benefit) from the impact of merger and divestitures is separately computed based on the underlying transaction. Income tax expense of all other (non-discrete) non-GAAP adjustments is computed by applying the jurisdictional tax rate to the pre-tax adjustments on a jurisdictional basis.(3)

(1) During fiscal 2024, the Company sold insignificant businesses and a strategic investment and made adjustments to estimated amounts from prior years’ dispositions that resulted in a net gain of $115 million. During fiscal 2023, the Company had a net gain of $190 million from the disposition of certain businesses, including a pre-tax gain of $215 million from the sale of its FDB business partially offset by a loss of $25 million from the sale of certain insignificant businesses.

(2) Impairment losses on dispositions for fiscal 2024 include $5 million of charges associated with certain strategic investments accounted for within Other income, net. Impairment losses on dispositions for fiscal 2024 included $4 million of Net income attributable to non-controlling interest, net of tax. Impairment losses for fiscal 2023 include an $8 million impairment charge for customer related intangible assets and an $11 million impairment charge associated with a strategic investment.

(3) Tax adjustments for fiscal 2024 include $(92) million of changes in valuation allowances on deferred tax assets, $(7) million of adjustments to transition tax, and $2 million of revaluation of deferred taxes resulting from changes in non-U.S. jurisdiction tax rates. Tax adjustments for fiscal 2023 include $(5) million changes in valuation allowances on deferred tax assets, $(28) million of adjustments to transition tax, and $(87) million of revaluation of deferred taxes resulting from changes in non-U.S. jurisdiction tax rates.

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A reconciliation of reported results to non-GAAP results is as follows:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31, 2024"],["(in millions, except per-share amounts)","","As Reported","","Restructuring Costs","","Transaction, Separation and Integration-Related Costs","","Amortization of Acquired Intangible Assets","","Merger Related Indemnification","","Gains and Losses on Dispositions","","Impairment Losses","","Pension and OPEB Actuarial and Settlement Gains and Losses","","Tax Adjustment","","Non-GAAP Results"],["Income before income taxes","","109","","","111","","","7","","","354","","","16","","","(115)","","","5","","","445","","","\u2014","","","932"],["Income tax expense","","23","","","23","","","1","","","75","","","14","","","(26)","","","1","","","109","","","97","","","317"],["Net income","","86","","","88","","","6","","","279","","","2","","","(89)","","","4","","","336","","","(97)","","","615"],["Less: net loss attributable to non-controlling interest, net of tax","","(5)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(4)","","","2","","","\u2014","","","(7)"],["Net income attributable to DXC common stockholders","","$","91","","","$","88","","","$","6","","","$","279","","","$","2","","","$","(89)","","","$","8","","","$","334","","","(97)","","","$","622"],["Effective Tax Rate","","21.1","%","","","","","","","","","","","","","","","","","","34.0","%"],["Basic EPS","","$","0.46","","","$","0.45","","","$","0.03","","","$","1.42","","","$","0.01","","","$","(0.45)","","","$","0.04","","","$","1.71","","","$","(0.50)","","","$","3.18"],["Diluted EPS","","$","0.46","","","$","0.44","","","$","0.03","","","$","1.40","","","$","0.01","","","$","(0.45)","","","$","0.04","","","$","1.68","","","$","(0.49)","","","$","3.13"],["Weighted average common shares outstanding for:"],["Basic EPS","","195.80","","","195.80","","","195.80","","","195.80","","","195.80","","","195.80","","","195.80","","","195.80","","","195.80","","","195.80"],["Diluted EPS","","198.78","","","198.78","","","198.78","","","198.78","","","198.78","","","198.78","","","198.78","","","198.78","","","198.78","","","198.78"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31, 2023"],["(in millions, except per-share amounts)","","As Reported","","Restructuring Costs","","Transaction, Separation and Integration- Related Costs","","Amortization of Acquired Intangible Assets","","Merger Related Indemnification, Arbitration Loss, and SEC Matter","","Gains and Losses on Dispositions","","Impairment Losses","","Pension and OPEB Actuarial and Settlement Gains and Losses","","Tax Adjustment","","Non-GAAP Results"],["(Loss) income before income taxes","","(885)","","","216","","","16","","","402","","","83","","","(190)","","","19","","","1,431","","","\u2014","","","1,092"],["Income tax (benefit) expense","","(319)","","","44","","","3","","","81","","","31","","","25","","","4","","","291","","","120","","","280"],["Net (loss) income","","(566)","","","172","","","13","","","321","","","52","","","(215)","","","15","","","1,140","","","(120)","","","812"],["Less: net income attributable to non-controlling interest, net of tax","","2","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2","","","\u2014","","","4"],["Net (loss) income attributable to DXC common stockholders","","$","(568)","","","$","172","","","$","13","","","$","321","","","$","52","","","$","(215)","","","$","15","","","$","1,138","","","$","(120)","","","$","808"],["Effective Tax Rate","","36.0","%","","","","","","","","","","","","","","","","","","25.6","%"],["Basic EPS","","$","(2.48)","","","$","0.75","","","$","0.06","","","$","1.40","","","$","0.23","","","$","(0.94)","","","$","0.07","","","$","4.97","","","$","(0.52)","","","$","3.53"],["Diluted EPS","","$","(2.48)","","","$","0.74","","","$","0.06","","","$","1.38","","","$","0.22","","","$","(0.92)","","","$","0.06","","","$","4.89","","","$","(0.52)","","","$","3.47"],["Weighted average common shares outstanding for:"],["Basic EPS","","228.99","","","228.99","","","228.99","","","228.99","","","228.99","","","228.99","","","228.99","","","228.99","","","228.99","","","228.99"],["Diluted EPS","","228.99","","","232.62","","","232.62","","","232.62","","","232.62","","","232.62","","","232.62","","","232.62","","","232.62","","","232.62"]]
[[/GREPCENT_TABLE]]

