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 (the “Merger”). At the time of the Merger, Everett was renamed DXC, and as a result of the 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 Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the 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 Merger.

All share and per share information has been restated to reflect the effects of the 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 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 "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 Merger, HPE settled certain obligations as required under the 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 a Separation Agreement, in each case relating to the combination of HPES and CSC. At the time the Merger Agreement and the 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 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 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 Merger, the Company began assessing the terms of the leases (including the amendments described above). During the Company’s second fiscal quarter, 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 $977 million, fixed assets under capital leases of $594 million, and a $383 million increase to goodwill.

The Company is addressing this matter with HPE in a manner consistent with the terms of the Separation Agreement, with any disagreement being treated in a confidential manner under the 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
Preliminary fair value of purchase consideration received by HPE stockholders⁽¹⁾	$	9,782
Preliminary fair value of HPES options assumed by CSC⁽²⁾	68
Total estimated 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 HPE, HPES and CSC agreed would be converted to DXC stock-based awards.

Due to the complexity of the Merger, the Company recorded the assets acquired and liabilities assumed at their preliminary fair values. The Company's preliminary estimates of the fair values of the assets acquired and the liabilities assumed, as well as the fair value of non-controlling interest, are based on the information that was available as of the Merger date, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger date. The cumulative impact of any subsequent changes resulting from the facts and circumstances that existed as of the Merger date will be adjusted in the reporting period in which the adjustment amount is determined. The preliminary estimated purchase price is allocated as follows:



(in millions)	Estimated Fair Value
Cash and cash equivalents	$	974
Accounts receivable⁽¹⁾	4,092
Other current assets	535
Total current assets	5,601
Property and equipment	2,799
Intangible assets	6,169
Other assets	1,614
Total assets acquired	16,183
Accounts payable, accrued payroll, accrued expenses, and other current liabilities	(4,496		)
Deferred revenue	(1,267		)
Long-term debt, net of current maturities	(4,817		)
Long-term deferred tax liabilities and income tax payable	(1,570		)
Other liabilities	(1,336		)
Total liabilities assumed	(13,486		)
Net identifiable assets acquired	2,697
Add: Fair value of non-controlling interests	(55		)
Goodwill	7,208
Total estimated 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 December 31, 2017, DXC has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to: receivables; property and equipment; deferred income taxes, net; deferred revenue and advanced contract payments; deferred costs; intangible assets; accounts payable and accrued liabilities; lease obligations; loss contracts; non-controlling interest; and goodwill.

As of the period ended December 31, 2017, the Company made a number of refinements to the April 1, 2017 preliminary purchase price allocation as reported June 30, 2017. These refinements were primarily driven by the Company recording valuation adjustments to certain preliminary estimates of fair values which resulted in a decrease in net assets of $450 million. Total assets increased by $1.2 billion, primarily driven by a $127 million increase of accounts receivable; $317 million increase in property and equipment primarily arising from the recognition of $594 million of fixed assets under capital lease, offset by a $277 million reduction in the preliminary fair value of assets related to data centers and land; and a $1.1 billion increase in intangible assets, primarily driven by a $1.3 billion increase in the preliminary fair value assessment for customer relationships. Liabilities increased by $1.7 billion primarily driven by an increase in capital lease obligations of $1.0 billion, a $343 million adjustment to deferred revenue primarily related to a valuation adjustment for outsourcing and other customer contracts taking into account continuing performance obligation, an increase of $106 million of debt, and an increase in long-term tax related liabilities of $200 million.

In accordance with ASU 2015-16, "Business Combinations (Topic 805)," Simplifying the Accounting for Measurement-period Adjustments, during the three months ended December 31, 2017, the Company continued to refine its fair value assessment of assets acquired and liabilities assumed. As a result, a $16 million increase in income before income taxes related to six months ended September 30, 2017 was recognized in the condensed consolidated statement of operations for the three months ended December 31, 2017. The change in income before income taxes was primarily attributed to a decrease of $9 million of interest expense related to capital leases and a decrease of $7 million in cost of services.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the Merger date. The goodwill recognized with the 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. During the three months ended December 31, 2017, the Company refined its preliminary allocation of goodwill by reportable segment, resulting in an allocation to the Company's reportable segments of $2.7 billion to the Global Business Services ("GBS") segment, $2.5 billion to the Global Infrastructure Services ("GIS") segment and $2.0 billion to the United States Public Sector ("USPS") segment. A portion of the total goodwill is expected to be deductible for tax purposes. See Note 9 - "Goodwill."

Current Assets and Liabilities

For the preliminary fair value estimates reported in the three months ended December 31, 2017, 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 an estimate for the fair value of those items as of the Merger date.

