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Section 1: 10-K (ANNUAL REPORT ON FORM 10-K)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
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
398236548_logoprspa07.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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
PRSP
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o  Yes  x  No

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.
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 Act).  o Yes  x   No

The aggregate market value of Perspecta’s voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, which was September 30, 2018, was approximately $3.6 billion.

162,729,752 shares of common stock, par value $0.01 per share, were outstanding as of May 31, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Perspecta’s Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”), which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended March 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements and assumptions contained in this Annual Report on Form 10-K that do not directly and exclusively relate to historical facts could be deemed “forward-looking statements.” Forward-looking statements are often identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “may,” “could,” “should,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target” and “will” and similar words and terms or variations of such. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking statements include, among other things, statements with respect to our financial condition, results of operations, cash flows, business strategies, prospects, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to:

any issue that compromises our relationships with the U.S. federal government, or any state or local governments, or damages our professional reputation;
changes in the U.S. federal, state and local governments’ spending and mission priorities that shift expenditures away from agencies or programs that we support;
any delay in completion of the U.S. federal government’s budget process;
failure to comply with numerous laws, regulations and rules, including regarding procurement, anti-bribery and organizational conflicts of interest;
failure by us or our employees to obtain and maintain necessary security clearances or certifications;
our ability to compete effectively in the competitive bidding process and delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us;
our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts;
problems or delays in the development, delivery and transition of new products and services or the enhancement of existing products and services to meet customer needs and respond to emerging technological trends;
failure of third parties to deliver on commitments under contracts with us;
misconduct or other improper activities from our employees or subcontractors;
delays, terminations or cancellations of our major contract awards, including as a result of our competitors protesting such awards;
failure of our internal control over financial reporting to detect fraud or other issues;
failure or disruptions to our systems, due to cyber-attack, service interruptions or other security threats;
failure to be awarded task orders under our indefinite delivery/indefinite quantity (“ID/IQ”) contracts;
changes in government procurement, contract or other practices or the adoption by the government of new laws, rules and regulations in a manner adverse to us; and
the other factors described in “Risk Factors” in this Annual Report on Form 10-K.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections titled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in other information we publicly disclose from time to time. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties.

No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.

Throughout this Annual Report on Form 10-K, we refer to Perspecta Inc., together with our consolidated or combined subsidiaries, as “we,” “us,” “our,” “Perspecta,” or the “Company.” All references to “Vencore” are to our legacy companies Vencore Holding Corp. (“Vencore HC”), KGS Holding Corp. (“KGS HC”) and their respective subsidiaries on a combined basis for the period prior to May 31, 2018, the date they were acquired by Perspecta. The term “Parent” refers to Hewlett-Packard Company, now known as HP Inc. (“HPI”) for the period prior to October 31, 2015, to Hewlett Packard Enterprise Company (“HPE”) for the period of November 1, 2015 to March 31, 2017, and to DXC Technology Company (“DXC”) for

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the period from April 1, 2017 to May 31, 2018. We also refer throughout to (1) the Consolidated Combined Financial Statements as the “Financial Statements,” (2) the Consolidated Combined Statements of Operations as the “Statements of Operations,” (3) the Consolidated Combined Statements of Comprehensive Income as the “Statements of Comprehensive Income,” (4) the Consolidated Combined Balance Sheets as the “Balance Sheets,” (5) the Consolidated Combined Statements of Cash Flows as the “Statements of Cash Flows” and (6) the Consolidated Combined Statements of Stockholders’ Equity as the “Statements of Stockholders’ Equity.” In addition, references throughout to numbered “Notes” refer to the numbered Notes to the Consolidated Combined Financial Statements that we include in the Financial Statements and Supplementary Data section of this Annual Report on Form 10-K.

PART I

ITEM 1. BUSINESS

Overview

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 as well as to certain state and local government agencies.

Perspecta provides government customers with highly differentiated offerings and capabilities, offering compelling scale, a promising financial profile, an extensive intellectual property portfolio, and unparalleled knowledge in areas that are directly aligned with government priorities. Although newly formed, Perspecta has evolved from some of the most iconic firms in government services market with a proud legacy of service to customers for more than 50 years.

History and Development

On May 31, 2018, Perspecta Inc. became an independent company through the consummation of the spin-off of the DXC U.S. Public Sector (“USPS”) business (the “Spin-Off”), and mergers with Vencore HC and KGS HC (the “Mergers”). 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”). On June 1, 2018, Perspecta began trading on the New York Stock Exchange under the ticker symbol “PRSP.” Both Vencore HC and KGS HC were owned by affiliates of Veritas Capital Fund Management, L.L.C. (“Veritas Capital”), a leading private equity firm recognized for its in-depth knowledge and understanding of government and technology-enabled end markets. Veritas Capital has remained an investor in Perspecta.

Each of the three legacy companies that formed Perspecta has a rich heritage and a strong set of capabilities:

The USPS business of DXC dates back to 1962, when H. Ross Perot founded Electronic Data Systems Corporation (“EDS”), a pioneer in IT infrastructure, applications and business process outsourcing. EDS was acquired by Hewlett-Packard Company in 2008, and later merged into DXC in April 2017.
Vencore, Inc., now renamed Perspecta Engineering Services Inc. (“PES”), traces its roots back to General Electric Company's aerospace division, established in 1972 as The SI Organization Inc. (“The SI”) to enable the National Reconnaissance Office (“NRO”) to create a comprehensive, space-based national intelligence system. The SI was acquired by the predecessor of Lockheed Martin Corporation (“Lockheed Martin”), the Martin Marietta Corporation, in 1993 and sold to Veritas Capital in 2010. The SI rebranded as Vencore, Inc. after the acquisitions of Applied Communication Sciences in 2013 and QinetiQ North America Services and Solutions Group in 2014, which brought capabilities in applied research and technology solutions, agile software development for mission-critical systems, classified and commercial launch support, spacecraft engineering and enterprise IT.
The legacy of KeyPoint is Kroll Government Services, Inc. (“KGS”), which was founded in 1995 to provide investigative due diligence and independent investigation services for police departments. KGS expanded to investigative support services for federal security and border patrol agents for the Department of Homeland Security (“DHS”) in 2003 and the National Background Investigation Bureau in 2004. In 2009, Kroll Government Services was acquired by Veritas Capital and renamed KeyPoint Government Solutions, Inc., which remains the largest provider of background investigative services for the U.S. government.

Our Offerings

With offerings in mission services, digital transformation and enterprise operations, our team of over 14,000 engineers, analysts, investigators and architects create repeatable, differentiated solutions aligned to our customers' goals. Our end-

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to-end portfolio of service offerings and solutions are supported by a strong engine of innovation in Perspecta Labs Inc. (“Perspecta Labs”), and a broad partner network. Our ten offering families consist of:

Application services. We develop, modernize, transform and manage customers’ enterprise application portfolios enabling a shift of IT spend from maintenance and operations to innovation. Our customers experience accelerated time-to-mission benefits by applying Agile/DevOps frameworks, accelerators, and other reusable components.
Analytics and data services. We offer an analytic services portfolio and robust partner ecosystem which enables our customers to gain rapid insights that accelerate their digital transformation journey and to make critical decisions to enable business and mission outcomes defensible with data-driven analysis.
Applied research. We deliver research, engineering, consulting and technology solutions that drive market innovation across government. Primary research areas include cybersecurity, cloud, quantum computing, network configuration and data analytics capabilities.
Cybersecurity. We bring transformative cyber expertise and mission-enabled solutions to the forefront of operations. Our security solutions predict attacks, proactively respond to threats, ensure compliance and protect data, applications, infrastructure and endpoints.
Cloud computing and infrastructure services. We help customers maximize their private cloud, public cloud and legacy infrastructure, in order to transform, optimize, and secure their hybrid environments.
Digital strategy and transformation. We accelerate customers’ digital transformation and business results through innovative approaches to transforming legacy technologies, processes and applications.
Digital workplace. We provide a user-focused digital workplace environment to enable government organizations to accomplish their missions with secure devices, productivity and collaboration tools, and workplace support.
Integrated Solutions. Our industry-specific solutions enable organizations to quickly integrate technology, transform their operations and develop new ways of doing business.
Investigative services. We provide identification and authentication validation to government organizations through investigative and risk mitigation services. We also help the government identify and eliminate fraud, waste, and abuse through integrated data analysis, medical claims review, and investigation services.
Systems engineering and integration. We help customers design, manage and integrate complex systems throughout the project life cycle to ensure enterprises are successful, affordable and reliable.

Long Standing Relationships with Industry and Customers

We support the toughest problems throughout the U.S. public sector such as protecting networks from cyber threats, enabling a trusted workforce to handle sensitive information, delivering student financial aid, and ensuring the integrity of government health care payments. Using our market-leading enterprise offerings and solutions, we help our government customers implement modern collaborative workplaces, hybrid cloud platforms and integrated digital systems of engagement with their enterprise management systems. By delivering these modern enterprise solutions, often while ensuring interoperability with mission critical legacy systems, we help our government customers better realize the benefits of technology, which will ultimately enable them to fulfill their mission objectives and achieve business outcomes.

We believe that our sophisticated solutions and proprietary processes and tools, developed over decades-long support of our customers’ missions, promote our longstanding relationships with our customers, with relationships with certain key customers spanning over 50 years.

We categorize our customers into two reporting 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 our chief operating decision maker, who is our Chief Executive Officer. Our reportable segments are:

Defense and Intelligence, which provides services to the Department of Defense (“DoD”), intelligence community, branches of the U.S. Armed Forces, and other DoD agencies; and
Civilian and Health Care, which provides services to the DHS, Department of Justice (“DOJ”), Department of Health and Human Services (“HHS”), as well as other federal civilian and state and local government agencies.

In fiscal year 201993% of our $4.0 billion in revenue was from the U.S. federal government, and we serve as the prime contractor on 94% of our contracts, as measured by annual revenue. Although rarely exercised, a significant portion of each segment’s contracts are subject to termination at the election of the government.

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Defense and Intelligence Segment

We provide a broad array of services for our Defense and Intelligence customers, including enterprise IT for massive DoD networks, model-based systems engineering and integration to support classified missions, applied research and development for defense and intelligence laboratories, and investigative support for personal security clearances. Example customer engagements include:
U.S. Navy. We provide the U.S. Navy with innovative solutions to secure its intranet, the largest in the world, by implementing a broad range of integrated security solutions to improve depth and secure posture, and network security and authentication for secure network access across all devices. Through our multifaceted security solution, the U.S. Navy’s intranet successfully detects over 300 million threats and prevents over 2.5 billion unauthorized intrusion attempts per year.
Defense Information Systems Agency (“DISA”). We partnered with DISA to transform key applications and services to drive efficiencies, improve security and capture costs savings. Through the integration of our offerings, DISA is able to provide integrated, interoperable and assured infrastructure capabilities, applications and services to its users across the software development lifecycle, engineering and technical support.
U.S. federal government. We are partnering with a client in the U.S. federal government to develop a DevOps environment, providing IT and engineering services for software residing on the government’s secure version of Amazon Web Services (“AWS”). The program scope includes identifying, prioritizing, integrating, and testing new and modified software and components to satisfy the architectural vision of the enterprise of the software services platform. Through the contract, our government client has enjoyed an exponential growth in the user base and the number of software services offerings to the enterprise community, and as a result, realized savings in project schedules and cost across many contracts within the enterprise.

Revenue generated from Defense and Intelligence segment customers was $2.6 billion, or approximately 64% of our revenue in fiscal year 2019 as compared to $1.4 billion, or approximately 50% of our revenue in fiscal year 2018. Our key Defense and Intelligence customers include the U.S. Army, U.S. Navy, U.S. Marine Corps, U.S. Air Force, and the Joint Combatant Commands. In fiscal year 2019, customers that generated more than 10% of Defense and Intelligence segment revenue include the Navy and the NRO.

Civilian and Health Care Segment

Our work spans the full breadth of civilian and health care agencies across the U.S. federal government as well as selected state and local governments, including homeland security, financial services, law enforcement, education, and enterprise IT. Example customer engagements include:

Centers for Medicare and Medicaid Services (“CMS”). As a result of the implementation of the Affordable Care Act, uninsured Americans were able to purchase health insurance through the Federal Health Insurance Marketplace (healthcare.gov), which we helped CMS and the U.S. government develop. More than 18 million people used the healthcare.gov website from November 1 to December 15, 2017, including 700,000 users on the Spanish-language website. Despite the high usage, website reliability and security were never compromised. Open Enrollment 2018 represented a record year for the federal marketplace as well as state-based exchanges, even with a compressed enrollment period. Approximately 8.8 million Americans from 39 states signed up for coverage through state exchanges.
County of San Diego. To help San Diego County probation officers more efficiently manage their caseloads, we developed the Probation Utility and Mobile Applications, which has provided on-demand access to cases and the ability to enter contact notes in the field. We rationalized and modernized hundreds of applications in a heterogeneous applications infrastructure across a distributed management structure, transforming the applications environment to enable the county to achieve its IT vision of “anytime, anywhere” service. As a result, San Diego County probation officers increased productivity by approximately 54% while ensuring accuracy and consistency. Application rationalization and modernization reduced the number of applications by 25%, refocused apps management personnel for higher value initiatives, and positioned the applications portfolio for further modernization in a cloud environment.

Revenue generated from Civilian and Health Care segment customers was $1.4 billion, or approximately 36% of our revenue in fiscal year 2019 as compared to $1.4 billion, or approximately 50% of our revenue in fiscal year 2018. In fiscal year 2019, no customers generated more than 10% of Civilian and Health Care segment revenue.

