Ken Sharp
Executive Vice President and Chief Financial Officer at DXC Technology
Thank you, Mike. Turning to slide 11. Our transformation journey remains on track with strong progress across all four key metrics. Organic revenue improved 100 basis points from Q2 to a decline of 1.4%. Adjusted EBIT margin is up to 8.7%. Year-over-year, our adjusted EBIT margin expanded 170 basis points, while we substantially reduced our restructuring and TSI expense. Q3 book-to-bill was 1.23 and 1.08 on a trailing four quarters. From our perspective, looking at book-to-bill over a trailing four quarters is more meaningful than looking at one quarter in isolation. Non-GAAP diluted earnings per share was $0.92, up $0.08 compared to the prior year. Our earnings per share expanded despite $0.23 of headwinds from taxes. The tax rate headwinds were more than offset by increased margins and lower interest expense.
Moving to our segment results on slide 12. GBS continued its strong performance, accelerating organic revenue growth of 7%, our third consecutive quarter of organic revenue growth. GBS is benefiting as we leverage our relationships with our platinum customers. Our GBS business has higher margins and lower capital intensity. So, as we grow that business, it has a disproportionately positive impact on margins and cash flow. Our GBS profit margin was 16.2%, up 200 basis points compared to the prior year. GIS organic revenue declined 8.3%. GIS profit margin was 4.8%, an improvement of 110 basis points compared to prior year. Our focus with GIS, heretofore has been on improving delivery to deliver for our customers, while stabilizing the margins. As we set up for next year, we are putting in place a program to drive cost out of GIS to move the margins forward.
Turning to our Enterprise Technology Stack, Analytics and Engineering revenue was $545 million and organic revenue was up 18.7%. We continue to see high demand in this area. Of note is the success we are seeing with our platinum customer channel. Applications organic revenue increased 4.8%, also accelerating. BPS, our smallest layer of the Enterprise Technology Stack, generated $116 million of revenue and organic revenue was down 8.3%. We expect the declines in this business to moderate as we move forward and put our new strategy in place.
For our GBS layers of our technology stack, our book-to-bill was 1.28 and 1.17 on a trailing 12-month basis. Cloud and security revenue was $471 million and organic revenue was down 12.2%. IT Outsourcing revenue was $1.11 billion and organic revenue was down 1.9%. Let me remind you that this business declined 19% in Q3 FY '21. This is a significant improvement that we indicated last quarter. We expect IT Outsourcing to continue to decline in low single-digit, ideally 5% or better. Lastly, Modern Workplace revenue was $561 million and organic revenue was down 16%, as compared to prior year.
We remain positive about our prospects and our strong book-to-bill of 1.11 over the trailing 12 months is expected to stabilize Modern Workplace, as we move through FY '23. For our GIS layers of the technology stack, our book-to-bill was 1.18 and 1.01 on a trailing 12-month basis. As you think about organic revenue growth prospects for GIS, our focus on improving the quality of revenue by expanding margins, reducing capital intensity and driving cash flow may create headwinds for organic revenue growth. For example, using our capital to buy laptops, bearing the risk and ultimately recovering our cash over three to four years with relatively low returns does not feel like a great economic model. At the end of the day we would prefer to provide our offerings and services and forgo the revenue associated with buying the assets to improve the underlying economics.
Next up let me touch on our efforts to build our financial foundation. This quarter we made particularly strong progress with cash generation and continued reduction of restructuring and TSI expense. With regard to financial discipline, remediating our material weakness is a top priority. We are in the late stage of our efforts to remediate the material weakness and we have fully implemented our 11 point remediation plan. As a result, we expect to remediate our material weakness in Q4.
I should note, as it relates to the material weakness and governance more holistically, we are clear-eyed on how we think about governance. We do not find our current governance score to be acceptable. We are working hard to ensure we improve its trajectory like many things at DXC. We are finishing the unfinished homework creating a sustainable business brick-by-brick. In addition, to our material weakness remediation, we are committed to improving our pay practices.
As part of good governance, our Board members and management are continuing to engage with our shareholders to proactively take their feedback as we work together to design and set our short-term and long-term incentive structure. Our focus is set to metrics and targets that are highly aligned to what our shareholders want, all the while incentivizing management to improve the company's performance, creating and enduring and sustainable business.
The execution of the transformation journey has made measurable improvement allowing us to put the business on a firmer financial foundation, expanding margins and generating and keeping more cash. Slide 15 shows the results of the structural improvements we have made. We reduced our debt from $12 billion to $4.9 billion and are now below our targeted debt level. We have reduced our quarterly net interest expense to $23 million, a $31 million reduction as compared to prior year.
As you recall, we were able to term out a significant portion of our debt last quarter with principally all of our outstanding borrowings at fixed rates. We expect to continue the lower interest expense at approximately $25 million per quarter. We also continued to make progress on reducing restructuring and TSI expense. This reduction contributed $195 million to cash flow during the quarter as compared to the prior year. Further, this also achieves one of our goals of narrowing the difference between GAAP and non-GAAP earnings. I should note that while we have been reducing restructuring and TSI expense, we have also been able to expand margins. Lastly, as you can see, we have also reduced operating lease cash payments from $156 million in the third quarter of the prior year to $117 million in the third quarter of FY '22.
