Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________

Commission File Number.: 001-38033
395777973_perslogopriblutmrgba02.jpg
PERSPECTA INC.
(Exact name of Registrant as specified in its charter)
Nevada
82-3141520
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
15052 Conference Center Drive
 
Chantilly, Virginia
20151
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number, including area code: (571) 313-6000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

Large Accelerated Filer  o
Accelerated Filer o
Non-accelerated Filer x
Smaller reporting company o    
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x   No

164,467,455 shares of common stock, par value $0.01 per share, were outstanding as of November 8, 2018.



EXPLANATORY NOTE

On May 31, 2018, DXC Technology Company (“DXC”) completed the spin-off (the “Spin-Off”) of its United States Public Sector business (“USPS”) held by Perspecta Inc. (“Perspecta”), and combination with Vencore Holding Corp. and KGS Holding Corp. (“KGS HC”) (the “Mergers”) pursuant to an Agreement and Plan of Merger dated October 11, 2017 (the “Merger Agreement”). To effect the Spin-Off, DXC distributed all of the shares of Perspecta common stock on a pro rata basis to the record holders of DXC common stock. Following the completion of the Spin-Off and Mergers, Perspecta, a Nevada corporation, became a publicly traded company.

Because the Spin-Off and the Mergers were not consummated until May 31, 2018, the unaudited Combined Condensed Financial Statements presented in this Quarterly Report on Form 10-Q include only the legacy USPS activity for the period from April 1, 2017 to September 30, 2017 and from April 1, 2018 to May 31, 2018, and Perspecta, including entities acquired in the Mergers, from June 1, 2018 to September 30, 2018.

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, all references to “Vencore” are to Vencore Holding Corp (“Vencore HC”), KGS HC, and their respective subsidiaries on a combined basis. The term “Parent” refers to DXC for the period from April 1, 2017 to May 31, 2018. In addition, “the Company,” “we,” “our” and “us” refer to USPS before giving effect to the Spin-Off and Mergers, for the period from April 1, 2017 to May 31, 2018, and to Perspecta and its combined subsidiaries, including the combined business of Vencore HC and KGS HC, after giving effect to the Spin-Off and the Mergers beginning June 1, 2018.

We also refer throughout to (1) the unaudited Condensed Consolidated Combined Financial Statements as the “Financial Statements,” (2) the unaudited Condensed Consolidated Combined Statements of Operations as the “Statements of Operations,” (3) the unaudited Condensed Consolidated Combined Balance Sheets as the “Balance Sheets”, (4) the unaudited Condensed Consolidated Combined Statements of Cash Flows as the “Statements of Cash Flows” and (5) the unaudited Condensed Consolidated Combined Statements of Changes in Stockholders’ Equity as the “Statements of Stockholders’ Equity.” In addition, references throughout to numbered “Notes” refer to the numbered Notes to the Financial Statements that we include in the Financial Statements section of this Quarterly Report on Form 10-Q.





TABLE OF CONTENTS

Item
 
 
Page
 
 
 
 
 
 
 
1.
 
2.
 
3.
 
4.
 
 
 
 
 
 
 
 
 
 
 
 
1.
 
1A.
 
2.
 
3.
 
4.
 
5.
 
6.
 
 
 
 
 
 
 


Table of Contents


PART I

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Combined Financial Statements (unaudited)
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 




1

Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
(unaudited)

 
 
Three Months Ended
 
Six Months Ended
(in millions, except per share amounts)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Revenue
 
$
1,068

 
$
706

 
$
1,861

 
$
1,382

 
 
 
 
 
 
 
 
 
Costs of services (excludes depreciation and amortization and restructuring costs)
 
813

 
557

 
1,410

 
1,082

Selling, general, and administrative (excludes depreciation and amortization and restructuring costs)
 
89

 
35

 
150

 
81

Depreciation and amortization
 
74

 
33

 
138

 
70

Restructuring costs
 
2

 
4

 
2

 
7

Separation and integration-related costs
 
21

 
6

 
65

 
17

Interest expense
 
37

 
5

 
47

 
7

Other income, net
 
(4
)
 

 
(28
)
 

Total costs and expenses
 
1,032

 
640

 
1,784

 
1,264

 
 
 
 
 
 
 
 
 
Income before taxes
 
36

 
66

 
77

 
118

Income tax expense
 
12

 
26

 
24

 
46

Net income
 
$
24

 
$
40

 
$
53

 
$
72

 
 
 
 
 
 
 
 
 
Earnings per common share(1):
 
 
 
 
 
 
 
 
  Basic
 
$
0.15

 
$
0.28

 
$
0.32

 
$
0.51

  Diluted
 
$
0.14

 
$
0.28

 
$
0.32

 
$
0.51


(1) Earnings per share information for the three and six months ended September 30, 2017 is computed using the 142.43 million shares of Perspecta common stock resulting from the Distribution, as Perspecta did not operate as a stand-alone entity during the period and therefore, no Perspecta common stock, stock options or other equity awards were outstanding and no dividends were declared or paid by Perspecta.

The accompanying Notes are an integral part of these unaudited Condensed Consolidated Combined Financial Statements.

2


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income
 
$
24

 
$
40

 
$
53

 
$
72

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
 
Cash flow hedges adjustments, net of tax(1)
 
6

 

 
5

 

Comprehensive income
 
$
30

 
$
40

 
$
58

 
$
72


(1) Tax expense related to cash flow hedge adjustments was not material for the three and six months ended September 30, 2018, respectively.

The accompanying Notes are an integral part of these unaudited Condensed Consolidated Combined Financial Statements.

3


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED BALANCE SHEETS
(unaudited)
 
 
As of
(in millions, except per share and share amounts)
 
September 30, 2018
 
March 31, 2018
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
126

 
$

Receivables, net of allowance for doubtful accounts of $2 and $0
 
535

 
354

Other receivables
 
122

 

Prepaid expenses and other current assets
 
173

 
74

Deferred contract costs
 
49

 
21

Total current assets
 
1,005

 
449

Intangible assets, net of accumulated amortization of $181 and $98
 
1,441

 
897

Goodwill
 
3,273

 
2,022

Property and equipment, net of accumulated depreciation of $100 and $66
 
363

 
290

Other assets
 
199

 
21

Total assets
 
$
6,281

 
$
3,679

LIABILITIES and STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
80

 
$

Current capital lease liability
 
146

 
160

Accounts payable
 
245

 
195

Accrued payroll and related costs
 
78

 
17

Accrued expenses and other current liabilities
 
508

 
180

Deferred revenue and advance contract payments
 
77

 
53

Income taxes payable
 
34

 

Total current liabilities
 
1,168

 
605

Non-current portion of long-term debt
 
2,415

 

Non-current capital lease liability
 
155

 
144

Non-current deferred revenue and advance contract payments
 
8

 
7

Non-current deferred tax liabilities
 
125

 
176

Other long-term liabilities
 
207

 
18

Total liabilities
 
4,078

 
950

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Parent company investment, prior to Spin-Off
 

 
2,729

Common stock, par value $0.01 per share; 750,000,000 shares authorized; 164,818,944 and 0 shares issued and outstanding
 
2

 

Additional paid-in capital
 
2,219

 

Retained earnings
 

 

Accumulated other comprehensive income
 
5

 

Treasury stock at cost, 938,287 shares and 0 shares
 
(23
)
 

Total stockholders’ equity
 
2,203

 
2,729

Total liabilities and stockholders’ equity
 
$
6,281

 
$
3,679


The accompanying Notes are an integral part of these unaudited Condensed Consolidated Combined Financial Statements.

4


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)

(in millions, except shares in thousands and per share amounts in ones)
Common Stock
Additional
Paid-in Capital
Retained Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive Income (Loss)
Treasury Stock
Parent Company Investment
Total Stockholders’ Equity
Shares
 
Amount
Balance at March 31, 2018

 
$

$

$

$

$

$
2,729

$
2,729

Impact of adoption of new accounting standard

 





4

4

Net income from April 1 to May 31, 2018

 





49

49

Transfers to Parent, net from April 1 to May 31, 2018

 





(145
)
(145
)
Balance at May 31, 2018

 





2,637

2,637

Dividend to DXC prior to May 31, 2018

 

(984
)




(984
)
Spin-Off activity
142,426

 
2

2,635




(2,637
)

Mergers activity
23,273

 

578





578

Net loss from June 1 to June 30, 2018

 


(20
)



(20
)
Other comprehensive loss

 



(1
)


(1
)
Dividends declared ($0.05 per share)

 

(8
)




(8
)
Balance at June 30, 2018
165,699

 
2

2,221

(20
)
(1
)


2,202

Net income from July 1 to September 30, 2018

 


24




24

Other comprehensive income

 



6



6

Stock-based compensation

 

1





1

Repurchases of common stock
(923
)
 




(23
)

(23
)
Stock option exercises and other common stock transactions
43

 

1





1

Dividends declared ($0.05 per share)

 

(4
)
(4
)



(8
)
Balance at September 30, 2018
164,819

 
$
2

$
2,219

$

$
5

$
(23
)
$

$
2,203


(in millions)
Parent Company Investment
Total Equity
Balance at March 31, 2017
$
416

$
416

Effects of purchase accounting
2,434

2,434

Net income from April 1 to June 30, 2017
32

32

Transfers to Parent, net
(77
)
(77
)
Balance at June 30, 2017
2,805

2,805

Net income from July 1 to September 30, 2017
40

40

Transfers to Parent, net
(108
)
(108
)
Balance at September 30, 2017
$
2,737

$
2,737


The accompanying Notes are an integral part of these unaudited Condensed Consolidated Combined Financial Statements.