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Business Environment and Competitive Landscape
Market Dynamics and Potential for Growth

We believe significant change is coming to the U.S. public sector, enabled by new technologies and the demand for empowered citizens and employees. Agencies are expected to deliver new services that inspire public trust. These services must be simple and flexible enough for citizens to evaluate, tailor and consume through multiple channels.

To adapt to these changing needs and expectations, government agencies are developing an ecosystem of partners and value-added service providers, connected through digital platforms. They are also overhauling processes through digital transformation and gaining control over their vast IT estate to become more effective and efficient in supporting programs.

At the center of this shift is a rapid migration from government-owned and developed custom IT systems, to standardized, service-delivered platforms and utilities. In this environment, we believe a limited number of key digital platforms will become dominant, such as Microsoft Azure, Office 365 and Microsoft Dynamics, AWS and ServiceNow, Inc. (“ServiceNow”).

We believe the market for providing technology-based enterprise solutions to the U.S. public sector, at the U.S. federal, state and local levels, has the potential for growth based on the following factors:

Large addressable market. U.S. federal, state and local governments will spend more than $120 billion on contracted services in our markets during the upcoming fiscal year, and spending will see incremental growth in the near term. Our addressable market includes both IT and mission services, much of which is classified.
Increasing demand for technology-based enterprise solutions. The public sector marketplace is undergoing a transformation driven, in part, by the imperative that public agencies be able to anticipate changing demands of the public while staying ahead of threats and adversaries. Given the central role technology plays in this transformation, there will be a continued demand for our enterprise IT and mission solutions.
Government-wide mandate to improve efficiency and reduce cost. U.S. federal, state and local governments have expressed a need to improve efficiency and reduce costs to help fund priorities such as national defense, cybersecurity, and an aging infrastructure. IT has the potential to disrupt traditional government business models and enable increased efficiency and cost savings, while improving public value.
Government cloud-first policy. The U.S. federal government’s cloud-first policy and the expectations for standardization, rationalization and modernization of IT presents an opportunity for us to lead government clients in digital business transformation to modern service-delivered platforms. Also, mission owners, with clear targets for policy outcomes, are becoming increasingly significant in digital decision making.
Aging critical systems require modernization. Mission critical legacy applications are rapidly aging, but still have rising costs, decreased performance, reliability, and functionality issues. With the passage of the Modernizing Government Technology Act, the U.S. federal government has prioritized modernizing their IT systems and created a working capital fund to support legacy modernization efforts. Our customers require application modernization and transformation services to update legacy systems in order to maintain mission critical services and leverage social, mobile, analytical and cloud technologies to improve IT services available to government employees and citizens.
Increased cybersecurity demands and focus. U.S. federal, state and local governments have established initiatives to modernize their cybersecurity in order to protect their IT enterprise systems. The need to secure large, complex, sensitive government networks, communications, data, and applications has created a growing demand for innovative security solutions to defend the country and protect sensitive information of its citizens.

Competitive Landscape

Our market for providing services to the U.S. public sector is highly competitive and favors participants with competitive cost structures and experience providing, procuring and delivering on bids. We believe we are well suited to compete given our experience and the breadth of professional IT services we can and have historically provided to our U.S. public sector customers. Given that we provide services across the U.S. public sector marketplace, we regularly compete with a broad array of companies including:

Pure-play U.S. government service providers that are highly specialized firms with exceptional mission knowledge, customer intimacy or specific intellectual property (“IP”) that can make them major competitors in the markets that they serve. Some of our competitors in this category include Leidos Holdings, Inc., Booz Allen

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Hamilton Inc., CACI International Inc., Science Applications International Corporation and ManTech International Corporation.
Large defense contractors that are capable of competing across our entire market, possessing the reputation and ability to compete on large deals with any U.S. government agency and the financial strength to manage and execute large-scale programs. Some of the large defense contractors we regularly compete with include Lockheed Martin, Northrop Grumman Corporation, General Dynamics, Raytheon Company, and The Boeing Company.
Diversified commercial consulting, technology and outsourcing service providers that are successful with commercial customers, but typically lack the breadth of public sector offerings and presence to compete broadly across the public-sector market. Some of our competitors in this category include subsidiaries of International Business Machines Corporation, Deloitte LLP, AT&T Inc., Verizon Communications Inc., Dell Inc., Accenture plc, NTT Data Corp, Unisys Corporation, and CGI Group Inc.
Small businesses generally providing services to the U.S. government pursuant to requirements and incentive programs designed to create entrepreneurial opportunities for small business owners. These can include businesses identified to receive a “fair proportion” of government contracts through the Small Business Act such as small disadvantaged businesses, woman owned small businesses, HUBZone businesses and service disabled veteran owned small businesses.
Commercial IT vendors have recently emerged as players in the U.S. government market. These vendors include AWS, Microsoft Azure, Google Inc., Salesforce.com, Inc., ServiceNow and other cloud providers.

Growth Strategy

With the strategic combination of DXC’s USPS business with Vencore HC and KGS HC, Perspecta became one of the largest pure play U.S. government IT services provider with annual revenues of approximately $4.0 billion. Perspecta delivers the most mission-enabling, innovative and technologically-advanced IT solutions to U.S. government customers by:

Leveraging innovation backed by its innovative applied research arm, Perspecta Labs, combined with highly-skilled talent, technical expertise, advanced IP, and a deep partnership ecosystem to enhance the technological sophistication and capabilities of its customers;
Bringing transformative digital skills and mission-enabled offerings in advanced analytics, cyber security, and agile software development (more than 1,000 agile certified developers) that have positioned the new company as the U.S. government’s partner of choice to help customers overcome mission-critical challenges; and
Tapping into a larger addressable market enabled by deep IP (with over 260 issued or licensed patents and significant research and development investment), industry expertise, and customer intimacy.

At the heart of our strategy is to drive revenue synergies through enhanced focus and the ability to leverage complementary capabilities across the merged businesses. In fiscal year 2019, we proved out this strategy with robust business development results, including a book-to-bill ratio of 1.7 times, which points to Perspecta’s strong market position. The landmark award of a $905 million contract to support the U.S. Army Cyber Command is a major proof point of the first thesis statement, as it was one of the first major bids as Perspecta and harnessed the unique offering of the combined companies.

We recently developed our first three-year strategic plan that fundamentally reaffirms the rationale behind the creation of Perspecta: we will unleash the “power of the pyramid” within an innovation-based culture to drive aggressive growth in the Federal market. Our strategic priorities center around cloud and IT transformation, cybersecurity, intelligent tools and analytics to drive mission success, trusted workforce, and emerging markets. The foundation for our success in these priorities is the innovation and applied research-driven solutions and offerings from Perspecta Labs. We are using the strategic plan to make investment decisions and drive behavior throughout the organization. Perspecta is committed to delivering robust and sustainable growth and by leveraging the power of its combined capabilities.

Employees

As a service company providing enterprise solutions, our employees are our most valuable and important asset. As of March 31, 2019, we had approximately 14,300 full-time and part-time employees led by an experienced team of senior executives with a long history of supporting the U.S. public sector.

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Approximately 18% of our employees are military veterans. Approximately 70% of our employees hold some form of security clearance or background investigation certification. Approximately 20% of our employees hold Top Secret and/or Sensitive Compartmented Information level clearance, which typically requires the completion of a polygraph.

Intellectual Property

Our services and solutions are not generally dependent upon patent protection, although we anticipate we will selectively seek certain patent protections. Our largely proprietary IP portfolio, comprising products, technical services, consulting, methodologies, and know-how, are protected using non-disclosure agreements and contractual arrangements, as well as one or more of the following: trade secret, patent, copyright or trademark protections.

For our work under U.S. federal government funded contracts and subcontracts, the U.S. federal government obtains certain rights to data, software and related information developed under such contracts or subcontracts. These rights may allow the U.S. federal government to disclose such data, software and related information to third parties.
Intellectual Property Arrangements with DXC

Pursuant to the Separation and Distribution Agreement (the “SDA”) and the Intellectual Property Matters Agreement (“IPMA”) entered into between us and DXC on May 31, 2018, DXC retained ownership of substantially all proprietary IP owned by DXC and USPS at the time of the Distribution and used by us. Pursuant to the IPMA, DXC grants us a perpetual, royalty-free, non-assignable license to certain know-how owned by DXC that we used to run our business prior to the Spin-Off. In addition, DXC grants us a perpetual, royalty-free, non-assignable license to certain software used in the conduct of the Perspecta business (including binaries, APIs, libraries, scripts, patches, configuration files, examples and documentation). Upon termination or expiration of the IPMA, we will only be entitled to access and use the then-current versions of the licensed products in our possession. The foregoing licenses granted to us will be restricted to use solely in connection with U.S. government and certain state and local government customers, and will be exclusive with respect to the federal government market for a period of five years, and non-exclusive with respect to certain U.S. state and local government customers. In addition, any improvements we make to such IP or derivative works of such IP that we develop during the five-year term of the agreement will be assigned to DXC and licensed back to us subject to the same limitations on use. Any additional rights to use other DXC products, improvements or proprietary rights will be negotiated by the parties in good faith on commercially reasonable arm’s-length terms.

Pursuant to the IPMA, we grant to DXC a perpetual, royalty-free, transferrable, assignable license to know-how owned by us as of the Spin-Off. Further, we grant to DXC a perpetual, royalty-free, fully paid-up, non-assignable license to any IP acquired or developed by us within six months following the Spin-Off (other than IP rights acquired from Vencore HC or KGS HC). During the first five years following the Distribution, the foregoing licenses granted by us will be restricted to use solely in connection with private sector customers on an exclusive basis and certain U.S. state and local government customers on a non-exclusive basis.

In addition to the foregoing licenses, we grant DXC a non-transferrable, non-assignable license for the five years following the Distribution to access, use, copy, make improvements and sublicense certain IP we obtained from our acquisition of Vencore HC or KGS HC. The foregoing license is exclusive with respect to DXC’s private sector business and non-exclusive for all other fields. Such license is royalty-free to the extent DXC does not commercially exploit the IP of Vencore HC or KGS HC, and will otherwise be subject to a commercially reasonable royalty, to be negotiated in good faith, for commercial exploitation. Further, we agreed to negotiate in good faith the terms and conditions of a license or services agreement relating to or permitting use by DXC of Perspecta Labs as acquired from Vencore HC and our existing security and digital protection service offerings, in each case on commercially reasonable arm’s-length terms in DXC’s private sector field. Further, during the five years following the Distribution, DXC will have the first right to participate in the event Perspecta Labs wishes to pursue research and development which has potential applicability in the DXC private sector field. Perspecta Labs must notify DXC of such opportunities and DXC has the right to elect to enter a collaborative development and commercialization effort with Perspecta Labs.

All licenses granted to us by DXC will not extend to any acquiring party of our business, and will be limited to the Perspecta entities that are subsidiaries prior to such acquisition. If either we or DXC divest any portion of our businesses or acquire a new business, the licenses granted under the IPMA may follow such divested business or extend to such newly acquired business, provided the licensed party adheres to all restrictions on the relevant license, notably the relevant licensed fields of each party.


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DXC will indemnify Perspecta from all losses incurred by Perspecta as a direct result of any third-party claim that Perspecta’s use of any improvements to the products licensed by DXC under the IPMA infringes or misappropriates any U.S. copyright, trademark or trade secret, except to the extent resulting from Perspecta’s modification, adaptation, failure to update, or third-party components. Perspecta will indemnify DXC from all losses incurred by DXC as a direct result of any third-party claim relating to Perspecta’s use of the products licensed by DXC, or arising from DXC’s use of Perspecta’s improvements to the licensed products, except to the extent resulting from DXC’s modification, adaptation, failure to update, or third-party components.

Regulatory Matters

As a U.S. government contractor, Perspecta’s business is heavily regulated and, as a result, our need for compliance awareness and business and employee support is significant. Specifically, Perspecta’s industry is governed by various laws and regulations, including but not limited to laws and regulations relating to: the formation, administration, and performance of contracts; the security and control of information and information systems; international trade compliance; human trafficking; and the mandatory disclosure of “credible evidence” of a violation of certain criminal laws receipt of significant overpayments, or violations of the civil False Claims Act. In addition, U.S. government contractors are generally subject to other federal and state laws and regulations, including:

the Federal Acquisition Regulation (“FAR”), agency supplements to the FAR, and related regulations, which regulate the formation, administration, and performance of U.S. federal government contracts;
the False Claims Act, which allows the government and whistleblowers filing on behalf of the government to pursue treble damages, civil penalties, and sanctions for the provision of false or fraudulent claims to the U.S. federal government.
the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders;
the Procurement Integrity Act, which regulates access to competitor bid and proposal information, as well as certain internal government procurement sensitive information, and regulates our ability to provide compensation to certain former government procurement officials;
laws and regulations restricting the ability of employees of the U.S. government to accept gifts or gratuities from a contractor;
post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the U.S. government and deploy former employees of the U.S. government;
laws, regulations, and executive orders requiring the safeguarding of and restricting the use and dissemination of information classified for national security purposes or determined to be “controlled unclassified information,” “covered defense information,” or “for official use only”;
laws and regulations relating to the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work;
laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a U.S. government contract;
laws, regulations, and executive orders governing organizational conflicts of interest that may prevent us from bidding for or restrict our ability to compete for certain U.S. government contracts because of the work that we currently perform for the U.S. government;
laws, regulations, and executive orders that mandate compliance with requirements to protect the government from risks related to our supply chain;
laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a government contract;
the DoD’s “Contractor Business Systems Rule,” which authorizes DoD agencies to withhold a portion of our payments if we are determined to have a significant deficiency in any of our accounting, cost estimating, purchasing, earned value management, material management and accounting, or property management systems; and
the Cost Accounting Standards and the Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts and require consistency of accounting practices over time.


