Ken Sharp
Executive Vice President and Chief Financial Officer at DXC Technology
Thank you, Mike. Let me provide you a quick rundown of our Q3 performance. Q3 organic revenue declined 3.8%. Adjusted EBIT margin and non-GAAP diluted earnings per share were above the top end of our guidance range at 8.7% and $0.95, respectively. Free cash flow was $463 million in the quarter. The team is making great progress with what we expect will be two consecutive years of positive cash flow of at least $630 million. This is quite a turnaround from two years ago with over $650 million of negative free cash flow.
Moving to our key financial metrics. Third quarter gross margin declined 60 basis points on lower volumes. SG&A as a percent of sales increased 10 basis points. Depreciation was lower by 10 basis points. Other income increased 60 basis points, primarily due to asset sale gains of $24 million and FX hedging gain of $11 million, partially offset by lower pension income. As a result, adjusted EBIT margin was flat compared to prior year and up 120 basis points sequentially. EPS was up $0.03 compared to the prior year due to $0.08 from a lower share count, $0.06 from a lower tax rate, $0.02 from lower interest expense. These benefits were partially offset by $0.13 from lower revenue and FX.
Let's turn to our segment results. Our business mix continues to improve as our GBS revenue mix increased 110 basis points to 48.7% of DXC's revenue. GBS grew 0.2% organically. The GBS profit margin declined 220 basis points year-over-year and was up 130 basis points sequentially. GIS organic revenue declined 7.4%. GIS profit margin increased 190 basis points year-over-year and was up 50 basis points sequentially benefiting 80 basis points from settling a commercial matter in the current quarter.
Turning to our offerings. Analytics and engineering continued with solid organic growth, up 11.7%. Applications declined 6.8% on lower project revenue coupled with a difficult prior year compare as Q3 was the strongest growth quarter in FY '22. Insurance, Software and BPS is up 3%. Our insurance software business is about $550 million of annual revenue and grew approximately 7% in the quarter. Security was up 4.2%. Cloud infrastructure and IT outsourcing declined 5.4%. Modern Workplace was down 15.3%. We are encouraged by the recent new logo wins.
Let me tie the year-over-year organic revenue decline above with Mike's earlier point on sequential quarterly revenue. I am pleased to note that we've delivered three quarters of revenues that are flat on a constant currency, excluding divestitures basis. Further, we are guiding to a fourth quarter that is also going in a positive direction, all while on the backdrop of very strong Q3 bookings demonstrating our momentum.
Turning to our financial foundation. Debt is $4.7 billion. We continue to tightly manage restructuring and TSI expenses. These expenses totaled $55 million in the quarter and year-to-date, restructuring in TSI is $147 million, down $124 million from prior year. Capital expenditures and capital lease originations as a percent of revenue were 6.4% in the quarter, up 120 basis points as compared to prior year. We continue to believe our capital intensity presents a long-term opportunity to improve cash flow. Free cash flow for the quarter was $463 million.
On January 3, we closed the sale of our German banks. Customer deposits were $70 million lower as compared to the start of the year, thus creating a free cash flow outflow. With the sale of our German banks for EUR300 million, we have substantially completed our $500 million portfolio shaping and asset proceeds goal. Last quarter, we announced a new $250 million asset sale proceeds goal. While selling these real estate assets will bring in real cash, we expect to incur a noncash loss that is not incorporated in our guidance.
In Q3, we closed on four facility sales yielding $56 million of cash proceeds and recognized a $16 million gain. The combination of our Q3 free cash flow, sale of our German banks and our Q3 asset sales delivered $840 million in cash. To put a finer point on the $840 million of cash, it is over 12% of our market capitalization. We expect to deploy $400 million to repay a portion of our debt and we'll adjust our target debt level to $4.5 billion. With the bank sales, customer bank deposits are no longer part of our cash balance. Accordingly, we are reducing our target cash balance to $1.8 billion. At these new target levels, we have an additional $400 million available to repurchase our stock.
Turning to our capital allocation on Slide 19. We repurchased approximately $600 million of our stock to date. With cash on hand, we feel good about our ability to deliver on our $1 billion share repurchase. Our Q4 guidance; organic revenue decline of minus 2.6% to minus 3.1%; adjusted EBIT margin of 8.7% to 9.2%; non-GAAP diluted earnings per share of $1 to $1.05.
Turning to our FY '23 guidance. Organic revenue decline of minus 2.6% to minus 2.7%; adjusted EBIT margin of 8% to 8.1%; non-GAAP diluted earnings per share of $3.45 to $3.50. As I mentioned earlier, our free cash flow was negatively impacted by $70 million due to lower customer bank deposits held in our German banks. Accordingly, free cash flow was adjusted to $630 million. As Mike and I reflected on our FY '24 guidance we gave almost two years ago, we envisioned a business that could grow with solid margins and good quality cash flow. We still envision that same business today.
Let me provide you some context on our original FY '24 guidance. At the time, organic revenue was declining double-digits and we guided to organic revenue growth of 1% to 3%. Adjusted EBIT margins were approximately 6%, including 190 basis points of non-cash pension income and we guided to a 10% to 11% margin. Free cash flow was negative $650 million and we guided to $1.5 billion of free cash flow. Lastly, let us not forget the $900 million of annual reoccurring restructuring and TSI costs that we guided to $100 million, all while expanding margins. From our vantage point, we have come a long way over the last two years as the business is on a much stronger foundation.
Let me take a minute to update you on our preliminary FY '24 expectations. For organic revenue, we are working plans to drive the business to flat to 1% growth, adjusted EBIT margin to expand above FY '23 levels, but do not expect margins to exceed 9%. When we provided the FY '24 EBIT guidance, pension income was 65 basis points higher than where we are in FY '23. We are assuming pension income continues at a similar level and is a 65 basis point headwind from our original FY '24 guidance. Free cash flow to increase above FY '23 levels, but do not expect to exceed $900 million. When we set our FY '24 $1.5 billion free cash flow guidance, we had $900 million of capital lease payments.
The capital lease payments are not part of free cash flow, but we're a significant consumer of free cash flow leaving $600 million of cash generation. As we sit here today, we expect to originate about $200 million to $250 million of capital leases in FY '23. Our lower originations over the last couple of years has driven down the capital lease payments to about $400 million next year. We will refine our FY '24 guidance on our next earnings call once we complete our annual planning process.
With that, let me turn the call back to Mike for his final thoughts.