5


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)

 
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
53

 
$
72

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
138

 
70

Stock-based compensation
 
3

 

Deferred income tax benefit
 
(11
)
 

Gain on sale of assets
 
(25
)
 

Other non-cash charges, net
 
(14
)
 
7

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Change in receivables
 
(4
)
 
29

Change in prepaid expenses and other current assets
 
(18
)
 
(5
)
Change in accounts payable and accrued liabilities
 
92

 
98

Change in income taxes payable and income tax liability
 
6

 

Change in deferred revenue and advanced contract payments
 
13

 
8

Other operating activities, net
 
3

 
(5
)
Net cash provided by operating activities
 
236

 
274

Cash flows from investing activities:
 
 
 
 
Payments for acquisitions, net of cash acquired
 
(312
)
 

Extinguishment of Vencore HC and KGS HC debt and related costs
 
(994
)
 

Proceeds from sale of assets
 
24

 

Purchases of property, equipment and software
 
(11
)
 
(5
)
Payments for outsourcing contract costs
 
(6
)
 
(6
)
Net cash used in investing activities
 
(1,299
)
 
(11
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(50
)
 

Proceeds from debt issuance
 
2,500

 

Payment of debt issuance costs
 
(43
)
 

Proceeds from revolving credit facility
 
50

 

Payments on revolving credit facility
 
(50
)
 

Payments on lease liability
 
(82
)
 
(76
)
Repurchases of common stock
 
(21
)
 

Dividend to DXC
 
(984
)
 

Dividends paid to Perspecta stockholders
 
(8
)
 

Net transfers to Parent
 
(88
)
 
(187
)
Net cash provided by (used in) financing activities
 
1,224

 
(263
)
Net increase in cash and cash equivalents, including restricted
 
161

 

Cash and cash equivalents, including restricted, at beginning of year
 

 

Cash and cash equivalents, including restricted, at end of period
 
161

 

Less restricted cash and cash equivalents included in prepaid expenses and other current assets
 
35

 

Cash and cash equivalents at end of period
 
$
126

 
$


The accompanying Notes are an integral part of these unaudited Condensed Consolidated Combined Financial Statements.

6


Table of Contents

PERSPECTA INC.
NOTES TO CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS (unaudited)


Note 1Overview and Basis of Presentation

Background

Perspecta is a leading provider of end-to-end enterprise information technology (“IT”), mission, and operations-related services across the United States (“U.S.”) federal government to the Department of Defense (“DoD”), the intelligence community, and homeland security, civilian and health care agencies, as well as to certain state and local government agencies through two reportable segments: (1) Defense and Intelligence, which provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies, and (2) Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.

On May 31, 2018, DXC Technology Company (“DXC”) completed the spin-off (the “Spin-Off”) of its U.S. Public Sector business (“USPS”). To effect the Spin-Off, DXC distributed all of the shares of Perspecta common stock on a pro rata basis to the record holders of DXC common stock (the “Distribution”). Following the Spin-Off, on May 31, 2018, and pursuant to the Merger Agreement, Perspecta completed the combination of USPS with Vencore HC and KGS HC through the following transactions:

Ultra KMS Inc., a wholly-owned subsidiary of Perspecta, merged with and into KGS HC (the “KeyPoint Merger”), with KGS HC surviving the KeyPoint Merger;
Concurrently with the KeyPoint Merger, Ultra First VMS Inc., another wholly-owned subsidiary of Perspecta, merged with and into Vencore HC (the “First Vencore Merger”), with Vencore HC surviving the First Vencore Merger; and
Immediately after the KeyPoint Merger and First Vencore Merger, Vencore HC merged with and into Ultra Second VMS LLC (the “Second Vencore Merger” and, together with the KeyPoint Merger and the First Vencore Merger, the “Mergers”), with Ultra Second VMS LLC surviving the Second Vencore Merger.

As a result of these transactions, the businesses owned by Vencore HC and KGS HC became wholly-owned by Perspecta.

As consideration for the Mergers, Perspecta paid affiliates of Veritas Capital Fund Management L.L.C. (“Veritas Capital”) $400 million in cash and approximately 14% of the total number of shares of Perspecta common stock outstanding immediately after the Mergers (on a fully diluted basis, excluding certain unvested equity incentive awards). See Note 4 – “Acquisitions.”

Perspecta’s Amendment No. 3 to the Registration Statement on Form 10, filed with the U.S. Securities and Exchange Commission (“SEC”) on April 30, 2018, was declared effective on May 2, 2018. Perspecta’s common stock began regular-way trading on the New York Stock Exchange on June 1, 2018 under the ticker symbol “PRSP.”

The accompanying unaudited Condensed Consolidated Combined Financial Statements and Notes present the combined results of operations, financial position, and cash flows of USPS for the periods prior to the completion of the Spin-Off and the combination with Vencore HC and KGS HC. Accordingly, the term “Parent” refers to DXC for periods from April 1, 2017 to May 31, 2018. As used in these Notes, the “Company,” “we,” “us,” and “our” refer to the combined businesses of USPS for the period from April 1, 2017 through May 31, 2018, and to Perspecta and its consolidated subsidiaries beginning June 1, 2018 and for the period from June 1, 2018 through September 30, 2018.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Combined Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the SEC. As discussed above, the Spin-Off and the Mergers were not consummated until May 31, 2018. In the period prior to consummation of the Spin-Off and Mergers, these financial statements include the combined financial statements of USPS, derived from the consolidated combined financial statements and accounting records of Parent as if USPS were operated on a stand-alone basis during the periods presented and were prepared in accordance with GAAP and, subsequent to the Spin-Off and Mergers, these financial statements represent the consolidated financial statements of

7

Table of Contents

Perspecta and its subsidiaries. Accordingly, the accompanying unaudited financial statements are presented as described below.

The periods prior to the Spin-Off and Mergers include:

the combined financial results and cash flows of USPS for the period from April 1, 2018 to May 31, 2018;
the combined financial results and cash flows of USPS for the three and six months ended September 30, 2017; and
the combined financial position of USPS as of March 31, 2018.

The period subsequent to the Spin-Off and Mergers includes:

the consolidated financial statements of Perspecta for the period from June 1, 2018 to September 30, 2018; and
the consolidated financial position of Perspecta as of September 30, 2018.
 
After the Spin-Off, DXC does not have any beneficial ownership of Perspecta or USPS. The chief executive officer and chief financial officer of DXC serve as members of the board of directors of Perspecta (the “Board of Directors”). Consequently, transactions between DXC and Perspecta are reflected as related party transactions pursuant to the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures. For the three and six months ended September 30, 2018, there was $4 million and $6 million of related party revenue from and $10 million and $12 million of related party expenses paid to DXC, respectively. For additional information about the allocation of expenses from DXC prior to the Spin-Off and certain continuing responsibilities between the Company and DXC, see Note 16 – “Related Party Transactions.”

Principles of Consolidation and Combination

The unaudited Condensed Consolidated Combined Financial Statements as of and for the three and six months ended September 30, 2018 reflect the financial position and results of operations of the Company, its consolidated subsidiaries and the joint ventures and partnerships over which the Company has a controlling financial interest. The combined financial statements as of and for periods prior to the consummation of the Spin-Off, reflect the financial position and results of operations of USPS as described above.

The financial statements for the periods prior to the Spin-Off are prepared on a carved-out and combined basis from the financial statements of DXC. The unaudited Condensed Consolidated Combined Statements of Operations of USPS reflect allocations of general corporate expenses from DXC, including, but not limited to, executive management, finance, legal, IT, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of Perspecta considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, USPS. The allocations may not, however, reflect the expense USPS would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if USPS had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as IT and infrastructure.

The unaudited Condensed Consolidated Combined Balance Sheet of USPS as of March 31, 2018 includes Parent assets and liabilities that are specifically identifiable or otherwise attributable to USPS, including subsidiaries and affiliates in which Parent has a controlling financial interest or is the primary beneficiary. Parent’s cash has not been assigned to USPS for the periods prior to consummation of the Spin-Off because those cash balances were not directly attributable to USPS. USPS reflects transfers of cash to and from Parent’s cash management system as a component of Parent company investment on the unaudited Condensed Consolidated Combined Balance Sheets. Parent’s receivables sales facility and long-term debt, other than capital lease obligations, have not been attributed to USPS for the periods prior to consummation of the Spin-Off because the Parent’s borrowings were not the legal obligation of USPS. All intercompany transactions have been eliminated in consolidation and combination.


8

Table of Contents

The unaudited Condensed Consolidated Combined Financial Statements included herein may not be indicative of the financial position, results of operations and cash flows of the Company in the future or if USPS had been operated as a consolidated group during all periods presented. In the opinion of management of the Company, the accompanying unaudited condensed combined financial statements of USPS contain all adjustments, including normal recurring adjustments, necessary to present fairly USPS’s financial position as of March 31, 2018 and its results of operations and cash flows for the period prior to consummation of the Spin-Off.

Business Segment Information

The Company reports separately information about each of its operating segments that engage in business activities from which revenue is recognized and expenses are incurred, and for which discrete financial information is available. These operating results are regularly reviewed by the Company’s chief operating decision maker, who is the chief executive officer. During the period prior to the Spin-Off, the Company had identified a single reportable segment that was regularly reviewed by the chief operating officer, who was the Company’s chief operating decision maker during that period. Following, and as a result of the Spin-Off and Mergers and the identification of a new chief operating decision maker, management reevaluated its reportable segments and determined that the information obtained, reviewed, and used by the chief operating decision maker to manage the Company’s financial performance is based on two reportable segments rather than one. These segments are aligned with the Company's industry verticals:    

Defense and Intelligence - provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies.
Civilian and Health Care - provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.