Moving to chart 16, let's talk about the focus we brought to capital expenditures including capital leases. Our capital expenditures were reduced from $219 million in Q3 FY '21 to $146 million in Q3 FY '22. We are closely managing our capital lease originations, which ultimately means our capital lease debt and associated payments continues to decline. In FY '20, we had $270 million quarterly run rate for originations, while our last two quarters averaged less than $60 million. We made $207 million of capital lease payments in Q3 last year, which is now down to $184 million in the current quarter.
For Q4, we expect a further reduction of capital lease payments to approximately $140 million. A metric we like to look at to gauge capital efficiency is capital expenditures and capital lease originations as a percent of revenue. We are now tracking at 5.2% for two consecutive quarters, down from roughly 10% in FY '20. Clearly, our focus has been on improving our cash flow. Specific to new business, we have been focused on structuring our transaction to have lower capital intensity potentially trading off revenue in favor of cash flow. As you can see from my prior comments, our focus on driving structural changes has improved our ability to generate and hold on to more cash. Cash flow from operations totaled an inflow of $696 million. Free cash flow for the quarter was $550 million, an increase of $956 million as compared to prior year and moves our year-to-date free cash flow to $650 million or $150 million, above our full year guidance.
Further, cash in the quarter was negatively impacted by two previously disclosed payments, totaling approximately $130 million. These payments were offset by much stronger performance due to improvements in the business and benefits from timing on payments and receipts in the quarter. We expect the timing to create some headwinds in Q4 cash flow. Slide 18 shows our trended cash flow profile. Our progress in Q2 and Q3 gives us confidence as we work towards delivering our longer-term FY '24 guidance of $1.5 billion in free cash flow.
Moving to slide 19, let's revisit our relatively simple capital allocation formula. We are targeting a debt level of approximately $5 billion and a cash level of $2.5 billion. We've [Indecipherable] our target debt level, cash over $2.5 billion is excess cash, which we expect to deploy. Based on this formula, we expect to self-fund stock repurchases of $1 billion over the next 12 months. The $1 billion in repurchases will be funded from a combination of cash generated from operating our business, as well as proceeds from our portfolio shaping efforts. We recently executed a number of sale agreements and expect to divest businesses and assets with approximately $500 million of revenue and will generate $500 million of proceeds in the next 12 months. These businesses are not synergistic and cannot be leveraged more broadly in our Platinum channel. As you will see in our 10-Q, we entered into an agreement to sell our German financial services subsidiary that includes both of our banks for approximately $340 million.
As noted in the liquidity section of our previously filed financials, the German financial services business has cash held on deposits for the bank's customers. The current cash balance related to these deposits is $670 million. We also announced an agreement for the sale of our Israeli business for $65 million. The valuation for these assets are accretive to our valuation. Further, we do not expect these divestitures to create headwinds related to achieving our FY '24 longer-term guidance for organic revenue growth, adjusted EBIT margin, and free cash flow. We continue to assess our portfolio to ensure we have businesses that are aligned to our strategy and not a distraction for our management team. Now, let me cover our progress on share repurchases. In Q3, we repurchased $213 million of common stock, bringing our FY '22 year-to-date repurchases to $363 million or 10.6 million shares. Our share repurchases are self-funded. As noted, we expect to repurchase $1 billion of our common stock over the next 12 months, as we firmly believe our stock is undervalued.
Turning to the fourth quarter guidance. Revenues between $4.11 billion and $4.15 billion. If exchange rates were at the same level as when we gave guidance last quarter, our fourth quarter revenue guidance range would be $20 million higher. Organic revenue decline, minus 1.2% to minus 1.7%. Adjusted EBIT margin in the range of 8.7% to 9%. Non-GAAP diluted earnings per share of $0.98 per share to $1.03 per share. For Q4, we expect a tax rate of approximately 26%. As we move to the end of FY '22, I would like to update our current fiscal year guidance. Based on the strengthening US dollar, our revenues are expected to be negatively impacted by approximately $40 million. We now expect to come in at approximately $16.4 billion. Organic revenue growth range of minus 2.2% to minus 2.3%, which is slightly lower than our previous range. Adjusted EBIT margin, 8.5% to 8.6%. We continue to expand margins, while significantly lowering restructuring and TSI expense and are now guiding to $400 million for FY '22.
To put this all in context, we expect to spend $500 million less on restructuring and TSI expense than last year, while expanding margins by over 200 basis points. Our focus is to embed these types of expenses over time into the normal performance of the business and believe we have taken significant strides in doing so. Non-GAAP diluted earnings per share of $3.64 to $3.69. Lastly, we are increasing free cash flow guidance that over $650 million, $150 million improvement to our prior FY '22 guidance. Fourth quarter cash flow is expected to be impacted by timing, which boosted Q3 cash flow. And in addition, a $100 million payment in Q4 to terminate a financial structure put in place a number of years ago.
We are reaffirming our guidance for FY '24. This reflects our strong execution in driving forward on our transformation journey. Overall, we are making great progress driving efficiency in the business and generating strong free cash flow. We are utilizing those cash flows to drive significant value for our shareholders through our stock repurchase program.
With that, I will now turn the call back to Mike for his closing remarks.