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We are also subject to oversight by the U.S. Office of Federal Contract Compliance Programs (“OFCCP”) for federal contract and affirmative action compliance, including the following areas:

affirmative action plans;
applicant tracking;
compliance training;
customized affirmative action databases and forms;
glass ceiling and compensation audits;
desk and on-site audits;
conciliation agreements;
disability accessibility for applicants and employees;
diversity initiatives;
equal employment opportunity compliance;
employment eligibility verification (known as “E-Verify”);
internal affirmative action audits;
internet recruiting and hiring processes;
OFCCP administrative enforcement actions;
record-keeping requirements; and
Sarbanes-Oxley Act of 2002 compliance.

The U.S. federal government routinely revises its procurement practices and adopts new contract statutes, rules and regulations. In order to anticipate compliance with changes to laws and regulations, we participate in industry-wide associations that represent the industry perspectives on proposed regulations to the government, monitor proposed regulatory changes to adapt our policies and processes to accommodate the changes when they become effective, maintain compliance staff in our corporate departments, and conduct awareness and training for affected employees, such as our contracts staff and government compliance team.

The U.S. federal government has a broad range of tools available to enforce its procurement law and policies. These include debarring or suspending a particular contractor, certain of its operations and/ or individual employees from future government business. Individuals, on behalf of the federal government, may also bring qui tam suits against us for any alleged fraud related to payments under a U.S. federal government contract or program.

Seasonality
The U.S. federal government’s fiscal year ends on September 30. It is not uncommon for U.S. federal government agencies to award extra tasks or complete other contract actions in the weeks leading up to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. We have generally experienced increased bid and proposal costs in the months leading up to the U.S. federal government’s fiscal year end as we pursue new contract opportunities being awarded at such time. We also experience some seasonality effects from the timing of the fiscal year end close for state and local governments, which in many instances are different than the U.S. federal government fiscal year end. In general, we tend to experience an increase in revenue in the first half of the calendar year from our state and local government customers as that is when funds are generally allocated to specific projects. Finally, we also tend to generate less revenue and profit from our labor services during the three months ending December 31, as a result of higher leave-taking during the holiday season.
Available Information
We use our corporate website, https://perspecta.com, as a routine channel for distribution of important information, including detailed company information, financial news, Securities and Exchange Commission (“SEC”) filings, Annual Reports, historical stock information and links to webcasts. Perspecta’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and the Proxy Statements for our Annual Meetings of Stockholders will be made available, free of charge, on our corporate website as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.
Our corporate governance guidelines, Board of Directors’ committee charters (including the charters of the Audit Committee, Human Resources and Compensation Committee and Nominating/Corporate Governance Committee) and code of business conduct and ethics entitled “The Standard” are also available on our website. The information on our website is not incorporated by reference into, and is not a part of, this Annual Report on Form 10-K. The SEC maintains a

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website (https://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Executive Officers of the Registrant

The following table presents information concerning the individuals who serve as our executive officers, and their titles, including a brief summary of the business experience of each of them.
Name
 
Age
 
Year First Appointed as Officer
 
Position Held With the Registrant as of the filing date
Mr. John M. Curtis
 
62
 
2018
 
President, Chief Executive Officer and Director
Mr. John P. Kavanaugh
 
57
 
2018
 
Senior Vice President and Chief Financial Officer
Mr. James L. Gallagher
 
52
 
2018
 
Senior Vice President, General Counsel and Secretary
Ms. Tammy M. Heller
 
46
 
2018
 
Senior Vice President and Chief Human Resources Officer
Mr. William G. Luebke
 
52
 
2018
 
Senior Vice President, Principal Accounting Officer and Controller

John M. Curtis has served as our President, Chief Executive Officer and as a Director on our Board of Directors since May 2018. From July 2013 until the completion of the Spin-Off and Mergers, Mr. Curtis was the President and Chief Executive Officer of Vencore, Inc. From 2011 to July 2013, Mr. Curtis served as a senior advisor to Veritas Capital where he served on the board of directors of three portfolio companies, including Truven Health Analytics Inc., CRGT Inc. and The SI, which became Vencore, Inc. after a strategic acquisition and new brand launch in 2014. From 2007 through 2011, Mr. Curtis served as President and Chief Executive Officer of Vangent, Inc., an information management and business process outsourcing company, which was sold to General Dynamics Corporation in 2011. Prior to his role at Vangent, Inc., Mr. Curtis served for more than six years as President and Chief Executive Officer of Pearson Government Solutions, Inc., which was sold to Veritas Capital in 2007 and changed its name to Vangent, Inc. Mr. Curtis also serves on the board of directors of the Intelligence and National Security Association and the Northern Virginia Technology Council and has Director Emeritus designation from his recent term as Chairman of the Professional Services Council. Mr. Curtis holds a Bachelor of Science degree in Civil Engineering from the Virginia Military Institute. Mr. Curtis was chosen to serve on our Board of Directors because of his position as our President and Chief Executive Officer, and his extensive experience in, and understanding of, government contracting.

John P. Kavanaugh has served as our Senior Vice President and Chief Financial Officer since May 2018. Mr. Kavanaugh was previously the Vice President of Finance for the Americas Region of DXC since April 2017. Mr. Kavanaugh previously served as the Vice President of Finance for the Americas Region of Computer Sciences Corporation (“CSC”) from January 2015 to April 2017 and Vice President of Finance, Public Sector at CSC from July 2013 to January 2015. From 2010 to 2013 he served as President of the Federal Solutions Group at Xerox Corporation.

James L. Gallagher has served as our Senior Vice President, General Counsel and Secretary since May 2018. Mr. Gallagher was previously the Vice President and Deputy General Counsel for the USPS Region of DXC since April 2017. From November 2015 to March 2017, Mr. Gallagher served as Vice President and Associate General Counsel for the U.S. Public Sector business at HPE, and held that same role at Hewlett-Packard Company from 2013 to October 2017. Mr. Gallagher previously served as Legal Director at Hewlett-Packard Company, and Senior Counsel at EDS.

Tammy M. Heller has served as our Senior Vice President and Chief Human Resources Officer since May 2018. From 2014 to March 2018, Ms. Heller was the Vice President of Global Human Resources at CGI Group Inc., a global IT consulting, systems integration, outsourcing, and solutions company. Ms. Heller served as Vice President of Human Resources at Capital One Financial Corp. from 2011 to 2014. Prior to that, Ms. Heller served as Senior Director, Human Resources and Vice President of Credit Division Governance and Oversight at Federal Home Loan Mortgage Corporation from 2007 to 2011.

William G. Luebke has served as our Senior Vice President, Principal Accounting Officer and Controller since May 2018. Mr. Luebke served from December 2015 to March 2018 as Vice President, Controller and Principal Accounting Officer of CSRA Inc. Mr. Luebke previously served as Head of Global Internal Audit and Enterprise Risk Management at CSC from August 2013 to November 2015. Prior to that, he was Director of Internal Audit, Americas at CSC from 2012 to July 2013. Before joining CSC, Mr. Luebke was an Associate Director at the Public Company Accounting Oversight Board from 2011 to 2012 and was a Partner at KPMG from 2006 through 2011.

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ITEM 1A. RISK FACTORS

You should carefully consider all of the information in this Annual Report on Form 10-K and each of the risks described below, which we believe are the principal risks that we face. Any of the following risks could materially and adversely affect our business, financial condition, and results of operations, and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K. The risks described below are not the only risks that Perspecta currently faces.

Risks Relating to Our Business

We depend on contracts with the U.S. government and its contractors for most of our revenue. If our relationships with such agencies are harmed, our future revenue and operating profits could materially decline.

The government, at the U.S. federal, state and local levels, is our primary customer, with revenue from U.S. government contracts, either as a prime contractor or a subcontractor, accounting for substantially all of our revenue. We believe the performance of our business will continue to depend primarily on our ability to be awarded work under U.S. government contracts, as we expect this will be the primary source of substantially all of our revenue in the foreseeable future.

For this reason, any issue that compromises our relationship with the U.S. government generally or any U.S. government agency that we serve could cause our revenue to materially decline. Among the key factors in maintaining our relationship with U.S. government agencies are our performance on contracts, the strength of our professional reputation, compliance with applicable laws and regulations, and the strength of our relationships with customer personnel. In addition, the failure to maintain adequate protection against security breaches, including from cyber-attack, or the mishandling or perceived mishandling of sensitive information, could harm our relationship with U.S. government agencies. This could include, for example, our failure to maintain the confidentiality of sensitive information associated with the work we perform for our customers, or even disclosure of the existence of our business relationships with certain of our customers, including as a result of misconduct or other improper activities by our employees or subcontractors. Our relationship with the U.S. government could also be damaged as a result of an agency’s dissatisfaction with work performed by us, a subcontractor, or other third parties that provide services or products for a specific project for any reason, including due to perceived or actual deficiencies in the performance or quality of our work. In such case, we may incur additional costs to address any such situation and the profitability of that work might be impaired. In addition, to the extent our performance under a contract does not meet a U.S. government agency’s expectations, such agency customer may seek to terminate the contract prior to its scheduled expiration date, provide a negative assessment of our performance to government-maintained contractor past-performance repositories, fail to award us additional business under existing contracts or otherwise, and direct future business to our competitors. Further, negative publicity concerning government contractors in general or us in particular may harm our reputation with U.S. government contractors. To the extent our reputation or relationships with U.S. government agencies is impaired, our revenue and operating profits could materially decline.
 
Changes in U.S. government spending, programs and mission priorities could adversely affect our business, financial condition, results of operations or prospects.

Substantially all of our revenue is generated from contracts with the U.S. government and its agencies, and we depend significantly upon continued U.S. federal government expenditures on intelligence, defense, space and federal civilian programs for which we provide support. These expenditures have not remained constant over time, have been reduced in certain periods and recently have been affected by the U.S. federal government’s efforts to improve efficiency and reduce costs. As a result, our business, financial condition, results of operations or prospects could be adversely affected by several factors, including:

budgetary constraints, including Congressionally-mandated automatic spending cuts, that affect U.S. federal government spending generally or specific agencies in particular;
changes in available funding or in government programs, including a shift in expenditures away from agencies or programs that we support;
reduced U.S. federal government outsourcing of functions that we are currently contracted to provide, including as a result of increased insourcing by various U.S. federal government agencies due to changes in the definition of “inherently governmental” work, including proposals to limit contractor access to sensitive or classified information and work assignments;

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efforts to improve efficiency and reduce costs affecting government programs, including a continuation of recent efforts by the U.S. federal government to decrease spending for management support service contracts;
government agencies awarding contracts on a technically-acceptable/lowest-cost basis to reduce expenditures;
delays in the payment of our invoices by government payment offices;
U.S. government shutdowns due to a failure by elected officials to fully fund the government, such as the recent partial shutdown in December 2018 and January 2019, and other potential disruption of the appropriations process;
an inability by the U.S federal government to fund its operations as a result of a failure to increase the U.S. federal government’s debt ceiling, a credit downgrade of U.S. government obligations or for any other reason;
elections, particularly that result in a change of the Presidential administration or control of Congress, or other changes in the political climate; and
general economic conditions, including a slowdown of the economy or unstable economic conditions and actions taken in response to such conditions, including emergency spending that may reduce funds available for other government priorities.

In addition, any disruption in the functioning of U.S. government agencies, including as a result of U.S. government closures and shutdowns, terrorism, war, natural disasters and other weather-related events, destruction of or damage to U.S. government facilities, and other potential calamities could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to deploy our staff to customer locations or facilities as a result of such disruptions.
The U.S. federal government budget deficits, the national debt, and prevailing economic conditions, as well as government actions taken to address them, could negatively affect U.S. federal government expenditures on intelligence, defense, space and federal civilian programs for which we provide support. In particular, the Budget Control Act of 2011, as amended by subsequent legislation, provides for automatic spending cuts (referred to as “sequestration”) totaling approximately $1.2 trillion between 2013 and 2021, including an estimated $500 billion in federal defense spending cuts over this time period. Although Congress has acted to prevent the sequestration cuts to discretionary programs for 2019, if further action is not taken, sequestration could occur in 2020 or 2021. We are unable to predict the extent of the impact of budget cuts, including as a result of sequestration, on our business, results of operations and prospects. In addition, in response to an Office of Management and Budget (“OMB”) mandate, U.S. federal government agencies have reduced management support services spending in recent years. If federal awards for management support services decline, our revenue and operating profits may materially decline and further efforts by the OMB to decrease federal awards for management support services could have a material and adverse effect on our business, results of operations and prospects.

These or other factors could cause our intelligence, defense and federal civilian customers to decrease the number or value of new contracts awarded generally and fail to award us new contracts, reduce their purchases under our existing contracts, exercise their right to terminate our contracts, or not exercise options to renew our contracts, any of which could cause a material decline in our revenue.

A delay in the completion of the U.S. federal government’s budget process and statutory debt limit could have a material adverse effect on our revenue and operating results.