Property and Equipment

The acquired property and equipment are summarized in the following table:



(in millions)	Amount
Land, buildings, and leasehold improvements	$	1,500
Computers and related equipment	1,122
Furniture and other equipment	45
Construction in progress	132
Total	$	2,799

The Company estimated the value of 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		Estimated Useful Lives (Years)
Customer relationships	$	5,200	10-13
Developed technology	141		2-7
Third-party purchased software	508		2-7
Deferred contract costs	320		n/a
Total	$	6,169

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

Restructuring Liabilities

The Company acquired approximately $328 million of restructuring liabilities incurred under HPES' restructuring plans, which are expected to be paid out through 2029. Approximately $256 million relates to workforce reductions and $72 million relates mainly to facilities costs.

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; as well as capitalized lease liabilities and other debt. Subsequent to the initial preliminary purchase price allocation as reported June 30, 2017, there was a fair value assessment of the senior notes and term loans as of the 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, premium, and discounts. Converted capital leases were recorded on the balance sheet at preliminary fair value as of April 1, 2017 resulting in a total capital lease obligation of $1.6 billion. Additionally, the Company completed its fair value assessment of certain debt and accrued interest with a carrying value of $87 million as of the Merger date, which resulted in a purchase accounting adjustment that increased debt by $12 million. The Company will continue to assess the fair value of assumed debt, including capital leases, during the measurement period.

Deferred Tax Liabilities

The Company preliminarily 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 certain U.S. and international 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 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 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 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 Merger.



Equity securities	22	%
Debt securities⁽¹⁾	72	%
Alternatives	5	%
Cash and other	1	%
Total	100	%

⁽¹⁾ Includes liability-driven investments

The following table summarizes the estimated future benefit payments due to the pension and benefit plans assumed from HPES as a result of the Merger.



(in millions)	Amount
Employer contributions:
2018	$	39

Benefit payments:
2018	$	225
2019	$	151
2020	$	163
2021	$	224
2022	$	180
2023 through 2027	$	1,132

Unaudited and Pro Forma Results of Operations

The Company's condensed consolidated statements of operations includes the following revenues and net income attributable to HPES since the Merger date:



(in millions)	Three Months Ended December 31, 2017		Nine Months Ended December 31, 2017
Revenues	$	4,374	$	12,942
Net income	$	422	$	1,199

The following table provides unaudited pro forma results of operations for the Company for the three and nine months ended December 31, 2016, as if the 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. In addition, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed during the measurement period. Accordingly, 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 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 October 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 three and nine months ended December 31, 2016 and of HPES for the three and nine months ended October 31, 2016.



(in millions, except per-share amounts)	Three Months Ended December 30, 2016⁽¹⁾			Nine Months Ended December 30, 2016⁽¹⁾
Revenues	$	6,585		$	19,358
Net loss	(166		)	(570		)
Loss attributable to the Company	(174		)	(587		)

Loss per common share:
Basic	$	(0.61	)	$	(2.07	)
Diluted	$	(0.61	)	$	(2.07	)


⁽¹⁾	The unaudited pro forma information is based on legacy CSC results for the three and nine months ended December 31, 2016 and legacy HPES results for the three and nine months ended October 31, 2016.

The unaudited pro forma information above is based on events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma statement of operations, expected to have a continuing impact on the consolidated results of operations of the combined company. Nonrecurring transaction costs associated with the Merger of $26 million for the nine months ended December 31, 2017 are not included in the unaudited pro forma information above.

Subsequent to the Merger, the Company adjusted the preliminary purchase price allocation, which would have decreased pro forma combined net loss and loss per common share by $96 million and $0.34, respectively, for the three months ended December 30, 2016, and $292 million and $1.03, respectively, for the nine months ended December 30, 2016. The decrease in pro forma combined net loss and loss per common share was primarily attributed to the acquisition-related fair value adjustments discussed 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 Company’s purchase price allocation for the Tribridge acquisition is preliminary and subject to revision as additional information related to the fair value of assets and liabilities becomes available. The preliminary purchase price was allocated to assets acquired and liabilities assumed based upon current 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.

Fiscal 2017 Acquisitions

Xchanging Acquisition

On May 5, 2016, DXC acquired Xchanging plc ("Xchanging"), 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. Xchanging was listed on the London Stock Exchange under the symbol “XCH.” Total cash consideration paid to and on behalf of the Xchanging shareholders of $693 million (or $492 million net of cash acquired) was funded from existing cash balances and borrowings under DXC's credit facility. Transaction costs associated with the acquisition of $17 million were included within Selling, general, and administrative expenses. The acquisition expanded CSC'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 Xchanging 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 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 years, 15 years and 3 to 5 years, respectively. The goodwill arising from the acquisition was allocated to the GBS and GIS segments and is not deductible for tax purposes.