The segment information for the period prior to the Spin-Off has been recast to reflect the Company’s current reportable segments structure. There is no impact on the Company’s previously reported combined statements of income, balance sheets or statements of cash flows resulting from these segment changes.

Note 2Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASC 606”), which, along with amendments issued in 2015 through 2017, replaced most existing revenue recognition guidance under GAAP and eliminated industry specific guidance. ASC 606 requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also addresses the timing of recognition of certain costs incurred to obtain or fulfill a customer contract. Further, it requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and information regarding significant judgments and changes in judgments made.

The amendments provide two methods of adoption: full retrospective and modified retrospective. The Company adopted ASC 606 as of April 1, 2018 for contracts not completed at the date of adoption using the modified retrospective transition method. Under the modified retrospective method, prior periods were not restated but rather a cumulative catch-up adjustment was recorded on the adoption date.

A majority of the Company’s service revenue continues to be recognized over time as the Company delivers these services. Under ASC 606, certain sales commissions historically expensed are capitalized as costs to obtain a contract.

We recorded a net increase to opening retained earnings of $4 million as of April 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact related to the capitalization of certain sales commissions. The impact of adoption on revenue, selling, general, and administrative expenses, and net income was not material for the three and six months ended September 30, 2018. The cumulative impact of adoption on our September 30, 2018 balance sheet was as follows:


9

Table of Contents

 
 
As of September 30, 2018
(in millions)
 
As
Reported
 
Balances
Without
Adoption of
ASC 606
 
Effect of
Change
Higher/(Lower)
Assets
 
 
 
 
 
 
Receivables, net of allowance for doubtful accounts
 
$
535

 
$
529

 
$
6

Deferred contract costs
 
49

 
47

 
2

Other assets
 
199

 
192

 
7

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
508

 
502

 
6

Non-current deferred tax liabilities
 
125

 
122

 
3

Total stockholders’ equity
 
2,203

 
2,197

 
6


See Note 5 Revenue From Contracts With Customers” for further details.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that whenever cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals must be presented in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company adopted the standard on April 1, 2018, on a retrospective basis. The adoption of the amendment changed the presentation of certain information in the Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017 (year ended March 31, 2019 for the Company), including interim periods within those periods. The Company adopted the standard on April 1, 2018. The adoption of the amendment did not have a significant impact on the Financial Statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted the ASU 2017-12 on April 1, 2018. The adoption of the amendment did not have a significant impact on the Financial Statements.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). Previous guidance required the aggregation of all the components of net periodic benefit costs on the Statements of Operations and did not require disclosure of the location of net periodic costs on the Statements of Operations. Under the amended guidance, the service cost component of net periodic benefit cost is included within the same line as other compensation expenses. All other components of net periodic benefit cost are reported outside operating income. The Company adopted this guidance in the first quarter of Fiscal 2019 when pension obligations were acquired in the Mergers. The adoption of this guidance resulted in no retrospective change to the previous period presented because the Company had no defined benefit pension expense during that period. The net periodic pension benefit discussed in Note 14 – “Pension and Other Benefit Plans” does not include a service cost component, so all expense is reported in other income, net in the Financial Statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The amendments in ASU 2016-16 require the recognition of the income tax consequences for

10

Table of Contents

intra-entity transfers of assets other than inventory when the transfer occurs. Under current GAAP, current and deferred income taxes for intra-entity asset transfers are not recognized until the asset has been sold to an outside party. The amendments have been applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the guidance in the first quarter of the fiscal year ending March 31, 2019. The adoption of the amendments did not result in a significant impact on the Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment. The amendments in ASU 2017-04 require goodwill impairment to be measured using the difference between the carrying amount and the fair value of the reporting unit and require the loss recognized to not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 should be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2017-04 in the second quarter of the fiscal year ending March 31, 2019, but the application of this guidance did not impact the Company’s goodwill impairment test performed as of July 1, 2018.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A—Leases (“ASU 2016-02”). The amendments in ASU 2016-02 require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. For finance leases, expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, expense will generally be recognized on a straight-line basis over the lease term. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. The Company is required to adopt the guidance in the first quarter of the fiscal year ending March 31, 2020 using a modified retrospective approach. Early adoption is permitted. Perspecta is currently evaluating the timing and the impact of these amendments on its financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). The amendment gives entities another option for transition to Topic 842 and provides lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Entities can opt to continue to apply the legacy guidance in Accounting Standards Codification Topic 840, including its disclosure requirements (annual only), in the comparative periods presented in the year they adopt the new leases standard. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-11 on its financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) (“ASU 2018-14”). ASU 2018-14 makes changes to the disclosure framework for defined benefit pension plans. The amendment is effective for public entities for fiscal years ending after December 15, 2020, and early adoption is permitted. Retrospective application is required for all periods presented. The Company is currently evaluating the impact of adopting ASU 2018-14 on its financial statements and related disclosures, as well as evaluating the date and method of adoption.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 provides guidance for determining when a cloud computing arrangement

11

Table of Contents

includes a software license and makes changes to the requirements for capitalizing implementation costs incurred in a hosting arrangement that is as a service contract. The amendment is effective for public entities for fiscal years beginning after December 15, 2019, and early adoption is permitted. The update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15 on its financial statements and related disclosures, as well as evaluating the date and method of adoption.

Other recently issued ASUs effective after September 30, 2018 are not expected to have a material effect on Perspecta’s financial statements.

Note 3Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and accompanying Notes.

Amounts subject to significant judgment and/or estimates include, but are not limited to, determining the fair value of assets acquired and liabilities assumed, the evaluation of impairment of goodwill and other long-lived intangible assets, costs to complete fixed-price contracts, fair value, certain deferred costs, valuation allowances on deferred tax assets, loss accruals for litigation, and inputs used for computing stock-based compensation and pension related liabilities. These estimates are based on management’s best knowledge of historical experience, current events, and various other assumptions that management considers reasonable under the circumstances.

Reclassifications

Certain prior period balances in the accompanying Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on total assets, total liabilities, total equity, income before taxes or net income.

Revenue Recognition

The Company’s revenue from contracts with customers is derived from its primary service offerings, including technology and business solutions, systems engineering and integration, cybersecurity, applied research and big data analytics, and investigative and risk mitigation services to the U.S. government and its agencies. The Company also serves various state and local governments.

The Company performs under various types of contracts, which include (1) fixed price contracts, such as firm-fixed-price (“FFP”), (2) cost reimbursable contracts such as cost-plus-fixed-fee, cost-plus-award-fee and cost-plus-incentive-fee, and (3) time-and-materials (“T&M”) contracts, including fixed-price-level-of-effort (“FP-LOE”) contracts.

To determine the proper revenue recognition, the Company first evaluates whether it has a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable. The Company also evaluates whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an indefinite delivery, indefinite quantity award. In addition, the Company assesses contract modifications to determine whether the changes to existing contracts should be accounted for as part of the original contract or as a separate contract. Contract modifications for the Company may relate to changes in contract specifications and requirements and do not add distinct services, and therefore are accounted for as part of the original contract. If contract modifications add distinct goods or services and increase the contract value by the stand-alone selling price, those modifications are accounted for as separate contracts.

For each contract, the Company assesses if multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation. The Company generally separates multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the

12

Table of Contents

contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined and accounted for as a single performance obligation.

The Company’s contracts with the U.S. federal government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract. The Company accounts for renewal options as separate contracts when they include distinct goods or services at stand-alone selling prices.

Contracts with the U.S. federal government are generally subject to the Federal Acquisition Regulation (“FAR”) and priced on an estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. federal government and its agencies. Each contract is competitively priced and bid separately. Pricing for non-U.S. federal government agencies is based on specific negotiations with each customer. The Company excludes any taxes collected or imposed when determining the transaction price.

Certain of the Company’s contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. The Company estimates variable consideration at the expected value amount to which it expects to be entitled based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.

The Company allocates the transaction price of a contract to its performance obligations in the proportion of such obligation’s stand-alone selling price. The stand-alone selling prices of the Company’s performance obligations are generally based on an expected cost-plus margin approach. For certain product sales, the Company uses prices from other stand-alone sales. Substantially none of the Company’s contracts contain a significant financing component that would require an adjustment to the transaction price of the contract.

The Company recognizes revenue on our service contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the Company performs the promised services. For U.S. federal government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process.

The Company’s IT and business process outsourcing arrangements typically have a single performance obligation that are a series of distinct goods or services that are substantially the same and are provided over a period of time using the same measure of progress. Revenue derived from IT and business process outsourcing arrangements is generally comprised of a series of distinct services, and thus, is recognized over time based upon the level of services delivered in the distinct periods in which they are provided using an input method based on time increments. IT outsourcing arrangements may include nonrefundable upfront fees billed for activities to familiarize us with the client’s operations, take control over their administration and operation, and adapt them to the Company’s solutions. These activities typically do not qualify as separate performance obligations, and the related revenue is allocated to the relevant performance obligation and satisfied over time as the performance obligation is satisfied.

On FFP contracts, revenue recognized over time generally uses a method that measures the extent of progress toward completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method). Under the cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion (“EAC”). The cost-to-cost method best depicts the Company’s performance and transferring control of services promised to the customer. A performance obligation’s EAC includes all direct costs such as materials, labor, subcontract costs, overhead, and a ratable portion of general and administrative costs. In addition, the Company includes in an EAC future losses of a performance obligation estimated to be incurred on onerous contracts, as and when known, and the most likely amount of transaction price (revenue) that the Company expects to receive for unpriced change orders (modifications). On certain other contracts, principally T&M, FP-LOE, and cost-plus-fixed-fee, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer.