On an annual basis, the U.S. Congress must approve budgets that govern spending by each of the federal agencies we support. When the U.S. Congress does not pass the annual budget on a timely basis, it may enact a continuing resolution that allows U.S. federal government agencies to operate at spending levels approved in the previous budget cycle. Under a continuing resolution, funding may not be available for new projects. In addition, when U.S. federal government agencies operate on the basis of a continuing resolution, they may delay funding we expect to receive on contracts we are already performing. Any such delays would likely result in new business initiatives being delayed or canceled and could have a material adverse effect on our revenue, cash flows and operating results. Furthermore, a failure to complete the budget process and fund government operations pursuant to a continuing resolution may result in a U.S. federal government shutdown, such as the recent partial shutdown in December 2018 and January 2019. Finally, while the U.S. Congress may pass a continuing resolution, it is possible no agreement on the annual budget may be reached and the U.S. government could shut down again following the expiration of the continuing resolution that acted largely as a stopgap measure. A shutdown may result in us incurring substantial costs without reimbursement under our contracts and

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the delay or cancellation of key programs, which could have a material adverse effect on our revenue, cash flows and operating results.

In July 2017, the Treasury Department determined that the U.S. federal government would exceed the statutory debt limit set by law in October 2015 at the end of September 2017. Since then, legislation was adopted to temporarily suspend the debt limit through March 1, 2019. The Treasury Department currently estimates that by September 2019 it will have exhausted all financing options and will no longer be able to pay for all federal obligations if the debt limit is not suspended or increased again. When the debt limit is exceeded, some federal payments to creditors, vendors, contractors, state and local governments, beneficiaries, and other entities would either be delayed or limited. These delays in payments would, in effect, be borrowings from contractors such as us, and would create a backlog of unpaid bills until the government collects more revenue or other sources of cash than its outlays. In some cases, delaying federal payments incurs interest penalties under some statutes such as the Prompt Payment Act, which directs the government to pay interest penalties to contractors if it does not pay them by the required payment date. Were there to be a delay in paying for all federal obligations, it is expected that this would result in significant economic and financial consequences that may have a lasting impact on federal programs and the U.S. federal government’s ability to borrow in the future. Failure by Congress to address the debt limit could result in delayed or limited payments to creditors, vendors, contractors, state and local governments and other entities, which could have a material adverse effect on our revenue and operating results.
We are subject to extensive and complex laws and regulations relating to award, administration and performance of U.S. government contracts. Our business and reputation could be adversely affected by the application of these laws.

We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business. U.S. government contractors are subject to a greater risk of investigation, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than companies with solely commercial customers. A violation of specific laws and regulations, by us, our employees, others working on our behalf, a supplier or a venture partner, could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services, and civil or criminal investigations or proceedings. In some instances, these laws and regulations impose terms or rights that are different from those typically found in commercial transactions.

Our U.S. federal, state and local government contracts may be terminated by such U.S. federal, state or local government customer at any time and may contain other provisions permitting such customer to discontinue contract performance, allow a contract to expire, or that are otherwise unfavorable to us, and if discontinued contracts are not replaced, our operating results may differ materially and adversely from those anticipated.

U.S. federal, state and local government contracts contain provisions and are subject to laws and regulations that provide those government customers with rights and remedies not typically found in commercial contracts. These rights and remedies allow government customers to, among other things:

terminate existing contracts, with short notice, for convenience as well as for default;
reduce orders under or otherwise modify contracts;
for contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor furnished cost or pricing data during negotiations that was not complete, accurate, and current;
for some contracts, demand a refund, make a forward price adjustment, or terminate a contract for default if a contractor provided inaccurate or incomplete data during the contract negotiation process and/or reduce the contract price under certain triggering circumstances, including the revision of price lists or other documents upon which the contract award was predicated;
terminate our facility security clearances and thereby prevent us from receiving classified contracts;
cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
decline to exercise an option to renew a multi-year contract or issue task orders in connection with ID/IQ contracts;
assert rights in solutions, systems, and technology produced by us during contract performance, and continue to use that work product without continuing to contract for our services, and/or disclose or permit such work

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product to be used by third parties, including other U.S. government agencies and our competitors, which could harm our competitive position;
prohibit future procurement awards with a particular U.S. federal government agency due to a finding of organizational conflict of interest based upon prior related work performed for the U.S. federal government agency that would give a contractor an unfair advantage over competing contractors, or the existence of conflicting roles that might bias a contractor’s judgment;
suspend or debar us from doing business with the U.S. federal government;
impose fines and penalties on us, and subject us to criminal prosecution;
repurpose funds to address rated orders;
control or prohibit the export of our services; and
impose special handling and control requirements for controlled information.

Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss.

Upon termination for convenience of a cost-reimbursable contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. Allowable costs would include our cost to terminate agreements with our suppliers and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation. We attempt to ensure that adequate funds are available by notifying the customer when its estimated costs, including those associated with a possible termination for convenience, approach levels specified as being allotted to its programs. As funds are typically appropriated on a fiscal-year basis and as the costs of a termination for convenience may exceed the costs of continuing a program in a given fiscal year, occasionally programs do not have sufficient funds appropriated to cover the termination costs were the U.S. federal government to terminate them for convenience. Under such circumstances, the U.S. federal government could assert that it is not required to appropriate additional funding.

A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. federal government could terminate a prime contract under which we are a subcontractor, notwithstanding the quality of our services as a subcontractor. In the case of termination for default, the U.S. federal government could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties. However, under such circumstances we have rights and access to remedial actions under laws and the FAR.

Budget cuts, the impact of sequestration or efforts by the OMB to decrease federal awards for management support services may cause U.S. federal government agencies with which we currently have contracts to terminate, reduce the number of task orders under, or fail to renew such contracts. If a government customer were to unexpectedly terminate, cancel, or decline to exercise an option to renew with respect to one or more of our significant contracts, or suspend or debar us from doing business with such government customer, our revenue and operating results could be materially harmed.

Our business is subject to reviews, audits and cost adjustments by the U.S. federal government, which, if resolved unfavorably to us, could adversely affect our profitability, cash flows or growth prospects.

Government audits and reviews may conclude that our practices are not consistent with applicable laws and regulations and result in adjustments to contract costs and mandatory customer refunds. U.S. federal government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency (“DCMA”) and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, its cost structure, its business systems, and compliance with applicable laws, regulations and standards. A finding of material weakness or significant control deficiencies in a contractor’s business systems or a finding of noncompliance with the FAR or Cost Accounting Standards can result in reduced billing rates to U.S. government customers until the material weakness or control deficiencies are corrected and their remediation is accepted by the DCMA. The U.S. federal government has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. Additionally, any costs found to be misclassified may be subject to repayment. We have unaudited and/or unsettled incurred cost claims related to past years, which places risk on our ability to issue final billings on contracts for which authorized and appropriated funds may be expiring. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including

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reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines and suspension, or prohibition from doing business with the U.S. government. In addition, we could incur significant legal costs and suffer serious reputational harm if allegations of impropriety were made against us. The agencies conducting these audits and reviews have come under increased scrutiny. As a result, audits and reviews have become more rigorous and the standards to which we are held are being more strictly interpreted which has increased the likelihood of an audit or review resulting in an adverse outcome.

Further, we are in the process of integrating the USPS and Vencore business systems, and as a result, any finding of noncompliance in either legacy company’s business system could result in a negative impact for the combined entity. Such adjustments, whether to USPS, Vencore, or to the combined entity, can be applied retroactively, which could result in significant customer refunds. Receipt of adverse audit findings or the failure to obtain an “approved” determination on our various business systems could significantly and adversely affect our business by, among other things, restricting our ability to bid on new contracts and, for those proposals under evaluation, diminishing our competitive position. A determination of noncompliance in our business systems could also result in the U.S. federal government imposing penalties and sanctions against us, including withholding of payments, suspension of payments and increased government scrutiny. Increased scrutiny could adversely impact our ability to perform on contracts, affect our ability to invoice for work performed, delay the receipt of timely payment on contracts, and weaken our ability to compete for new contracts with the U.S. federal government.
The U.S. government’s organizational conflict of interest rules could limit our ability to successfully compete for new contracts or task orders or may require us to exit or wind down certain existing contracts or task orders, any of which could adversely affect our results of operations and prospects.

Past efforts by the U.S. government to reform its procurement practices have focused, among other areas, on the separation of certain types of work to facilitate objectivity and avoid or mitigate organizational conflicts of interest, and the strengthening of regulations governing organizational conflicts of interest. Organizational conflicts of interest may arise from circumstances in which a contractor has:

impaired objectivity during performance;
unfair access to non-public information; or
the ability to set the “ground rules” for another procurement for which the contractor competes.

A focus on organizational conflicts of interest issues has resulted in legislation and regulations aimed at increasing organizational conflicts of interest requirements, including, among other things, separating sellers of products and providers of advisory services in major defense acquisition programs. These organizational conflicts of interest regulations have led to increased bid protests related to arguments to disqualify or overturn awards based on conflict grounds.

Future legislation and regulations may increase the restrictions in current organizational conflicts of interest regulations and rules. To the extent that organizational conflicts of interest laws, regulations and rules limit our ability to successfully compete for new contracts or task orders with the U.S. government and/or commercial entities, or require us to exit certain existing contracts or task orders or winding down certain existing contracts or task orders, either because of organizational conflicts of interest issues arising from our business or because companies with which we are affiliated or with which we otherwise conduct business create organizational conflicts of interest issues for us, our results of operations and prospects could be materially and adversely affected.

We may fail to obtain and maintain necessary security clearances or certifications, which may adversely affect our ability to perform on certain contracts.

Many U.S. government programs require contractor employees and facilities to have security clearances or certifications. Depending on the level of required clearance, security clearances and certifications can be difficult and time-consuming to obtain. If we, our employees or prospective employees or facilities are unable to obtain or retain necessary security clearances or certifications, we may not be able to bid on, win or perform on new contracts, or effectively compete for expiring contracts, and we may lose existing contracts, which may adversely affect our operating results and inhibit the execution of our growth strategy.


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We derive a majority of our revenue from contracts awarded through a competitive bidding process, and our revenue and profitability may be materially adversely affected if we are unable to compete effectively in the process.

We derive a majority of our revenue from U.S. government contracts awarded through competitive bidding processes including through competitions for orders under multiple award contracts. We do not expect this to change for the foreseeable future. Our failure to compete effectively in this procurement environment would have a material adverse effect on our revenue and profitability. In addition, our current contracts are re-competed from time to time, and we are not assured of winning these re-competes. In circumstances where we do not win those re-competes, and those lost contracts are not replaced, our operating results may be materially and adversely affected.

The competitive bidding process involves risk and significant costs to businesses operating in this environment, including:

the necessity to expend resources, make financial commitments (such as procuring leased premises) and bid on engagements in advance of the completion of their design, which may result in unforeseen difficulties in execution and cost overruns;
the substantial cost and managerial time and effort spent to prepare bids and proposals for contracts that may not be awarded to us;
the ability to accurately estimate the resources and costs that will be required to service any contract we are awarded;
the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract; and
any opportunity costs associated with not bidding and winning other contracts we might otherwise pursue.

In circumstances where contracts are held by other companies and are scheduled to expire, we may not be provided the opportunity to bid on those contracts if the government extends the existing contract. If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for the duration of those contracts to the extent that there is no additional demand for such services. In addition, if the government elects to use a multiple award ID/IQ contract, government-wide acquisition contract, or other schedule contract (collectively a “contract vehicle”) that we do not hold, we will not be able to compete for work under that contract vehicle as a prime contractor. An inability to consistently win new contract awards or compete for work as a prime contractor over any extended period could have a material adverse effect on our business, results of operations and prospects.

Our earnings and profitability may vary based on the mix of our contracts and may be adversely affected by our failure to accurately estimate or otherwise recover the expenses, time, and resources for our contracts.

We enter into several different types of contracts with our government customers for our services including cost-reimbursable, time-and-materials, and fixed-price. Each of these types of contracts, to varying degrees, involves the risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract and adversely affect our operating results.

Under cost-reimbursable contracts, we are reimbursed for allowable costs up to a ceiling and paid a fee, which may be fixed or performance-based. If our actual costs exceed the contract ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. In particular, there is increasing focus by the U.S. government on the extent to which government contractors, including us, are able to receive reimbursement for employee compensation, including rules that substantially limit the level of allowable compensation cost for executive-level and other employees. In addition, there is risk of compensation being deemed unallowable or payments being withheld as a result of government audit, review, or investigation.

Under time-and-materials contracts, we are reimbursed for the hours worked using predetermined hourly rates for each labor category, and typically reimbursed for other direct contract costs and expenses at cost. We assume financial risk on time-and-materials contracts because our cost of performance may exceed these negotiated hourly rates.

Under fixed-price contracts, we perform specific tasks for a pre-determined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher margin opportunities because we receive the

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benefits of any cost savings, but involve greater financial risk because we bear the impact of any cost overruns. Because we assume the risk for cost overruns and contingent losses on fixed-price contracts, an increase in the percentage of fixed-price contracts in our contract mix could increase our risk of suffering losses. In addition, the government procurement policies have focused on requiring disclosure of cost and pricing data in the context of fixed-price contracting, which can impact the profitability of those contracts.

Additionally, our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract. For example, we may miscalculate the costs, resources, or time needed to complete projects or meet contractual milestones as a result of delays on a particular project, including delays in designs, engineering information, or materials provided by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, and other factors, some of which are beyond our control.

We have recorded provisions in our consolidated financial statements for losses on our contracts, as required under U.S. generally accepted accounting principles (“GAAP”), but our contract loss provisions may not be adequate to cover all actual losses that we may incur in the future. Actual losses could have an adverse effect on our business and financial results.

We may earn less revenue than projected, or no revenue, under certain of our contracts.