50

Reconciliations of revenue growth to organic revenue growth are as follows:

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended"],["","","March 31, 2024","","March 31, 2023"],["Total revenue growth","","(5.3)","%","","(11.3)","%"],["Foreign currency","","(0.7)","%","","6.0","%"],["Acquisitions and divestitures","","1.9","%","","2.6","%"],["Organic revenue growth","","(4.1)","%","","(2.7)","%"],["GBS revenue growth","","(2.0)","%","","(8.4)","%"],["Foreign currency","","(0.4)","%","","5.9","%"],["Acquisitions and divestitures","","3.8","%","","4.9","%"],["GBS organic revenue growth","","1.4","%","","2.4","%"],["GIS revenue growth","","(8.3)","%","","(13.8)","%"],["Foreign currency","","(1.0)","%","","6.0","%"],["Acquisitions and divestitures","","\u2014","%","","0.6","%"],["GIS organic revenue growth","","(9.3)","%","","(7.2)","%"]]
[[/GREPCENT_TABLE]]

Reconciliations of net income (loss) to adjusted EBIT are as follows:

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended"],["(in millions)","","March 31, 2024","","March 31, 2023"],["Net income (loss)","","$","86","","","$","(566)"],["Income tax expense (benefit)","","23","","","(319)"],["Interest income","","(214)","","","(135)"],["Interest expense","","298","","","200"],["EBIT","","193","","","(820)"],["Restructuring costs","","111","","","216"],["Transaction, separation and integration-related costs","","7","","","16"],["Amortization of acquired intangible assets","","354","","","402"],["Merger-related indemnification","","16","","","46"],["SEC Matter","","\u2014","","","8"],["Gains on dispositions","","(115)","","","(190)"],["Arbitration loss","","\u2014","","","29"],["Impairment losses","","5","","","19"],["Pension and OPEB actuarial and settlement losses","","445","","","1,431"],["Adjusted EBIT","","$","1,016","","","$","1,157"]]
[[/GREPCENT_TABLE]]

51

Liquidity and Capital Resources

Cash and Cash Equivalents and Cash Flows

As of March 31, 2024, our cash and cash equivalents ("cash") were $1.2 billion, of which $0.6 billion was held outside of the U.S. We maintain various multi-currency, multi-entity, cross-border, physical and notional cash pool arrangements with various counterparties to manage liquidity efficiently that enable participating subsidiaries to draw on the Company’s pooled resources to meet liquidity needs.

A significant portion of the cash held by our foreign subsidiaries is not expected to be impacted by U.S. federal income tax upon repatriation. However, a portion of this cash may still be subject to foreign and U.S. state income tax consequences upon future remittance. Therefore, if additional funds held outside the U.S. are needed for our operations in the U.S., we plan to repatriate these funds not designated as indefinitely reinvested.

We have $0.1 billion in cash held by foreign subsidiaries used for local operations that is subject to country-specific limitations, which may restrict or result in increased costs in the repatriation of these funds. In addition, other practical considerations may limit our use of consolidated cash. This includes cash of $0.1 billion held by majority owned consolidated subsidiaries where third parties or public shareholders hold minority interests.