13

Table of Contents


Billed Receivables

Amounts billed and due from the Company’s customers are classified as receivables, net of allowance for doubtful accounts on the balance sheets. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer in the event the Company does not perform on our obligations under the contract.

Costs to Obtain a Contract

Certain sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. For sales commissions earned on contracts with a period of benefit of less than one year, the Company applies the practical expedient to recognize the costs as incurred. For sales commissions earned on contracts with a period of benefit beyond one year, such costs are deferred and amortized, on a straight-line basis, over a period of benefit not to exceed five years. The Company determined the average period of benefit considering the length of its customer contracts, its technology and other factors. The closing balance of the associated asset is $2 million and $7 million included within deferred contract costs and other assets, respectively, in the accompanying Balance Sheet as of September 30, 2018. Amortization expense of less than $1 million and $1 million for the three and six months ended September 30, 2018, respectively, is included in selling, general, and administrative expenses in the accompanying Statements of Operations.

Costs to Fulfill a Contract

Certain contract setup costs incurred upon initiation of a contract that are expected to be recovered over the course of an arrangement are capitalized in accordance with ASC Topic 340, Other Assets and Deferred Costs. Costs to fulfill a contract typically include contract set up costs that are directly related to a contract or an anticipated contract that generate or enhance resources to be used in satisfying performance obligations. These costs are amortized on a straight-line basis over the contract term. The closing balance of the outsourcing contract costs is $13 million, included within intangible assets in the accompanying Balance Sheet as of September 30, 2018. For the three and six months ended September 30, 2018, amortization expense of less than $1 million and $6 million, respectively, is included within depreciation and amortization in the accompanying Statements of Operations.

Acquisition Accounting and Goodwill

When the Company acquires a controlling financial interest through a business combination, it uses the acquisition method of accounting to allocate the purchase consideration to the assets acquired and liabilities assumed, which are recorded at fair value. Any excess of purchase consideration over the fair value of the assets acquired and liabilities assumed is recognized as goodwill.

Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. The results of operations of acquired businesses are included in the combined financial statements from the acquisition date.

The goodwill impairment test initially involves the assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A significant amount of judgment is involved in determining whether an event indicating impairment has occurred between annual testing dates. Such indicators include the loss of significant business, significant reductions in U.S. federal government appropriations or other significant adverse changes in industry or market conditions.


14

Table of Contents

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would not be able to realize the deferred tax assets in the future equal to their net recorded amount, the Company would record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

The Company records accruals for uncertain tax positions in accordance with ASC Topic 740, Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties. Interest and penalties related to unrecognized tax benefits are recognized and included in the provision for income taxes in the accompanying Statements of Operations. Accrued interest and penalties are included in the related tax liability in the Balance Sheets.

Cash and Cash Equivalents

The Company considers investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

The Company accounts for amounts collected associated with its MARPA Facility and unremitted to the Financial Institutions as restricted cash within our prepaid expenses and other current assets caption in the balance sheet. See Note 7 – “Sale of Receivables” for additional information and definitions of MARPA Facility and Financial Institutions.

Concentrations of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of receivables from trade customers and financing receivables.

The Company participates in cash management, funding arrangements and risk management programs, which were managed by the Parent prior to consummation of the Spin-Off. Perspecta performs ongoing credit evaluations of the financial condition of its customers. The Company’s receivables are primarily with the U.S. federal government, and thus the Company does not have material credit risk exposure for amounts billed.

Derivative and Hedging Activities

The Company primarily uses derivative instruments to manage interest rate risk on outstanding debt. The Company designates interest rate swaps as hedges for purposes of hedge accounting, through a match of all the critical terms of the derivative and the hedged interest rate risks, and recognizes all such derivative instruments as either assets or liabilities in the Balance Sheets at fair value. These derivative instruments are classified by their short- and long-term components, based on the fair value anticipated timing occurring within one year or beyond one year. The effective portion of changes in the fair value of derivative instruments designated and that qualify for cash flow hedges are reflected as adjustments to other comprehensive income, net of tax, and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. Any ineffective portion of the change in fair value of the

15

Table of Contents

derivatives is recognized directly in earnings.
 
All cash flows associated with the Company’s derivative instruments are classified as operating activities in the Statements of Cash Flows.

Leases

The Company’s leasing arrangements are accounted for as capital leases or operating leases based on the contractual terms of the individual leasing arrangements, which are cash settled on a recurring basis in accordance with its contractual terms. Capital lease obligations are presented on the face of the Balance Sheets as current and non-current capital lease liability and principal payments on these obligations are reflected in payments on lease liability within financing activities in the Statements of Cash Flows.

Intangible Assets

The estimated useful lives for finite-lived intangible assets are shown in the table below:
Acquired backlog
1 year
Software
2 to 10 years
Developed technology
6 years
Program assets
Expected program asset life
Outsourcing contract costs
Contract life, excluding option years

Acquired backlog intangible assets represent the funded economic value of predominantly long-term contracts, less the amount of revenue already recognized on those contracts. Acquired backlog was valued using the excess earnings approach, amortized over a one year period. Software is amortized predominately using the straight-line method. Developed technology intangible assets represent acquired intellectual property and were valued using the relief from royalty method. Program intangible assets are amortized in proportion to the estimated undiscounted cash flows projected over the estimated life of the asset or on a straight-line basis if such cash flows cannot be reliably estimated. Costs of outsourcing contracts, including costs incurred for bid and proposal activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed on a straight-line basis over the contract life, excluding option years. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or transition activities and can be separated into two principal categories: contract premiums and transition/set-up costs. Contract premiums are amounts paid to customers in excess of the fair value of assets acquired and are amortized as a reduction to revenue. Transition/set-up costs are primarily associated with assuming control over customer IT operations and transforming them consistent with contract specifications.

Note 4Acquisitions

On May 31, 2018, immediately following the consummation of the Spin-Off, the Company completed the Mergers. As defined in the Merger Agreement, Perspecta issued shares of Perspecta common stock to Veritas Capital and its affiliates, including 18,877,244 shares to The SI Organization Holdings LLC (the “Vencore HC Stockholder”) and 4,396,097 shares to KGS Holding LLC (the “KeyPoint Stockholder,” and, together with the Vencore HC Stockholder, the “Vencore Stockholders”), representing in the aggregate approximately 14% of the outstanding shares of Perspecta common stock immediately following the Mergers. As a result of these transactions, Vencore HC and KGS HC became wholly-owned subsidiaries of Perspecta.

The Spin-Off and Mergers were structured as a “Reverse Morris Trust” transaction, in which Perspecta was deemed the accounting acquirer of Vencore HC and KGS HC and their respective subsidiaries. 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. Accordingly, the fair value of the purchase consideration transferred was measured based on the fair value of approximately 14% of shares of the combined business, $400 million cash transferred by Perspecta to the Vencore Stockholders, and approximately $1.0 billion paid to extinguish certain existing Vencore HC and KeyPoint HC indebtedness.

16

Table of Contents

 
Under the acquisition method of accounting, total consideration exchanged was:
(in millions)
 
Amount
Preliminary fair value of equity purchase consideration received by Vencore Stockholders(1)
 
$
578

Preliminary fair value of cash purchase consideration received by Vencore Stockholders
 
400

Preliminary fair value of cash consideration paid by USPS to extinguish certain existing Vencore indebtedness
 
994

Consideration transferred
 
$
1,972

(1) 
Represents the fair value of consideration received by the Vencore HC Stockholder and the KeyPoint Stockholder for approximately 14% ownership in the combined company. The fair value of the purchase consideration transferred was based on 18,877,244 shares of Perspecta common stock distributed to Vencore HC Stockholder and 4,396,097 shares of Perspecta common stock distributed to the KeyPoint Stockholder as of the close of business on the record date for the Mergers, at the closing price of $24.86 per share on May 31, 2018.

The information presented below represents the allocation of Vencore’s purchase price to the assets acquired and liabilities assumed as of the acquisition date, May 31, 2018.

The major classes of assets and liabilities to which the purchase price allocated were as follows:
(in millions)
 
Estimated Fair Value
Current assets
 
$
332

Property and equipment
 
35

Intangible assets
 
622

Other assets
 
34

Accounts payable, accrued payroll, accrued expenses, and other current liabilities
 
(188
)
Deferred revenue
 
(12
)
Other liabilities
 
(91
)
Net identifiable assets acquired
 
732

Goodwill
 
1,240

Consideration transferred
 
$
1,972


Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the closing date of the Mergers.

The goodwill recognized in the acquisition is attributable to the intellectual capital, the acquired assembled work force and expected cost synergies, none of which qualify for recognition as a separate intangible asset. The goodwill is not expected to be deductible for tax purposes. Goodwill arising from the acquisition has been allocated on a preliminary basis to Perspecta’s reporting units based on the relative fair value of assets acquired.

