Ken Sharp
Executive Vice President and Chief Financial Officer at DXC Technology
Thank you, Mike. Turning to our quarterly financial performance on slide 11. As you can see, our progress continues. Our organic revenue improved to a decline of 2.4% or a 130 basis point improvement from Q1. This represents our third consecutive quarterly improvement. As you can see, we have come a long way from double-digit organic revenue declines in Q1 FY '21 to low single-digit declines in FY '22. Our adjusted EBIT margin continues to improve as well, delivering 8.6% in Q2, up 60 basis points as compared to the first quarter. Year-over-year, our adjusted EBIT margins have expanded 240 basis points or 460 basis points, excluding the disposed businesses. Our book-to-bill for Q2 was 0.91, below our goal of one due to timing and remains over one year-to-date. Further, we expect to deliver a book-to-bill of over one for Q3 and for the full year. Non-GAAP diluted earnings per share was $0.90, up $0.06 from Q1 and a healthy 41% increase as compared to the prior year.
Our earnings per share expanded due to increased margins, lower interest expense and a lower tax rate. Moving to our segment results on slide 12. Our GBS segment continued its strong growth performance, posting its second quarter of positive organic revenue growth of 3.4%, an improvement from 2% in the first quarter. The GBS growth is a positive sign as we continue to deliver higher value for our customers. Our GBS business has higher margins and lower capital intensity. So as we grow this business, it has a more positive impact on margins and cash flow. Our GBS margin was 15.9%, up 150 basis points compared to the first quarter and up 180 basis points compared to prior year.
Our GIS segment organic revenue declined 8%, a full 110 basis point improvement compared to the first quarter and improved 380 basis points compared to the decline from prior year. GIS margins were 5.5%, an improvement of 390 basis points compared to prior year. Turning to the enterprise technology stack. Analytics and Engineering revenue was $520 million, up 17.3%. Analytics and Engineering book-to-bill was 0.95 and 1.13 year-to-date. We continue to see high demand in this area. The Applications layer was up 1.5%, book-to-bill was 0.94 and 1.13 year-to-date. BPS, our smallest layer of the enterprise technology stack, at $118 million of revenue, was down 13.7%. Book-to-bill was 0.69 and 0.91 year-to-date. Cloud and security revenue was $521 million, down 1.5%. Book-to-bill was at 0.8 in the quarter and 0.82 year-to-date. IT Outsourcing revenue was $1.05 billion, down 9.6%. ITO book-to-bill was 0.81 and 0.92 year-to-date. We expect our ITO decline to continue to gradually moderate as we move through FY '22.
The two deals Mike mentioned earlier that slipped out of Q2 that were subsequently closed were in the ITO and Cloud and Security layers of our technology stack and would have boosted our GIS book-to-bill for the quarter to over 1.1. Lastly, Modern Workplace revenues were $581 million, down 10.9% as compared to prior year. This is an improvement from last quarter when Modern Workplace was down 19.7% year-over-year. Book-to-bill was 1.2 and 1.1 year-to-date. Next up, let me touch on our efforts to build our financial foundation. This quarter, we made particularly strong progress on strengthening our balance sheet and solidifying our financial position, cash generation and reducing restructuring and TSI expense. As Mike pointed out earlier, we've made measurable improvements driving our business to improve our financial foundation that will ultimately allow us to increase our deployable cash affording us more opportunities to create value.
We reduced our debt from $12 billion to $5.1 billion. The refinancing of all of our high rate bonds during the quarter culminates our collective efforts to transform the business, improve its trajectory and strengthen our balance sheet. There is no similar and clear way of seeing the impact that Mike and his team have made improving the operations of the business than what was accomplished with our debt over the last year. Net interest expense has been reduced from $83 million in the first quarter of FY '21 to $45 million this quarter. With the full benefit of our refinancing, we anticipate interest expense to be reduced to approximately $33 million in Q3. We also continue to deliver on reducing restructuring and TSI expense while increasing our margins.
This not only improves our cash flow, it also narrows the difference between GAAP and non-GAAP earnings. Finally, capital lease and asset financing is an area that was overused. In the last year or so, we've significantly curtailed new capital lease originations from $1.1 billion in FY '20 and are on track to reduce originations to approximately $500 million this year. These efforts to better manage this form of financing allowed us to reduce our debt and ultimately our capital lease cash outflows from $245 million in Q1 FY '21 to $177 million this quarter. We expect further reductions in our quarterly cash outflows to around $150 million per quarter at the end of FY '22 and further below that level going forward. We delivered these reductions while also better managing capital expenditures. Our capital expenditures were reduced from $225 million in Q1 FY '21 to $159 million Q2 FY '22. Based on our reductions to capital lease originations, a more meaningful metric to demonstrate our progress is capex spend and capital lease originations as a percent of revenue.