The following table summarizes our cash flow activity:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended"],["(in millions)","","March 31, 2024","","March 31, 2023","","Change"],["Net cash provided by (used in):"],["Operating activities","","$","1,361","","","$","1,415","","","$","(54)"],["Investing activities","","(491)","","","(635)","","","144"],["Financing activities","","(1,487)","","","(1,507)","","","20"],["Effect of exchange rate changes on cash and cash equivalents","","(17)","","","(97)","","","80"],["Cash classified within current assets held for sale","","\u2014","","","10","","","(10)"],["Net decrease in cash and cash equivalents","","$","(634)","","","$","(814)","","","$","180"],["Cash and cash equivalents at beginning of year","","1,858","","","2,672"],["Cash and cash equivalents at end of year","","$","1,224","","","$","1,858"]]
[[/GREPCENT_TABLE]]

Operating cash flow

Net cash provided by operating activities was $1,361 million and $1,415 million, respectively, in fiscal 2024 and fiscal 2023, reflecting a year-over-year decrease of $54 million. The decrease was primarily due to:

•a decrease in net income, net of adjustments of $214 million; partially offset by

•a $160 million favorable change in working capital primarily from improvements in our cash conversion cycle.

The following table contains certain key working capital metrics:

[[GREPCENT_TABLE]]
[["","","Three months ended"],["","","March 31, 2024","","March 31, 2023","","March 31, 2022"],["Days of sales outstanding in accounts receivable","","69","","","67","","","70"],["Days of purchases outstanding in accounts payable","","(64)","","","(51)","","","(45)"],["Cash conversion cycle","","5","","","16","","","25"]]
[[/GREPCENT_TABLE]]

52

Investing cash flow

Net cash used in investing activities was $491 million and $635 million, respectively, in fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $144 million. The change was primarily due to:

•cash inflows of $26 million in fiscal 2024 resulting from various business divestitures, compared with cash outflows from business dispositions of $147 million in fiscal 2023 caused by net cash deposit outflows from the sale of the FDB Business; and

•a $73 million year-over-year decrease in cash outflows from capital expenditures; partially offset by

•a decrease in proceeds from sale of assets and other investing activities of $96 million and $6 million, respectively.

Financing cash flow

Net cash used in financing activities was $1,487 million and $1,507 million, respectively, in fiscal 2024 and fiscal 2023, reflecting a year-over-year change of $20 million. The change was primarily due to:

•a $140 million decrease in cash outflows from commercial paper payments, net of borrowings;

•an $81 million decrease in payments on capital leases and borrowings for asset financings, as the Company continues reducing the volume of these financing arrangements; and

•$63 million in payments on long term debt in fiscal 2023 that did not occur in fiscal 2024; partially offset by

•a $249 million increase in cash used for share repurchase activity and related taxes paid on net share settlements; and

•a $15 million increase in cash outflows from other financing activities.

Debt Financing

The following table summarizes our total debt:

[[GREPCENT_TABLE]]
[["","","As of"],["(in millions)","","March 31, 2024","","March 31, 2023"],["Short-term debt and current maturities of long-term debt","","$","271","","","$","500"],["Long-term debt, net of current maturities","","3,818","","","3,900"],["Total debt","","$","4,089","","","$","4,400"]]
[[/GREPCENT_TABLE]]

The $0.3 billion decrease in total debt during fiscal 2024 was primarily due to net decreases in finance lease liabilities, borrowings for asset financing, and commercial paper borrowings.

We were in compliance with all financial covenants associated with our borrowings as of March 31, 2024 and March 31, 2023.

As of March 31, 2024, our credit ratings were as follows:

[[GREPCENT_TABLE]]
[["Rating Agency","","Long Term Ratings","","Short Term Ratings","","Outlook"],["Fitch","","BBB","","F-2","","Stable"],["Moody's","","Baa2","","P-2","","Stable"],["S&P","","BBB-","","-","","Stable"]]
[[/GREPCENT_TABLE]]

For information on the risks of ratings downgrades, see Part I, Item 1A - "Risk Factors" subsection titled "Failure to maintain our credit rating and ability to manage working capital, refinance and raise additional capital for future needs could adversely affect our liquidity, capital position, borrowing cost, and access to capital markets."

53

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 and beyond. We expect to continue using cash generated by operations as a primary source of liquidity; however, should we require funds greater than that generated from our operations to fund discretionary investment activities, such as business acquisitions, we have the ability to raise capital through debt financing, including the issuance of capital market debt instruments such as commercial paper and bonds. In addition, we currently utilize and will further utilize accounts receivable sales facilities, and our cross-currency cash pool for liquidity needs. There is no guarantee that we will be able to obtain debt financing, if required, on terms and conditions acceptable to us, if at all, in the future.