The fair values of assets acquired and liabilities assumed are preliminary and based on a valuation using estimates and assumptions that are subject to change, which could result in material changes to the purchase price allocation. During the second quarter, the Company made certain valuation adjustments to provisional amounts previously recognized. These adjustments resulted in a net $1 million increase of the goodwill, primarily due to fair value adjustments resulting in a decrease in liabilities. As a result, the Company updated the preliminary allocation to Perspecta’s reportable segments as follows: $1,157 million allocated to Defense and Intelligence and $83 million allocated to Civilian and Health Care.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents results as if the Spin-Off and the Mergers and the related financing had occurred on April 1, 2017. The historical consolidated financial information of Perspecta has been adjusted in the pro forma information to give effect to the events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The effects of the Spin-Off are primarily attributable to interest expense associated with the incurrence of debt in connection with the Spin-Off. The effects of the Mergers primarily relate to amortization of acquired intangible assets. The consolidated financial information of Perspecta includes merger and integration-related costs that are not expected to recur and impact the combined results over the long-term. The unaudited pro forma results do not reflect future events that have occurred or may occur after the

17

Table of Contents

transactions, including but not limited to, the impact of any actual or anticipated synergies expected to result from the Mergers. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on April 1, 2017, nor is it necessarily an indication of future operating results.
 
 
Six Months Ended September 30, 2018
 
Period from April 1, 2018 to May 31, 2018
 
Six Months Ended September 30, 2018
(in millions, except per-share amounts)
 
Historical Perspecta(1)
 
Historical Vencore HC and KeyPoint HC
 
Effects of the Spin-Off
 
Effects of the Mergers
 
Pro Forma Combined for the Spin-Off and Mergers
Revenue
 
$
1,861

 
$
245

 
$

 
$

 
$
2,106

Net income (loss)
 
53

 
(57
)
 
(7
)
 
12

 
1

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share(2):
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.32

 
 
 
 
 
 
 
$
0.01

Diluted
 
0.32

 
 
 
 
 
 
 
0.01

(1) Revenue and net income includes $490 million and $71 million associated with Vencore HC and KeyPoint HC, respectively, for the period of June 1, 2018 through September 30, 2018.
(2) Historical and pro forma combined earnings per share information is computed based on 165.54 million basic weighted average shares and 165.82 million diluted shares. See Note 6 – “Earnings Per Share.”

 
 
Three Months Ended September 30, 2017
(in millions, except per-share amounts)
 
Historical Perspecta
 
Historical Vencore HC and KeyPoint HC
 
Effects of the Spin-Off
 
Effects of the Mergers
 
Pro Forma Combined for the Spin-Off and Mergers
Revenue
 
$
706

 
$
349

 
$

 
$

 
$
1,055

Net income (loss)
 
40

 
5

 
(9
)
 
(9
)
 
27

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share(1):
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.28

 
 
 
 
 
 
 
$
0.16

Diluted
 
0.28

 
 
 
 
 
 
 
0.16

(1) Historical earnings per share information for the three months ended September 30, 2017 is computed using the 142.43 million shares of Perspecta common stock resulting from the Distribution. See Note 6 – “Earnings Per Share.” Pro forma combined earnings per share includes the shares issued by Perspecta in connection with the Mergers. As a result, both basic and diluted pro forma combined earnings per share information is computed based on 165.49 million shares of Perspecta common stock, as Perspecta did not operate as a stand-alone entity during the period and therefore, no Perspecta common stock, stock options or other equity awards were outstanding and no dividends were declared or paid by Perspecta.
 
 
Six Months Ended September 30, 2017
(in millions, except per-share amounts)
 
Historical Perspecta
 
Historical Vencore HC and KeyPoint HC
 
Effects of the Spin-Off
 
Effects of the Mergers
 
Pro Forma Combined for the Spin-Off and Mergers
Revenue
 
$
1,382

 
$
692

 
$

 
$

 
$
2,074

Net income (loss)
 
72

 
2

 
(18
)
 
(29
)
 
27

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share(1):
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.51

 
 
 
 
 
 
 
$
0.16

Diluted
 
0.51

 
 
 
 
 
 
 
0.16

(1) Historical earnings per share information for the six months ended September 30, 2017 is computed using the 142.43 million shares of Perspecta common stock resulting from the Distribution. See Note 6 – “Earnings Per Share.” Pro forma combined earnings per share includes the shares issued by Perspecta in connection with the Mergers. As a result, both basic and diluted pro forma combined earnings per share information is computed based on 165.54 million shares of Perspecta common stock, as Perspecta did not operate as a stand-alone entity during the period and therefore, no Perspecta common stock, stock options or other equity awards were outstanding and no dividends were declared or paid by Perspecta.


18

Table of Contents

Note 5Revenue From Contracts With Customers

The Company’s primary service offerings are technology and business solutions, systems engineering and integration, cybersecurity, applied research and big data analytics, and investigative and risk mitigation services to the U.S. government and its agencies. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

The Company determines revenue recognition through the five-step model as follows:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation

Disaggregated Revenue

The following tables present revenue disaggregated by contract type:
 
 
Three Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Cost-reimbursable
 
$
231

 
$
20

 
$
251

Fixed-price
 
367

 
240

 
607

Time-and-materials
 
104

 
106

 
210

Total
 
$
702

 
$
366

 
$
1,068

 
 
Six Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Cost-reimbursable
 
$
340

 
$
41

 
$
381

Fixed-price
 
612

 
470

 
1,082

Time-and-materials
 
187

 
211

 
398

Total
 
$
1,139

 
$
722

 
$
1,861


The following tables present revenue disaggregated by prime or subcontractor:
 
 
Three Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Prime contractor
 
$
660

 
$
315

 
$
975

Subcontractor
 
42

 
51

 
93

Total
 
$
702

 
$
366

 
$
1,068

 
 
Six Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Prime contractor
 
$
1,077

 
$
650

 
$
1,727

Subcontractor
 
62

 
72

 
134

Total
 
$
1,139

 
$
722

 
$
1,861



19

Table of Contents

The following tables present revenue disaggregated by customer type:
 
 
Three Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Federal, including independent agencies
 
$
700

 
$
298

 
$
998

Non-federal (state, local, other)
 
2

 
68

 
70

Total
 
$
702

 
$
366

 
$
1,068

 
 
Six Months Ended September 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Federal, including independent agencies
 
$
1,136

 
$
591

 
$
1,727

Non-federal (state, local, other)
 
3

 
131

 
134

Total
 
$
1,139

 
$
722

 
$
1,861


Performance Obligations

As of September 30, 2018, approximately $2.9 billion of revenue is expected to be recognized from remaining unsatisfied performance obligations on executed contracts. The Company expects to recognize revenue on these remaining performance obligations within approximately twelve months.

Contract Balances

Contract assets consist of unbilled receivables, which result from services provided under contracts when revenue is recognized over time, revenue recognized exceeds the amounts billed to the customer, and right to payment is not just subject to the passage of time. Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Payment to employees and third parties for services provided to customers is generally immediate, while the related billing is generally within 90 days.

Contract liabilities include advance contract payments and billings in excess of costs incurred. Under certain contracts, the Company receives advances and milestone payments from its customers that exceed revenue earned to date, resulting in contract liabilities. Advances typically are not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the Company from the customer failing to adequately complete some or all of its obligations under the contract.

Contract assets and contract liabilities were as follows:
 
 
 
 
As Of
(in millions)
 
Balance Sheet Line Item
 
September 30, 2018
 
April 1, 2018
Contract assets:
 
 
 
 
 
 
Unbilled receivables
 
Receivables, net of allowance for doubtful accounts
 
$
316

 
$
193

 
 
 
 
 
 
 
Contract liabilities:
 
 
 
 
 
 
Current portion of deferred revenue and advance contract payments
 
Deferred revenue and advance contract payments
 
$
77

 
$
27

Non-current portion of deferred revenue and advance contract payments
 
Non-current deferred revenue and advance contract payments
 
$
8

 
$
7


Contract assets increased $123 million during the six months ended September 30, 2018, primarily due to the Mergers. There were no significant impairment losses related to the Company’s contract assets during the six months ended September 30, 2018.


20

Table of Contents

Contract liabilities increased $51 million during the six months ended September 30, 2018, primarily due to the Mergers. During the three and six months ended September 30, 2018, the Company recognized $12 million and $22 million, respectively, of the deferred revenue and advance contract payments at April 1, 2018 as revenue.

Note 6Earnings Per Share

Basic earnings per share (“EPS”) for the period ended September 30, 2018, is computed using the weighted average number of shares of common stock outstanding between the date of the Distribution and the end of the period. Diluted EPS reflects the incremental shares issuable upon the assumed exercise of stock options and vesting of other equity awards, based on the DXC equity awards that were converted to Perspecta awards on the date of the Distribution. At September 30, 2017, EPS is computed using the shares of Perspecta common stock resulting from the Distribution, as Perspecta did not operate as a stand-alone entity and therefore, no common stock, stock options or other equity awards were outstanding.

The following table reflects the calculation of basic and diluted EPS:


Three Months Ended
 
Six Months Ended
(in millions, except per share amounts)

September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Net income:
 
$
24

 
$
40

 
$
53

 
$
72

 
 
 
 
 
 
 
 
 
Common share information:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
165.49

 
142.43

 
165.54

 
142.43

Dilutive effect of stock options and equity awards
 
0.30

 

 
0.28

 

Weighted average common shares outstanding for diluted EPS
 
165.79

 
142.43

 
165.82

 
142.43

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
     Basic
 
$
0.15

 
$
0.28

 
$
0.32

 
$
0.51

     Diluted
 
$
0.14

 
$
0.28

 
$
0.32

 
$
0.51


Certain restricted stock units (“RSUs”) were excluded from the computation of diluted EPS because inclusion of these amounts would have had an anti-dilutive effect. The number of RSUs excluded were as follows:
Award Type
 
Three Months Ended September 30, 2018
 
Six Months Ended September 30, 2018
RSUs
 
5,160

 
6,884


Note 7Sale of Receivables

Receivables Sales Facility

On July 14, 2017, Enterprise Services LLC, a wholly-owned subsidiary of the Company (“ES LLC”), entered into a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with certain financial institutions (the “Financial Institutions”). The Purchase Agreement established a federal government obligor receivables purchase facility (the “MARPA Facility”), which is an off-balance sheet facility. Concurrently, Parent entered into a guaranty made in favor of the Financial Institutions, that guarantees the obligations of the sellers and servicers of receivables under the Purchase Agreement. The guaranty does not cover any credit losses under the receivables. In accordance with the terms of the Purchase Agreement, on January 23, 2018, the Purchase Agreement was amended to increase the facility limit from $200 million to $300 million in funding based on the availability of eligible receivables and the satisfaction of certain conditions. On May 31, 2018, the Purchase Agreement was amended to increase the facility limit from $300 million to $450 million in funding based on the availability of eligible receivables and the satisfaction of certain conditions.