Some of our contracts with our clients are ID/IQ contracts. ID/IQ contracts provide for the issuance by the client of orders for services or products under the contract, and often contain multi-year terms and unfunded ceiling amounts, which allow but do not commit the government customer to purchase products and services from contractors. Our ability to generate revenue under each of these types of contracts depends upon our ability to be awarded task orders for specific services by the client. ID/IQ contracts may be awarded to one contractor (single award) or several contractors (multiple award). Multiple contractors must compete under multiple award ID/IQ contracts for task orders to provide particular services, and contractors earn revenue only to the extent that they successfully compete for these task orders. A failure to be awarded task orders under such contracts would have a material adverse effect on our results of operations and financial condition. In addition, our ability to maintain our existing business and win new business depends on our ability to maintain our prime and subcontractor positions on our ID/IQ contracts.

Many of our contracts contain provisions that require innovative design capabilities, are technologically complex or are dependent upon factors not wholly within our control. Failure to meet these obligations could adversely affect our revenue and profitability.

We design and develop technologically advanced and innovative products and services applied by our customers in a variety of environments. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions or materials and components could prevent us from achieving contractual requirements.

In addition, our offerings cannot be tested and proven in all situations and are otherwise subject to unforeseen problems that could negatively affect revenue and profitability such as problems with quality and workmanship, country of origin, delivery of subcontractor components or services and unplanned degradation of product performance. Among the factors that may adversely affect revenue and profits could be unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the U.S. government customer of contract cost and fee payments we previously received.

Failure of third parties to deliver on commitments under contracts and misconduct of employees, subcontractors, agents and business partners could cause us to lose existing contracts or customers and adversely affect our ability to obtain new contracts and customers and could have a significant adverse impact on our business and reputation.

Our contracts are complex and may require us to partner with other parties, including software and hardware vendors, to provide the solutions required by our customers. Our ability to deliver the solutions and provide the services required by our customers depends on our, and our partners’, ability to meet customers’ delivery schedules. If we or our partners fail to deliver services or products on time, our ability to complete the contract may be adversely affected, which may have a material and adverse impact on our revenue and profitability.


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Misconduct could include fraud or other improper activities such as falsifying time or other records and violations of laws and regulations, including the Procurement Integrity Act and anti-corruption laws. Other examples could include the failure to comply with our code of business conduct and ethics (The Standard), policies and procedures or with U.S. federal, state or local government procurement regulations, rules regarding the use and safeguarding of classified or other protected information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental, health or safety matters, international trade controls (particularly the International Traffic in Arms Regulations), lobbying or similar activities and any other applicable laws or regulations. Any data loss or information security lapses resulting in the compromise of personal information or the improper use or disclosure of sensitive or classified information could result in claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation. Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct and, as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could damage our reputation and subject us to fines and penalties, restitution or other damages, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with U.S. federal, state or local government agencies, any of which would adversely affect our business and our future results.
Our business could be adversely affected if there are delays, terminations or cancellations caused by our competitors protesting major contract awards received by us or there are adverse protest decisions in contracts awarded to us.

U.S. government contracts are frequently subject to bid protests from unsuccessful bidders on new program awards. It can take many months for the relevant U.S. government agency to resolve protests by one or more of our competitors of contract awards we receive. Bid protests may result in significant expense to us, and termination or cancellation of an awarded contract as a result of the award being overturned. Even if we do not lose the awarded contract, the resulting delay in the startup and funding of the work under these contracts may cause our revenue and profitability to be materially and adversely affected.

The U.S. government may revise its procurement, contract or other practices in a manner materially adverse to us at any time.

Our industry continues to experience significant changes to business practices as a result of an increased focus on affordability, efficiencies and recovery of costs, among other items. Legislation, regulations and initiatives dealing with procurement reform, mitigation of potential organizational conflicts of interest, deterrence of fraud, and environmental responsibility or sustainability could have a material adverse effect on us. Moreover, shifts in the buying practices of government agencies (such as increased usage of fixed-price contracts with disclosure of cost and pricing data, multiple award contracts and small business set-aside contracts) could have material adverse effects on government contractors, including us. The government may:

revise its procurement practices or adopt new contract laws, rules, and regulations, such as cost accounting standards, organizational conflicts of interest, and other rules governing inherently governmental functions at any time;
reduce, delay, or cancel procurement programs resulting from government efforts to improve procurement practices and efficiency;
limit the creation of new government-wide or agency-specific multiple award contracts;
face restrictions or pressure from government employees and their unions regarding the amount of services the U.S. federal, state or local governments may obtain from private contractors;
award contracts on a technically acceptable/lowest-cost basis to reduce expenditures, and we may not be the lowest-cost provider of services;
adopt new socio-economic requirements, including setting aside procurement opportunities for small, disadvantaged, minority-, women- or veteran-owned businesses;
change the basis upon which it reimburses our compensation and other expenses or otherwise limit such reimbursements; and
at its option, terminate or decline to renew our contracts.

In addition, any new contracting methods could be costly or administratively difficult for us to implement and could materially adversely affect our future revenue and profit margin. Furthermore, changes to the procurement system could cause delays in the procurement decision-making process. Any such changes to the government’s procurement practices

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or the adoption of new contracting rules or practices could impair our ability to obtain new or re-compete contracts and any such changes or increased associated costs could materially and adversely affect our results of operations. Moreover, cost-cutting initiatives announced by the U.S. federal government may significantly change the way the U.S. federal government solicits, negotiates, and manages its contracts, which could result in an increase in competitive pressure and decreased profitability on contracts and have a material adverse effect on our results of operations.

If we cannot collect our receivables or if payment is delayed, our business and financial condition may be materially and adversely affected.

We depend on the timely collection of our receivables to generate cash flow, provide working capital, and continue our business operations. Over the course of a long-term contract, a customer’s financial condition may decline and lower its ability to pay its obligations. This would cause our cash collections to decrease and bad debt expense to increase. While we may resort to alternative methods to pursue claims or collect receivables, these methods are expensive and time consuming and successful collection is not guaranteed. Failure to collect our receivables or prevail on claims would have an adverse effect on our profitability and cash flows.

U.S. federal, state or local governments may delay or fail to pay invoices for a number of reasons, including lack of appropriated funds, lack of an approved budget, or as a result of audit findings by government regulatory agencies. Some prime contractors, for whom we are a subcontractor, have significantly fewer financial resources than we do, which may increase the risk that we may not be paid in full or that payment may be delayed.

We seek to mitigate these risks and to manage our liquidity by relying on a receivables purchase facility (the “MARPA Facility”) to provide us with up to $450 million in funding based on the availability of eligible U.S. federal government receivables. However, pursuant to the terms of the MARPA Facility, the failure by Congress to pass legislation funding U.S. federal government operations in whole or in part affecting Approved Obligators (as defined in the MARPA Facility), or the failure of such legislation to become law, constitutes a Facility Suspension Event (as defined in the MARPA Facility) that entitles the MARPA Facility administrative agent to exercise various rights and remedies, including the right to terminate commitments under the MARPA Facility. Such an event could cause either a termination or a suspension of the MARPA Facility. A termination would result in, among other things, the Company having to immediately repurchase all previously sold receivables. A protracted suspension of the commitments under the MARPA Facility would cause the suspension of new receivables sales and result in the MARPA Facility outstanding balance running off over time. Any of these outcomes could materially reduce the Company’s liquidity and increase the Company’s debt and interest expense.

Our business is subject to fluctuations that may cause our operating results to decline.

The U.S. federal government’s fiscal year ends on September 30th of each year. It is not uncommon for U.S. federal government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. We have historically experienced increased bid and proposal costs in the months leading up to the U.S. federal government’s fiscal year end as we pursue new contract opportunities being shortly before the U.S. federal government fiscal year end. We also experience some seasonality effects from the timing of the fiscal year end close for state and local governments, which in many instances are different than the U.S. federal government fiscal year end. In general, we tend to experience an increase in revenue in the first half of the calendar year from our state and local government customers as that is when funds are generally allocated to specific projects. Finally, we also tend to generate less revenue and profit from our labor services during our third quarter as a result of higher leave-taking during the holiday season. We may continue to experience this seasonality in future periods, and our results of operations may be affected by it. While not certain, changes in the U.S. federal government’s funding and spending patterns have altered historical seasonality trends, supporting our approach to managing the business on an annual basis. Seasonality is just one of a number of factors, many of which are outside of our control, which may negatively affect our operating results in any period.

Our ability to provide customers with competitive services is dependent on our ability to attract and retain qualified personnel, including our senior management team.

Our ability to grow and provide our customers with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills necessary to serve our customers. The markets we serve are highly competitive and competition for skilled employees in the technology outsourcing, consulting, and systems integration and enterprise services markets is intense. Personnel with the requisite skills, qualifications, or security clearance may be in short supply or generally unavailable. The loss of personnel could impair our ability to perform under certain contracts,

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which could have a material adverse effect on our consolidated financial position, results of operations, prospects and cash flows.

If we do not hire, train, motivate, and effectively utilize employees with the right mix of skills and experience in the right geographic regions and for the right offerings to meet the needs of our customers, our financial performance could suffer. For example, if our employee utilization rate is too low, our profitability, and the level of engagement of our employees could decrease. If that utilization rate is too high, it could have an adverse effect on employee engagement and attrition and the quality of the work performed, as well as our ability to staff projects. If we are unable to hire and retain enough employees with the skills or backgrounds needed to meet current demand, we may need to redeploy existing personnel, increase our reliance on subcontractors or increase employee compensation levels, all of which could also negatively affect our profitability. We may also incur increased costs if we have more employees than necessary with certain skill sets or in certain geographies as we will need to rebalance our supply of skills and resources with customer demand in those geographies. Effective utilization and retention of our employees can be adversely affected by disruptions in government operations or procurement processes, including as a result of the factors discussed above under “Changes in U.S. government spending, programs and mission priorities could change in a manner that adversely affects our business, financial condition, results of operations or prospects” and “A delay in the completion of the U.S. federal government’s budget process and statutory debt limit could have a material adverse effect on our revenue and operating results.”

In addition to attracting and retaining qualified technical personnel, we depend on the continued employment of our senior management team and our ability to generate new business and execute projects successfully. Our senior management team is very important to our business because personal reputations and individual business relationships are a critical element of obtaining and maintaining customer engagements in our industry, particularly with agencies performing classified operations. The loss of any of our senior executives could cause us to lose customer relationships or new business opportunities, which could cause actual results to differ materially and adversely from those anticipated.

Our business and financial results could be negatively affected by cyber-attack, service interruptions or other security threats.

As a provider of IT services to U.S. public sector customers, we store and process large amounts of sensitive information which includes personally identifiable information, protected health information, personnel information, classified information, controlled unclassified information, financial information and other confidential information concerning our business and employees and those of our customers (collectively referred to as “sensitive information”). We are continuously exposed to risk from cyber-attack and other security threats, including computer viruses, malware, insider threats, and attacks by hackers, as are our customers, suppliers and subcontractors. Any electronic or other security breach or compromise may compromise the security of sensitive information stored or transmitted through our IT systems and networks, and could expose us to regulatory scrutiny, actions and penalties, extensive contractual liability litigation, reputational harm, and a loss of customer confidence, which could have a material and adverse impact on our business, financial condition and results of operations.

Computer hackers, or other unauthorized third parties, may be able to penetrate our network security and misappropriate or compromise our sensitive information or that of third parties, create system disruptions or cause shutdowns. Computer hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of these products. In addition, hardware and operating system software and applications we produce or that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to eliminate or alleviate cyber or other security problems, including bugs, viruses, worms, malicious software programs, and other security vulnerabilities, could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service, and loss of existing or potential customers, which may impede our sales, manufacturing, distribution or other critical functions and materially and adversely affect our business, financial condition and results of operations.

In addition, in many cases we must rely on the safeguards put in place by our customers, suppliers, subcontractors and other third parties to protect against and report cyber threats. As such, we require our subcontractors supporting or involving covered defense information to maintain certain security standards. We work with other companies in the industry and government participants to share threat intelligence and promote increased awareness and enhanced protections against cybersecurity threats, and we seek to detect and investigate all security events and to prevent their occurrence or recurrence. National security regulations or other confidentiality obligations may prevent us or our

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counterparties from sharing information regarding threats or attacks when they occur, or ever, which could impair our ability to respond to and effectively counteract such threats. Our failure to detect, prevent or adequately respond to a threat incident or cyber-attack could subject us to liability and reputational damage and have a material adverse effect on our business, financial condition and results of operations.
Increasing data privacy and information security obligations impose regulatory pressures on our customers’ businesses and, indirectly, on our operations.

In response to increasing data privacy and information security obligations, our customers have sought and may continue to seek, to contractually impose certain strict data privacy and information security obligations on us. Under certain of our customer contracts we are specifically tasked with cybersecurity compliance obligations and are responsible for implementing cybersecurity measures to protect against, detect and mitigate these threats. Some of our customer contracts may not limit our liability for the loss of sensitive information. If we are unable to adequately address these concerns, our business, results of operations and prospects could suffer. Compliance with new privacy and security laws, requirements and regulations, where required or undertaken by us, may result in cost increases due to potential systems changes, the development of additional administrative processes and increased enforcement actions, fines and penalties. While we strive to comply with all applicable data protection laws and regulations as well as internal privacy policies, any failure or perceived failure to comply or any misappropriation, loss or other unauthorized disclosure of sensitive information may result in proceedings or actions against us by government or other entities, private lawsuits against us (including class actions) or the loss of customers, which could potentially have an adverse effect on our business, reputation, results of operations and prospects.

Our business and operations expose us to numerous legal and regulatory requirements, and any violation of these requirements could harm our business.