Our exposure to operational liquidity risk is primarily from long-term contracts 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.

Our liquidity of $4.4 billion as of March 31, 2024, includes $1.2 billion of cash and cash equivalents and $3.2 billion of available borrowings under our revolving credit facility.

Share Repurchases

See Note 15 - "Stockholders' Equity."

Dividends

To maintain our financial flexibility, we continued to suspend payment of quarterly dividends for fiscal 2024.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to arrangements that include guarantees, the receivables sales facility and certain other financial instruments with off-balance sheet risk, such as letters of credit and surety bonds. We also use performance letters of credit to support various risk management insurance policies. No liabilities related to these arrangements are reflected in the Company's balance sheets. See Note 4 - "Receivables" and Note 20 - "Commitments and Contingencies" for additional information regarding these off-balance sheet arrangements.

Cash Commitments

For a description of the Company’s cash commitments to debt, leases, pension and other benefit plans, and minimum purchase commitments, refer to “Note 10 - Debt,” Note 5 - "Leases,” "Note 20 - Commitments and Contingencies," and “Note 13 - Pension and Other Benefit Plans,” for the estimated future benefit payments under our Pension and OPEB plans.

Our other cash commitments as of March 31, 2024, were as follows:

[[GREPCENT_TABLE]]
[["(in millions)","","Less than 1 year","","2-3 years","","4-5 years","","More than5 years","","Total"],["U.S. Tax Reform - Transition Tax(1)","","57","","","(38)","","","\u2014","","","\u2014","","","19"],["Interest payments(2)","","57","","","85","","","39","","","18","","","199"],["Total","","$","114","","","$","47","","","$","39","","","$","18","","","$","218"]]
[[/GREPCENT_TABLE]]

(1) The transition tax is payable over eight years. We have remitted the first six installment payments. Our remaining liability from the originally computed transition tax in 2018 is $128 million. We are in the process of amending our tax return for historical transactions and other adjustments which are expected to reduce our overall transition tax obligation by approximately $109 million, resulting in a net refund due in the final installment period.

(2) Amounts represent scheduled interest payments on long-term debt.

54

Critical Accounting Estimates

The preparation of the 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. 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 materially from those estimates. 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, defined benefit plans, valuation of assets, and loss accruals for litigation. We have discussed the selection of our critical accounting policies and the effect of estimates with the Audit Committee of our Board.

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 may require significant estimates, including contracts which include multiple performance obligations.

Contracts with multiple performance obligations

Many of our contracts require us to provide a range of services or performance obligations to our customers, which may include a combination of services and products and may also contain leases embedded in those arrangements. Significant judgment may be required to determine the appropriate accounting, including whether the elements specified in contracts with multiple performance obligations should be treated as separate performance obligations for revenue recognition purposes, and, when considered appropriate, how the total transaction price should be allocated among the performance obligations and any lease components and the timing of revenue recognition for each. For contracts with multiple performance obligations and lease components, we allocate the contract’s transaction price to each performance obligation and lease component based on the relative standalone selling price. Other than software sales involving multiple performance obligations, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Certain of our contracts involve the sale of DXC proprietary software, post-contract customer support and other software-related services. The standalone selling price generally is determined for each performance obligation using an adjusted market assessment approach based on the price charged where each deliverable is sold separately. In certain limited cases (typically for software licenses) when the historical selling price is highly variable, the residual approach is used. This approach allocates revenue to the performance obligation equal to the difference between the total transaction price and the observable standalone selling prices for the other performance obligations. These methods involve significant judgments and estimates that we assess periodically by considering market and entity-specific factors, such as type of customer, features of the products or services and market conditions.

Once the total revenues have been allocated to the various performance obligations and lease components, revenues for each are recognized based on the relevant revenue recognition method for each. 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.

Contract modifications

A contract modification is a legally binding change to the scope, price, or both of an existing contract. Contract modifications are reviewed to determine whether they should be accounted for as part of the original contract, the termination of an existing contract and the creation of a new contract, or as a separate contract, and whether they modify an embedded lease. This determination requires significant judgment, which could impact the timing of revenue recognition.