21

Table of Contents


Under the MARPA Facility, the Company sells USPS’ eligible U.S. government obligor receivables, including both billed and certain unbilled receivables. The MARPA Facility has a one-year term, but the Purchase Agreement provides for optional extensions, if agreed to by the Financial Institutions, in each case for an additional six month duration. As part of the amendment on May 31, 2018, the term of the Purchase Agreement was extended through May 31, 2019.

The Company accounts for these receivable transfers as sales and derecognizes the sold receivables from its balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature. The Company estimated that its servicing fee was at fair value and therefore, no servicing asset or liability related to these services was recognized as of September 30, 2018. Sold receivables are presented as a change in receivables within operating activities in the Statements of Cash Flows.

During the three and six months ended September 30, 2018, the Company sold $714 million and $1.4 billion of billed and unbilled receivables, respectively. The amount outstanding at September 30, 2018 was $165 million. As of September 30, 2018, collections not remitted to the Financial Institutions corresponding to these receivables sales were $35 million. This amount represents restricted cash recorded by the Company within the prepaid expenses and other current assets caption of the Balance Sheet as of September 30, 2018.
 
 
 
 
 
Note 8Fair Value

The Company accounts for recurring and non‑recurring fair value measurements in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

Level 3 - Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity - e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security. If a change in Level 3 inputs occurs, the resulting amount might result in a significantly higher or lower fair value measurement.

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the ASC 820 hierarchy.


22

Table of Contents

The Company estimates the fair value of its long-term debt primarily using an expected present value technique, which is based on observable market inputs, using interest rates currently available to the Company for instruments with similar terms and remaining maturities. The estimated fair value of the Company’s long-term debt, excluding capital leases and unamortized debt issuance costs, was $2,525 million as of September 30, 2018, as compared with the gross carrying value of $2,516 million. If measured at fair value, long-term debt, excluding capital lease liabilities, would be classified in Level 2 of the fair value hierarchy.

Non-financial assets such as goodwill and tangible assets, intangible assets and other contract related long-lived assets are reduced to fair value in the period an impairment charge is recognized. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the three and six months ended September 30, 2018 and September 30, 2017, respectively.

Note 9Derivative Instruments

In the normal course of business, the Company is exposed to interest rate fluctuations. As part of its risk management strategy, the Company uses derivative instruments, primarily interest rate swaps, to hedge certain interest rate exposures. The Company’s objective is to add stability to interest expense and to manage its exposure to movements in market interest rates. The Company does not use derivative instruments for trading or any speculative purpose.

Derivatives Designated for Hedge Accounting

The Company uses interest rate swap agreements designated as cash flow hedges to mitigate its exposure to interest rate risk associated with the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted the debt into fixed interest rate debt. The Company entered into interest rate swap agreements concurrently with its Credit Facilities (as defined under Note 12 Debt”), on May 31, 2018. As of September 30, 2018, the Company had interest rate swap agreements with a total notional amount of $1.4 billion. The Company initially accounted for all changes in fair value of its interest rate swaps in the Statements of Operations until designation as a cash flow hedge of interest rate risk on June 22, 2018. As a result, the Company recorded a gain of $5 million, included in interest expense in the Statements of Operations for the six months ended September 30, 2018.

Following the June 22, 2018 cash flow hedge designation, all changes in the hedging instruments’ fair value are recorded in accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges is recorded in AOCI, net of taxes, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The pre-tax impact of gain (loss) on derivatives designated for hedge accounting recognized in other comprehensive income was not material for the three and six months ended September 30, 2018.

For the three and six months ended September 30, 2018, the Company performed both retrospective and prospective hedge effectiveness analyses for the interest rate swaps designated as cash flow hedges. The Company applied the long-haul method outlined in ASC Topic 815, Derivatives and Hedging, to assess retrospective and prospective effectiveness of the interest rate swaps. A quantitative effectiveness analysis assessment of the hedging relationship was performed using regression analysis. As of September 30, 2018, the Company has determined that the hedging relationship was highly effective.

As of September 30, 2018, we expect amounts of approximately $2 million pertaining to cash flow hedges to be reclassified from accumulated other comprehensive income into earnings over the next 12 months.

23

Table of Contents


Fair Value of Derivative Instruments

All derivatives are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. As of September 30, 2018, the gross fair value of our derivative assets in interest rate swaps designated for hedge accounting is $13 million and is presented as other assets in the balance sheet. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs.

Other risks

The Company is exposed to the risk of losses in the event of non-performance by counter parties to its derivative contracts. To mitigate counter party credit risk, the Company regularly reviews its credit exposure and the creditworthiness of counter parties. The Company also enters into enforceable master netting arrangements with some of its counter parties. However, for financial reporting purposes, it is Company policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counter parties.

Note 10Intangible Assets

Intangible assets, including preliminary fair values of those recorded in the Mergers, consisted of the following:
 
 
As of September 30, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Program assets
 
$
1,400

 
$
117

 
$
1,283

Software
 
80

 
44

 
36

Developed technology
 
105

 
8

 
97

Backlog
 
16

 
5

 
11

Outsourcing contract costs
 
20

 
7

 
13

Favorable leases
 
1

 

 
1

Total intangible assets
 
$
1,622

 
$
181

 
$
1,441

 
 
As of March 31, 2018
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Program assets
 
$
900

 
$
69

 
$
831

Software
 
75

 
28

 
47

Outsourcing contract costs
 
20

 
1

 
19

Total intangible assets
 
$
995

 
$
98

 
$
897


Total intangible assets amortization was $44 million and $83 million for the three and six months ended September 30, 2018, respectively, compared to $16 million and $36 million, respectively, for the three and six months ended September 30, 2017.

The increase in net and gross carrying value for the six months ended September 30, 2018, were primarily due to the Mergers. See Note 4 – “Acquisitions.”


24

Table of Contents

Estimated future amortization related to intangible assets as of September 30, 2018 is as follows:
Fiscal Year
 
(in millions)

Remainder of fiscal year 2019
 
$
95

2020
 
177

2021
 
161

2022
 
143

2023
 
131

Thereafter
 
734

Total
 
$
1,441


Note 11Goodwill

The following table summarizes the changes in the carrying amount of Goodwill, by segment, as of September 30, 2018.
(in millions)
 
Defense and Intelligence
 
Civilian and Health Care
 
Total
Balance as of March 31, 2018
 
$
977

 
$
1,045

 
$
2,022

Additions
 
1,157

 
83

 
1,240

Allocations from DXC
 
11

 

 
11

Balance as of September 30, 2018
 
$
2,145

 
$
1,128

 
$
3,273


The additions to goodwill during six months ended September 30, 2018 are due to the Mergers described in Note 4 – “Acquisitions.”

Goodwill Impairment Analysis

The Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2018, did not result in an impairment charge. This qualitative analysis under ASC Topic 350, Goodwill and Other Intangible Assets, considered all relevant factors specific to the reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.


25

Table of Contents

Note 12Debt

The following is a summary of the Company’s outstanding debt as of September 30, 2018:
 
 
Interest Rates
 
Maturities
 
September 30, 2018
(in millions)
Revolving Credit Facility
 
LIBOR + 1.75%
 
May 2023
 
$

Term Loan A Facilities (Tranche 1)
 
LIBOR + 1.625%
 
May 2021
 
322

Term Loan A Facilities (Tranche 2)
 
LIBOR + 1.75%
 
May 2023
 
1,629

Term Loan B Facility
 
LIBOR + 2.25%
 
May 2025
 
499

Subtotal senior secured credit facilities
 
 
 
 
 
2,450

Senior unsecured EDS Notes
 
7.45%
 
October 2029
 
66

Total debt
 
 
 
 
 
2,516

Less: current maturities of long-term debt, net (1)
 
 
 
 
 
(80
)
Less: unamortized debt issuance costs and premiums (2)
 
 
 
 
 
(21
)
Total long-term debt, net of current maturities
 
 
 
 
 
$
2,415

(1) Current maturities of long-term debt are presented net of $7 million of debt issuance costs associated with the Term Loan A Facilities and Term Loan B Facility.
(2) Includes $12 million of unamortized premiums on the assumed Electronic Data Systems Corporation (“EDS”) Notes resulting from the application of fair value accounting associated with the merger of the Enterprise Services business unit (“HPES”) of Hewlett Packard Enterprise Company (“HPE”) and Computer Sciences Corporation to form DXC.