We are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment and labor relations, environmental, health and safety, immigration, taxation, anti-corruption, import/export controls, trade restrictions, internal and disclosure control obligations, securities regulation and anti-competition. Compliance with diverse and changing legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these diverse legal requirements in the conduct of our business could result in significant fines and other damages, criminal sanctions against us or our officers, prohibitions on doing business (including suspension or debarment from government contracts or grants) and damage to our reputation. Violations of these regulations or contractual obligations related to regulatory compliance in connection with the performance of customer contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to compete for certain work and allegations by our customers that we have not performed our contractual obligations.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), and similar anti-bribery laws in other jurisdictions. We pursue opportunities in certain parts of the world that experience government corruption and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our employees, partners, subcontractors, agents, and others to comply with the FCPA and other anti-bribery laws. Our policies or procedures may not protect us against liability under the FCPA or other laws for actions taken by our employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our omissions, or due to the acts or omissions of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating, and resolving actual or alleged violations of the FCPA or other anti-bribery violations is expensive and could consume significant time and attention of our senior management.

In the course of providing services to customers, we may inadvertently infringe on the IP rights of others and be exposed to claims for damages.

In recent years, there has been significant litigation involving IP rights in technology industries. The solutions we provide to our customers may inadvertently infringe on the IP rights of third parties resulting in claims for damages against us or our customers.

Any infringement, misappropriation or related claims, whether or not meritorious, are time consuming, divert technical and management personnel and are costly to resolve. As a result of any such dispute, we may have to develop non-infringing

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technology, pay damages, enter into royalty or licensing agreements, cease utilizing certain products or services or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. If we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing IP or otherwise alter our business practices on a timely or cost-efficient basis, our business and operating results may be adversely affected. Additionally, the publicity resulting from infringing IP rights may damage our reputation and adversely impact our ability to develop new business.

In addition, U.S. government contracts typically contain provisions that allow the U.S. government to claim rights, including IP rights, in products and data developed and/or delivered under such agreements. We may not have the right to prohibit the U.S. government from using or disclosing certain technologies developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those technologies commercially or in providing products and services to the U.S. government. The U.S. government generally takes the position that it has an unlimited right to royalty-free use of technologies that are developed under U.S. government contracts.

Our ability to pursue strategic acquisitions and partnerships may impact our ability to compete in the markets we serve.

Aside from pursuing organic growth, we may explore potential strategic acquisitions that could allow us to expand our operations. However, we may be unable to identify attractive candidates or complete acquisitions on terms favorable to us. In addition, our ability to successfully integrate the operations we acquire and leverage these operations to generate revenue and earnings growth may significantly impact future revenue and earnings as well as investor returns. Integrating acquired operations is a significant challenge and we may not be able to manage such integrations successfully. Failure to successfully integrate acquired operations may adversely affect our cost structure, thereby reducing our margins and return on investment.

We have also entered into, and expect to seek to enter into, additional strategic partnerships with other industry participants as part of an effort to expand our business. However, we may be unable to identify attractive strategic partnership candidates or complete such partnerships on terms favorable to us. In addition, if we are unable to successfully implement our partnership strategies or our strategic partners do not fulfill their obligations or otherwise do not prove advantageous to our business, our investments in such partnerships and our anticipated business expansion could be adversely affected.

Achieving our growth objectives may prove unsuccessful. We may be unable to identify future attractive acquisitions and strategic partnerships, which may adversely affect our growth. In addition, our ability to consummate or integrate acquisitions or to consummate or implement our strategic partnerships may be materially and adversely affected.

Our ability to expand our business beyond U.S. federal and certain state and local government customers is subject to restrictions imposed by our agreements with DXC.

We are subject to non-compete provisions pursuant to which we and DXC generally agree to not compete in certain customer, product and service categories through May 2020, subject to certain exceptions. Additionally, we hold a perpetual, royalty-free license to use certain DXC IP, restricted to use solely in connection with U.S. federal and certain state and local government customers, and exclusive with respect to the U.S. federal government market until May 2023, and non-exclusive with respect to certain U.S. state and local government customers. The Non-U.S. Agency Agreement between DXC and us appoints DXC as our exclusive agent outside the U.S. for certain non-U.S. government customers, excepting certain U.S. government contracts, through May 2023. While we have no current plans to expand our existing business in ways that would require us to engage in business beyond the scope of the rights to IP we currently have, we are unable to engage in business activities outside the scope of that license until the expiration of those restrictions unless we develop or acquire new IP. The foregoing restrictions may limit our ability to engage in certain activities, may potentially lead to costly and disruptive disputes, and may materially and adversely affect our business, financial condition, results of operations and prospects.

We face intense competition, which could cause us to lose business, lower prices or suffer employee departures.

Our business operates in a highly competitive industry, and we generally compete with a wide variety of U.S. government contractors, including large defense contractors, diversified service providers and small businesses. There is also a significant industry trend towards consolidation, which lead to the emergence of companies that are better able to

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compete against us. Some of our competitors possess greater financial and technical resources than we do and could, among other things:
divert sales from us by winning very large-scale government contracts, a risk that is enhanced by the recent trend in government procurement practices to bundle services into larger contracts;
force us to offer lower prices in order to win or maintain contracts;
seek to hire our employees; or
adversely affect our relationships with current clients, including our ability to successfully recompete on incumbent work.

If we lose business, are forced to lower our prices or suffer employee departures, our revenue and our operating profits could be adversely affected. In addition, we may face competition from our subcontractors who, from time to time, seek to obtain prime contractor status on contracts for which they currently serve as a subcontractor to us. If one or more of our current subcontractors are awarded prime contractor status on such contracts in the future, it could divert sales from us and could force us to charge lower prices, which could have a material adverse effect on our revenue and profitability.

The U.S. federal government may prefer small, disadvantaged, minority-, women- or veteran-owned businesses. As a result, we may have fewer opportunities to bid on new or incumbent work.

As a result of Small Business Administration (“SBA”), U.S. Department of Veterans Affairs (“VA”) and other set-aside and preference programs, the U.S. federal government may decide to restrict certain procurements only to bidders that qualify as small, disadvantaged, minority-, women- or veteran-owned. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted as to the work we could perform as a subcontractor on those programs. An increase in the amount of procurements under the SBA or VA set-aside programs may impact our ability to bid on new procurements as a prime contractor or restrict our ability to re-compete on incumbent work that is placed in the set-aside program.

We have substantial indebtedness and the ability to incur significant additional indebtedness, which could adversely affect our business, financial condition and results of operations.

We have substantial indebtedness and may increase our indebtedness in the future. As of March 31, 2019, our total indebtedness, excluding capital leases, was approximately $2.4 billion. In addition, following the Spin-Off, Perspecta Enterprise Solutions LLC (“PES LLC”), a subsidiary of Perspecta, retained contractual capitalized lease obligations with an aggregate outstanding balance of up to $300 million, net of cash payments from DXC.

Our level of indebtedness could have important consequences. For example, it could:

increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;
increase our cost of borrowing;
require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;
limit our ability to make material acquisitions or take advantage of business opportunities that may arise;
expose us to fluctuations in interest rates, to the extent our borrowings bear variable rates of interest;
limit our flexibility in planning for, or reacting to, changes in our business and industry; and
place us at a potential disadvantage compared to our competitors that have less debt.

Our ability to make scheduled payments on and to refinance our indebtedness will depend on and be subject to our future financial and operating performance, which in turn is affected by general economic, financial, competitive, business and other factors beyond our control, including the availability of financing in the banking and capital markets. Our business may fail to generate sufficient cash flow from operations or to borrow funds in an amount sufficient to enable us to make payments on our debt, to refinance our debt or to fund our other liquidity needs. If we were unable to make payments on or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as asset sales, equity issuances or negotiations with our lenders to restructure the applicable debt. The terms of debt agreements that we entered into in connection with the Spin-Off and Mergers and market or business conditions may limit

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our ability to take some or all of these actions. In addition, if we incur additional debt, the related risks described above could be exacerbated.
The agreements governing our indebtedness contain restrictive covenants, which restrict our operational flexibility.

The agreements governing our indebtedness contain restrictions and limitations affecting our ability to engage in activities that may be in our long-term best interests, including covenants that place limitations on the incurrence of additional indebtedness; the creation of liens; the payment of dividends; 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; and changes in fiscal year and limitations on conduct of business.

In addition, certain agreements governing our indebtedness contain financial maintenance covenants requiring, as of the end of any fiscal quarter ending on or after September 30, 2018, (a) a ratio of consolidated total net debt to consolidated EBITDA (as defined in the debt agreement) not in excess of 4.50:1.00, stepping down to 3.75:1.00 at the end of the 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 March 31, 2019. The agreements governing our indebtedness also contain affirmative covenants and representations and warranties customary for financings of this type.

Events beyond our control could affect our ability to meet these covenants. Our failure to comply with obligations under the agreements governing our indebtedness may result in an event of default under those agreements. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious consequences to our financial condition, operating results and business and could cause us to become insolvent or enter bankruptcy proceedings.

We may need to raise additional capital, and we cannot be sure that additional financing will be available.

We must fund our ongoing working capital, capital expenditure and financing requirements through cash flows from operations and new sources of capital, including additional financing. Our ability to obtain future financing depends, among other things, on our financial condition and results of operations as well as on the condition of the capital markets or other credit markets at the time we seek financing. Increased volatility and disruptions in the financial markets could make it more difficult and more expensive for us to obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws or new interpretations or the enforcement of older laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. If we do not have sufficient access to the capital markets on terms that we find acceptable, our financial condition, operating results and business could be materially and adversely affected.

A termination of our defined benefit pension plan would adversely affect our financial condition and results of operations.

As of March 31, 2019, we had unfunded pension obligations related to Vencore HC’s defined benefit pension plan of approximately $103 million. The Pension Benefit Guaranty Corporation (the “PBGC”) has authority under the Employment Retirement Income Security Act of 1974, as amended, to terminate an underfunded defined benefit pension plan under certain circumstances, including when (1) the plan has not met the minimum funding requirements, (2) the plan cannot pay current benefits when due, or (3) the loss to the PBGC is reasonably expected to increase unreasonably over time if the plan is not terminated. If the PBGC were to terminate our U.S. defined benefit pension plan, our obligations with respect to such plan would become due and payable in full. Any such event or the failure by us to pay our pension plan insurance premiums with respect to our U.S. defined benefit pension plan could result in the PBGC obtaining a lien on our assets. Such an event would materially and adversely affect our financial condition and results of operations.

Our internal control over financial reporting may not be able to detect fraud or other issues.

We are required under the Sarbanes-Oxley Act of 2002 to include a report of management on our internal control that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition,

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the independent registered public accounting firm auditing our financial statements will be required to report on the effectiveness of internal control over financial reporting as of March 31, 2020. Effective internal control is necessary for us to provide reliable financial reports and effectively prevent fraud. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. We may not detect all control issues or fraud. In connection with the Mergers, and as we continue to grow our business, our internal control continues to become more complex and require more resources.

We may be unable to realize the anticipated cost savings or synergies within the anticipated time frame or in the anticipated amounts, or may incur additional and/or unexpected costs in order to realize them.

We may not be able to realize the anticipated cost savings or synergies from acquisitions in the anticipated amounts or within the anticipated timeframes or costs expectations or at all. The cost savings and synergies that we realize may differ materially from our estimates. We cannot provide assurances that these anticipated savings and synergies will be achieved or that our programs and improvements will be completed as anticipated or at all. In addition, any cost savings that we realize may be offset, in whole or in part, by reductions in revenue or through increases in other expenses. The projections and assumptions related to cost savings and synergies contained herein are based on our current estimates, but they involve risks, uncertainties, projections and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements, express or implied.

Assumptions relating to these projections involve subjective decisions and judgments with respect to, among other things, the estimated impact of certain operational adjustments, labor management and other cost and savings adjustments, as well as future economic, competitive, industry and market conditions and future business decisions, all of which are inherently uncertain and may be beyond the control of our management. The internal financial projections used to calculate estimated cost savings also do not take into account any circumstances or events occurring after the date on which they were prepared. These internal financial projections reflect assumptions as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in these internal financial projections.

Failure to realize the expected costs savings and synergies related to acquisitions could result in increased costs and have an adverse effect on the combined company’s financial results and prospects.

Changes in our effective income tax rate could impact our business, results of operations, liquidity, and net income.

An increase in our effective income tax rate could adversely affect our business, results of operations, liquidity, and net income. Various factors influence our effective income tax rate, including changes in tax law and related regulations, interpretation of existing laws, tax treaties, our mix of earnings across jurisdictions, and our ability to sustain our reporting positions on examination. Changes in any of those factors could change our effective tax rate, which could adversely affect our net income.

Risks Relating to the Spin-Off and Mergers
The actions required to integrate the business operations acquired in the Mergers demand significant management time and attention and may require us to incur significant incremental costs.

The actions required to integrate the business operations acquired in the Mergers have demanded, and are expected to continue to demand, significant amounts of management’s time and attention, which is in addition to, and may divert management’s time and attention from, the operation of our remaining businesses and the execution of our other strategic initiatives. Additionally, we have incurred significant costs and may incur future significant costs related to the integration of USPS, Vencore HC and KGS HC.

Further, one of the challenges faced in integrating the business operations acquired in the Mergers is the possibility
that employees of USPS, Vencore HC and KGS HC legacy companies could experience uncertainty about their future roles with the combined company, which could harm the ability of our business to attract and retain key personnel. Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.


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We could have an indemnification obligation to DXC if the Distribution were determined not to qualify for tax-free treatment, which could materially adversely affect our financial condition.