Capex and capital lease originations as a percent of revenue were 10.2% for FY '20, 8% for FY '21 and now down to 5.3% for Q2 FY '22. Delivering 5.3% is a good step forward related to better managing our capital spend as it gets us in the peer range, albeit at the top end and is a proof point of our improved operational rigor. Returning to our debt on slide 16, I want to spend a minute on our recent refinancing. This chart shows how the refinancing further solidifies our financial position. By extending maturities, we now have no bond maturities before FY '26, lowering maturity towers and reducing annual interest expense and cash outflows by about $50 million a year. From our improved balance sheet, let's move to cash flow. Cash flow from operations totaled an inflow of $563 million. Free cash flow for the quarter was $404 million, up 33% compared to prior year and moves us to positive free cash flow for the first half of FY '22 of $100 million.
The second quarter was impacted by previously disclosed cash tax payments related to business disposals, accelerated interest payments due to our refinancing and a payment related to restructuring a vendor relationship to take greater control over our delivery. Further, as part of our strategy to focus on customers, we were able to better manage working capital in the quarter. As we look to the second half, we expect the fourth quarter free cash flow to be stronger. Our third quarter has two discrete nonrecurring cash payments, including a $60 million payment associated with a legacy vendor that has a take-or-pay agreement and a $90 million payment associated with COVID relief legislation where we deferred certain tax payments and now have opted to accelerate the tax payments to utilize the tax deduction. slide 18 shows our trended free cash flow profile.
The negative cash flow over the last three quarters was due in large part to absorbing a number of nonrecurring cash outflows of over $1.7 billion to put the business on a better trajectory, building our foundation. These cash outflows include: $700 million tax payment associated with taxable gains on our divestitures; $500 million to normalize vendor payments; $332 million related to readying the U.S. state and local health and human services business for sale; $114 million to end an AR securitization program; $88 million to end a value-destructive take-or-pay agreement; the $1.7 billion headwinds put into perspective; the $749 million trailing four quarters negative free cash flow.
A key driver of improving cash flow is to continue to reduce our restructuring and TSI spend. Our restructuring and TSI efforts are highly focused, and we believe are a prudent investment in the business addressing our outsized cost structure in certain countries and to reduce our facilities footprint to align to our virtual model. We remain on track to reduce restructuring in TSI from an average of $900 million per year over the last four years to $550 million in FY '22 and about $100 million in FY '24. I would like to take a moment to update our capital deployment expectations from Investor Day. The Investor Day chart called for 55% of our free cash flow to be used to pay debt and capital lease obligations. As a result of our progress, our cash outflows for debt and capital lease financing are now expected to be about 20% of our free cash flow.
That leaves 80% of our expected free cash flow to invest in our business and/or repurchase our stock. I should note, we like the business we have and believe that we have the right level of investment in GBS and GIS. We believe our technology stack has critical mass and capability at each layer. We believe we will create more value by continuing to focus on driving the transformation journey across our business, improving the fundamentals and continuing to build organic growth up the stack, ultimately delivering 1% to 3% organic growth in FY '24. Related to acquisitions, our focus is to ensure our platinum channel strategy will be fully vetted and proven out. So eventually, when we are acquisitive with tuck-in sized acquisitions, we will have a clear path to deliver value. Related to our debt, we have a clear line of sight to achieving our targeted debt level of $5 billion near term as we have scheduled debt repayments via our capital lease financing and commercial paper.
Our preference is to maintain approximately $2.5 billion of cash on hand to fund an appropriate level of working capital. When we have cash in excess of $2.5 billion, we will determine how best to deploy the cash as we do not expect to leave significant levels of excess cash, generating no meaningful returns on our balance sheet for an extended period of time. At this point in our journey, we favor share repurchases as our valuation is attractive. In Q2, we repurchased $83 million of our common stock, bringing the FY '22 year-to-date repurchases to $150 million or 3.9 million shares. Our share repurchases are a disciplined approach to capital allocation and are expected to be self-funding using a rather simple formulaic approach of deploying cash in excess of $2.5 billion when we are at our target debt level of approximately $5 billion. We remain very focused on our investment-grade credit profile.
Turning to our third quarter guidance. We expect revenue between $4.08 billion and $4.13 billion. If exchange rates were at the same level as when we gave guidance last quarter, our third quarter revenue guidance range would be $90 million higher. Organic revenue decline improved to down 1% to down 2.5%; adjusted EBIT margin of 8.6% to 8.9%. Non-GAAP diluted earnings per share is expected to be in the range of $0.88 to $0.93 per share. We are pleased by our progress as we look to the second half of FY '22. I would like to update our current fiscal year guidance. Based on the strengthening U.S. dollar, our revenues are expected to be negatively impacted by approximately $200 million, which has been reflected in our revised guidance range of $16.4 billion to $16.6 billion; reaffirming organic revenue growth at down 1% to down 2%; increasing adjusted EBIT to a range of 8.5% to 8.9%; increasing non-GAAP diluted earnings per share to $3.52 to $3.72 per share; and reaffirming free cash flow guidance of $500 million.
We are reaffirming our guidance for FY '24. This reflects our strong execution in driving forward on our transformation journey. Before I turn the call back to Mike, I want to reflect a moment as I'm closing out on my first year at DXC. We are clear-eyed on the value we are driving with the transformation journey. We feel strongly there is more opportunity in front of us to continue to improve the business and the underlying economics. With that, I will now turn the call back over to Mike for his closing remarks.