Term Loan Facilities and Revolving Credit Facility

Following the Spin-Off, Perspecta obtained financing under secured credit facilities, consisting of (1) new senior secured term loan credit facilities in an aggregate principal amount of $2.0 billion (the “Term Loan A Facilities”) and $500 million (the “Term Loan B Facility”), net of $34 million of debt issuance costs and (2) a senior secured revolving credit facility in an aggregate principal amount of $600 million (the “Revolving Credit Facility,” and, together with the Term Loan A Facilities and Term Loan B Facility, the “Credit Facilities”), with $50 million initially drawn, net of $9 million of debt issuance costs. The Credit Facilities were in place and drawn upon at the closing of the Mergers on May 31, 2018. These Credit Facilities funded a $984 million cash distribution to DXC stockholders as a result of the Spin-Off, as well as $400 million for the cash consideration paid to Veritas Capital and approximately $1.0 billion repayment of existing Vencore debt. As of September 30, 2018, $600 million of available credit remained undrawn under the Revolving Credit Facility as the initial $50 million borrowing was repaid in June 2018.

The Credit Facilities contain negative covenants customary for financings of this type, including covenants that place limitations on the incurrence of additional indebtedness; the creation of liens; the payment of dividends or other restricted payments such as share repurchases; sales of assets; fundamental changes, including mergers and acquisitions; loans and investments; negative pledges; transactions with affiliates; restrictions affecting subsidiaries; modification to charter documents in a manner materially adverse to the lenders; changes in fiscal year and limitations on conduct of business. The Credit Facilities also contain affirmative covenants and representations and warranties customary for financings of this type. Perspecta was in compliance with all applicable covenants as of September 30, 2018.

In addition, the Revolving Credit Facility and Term Loan A Facilities contain financial maintenance covenants requiring, as of the end of any fiscal quarter of Perspecta ending on or after September 30, 2018, (a) a ratio of consolidated total net debt to consolidated EBITDA not in excess of 4.50:1.00, stepping down to 3.75:1.00 no later than fiscal quarter ending December 31, 2019 and thereafter stepping up to 4.00:1.00 during the twelve-month period following the consummation of a permitted acquisition that involves consideration with a fair market value in excess of $100 million and (b) a ratio of consolidated EBITDA to interest expense of not less than 3.00:1.00. The Company was in compliance with these covenants at September 30, 2018.

In addition, on May 31, 2018, Perspecta and each of the other grantors party thereto (the “Grantors”) entered into a Collateral Agreement (the “Collateral Agreement”) with MUFG Bank, Ltd. (“MUFG”), in its capacity as administrative agent, and MUFG Union Bank, N.A., in its capacity as collateral agent. Pursuant to the terms of the Collateral Agreement, each

26

Table of Contents

of the Grantors granted a perfected first priority security interest in substantially all of its assets to secure its obligations under the Credit Agreement and related documents to which it is a party, subject to certain customary exceptions.

Interest on the Company’s term loans is payable monthly or quarterly in arrears. The Company fully and unconditionally guaranteed term loans issued by its 100% owned subsidiaries. Interest on the Company’s senior notes is payable semi-annually in arrears. Generally, the Company’s notes are redeemable at the Company’s discretion at the then-applicable redemption prices plus accrued interest.

Expected maturities of long-term debt are as follows:
Fiscal Year:
(in millions)

Remainder of fiscal year 2019
$
44

2020
88

2021
88

2022
409

2023
88

Thereafter
1,799

Total
$
2,516


Note 13Capital Leases

Property under capital leases is comprised primarily of computers and related equipment. Capital lease assets included in the Balance Sheets were $314 million and $274 million as of September 30, 2018 and March 31, 2018, respectively. Accumulated depreciation on the property under capital leases was $83 million and $57 million as of September 30, 2018 and March 31, 2018, respectively.

Depreciation expense for capital lease assets was $25 million and $15 million for the three months ended September 30, 2018 and September 30, 2017, respectively. Depreciation expense for capital lease assets was $47 million and $30 million for the six months ended September 30, 2018 and September 30, 2017, respectively.

Capital lease obligations primarily consist of contractual arrangements with HPE’s wholly-owned leasing subsidiary (“HPE Financial Services”). Capital lease obligations included in the Balance Sheets were $301 million and $304 million as of September 30, 2018 and March 31, 2018, respectively. Interest expense on capital lease obligations was $5 million and $5 million for the three months ended September 30, 2018 and September 30, 2017, respectively. Interest expense on capital lease obligations was $9 million and $7 million for the six months ended September 30, 2018 and September 30, 2017, respectively.

As of September 30, 2018, future minimum lease payments required to be made under capital leases were as follows:
Fiscal Year:
(in millions)

Remainder of fiscal year 2019
$
99

2020
108

2021
71

2022
42

2023
10

Total minimum lease payments
330

Less: Amount representing interest and executory costs
29

Present value of net minimum lease payments
301

Less: Current capital lease liability
146

Non-current capital lease liability
$
155



27

Table of Contents

Note 14Pension and Other Benefit Plans

The Company offers a number of pension and other post-retirement benefit (“OPEB”) plans, life insurance benefits, deferred compensation and defined contribution plans. Most of the Company’s pension plans are not admitting new participants; therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates.

Defined Benefit Plans

As a result of the Mergers, the Company now sponsors defined benefit pension and post-retirement medical benefit plans for the benefit of eligible employees acquired in the Mergers. At the date of the Mergers, the net projected benefit obligations and assets were $489 million and $419 million, respectively, of which $7 million was recorded in other assets and $77 million in other long-term liabilities. The Company did not contribute to the defined benefit pension and other post-retirement benefit plans during the three and six months ended September 30, 2018, and does not expect to contribute during the remainder of fiscal year 2019.

The components of net periodic pension expense (benefit) were:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2018
Service cost
 
$

 
$

Interest cost
 
5

 
6

Expected return on assets
 
(7
)
 
(9
)
Net periodic pension benefit
 
$
(2
)
 
$
(3
)

The weighted-average rates used to determine the benefit obligation and net periodic pension cost were:
 
 
Rate
Benefit obligation:
 
 
Discount rate
 
4.3
%
Rate of increase in compensation levels
 
%
Net periodic pension cost:
 
 
Discount rate
 
4.3
%
Expected long-term rates of return on assets
 
7.3
%
Rates of increase in compensation levels
 
%

Deferred Compensation Plans

Effective May 1, 2018, Perspecta assumed sponsorship of the Enterprise Services LLC Deferred Compensation Plan (the “ES DCP”). The plan is a non-qualified deferred compensation plan maintained for a select group of management or highly compensated employees.

The ES DCP covers eligible former USPS employees who participated in the plan prior to the Spin-Off. The plan allows participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under the tax-qualified 401(k) plan. The plan does not provide for employer contributions, and does not admit new participants.

Certain management and highly compensated employees are eligible to defer all, or a portion of, their regular salary that exceeds the limitation set forth in the Internal Revenue Code of 1986 (the “Code”) Section 401(a)(17) and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. The liability, which is included in other long-term liabilities in the Company’s Balance Sheets, amounted to $3 million as of September 30, 2018.

28

Table of Contents


Effective as of the Mergers, Perspecta assumed sponsorship of Vencore HC’s Deferred Compensation Plan (the “Vencore HC DCP”). The Vencore HC DCP is a non-qualified deferred compensation plan maintained for a select group of management, highly compensated employees and non-employee directors.

The Vencore HC DCP covers eligible employees who participated in Vencore HC’s Deferred Compensation Plan prior to the Mergers. It allows participating employees to defer the receipt of current compensation to a future distribution date or event above the amounts that may be deferred under Perspecta’s tax-qualified 401(k) plan.

Certain management and highly-compensated employees are eligible to defer all, or a portion of, their regular salaries that exceed the limitation set forth in Section 401(a)(17) of the Code and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. The liability, which is included in other long-term liabilities in the Company’s Balance Sheets, amounted to $11 million as of September 30, 2018.

On October 9, 2018, Perspecta’s Board of Directors, upon the recommendation of its Human Resources and Compensation Committee, adopted a framework for a new, Company-sponsored nonqualified deferred compensation plan (the “Plan”), to replace the existing deferred compensation plans described above. The Plan will be effective January 1, 2019.

The Plan is an unfunded, nonqualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees of the Company, including the Company’s principal executive officer, principal financial officer and other “named executive officers.” Non-employee directors of the Company are also eligible to participate and defer their cash fees under the Plan.

Below is a brief description of the terms and conditions of the Plan. Currently, there are no amounts payable to any named executive officer or director under the Plan.

The Plan is an account-based plan that allows participants to defer voluntarily the payment of current compensation to future years. The Plan permits each participant to defer cash compensation up to any limits set forth in the Plan, which amounts are credited to a bookkeeping account established for the participant under the Plan. The amounts credited to a participant’s account are fully vested. The Plan does not provide for any employer contributions.

Amounts credited to a participant’s account are indexed to one or more deemed investment alternatives chosen by the participant from a range of alternatives available under the Plan. Each participant’s account is adjusted to reflect gains and losses based on the performance of the selected investment alternatives. None of the deemed investment options provide for an above-market or preferential rate of return.

A participant may receive distributions from the Plan upon separation from service or on in-service dates specified by the participant, in the form of distribution elected by the participant available under the Plan. There will be a six-month delay for commencement of payment upon termination of employment to any “specified employee” as defined under Internal Revenue Code Section 409A. The Human Resources and Compensation Committee (or its authorized delegate) will be the administrator of the Plan.

Note 15Income Taxes

The Company’s effective tax rate (“ETR”) was approximately 33% and 31% for the three and six months ended September 30, 2018, respectively, as compared to an estimated 39% for both the three and six months ended September 30, 2017, that was presented on a carve-out basis. The decrease in the ETR for the three and six months ended September 30, 2018 compared to the same periods in the prior year, was primarily driven by the reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, partially offset by an increase in non-deductible transaction expenses.