If, due to any transaction undertaken by us, it was determined that the Distribution was determined not to qualify for tax-free treatment under Section 355 of the U.S. Internal Revenue Code of 1986 (the “Code”), DXC would generally be subject to tax as if it sold the DXC common stock in a taxable transaction, which could result in a material tax liability. In addition, each DXC stockholder who received Perspecta common stock in the Distribution would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of the Perspecta common stock received by the stockholder in the Distribution.

In addition, the Distribution would be taxable to DXC (but not to DXC stockholders) pursuant to Section 355(e) of the Code if one or more persons acquire a 50% or greater interest in the stock of DXC or us, directly or indirectly (including through acquisitions of our stock after the Mergers), as part of a plan or series of related transactions that includes the Distribution. In addition, Section 355(e) of the Code generally creates a presumption that any direct or indirect acquisition of stock of DXC or us within two years before or after the Distribution is part of a plan that includes the Distribution, although the parties may be able to rebut that presumption in certain circumstances. The process for determining whether an acquisition is part of a plan under these rules is complex, inherently factual in nature, and subject to a comprehensive analysis of the facts and circumstances of the particular case. If the U.S. Department of Treasury and Internal Revenue Service were to determine that direct or indirect acquisitions of stock of DXC or us, either before or after the Distribution, were part of a plan that includes the Distribution, such determination could cause Section 355(e) of the Code to apply to the Distribution, which could result in a material tax liability.

Under the Tax Matters Agreement, we were required to indemnify DXC against taxes resulting from the Distribution arising as a result of any Prohibited Act (as defined in the Tax Matters Agreement). If we were required to indemnify DXC for taxes resulting from a Prohibited Act, that indemnification obligation would likely be substantial and could materially adversely affect our financial condition.

To address compliance with Section 355(e) of the Code, in the Tax Matters Agreement, we agreed to certain restrictions that may limit our ability to pursue certain strategic transactions or engage in other transactions, including stock issuances, certain asset dispositions, mergers, consolidations and other strategic transactions for a period of time following the Distribution. As a result, we may decide to forgo certain transactions that otherwise could be advantageous.

Under the Tax Matters Agreement, Perspecta is restricted from taking certain actions that could adversely affect the intended U.S. federal income tax treatment of the Spin-Off and such restrictions could significantly impair Perspecta’s ability to implement strategic initiatives that otherwise would be beneficial.
The Tax Matters Agreement generally restricts us from taking certain actions that could adversely affect the intended U.S. federal income tax treatment of the Spin-Off. Failure to adhere to these restrictions, including in certain circumstances that may be outside of our control, could result in tax being imposed on DXC for which we could bear responsibility and for which we could be obligated to indemnify DXC. In addition, even if we are not responsible for tax liabilities of DXC under the Tax Matters Agreement, we nonetheless could be liable under applicable tax law for such liabilities if DXC were to fail to pay such taxes. Because of these provisions in the Tax Matters Agreement, we are restricted from taking certain actions, particularly for the two years following the Spin-Off, including (among other things) the ability to freely issue stock, to make certain acquisitions and to raise additional equity capital. These restrictions could have a material adverse effect on our liquidity and financial condition, and otherwise could impair our ability to implement strategic initiatives. Also, our indemnity obligation to DXC might discourage, delay or prevent a change of control that our stockholders may consider favorable.
Certain of our directors and officers have actual or potential conflicts of interest because of their previous or continuing positions at DXC.

Because of their current or former positions with DXC, certain of our directors and officers own DXC common stock and equity awards. Although our Board of Directors consists of a majority of directors who are independent, some of our directors and officers continue to have a financial interest in DXC common stock and equity awards. In addition, the Chairman and a member of our Board of Directors are employed as the DXC Chairman, President and Chief Executive Officer, and DXC Chief Financial Officer, respectively. Continuing ownership of DXC common stock and equity awards, or service as a director at both companies could create, or appear to create, potential conflicts of interest if we have disagreements with DXC about the contracts between us that continue, or face decisions that could have different implications for us and DXC.

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We have limited operating history as an independent publicly-traded company, and our historical financial information is not necessarily representative of the results we would have achieved as an independent publicly traded company and may not be a reliable indicator of our future results.

We derived the Perspecta historical financial information through May 31, 2018 included in this Annual Report on Form 10-K from DXC’s combined and consolidated financial statements, and this information does not necessarily reflect the results of operations and financial positions we would have achieved as an independent publicly-traded company during the periods presented or those that we will achieve in the future. This is primarily because of the following factors:

Prior to the Spin-Off, we operated as part of DXC’s broader corporate organization and DXC performed various corporate functions for us, including IT, tax administration, treasury activities, technical accounting, benefits administration, procurement, legal and ethics and compliance program administration. Our historical financial information through May 31, 2018 reflects allocations of corporate expenses from DXC for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly-traded company.
We entered into transactions with DXC that did not exist prior to the Spin-Off, such as DXC’s provision of certain IT services, which has caused us to incur new costs.
Our historical financial information through May 31, 2018 does not reflect changes that have resulted from our separation from DXC, including changes in our cost structure, personnel needs, tax profile, financing and business operations. As part of DXC, we enjoyed certain benefits from DXC’s operating diversity, size, purchasing power, borrowing leverage and available capital for investments, and we lost these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets on terms as favorable to us as those we obtained as part of DXC prior to the Spin-Off.
The Mergers resulted in our consolidated operations and the results therefrom being substantially different than USPS’s operations and the results therefrom and a result, our historical information will not necessarily reflect our results of operations going forward.

Following the Spin-Off, we are also responsible for the additional costs associated with being an independent publicly-traded company, including costs related to corporate governance, investor and public relations, and public reporting. Therefore, the financial statements through May 31, 2018 may not be indicative of our future performance as an independent publicly-traded company. For additional information about our past financial performance and the basis of presentation of the financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes included elsewhere in this Annual Report on Form 10-K.
Our potential indemnification liabilities pursuant to the SDA could materially and adversely affect us.

The SDA between us and DXC provides for, among other things, the principal corporate transactions required to effect the Spin-Off, certain conditions to the Spin-Off and provisions governing the relationship between us and DXC after the Spin-Off. Among other things, the SDA provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to or arising out of our business. If we are required to indemnify DXC under the circumstances set forth in the SDA, we may be subject to substantial liabilities. For a description of the SDA, see “Certain Relationships and Related Transactions, and Director Independence - Agreements with DXC - Separation and Distribution Agreement.”

In connection with the Spin-Off, DXC will indemnify us for certain liabilities. However, these indemnities may not be sufficient to insure us against the full amount of such liabilities, or DXC’s ability to satisfy its indemnification obligation may be impaired in the future.

Pursuant to the SDA and other agreements we entered into in connection with the Spin-Off, DXC has agreed to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that DXC will agree to retain pursuant to these agreements, and DXC may not be able to fully satisfy its indemnification obligations under these agreements. Moreover, even if we ultimately succeed in recovering from DXC any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recovery from DXC.


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Risks Relating to our Common Stock and Capital Structure

Our stock price may fluctuate significantly.

The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategies;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our common stock after the Spin-Off;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
investor perception of our company and the IT services industry;
overall market fluctuations;
results from any material litigation or government investigation;
changes in laws and regulations (including tax laws and regulations) affecting our business;
changes in capital gains taxes and taxes on dividends affecting stockholders; and
general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

We may not pay dividends on our common stock and our indebtedness may limit our ability to pay dividends on our common stock.

The timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of our Board of Directors. Our Board of Directors’ decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements of our business and covenants associated with debt obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board of Directors deems relevant. We may not pay a dividend in the future, or continue to pay any dividend if we do commence paying dividends.

We have contracts with the U.S. federal government that are classified which may limit investor insight into portions of our business.

Revenue is derived from classified programs with the U.S. federal government that are subject to security restrictions which preclude the dissemination of information that is classified for national security purposes. We are limited in our ability to provide information about these classified programs, their risks or any disputes or claims relating to such programs. As a result, investors may have less insight into our classified programs than our other programs and therefore less ability to fully evaluate the risks related to our classified business.

Provisions in our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws and of Nevada law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Several provisions of our Amended and Restated Articles of Incorporation, Amended and Restated Bylaws and Nevada law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. These include provisions that:

permit us to issue blank check preferred stock with conversion and exchange rights that could negatively affect the rights of our common stockholders, and the Board of Directors could take that action without stockholder approval;
preclude stockholders from calling special meetings except where such special meetings are requested by stockholders representing 75% of the capital stock entitled to vote. Our Amended and Restated Bylaws

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prevent stockholder action by written consent for the election of directors and require the written consent of 90% of the capital stock entitled to vote for any other stockholder actions by written consent;
require stockholders to follow certain advance notice and disclosure requirements in order to propose business or nominate directors at an annual or special meeting; and
limit our ability to enter into business combination transactions with certain stockholders.

These and other provisions of our Amended and Restated Articles of Incorporation, Amended and Restated Bylaws and Nevada law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Perspecta, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock Anti-Takeover Effects of Various Provisions of Nevada Law and Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws” for more information.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.
ITEM 2. PROPERTIES

As of March 31, 2019, we conducted our operations in approximately 60 Perspecta-owned or leased locations occupying approximately 2.7 million square feet. Our major locations are in Chantilly, Herndon, and Clarksville, Virginia, where we occupy approximately 1.0 million square feet, collectively, used primarily for our corporate headquarters, customer service and data centers. We have other significant facilities located in Boise, Idaho, Reston, Virginia, and San Diego, California, where we occupy approximately 0.2 million, 0.1 million, and 0.1 million square feet, respectively, used primarily for customer service. We consider our facilities to be well-maintained and adequate to meet our current needs.
 
 
 
 
 
 
 
 
 
ITEM 3. LEGAL PROCEEDINGS

See Note 20 – “Commitments and Contingencies” to the financial statements for information regarding legal proceedings in which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the New York Stock Exchange under the symbol “PRSP” since June 1, 2018. Prior to that time, there was no public market for our stock.

Number of Holders

As of May 31, 2019, there were 42,284 holders of record of our common stock.

Unregistered Sales of Equity Securities

There were no sales of unregistered equity securities during the year ended March 31, 2019.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

On June 1, 2018, our Board of Directors authorized up to $400 million for future repurchases of outstanding shares of our 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. The following table provides information on a monthly basis for the quarter ended March 31, 2019 with respect to the Company’s purchase of equity securities:
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Approximate
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or
Programs
(in millions)
January 1, 2019 to January 31, 2019
 
295,111

 
$
18.96

 
295,111

 
$
351

February 1, 2019 to February 28, 2019
 
240,684

 
$
20.68

 
240,684

 
$
346

March 1, 2019 to March 31, 2019
 
269,655

 
$
20.74

 
269,655

 
$
340

Total
 
805,450

 
$
20.07

 
805,450

 
 
 

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Performance Comparison Graph

The following graph shows a comparison from June 1, 2018 (the date our common stock commenced trading on the New York Stock Exchange) through March 31, 2019 of the cumulative total return for our common stock, with the comparable cumulative total return of the Standard & Poor’s (“S&P”) Midcap 400 Index and the Dow Jones US Computer Services Index. The graph assumes that $100 was invested at the market close on June 1, 2018 in our common stock, the S&P Midcap 400 Index and the Dow Jones US Computer Services Index and that dividends have been reinvested. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
398236548_chart-0f29d52b5e571fce6a9.jpg
 
 
 
Equity Compensation Plans

See Item 12, contained in Part III of this Annual Report for information regarding our equity compensation plans.

ITEM 6. SELECTED FINANCIAL DATA

The following tables present our selected historical financial data. We derived the selected historical financial data as of and for the fiscal years ended March 31, 2019 and 2018, as of and the five months ended March 31, 2017, and as of and for the fiscal year ended October 31, 2016 from the audited financial statements included elsewhere in this Annual Report on Form 10-K. Our selected historical financial data set forth below as of and for the fiscal year ended October 31, 2015 are derived from our audited financial statements not included elsewhere herein. We derived the selected historical financial data as of and for the fiscal year ended October 31, 2014 from the historical books and records of HPE. In the opinion of management, the unaudited combined financial statements as of and for the fiscal year ended October 31, 2014 have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of ordinary recurring adjustments, necessary for a fair statement of the information for the periods presented.

The selected historical financial data may not be indicative of our performance, financial conditions or results of operations following the Spin-Off and Mergers. You should read the selected financial data presented below in conjunction with the information contained under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and accompanying notes included elsewhere in this Annual Report on Form 10‑K.


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Statement of Operations Data:
 
 
Successor(1)
 
 
Predecessor
 
 
Fiscal Years Ended March 31,
 
 
Five Months
Ended March 31,
2017
 
Fiscal Years Ended October 31,
(in millions)
 
2019
 
2018
 
 
 
2016
 
2015
 
2014
Revenue
 
$
4,030

 
$
2,819

 
 
$
1,073

 
$
2,732

 
$
2,585

 
$
2,955

Income (loss) before taxes
 
112

 
199

 
 
59

 
129

 
(51
)
 
221

Income tax expense (benefit)
 
40

 
(9
)
 
 
23

 
49

 
(22
)
 
83

Net income (loss)
 
72

 
208

 
 
36

 
80

 
(29
)
 
138


Balance Sheet Data:
 
 
Successor(1)
 
 
Predecessor
(in millions)
 
March 31, 2019
 
March 31, 2018
 
 
March 31, 2017
 
October 31, 2016
 
October 31, 2015
 
October 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
Total assets
 
$
6,083

 
$
3,679

 
 
$
1,073

 
$
1,234

 
$
1,512

 
$
1,416

Capital leases
 
 
 
 
 
 
 
 
 
 
 
 
 
Current capital lease obligations
 
137

 
160

 
 
139

 
145

 
127

 
111

Non-current capital lease obligations
 
168

 
144

 
 
155

 
215

 
223

 
224

Total capital leases
 
305

 
304

 
 
294

 
360

 
350

 
335

Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
 
80

 

 
 

 

 

 

Long-term debt, net of current maturities
 
2,297

 

 
 

 

 

 

Total long-term debt
 
2,377

 

 
 

 

 

 

Total equity
 
2,162

 
2,729

 
 
416

 
338

 
555

 
539

(1) The fiscal year ended March 31, 2019 is not directly comparable to fiscal year 2018 financial results due to the Spin-Off and Mergers on June 1, 2018, and fiscal years 2019 and 2018 are not directly comparable to periods ending prior to April 1, 2017, which reflect USPS’s financial results before the HPES Merger (as defined below) on April 1, 2017. See Note 1 – “Overview and Summary of Significant Accounting Policies” to the financial statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this document.