55

Costs to obtain contracts with customers

Accounting for the costs to obtain contracts with customers requires significant judgments and estimates with regards to the determination of sales commission payments that qualify for deferral of costs and the related amortization period. Most of our sales commission plans are quota-based and payments are made by achieving targets related to a large number of new and renewed contracts. Certain sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. We defer and amortize these costs on a straight-line basis over an average period of benefit of five years, which is determined and regularly assessed by considering the length of our customer contracts, our technology and other factors. Significant changes in these estimates or impairment may result if material contracts terminate earlier than the expected benefit period, or if there are material changes in the average contract period.

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 any corresponding adjustment of valuation allowances. In addition, our tax returns are routinely audited, and settlements of issues raised in these audits sometimes affect our tax provisions.

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 with certainty what our ETR will be in the future because there is uncertainty regarding these factors. Future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur.

The Organization for Economic Co-operation and Development (“OECD”), along with members of its inclusive framework, have, through the Base Erosion and Profit Shifting project, proposed changes to numerous long-standing tax principles (“Pillar Two Rules”), which imposes a global minimum corporate tax rate of 15%. Although the U.S. has not yet enacted legislation implementing Pillar Two Rules, other countries where the Company does business, including the U.K. and Germany, have enacted legislation implementing Pillar Two Rules, which are effective from January 1, 2024, and several other countries are also considering changes to their tax laws to implement it. When and how these rules are adopted or enacted by the various countries in which we do business could increase tax complexity and uncertainty and may adversely affect our provision for income taxes in the U.S. and non-U.S. jurisdictions.

The majority of our global unremitted foreign earnings have been taxed or would be exempt from U.S. tax upon repatriation. Such earnings and all current foreign earnings are not indefinitely reinvested. The following earnings are considered indefinitely reinvested: approximately $480 million that could be subject to U.S. federal tax when repatriated to the U.S. under section 1.245A-5(b) of the final Treasury regulations; and approximately $200 million of our accumulated earnings in India. A portion of these indefinitely reinvested earnings may be subject to foreign and U.S. state tax consequences when remitted. The Company will continue to evaluate its position based on its future strategy and cash needs.

Considerations impacting the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, historical and projected taxable income as well as deferred 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 results of financial operations. We recorded a valuation allowance against deferred tax assets of approximately $2.3 billion as of March 31, 2024, 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 such as when inputs or estimates used in determining valuation allowances significantly change or upon the receipt of new information.

56

We determine whether it is more likely than not a tax position will be sustained upon examination by the appropriate taxing authorities before any portion of the tax benefit is recorded in our financial statements and only the portion of the tax benefit that is measured as greater than 50% likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information) is recognized. We may be required to change our provision for income taxes when the ultimate outcome of a tax position is agreed to by taxing authorities or otherwise effectively settled.

In the U.S., the IRA was signed into law on August 16, 2022. We do not currently expect the IRA to have a material impact on our Consolidated Financial Statements.

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 observable inputs are 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:

[[GREPCENT_TABLE]]
[["","","March 31, 2024","","March 31, 2023"],["Discount rates","","4.5","%","","2.7","%"],["Expected long-term rates of return on assets","","6.0","%","","4.3","%"]]
[[/GREPCENT_TABLE]]

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 impact that changes in the weighted-average assumptions would have had on our net periodic pension benefits and settlement and contractual termination charges for fiscal 2024:

[[GREPCENT_TABLE]]
[["(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","","50 basis points","","$","(38)","","","$","38"],["Expected long-term return on plan assets","","(50) basis points","","$","38","","","$","(38)"],["Discount rate","","50 basis points","","$","10","","","$","(441)"],["Discount rate","","(50) basis points","","$","(13)","","","$","497"]]
[[/GREPCENT_TABLE]]

57

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 judgment 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 identification of reporting units requires consideration of components of the operating segments and whether or not there is discrete financial information available that is regularly reviewed by management. Additionally, we consider whether or not it is reasonable to aggregate components that have similar economic characteristics. The assumptions used to estimate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these assumptions may be impacted by a significant change in the business climate, established business plans, operating performance indicators or competition which could materially affect the estimates 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 performance-metric 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 generate the projected future cash flows.

Assumptions and Estimates Used to Analyze Contingencies and Litigation

We are subject to various claims and contingencies associated with lawsuits, insurance, tax and other issues arising in the normal course of business. 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 seeks input from other experts and advisors with respect to matters in the ordinary course of business. If the likelihood of an adverse outcome is probable and the amount is estimable, we accrue a liability in accordance with ASC 450 "Contingencies." Significant changes in the estimates or assumptions used in assessing the likelihood of an adverse outcome could have a material effect on our results of operations.

58