29

Table of Contents

On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes significant changes to the Internal Revenue Code with varying effective dates and reduces the maximum corporate income tax rate to 21% effective as of January 1, 2018, creates a new limitation on the deductibility of interest expense, limits the deductibility of certain executive compensation and allows for immediate capital expensing of certain qualified property, among other changes.

Under SEC staff issued Staff Accounting Bulletin No 118, the Company has made reasonable estimates and has recorded provisional amounts during the Company’s fiscal year ending March 31, 2018. The Company has not made any adjustments during the six months ended September 30, 2018 to the provisional amounts recorded. The Company expects to finalize its assessment with regard to the provisional items recorded related to the revaluation of deferred items for the reduction in federal rate and capital expensing within the allowed one-year measurement period.

The Tax Matters Agreement, entered into with DXC in connection with the Spin-Off, states each company’s rights and responsibilities with respect to payment of taxes, tax return filings and control of tax examinations. Except for Vencore HC and KeyPoint HC, the Company is generally only responsible for tax assessments, penalties and interest allocable to periods (or portions of periods) related to USPS beginning after the Spin-Off and Mergers. The Company has recorded income tax refunds receivable from the Internal Revenue Service (“IRS”) and various state taxing authorities of approximately $101 million that are payable to DXC upon receipt under the Tax Matters Agreement, which are included in Other receivables and Accrued expenses and other current liabilities at September 30, 2018.

The Company’s entities included in the Spin-Off are currently under examination or in appeals in several tax jurisdictions. The tax years that remain open under statute of limitations and currently under IRS review include:
Jurisdiction    
 
Tax Years Subject to Examination
U.S. Federal
 
2005 and forward
Various U.S. States
 
2003 and forward

The IRS is not currently examining Vencore HC or KeyPoint HC for any open years, but entities related to these businesses are open to examination in various state and local jurisdictions.

Note 16Related Party Transactions

Corporate Allocations

The Statements of Operations include an allocation of general corporate expenses from Parent for certain management and support functions that are provided on a centralized basis within Parent. These management and support functions include, but are not limited to, executive management, finance, legal, IT, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. These allocations were $24 million for the period from April 1 to May 31, 2018, $41 million for the three months ended September 30, 2017, and $84 million for the six months ended September 30, 2017, and they are recorded within costs of services and selling, general and administrative in the Statements of Operations.

Management of the Company and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, USPS prior to the Spin-Off. These allocations may not, however, reflect the expense USPS would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if USPS had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as IT and infrastructure.

Parent Company Investment

Parent investment in the Balance Sheets, Statements of Cash Flows and Statements of Equity represents the Parent’s historical investment in USPS, the net effect of transactions with and allocations from Parent and USPS’s accumulated earnings prior to consummation of the Spin-Off.

30

Table of Contents


Transition Agreements with DXC

DXC does not have an ownership interest in Perspecta following the Spin-Off, and the Company operates independently of DXC, apart from certain agreements pursuant to the Merger Agreement between Perspecta and DXC, including the Separation and Distribution Agreement (the “SDA”), and certain transition services agreements. In order to govern the ongoing relationships between the Company and DXC after the Spin-Off and to facilitate an orderly transition, the Company and DXC entered into agreements providing for various services and rights following the Spin-Off and under which the Company and DXC agreed to indemnify each other against certain liabilities arising from their respective businesses.

Note 17 Stockholders' Equity

Description of Capital Stock

The Company has authorized share capital consisting of 750 million shares of common stock, par value $0.01 per share, and 1 million shares of preferred stock, par value $0.01 per share.

Each share of common stock is equal in all respects to every other share of common stock of the Company. Each share of common stock is entitled to one vote per share at each annual or special meeting of stockholders for the election of directors and upon any other matter coming before such meeting. Subject to all the rights of the preferred stock, dividends may be paid to holders of common stock as and when declared by the Board of Directors.

Cash Dividends

On June 1, 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share on Perspecta’s common stock, approximately $8 million in the aggregate, which was paid on July 17, 2018 to common stockholders of record at the close of business on June 11, 2018. On August 14, 2018, the Board of Directors declared a dividend of $0.05 per share on Perspecta’s common stock, approximately $8 million in the aggregate, which was paid on October 16, 2018 to common stockholders of record at the close of business on September 5, 2018. On November 14, 2018, the Board of Directors declared a dividend of $0.05 per share payable on January 15, 2019 to common stockholders of record at the close of business on December 5, 2018.

Share Repurchase Program

On June 1, 2018, the Board of Directors authorized up to $400 million for future repurchases of outstanding shares of Perspecta’s common stock. Repurchases may be made at the Company’s discretion from time to time on the open market depending on market conditions. The repurchase program has no time limit, does not obligate the Company to make any repurchases and may be suspended for periods or discontinued at any time. During the six months ended September 30, 2018, the Company repurchased 923,188 shares of its common stock for aggregate consideration of $23 million, of which $2 million was settled subsequent to the end of the second quarter. The shares were repurchased at an average price of $24.38 per share and are reported as treasury stock at cost. The shares repurchased are retired immediately and included in the category of authorized but unissued shares. For accounting purposes, the excess of purchase price over par value of the common shares is recorded as a reduction of additional paid-in-capital. The total remaining authorization for future common share repurchases under the share repurchase program was $377 million as of September 30, 2018.


31

Table of Contents

Note 18Cash Flows

Cash payments for interest on indebtedness and income taxes and other select non-cash activities are as follows:
 
 
Six Months Ended
(in millions)
 
September 30, 2018
 
September 30, 2017
Cash paid for:
 
 
 
 
Interest
 
$
33

 
$
4

Taxes on income, net of refunds
 
$
19

 
$
46

 
 
 
 
 
Non-cash activities:
 
 
 
 
Investing:
 
 
 
 
Equipment acquired through capital lease obligations
 
$
83

 
$
10

Financing:
 
 
 
 
Dividends declared but not yet paid
 
$
8

 
$

Stock issued for the acquisition of Vencore
 
$
578

 
$


Note 19Segment Information

USPS was a reportable segment of DXC through May 31, 2018. As a result of the Spin-Off and Mergers on that date, during the first quarter of fiscal year 2019, Perspecta’s management reevaluated its operating segments and segment reporting, and determined that the Company’s chief operating decision maker, the chief executive officer, evaluates Perspecta’s combined operations based on two reportable segments: (1) Defense and Intelligence, and (2) Civilian and Health Care. Management believes that these changes provide investors with a more precise view of field operations and corporate costs that accurately aligns with the chief operating decision maker’s view of the business. In the following tables, corporate activity is reported separately to reconcile to the Statements of Operations. The accounting policies of the reportable segments are the same as those described in Note 1 – “Overview and Basis of Presentation.” Reportable segments and their respective operations are defined as follows:

Defense and Intelligence

Through its Defense and Intelligence business, Perspecta provides cybersecurity, data analytics, digital transformation, information technology modernization, and agile software development, as well as technology to support intelligence, surveillance, and reconnaissance services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies.

Key competitive differentiators for the Defense and Intelligence segment include global scale, solution objectivity, depth of industry expertise, strong partnerships, vendor and product independence and end-to-end solutions and capabilities. Evolving business demands such as globalization, fast-developing economies, government regulation and growing concerns around risk, security, and compliance drive demand for these offerings.

Civilian and Health Care

Through its Civilian and Health Care business, Perspecta provides enterprise IT transformation and modernization, application development and modernization, enterprise security, risk decision support, operations and sustainment, systems engineering, applied research, cyber services, and cloud transformation to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.


32

Table of Contents

Segment Measures

The following table summarizes operating results regularly provided to the chief operating decision maker by reportable segment and a reconciliation to the financial statements:
(in millions)
 
Defense and Intelligence
 
Civilian and Health Care
 
Total Reportable Segments
Three Months Ended September 30, 2018
 
 
 
 
 
 
Revenue
 
$
702

 
$
366

 
$
1,068

Segment profit
 
$
71

 
$
21

 
$
92

Depreciation and amortization(1)
 
$
34

 
$
40

 
$
74

 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
Revenue
 
$
357

 
$
349

 
$
706

Segment profit
 
$
27

 
$
53

 
$
80

Depreciation and amortization(1)
 
$
15

 
$
18

 
$
33

(1) Depreciation and amortization as presented includes amortization of acquired intangible assets of $36 million and $18 million for the three months ended September 30, 2018 and September 30, 2017, respectively.

(in millions)
 
Defense and Intelligence
 
Civilian and Health Care
 
Total Reportable Segments
Six Months Ended September 30, 2018
 
 
 
 
 
 
Revenue
 
$
1,139

 
$
722

 
$
1,861

Segment profit
 
$
96

 
$
68

 
$
164

Depreciation and amortization(2)
 
$
64

 
$
74

 
$
138

 
 
 
 
 
 
 
Six Months Ended September 30, 2017
 
 
 
 
 
 
Revenue
 
$
677

 
$
705

 
$
1,382

Segment profit
 
$
50

 
$
99

 
$
149

Depreciation and amortization(2)
 
$
33

 
$
37

 
$
70

(2) Depreciation and amortization as presented includes amortization of acquired intangible assets of $61 million and $35 million for the six months ended September 30, 2018 and September 30, 2017, respectively.

Reconciliation of Reportable Segment Profit to Consolidated Income Before Taxes

The Company’s management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenue less segment cost of services, selling, general and administrative, and depreciation and amortization. The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate fu