The statements in this discussion regarding industry outlook, expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Actual results may differ materially from those contained in any forward-looking statements.

The financial information, discussed below, reflects our financial condition, results of operations, and cash flows. The financial information discussed below and included in this document, however, may not necessarily reflect what our financial condition, results of operations, or cash flows would have been had we been operated as a separate, independent entity during the periods presented, or what our financial condition, results of operations, and cash flows may be in the future.

Overview

We are a leading provider of end-to-end enterprise IT services to government customers across U.S. federal, state and local markets. Using our market-leading enterprise offerings and solutions, we help our government customers implement modern collaborative workplaces, hybrid cloud platforms and integrated digital systems of engagement with their enterprise management systems. By delivering these modern enterprise solutions, often while ensuring interoperability with mission critical legacy systems, we believe we have helped our government customers better realize the benefits of technology, which will ultimately enable them to fulfill their mission objectives and achieve their desired business outcomes.

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In addition to providing substantial benefits through increased efficiencies and capabilities, we believe demand for our services is also driven by the technological advances that already reinvented commercial industries, which are now exerting a similar evolutionary effect on government customers. In response to these pressures, we believe government customers are increasingly turning to outside partners, such as Perspecta, to help guide them through this digital transformation.

We believe our breadth of contracts and customers in the U.S. government, and our longstanding history of having partnered with our public sector customers for more than 50 years via our legacy companies, provides us with a competitive advantage. For example, we have existing contracts with a range of public sector entities ranging from the VA, to the U.S. Postal Service, National Aeronautics and Space Administration, the U.S. Food and Drug Administration and large state and local government customers such as the county of San Diego, California. Based on this breadth of experience and our expertise, we believe we are well positioned to help our U.S. government customers continue their ongoing digital transformation journey.

Perspecta was formed on May 31, 2018, when DXC completed the Spin-Off and Mergers. Following the completion of the Spin-Off and Mergers, Perspecta, a Nevada corporation, became a publicly traded company. Perspecta’s common stock began trading under the ticker symbol “PRSP” on the New York Stock Exchange on June 1, 2018. The financial results of Perspecta prior to May 31, 2018, are based upon the historical results of USPS and do not give effect to the Mergers. See Note 1 – “Overview and Summary of Significant Accounting Policies” to the financial statements for additional details.

The purpose of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to present information that management believes is relevant to an assessment and understanding of Perspecta’s results of operations and cash flows for the year ended March 31, 2019. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes, as well as the other information included in this Annual Report on Form 10-K and our other public filings.

Segments and Services

Our reportable segments are (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 DHS, DOJ, HHS, as well as other federal civilian and state and local government agencies. Segment information is included in Note 19 – “Segment Information” to the financial statements. For a discussion of risks associated with our operations, see Part I, Item 1A “Risk Factors.”

Factors and Trends Affecting our Results of Operations
Revenue Generation
Revenue is generated by providing services on a variety of contract types which vary in duration from as little as six months to more than ten years. Factors affecting revenue include, among others, our ability to successfully:
bid on and win new contract awards;
satisfy existing customers, obtain add-on business, and win contract re-competes;
compete on services offered, delivery models offered, technical ability and innovation, quality, flexibility, experience, and results created; and
identify and integrate acquisitions and leverage them to generate new revenue.
Earnings are impacted by the above revenue factors and, among others, our ability to:
integrate acquisitions and eliminate redundant costs;
control costs, particularly labor costs, subcontractor expenses, and overhead costs including health care, pension and general and administrative costs;
anticipate talent needs to avoid staff shortages or excesses; and
accurately estimate various factors incorporated in contract bids and proposals.
Competitive Markets
We believe that we are well positioned to take advantage of the markets in which we operate because of our expertise in providing information technology services to public sector customers. Our ability to effectively manage project

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engagements, including logistics, client requirements, engineering resources and service levels, will affect our financial performance. Increased competition from other government contractors and market entrants seeking to take advantage of certain industry trends may result in the emergence of companies that are better able to compete against us.
Regulations
Increased audit, review, investigation and general scrutiny by U.S. government agencies of government contractors’ performance under U.S. government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to U.S. government expenditures for contractor services; incidents involving the mishandling of sensitive or classified information; and the increasingly complex requirements of the DoD and the intelligence community, including those related to cybersecurity, management of federal health care cost growth, and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and health care, could impact our ability to perform in the marketplace.
Seasonality
The U.S. federal government’s fiscal year ends on September 30. It is not uncommon for U.S. federal government agencies to award extra tasks or complete other contract actions in the weeks leading up to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. We have generally experienced increased bid and proposal costs in the months leading up to the U.S. federal government’s fiscal year end as we pursue new contract opportunities being awarded shortly before the U.S. federal government fiscal year end. We also experience some seasonality effects from the timing of the fiscal year end close for state and local governments, which in many instances are different than the U.S. federal government fiscal year end. In general, we tend to experience an increase in revenue in the first half of the calendar year from our state and local government customers as that is when funds are generally allocated to specific projects. Finally, we also tend to generate less revenue and profit from our labor services during the three months ending December 31, as a result of increased employee vacations during the holiday season.

Cash Flows

Cash flows are affected by the above earnings factors and, in addition, by the following factors:
the ability to efficiently manage capital resources and expenditures;
timely management of receivables and payables;
investment opportunities available, particularly related to business acquisitions and implementations, dispositions and large outsourcing contracts; and
tax obligations.

Economic and Industry Factors
Our results of operations are impacted by general economic conditions including macroeconomic conditions. We are monitoring current macroeconomic and credit market conditions and levels of business confidence and their potential effect on our customers and on us. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activities in the industries and geographies in which we operate. Such a downturn may reduce demand for our services or depress pricing of those services and have a material adverse effect on our new contract bookings and results of operations. Particularly in light of recent economic uncertainty, we continue to monitor costs closely in order to respond to changing conditions and to manage any impact to our results of operations. Our results of operations are also affected by the evolving priorities of the U.S. federal government, as well as by the pace of technological change and the type and level of technology spending by our customers. The ability to identify and capitalize on these markets and technological changes early in their cycles is a key driver of our performance.
Revenue is driven by our ability to secure new contracts and to deliver solutions and services that add value to our customers. Our ability to add value for customers, and therefore generate revenue, depends in part on our ability to deliver market-leading service offerings and to deploy skilled teams of professionals quickly across all government industries and domains. Our market is highly competitive and has characteristics unique to the federal contracting environment. Almost all of our U.S. federal government contracts and subcontracts may be modified, curtailed, or terminated either at the convenience of the government or for default based on factors set forth in the FAR. Upon termination for convenience of a fixed-price type contract, our U.S. federal government contracts normally entitle us to receive the purchase price for delivered items, reimbursement for contractual commitments and allowable costs for work-

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in-process, and a reasonable allowance for profit, although there can also be financial impact resulting from the negotiated contract settlement. Upon termination for convenience of a U.S. federal government cost reimbursable or time and material contract, we are normally entitled to reimbursement of allowable costs plus a fee. Allowable costs generally include the cost to terminate agreements with suppliers and subcontractors.
The amount of the fee recovered, if any, generally is related to the portion of the work completed prior to termination and is determined by negotiation. See Part I, Item 1A “Risk Factors.” If contracts are lost through the competitive bid process, our operating results may differ materially and adversely from those anticipated. Finally, shifting U.S. federal government priorities can also impact the future of projects. Management monitors U.S. federal government priorities and industry factors through numerous industry and government publications and forecasts, legislative activity, budgeting and appropriation processes, and by participating in industry professional associations in order to anticipate these shifting priorities.

Backlog

Since our adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), on April 1, 2018, revenue from remaining unsatisfied performance obligations is now calculated as the dollar value of our remaining performance obligations on executed contracts. As of March 31, 2019, approximately $3.6 billion of revenue is expected to be recognized from remaining performance obligations. The Company expects to recognize approximately 67% of these remaining performance obligations as revenue within one year and approximately 79% within two years, with the remainder recognized thereafter.
Total contract value (“TCV”) backlog is our estimate of the remaining revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under ID/IQ contracts. TCV backlog can include award fees, incentive fees, or other variable consideration estimated at the most likely amount to which the Company is expected to be entitled to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur. TCV backlog includes both funded and unfunded future revenue under government contracts.

We define funded backlog as estimated future revenue under government contracts and task orders for which funding has been appropriated by Congress and authorized for expenditure by the applicable agency. Funded backlog does not include the full potential value of the Company’s contracts because Congress often appropriates funds to be used by an agency for a particular program of a contract on a yearly or quarterly basis even though the contract may call for performance over a number of years. As a result, contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and until Congress makes subsequent appropriation and the procuring agency allocates funding to the contract.

A variety of circumstances or events may cause changes in the amount of our TCV backlog and funded backlog, including the execution of new contracts, the extension of existing contracts, the non-renewal or completion of current contracts, the early termination of contracts, and adjustment to estimates for previously included contracts. Changes in the amount of our funded backlog also are affected by the funding cycles of the government.

The estimated value of our TCV backlog as of March 31, 2019 was as follows:
(in millions)
 
Defense and
Intelligence
 
Civilian and
Health Care
 
Total
Funded backlog
 
$
1,215

 
$
1,023

 
$
2,238

Unfunded backlog
 
5,429

 
3,016

 
8,445

Total contract value backlog
 
$
6,644

 
$
4,039

 
$
10,683



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Results of Operations
Fiscal Year 2019 Highlights

Financial highlights for the fiscal year ended March 31, 2019 include the following:
Revenue was $4.0 billion.
Net income was $72 million, including the cumulative impact of certain items of $281 million, reflecting restructuring costs of $10 million, transaction, separation and integration-related costs of $106 million and amortization of acquired intangible assets of $165 million.
We generated $462 million of cash from operations.

Revenue

Our total revenue for the year ended March 31, 2019 was $4.0 billion, an increase of $1.2 billion as compared to revenue for the year ended March 31, 2018. The revenue growth is primarily driven by $1.3 billion attributed to the revenue acquired in the Mergers, new contracts and increased scope on existing contracts, partially offset by decreases in contract scope and contract completions.

Our total revenue for the year ended March 31, 2018 was $2.8 billion, an increase of $87 million as compared to revenue for the year ended October 31, 2016. The results for the year were primarily impacted by an increase of $79 million in revenue from new business and $63 million associated with increases in ongoing business in addition to the exclusion of certain USPS consulting activities that were historically conducted pursuant to contracts held by HPE, rather than USPS or its subsidiaries. Because those contracts were not novated to USPS until after October 31, 2016, no information regarding USPS consulting activities performed pursuant to those contracts has been presented in USPS’s results of operations for the year ended October 31, 2016. These increases were offset by contracts that concluded or were renewed at a lower rate in 2018 as compared to the year ended October 31, 2016 and by $133 million in revenue recognized in the year ended October 31, 2016 associated with a major contract renegotiation.

Revenue for the years ended March 31, 2019 and March 31, 2018, five months ended March 31, 2017 and the year ended October 31, 2016 were as follows:
 
 
Successor
 
 
 
 
 
 
Predecessor
 
 
 
 
 
 
Fiscal Years Ended
 
Change from Fiscal
2019 to 2018
 
 
Five Months Ended
 
Fiscal Year Ended
 
Change from Fiscal
2018 to 2016
(in millions)
 
March 31, 2019
 
March 31, 2018
 
$
 
%
 
 
March 31, 2017
 
October 31, 2016
 
$
 
%
Defense and Intelligence
 
$
2,587

 
$
1,416

 
$
1,171

 
83
%
 
 
$
488

 
$
1,153

 
$
263

 
23
 %
% of total revenue
 
64
%
 
50
%
 
 
 
 
 
 
45
%
 
42
%
 
 
 
 
Civilian and Health Care
 
1,443

 
1,403

 
40

 
3
%
 
 
585

 
1,579

 
(176
)
 
(11
)%
% of total revenue
 
36
%
 
50
%
 
 
 
 
 
 
55
%
 
58
%
 
 
 
 
Total revenue
 
$
4,030

 
$
2,819

 
$
1,211

 
43
%
 
 
$
1,073

 
$
2,732

 
$
87

 
3
 %

Defense and Intelligence Segment

Our Defense and Intelligence segment revenue during the year ended March 31, 2019 was $2.6 billion, or 64% of our total revenue for the period, and represented an increase of $1.2 billion or 83% as compared to the prior year. The revenue growth is primarily driven by $1.2 billion attributed to the revenue acquired in the Mergers, growth in new contracts and increases in scope on existing contracts across multiple programs, partially offset by a net decrease related to the divestiture of a contract due to organizational conflict of interest, decreases in scope on certain contracts and contract completions.

Our Defense and Intelligence segment revenue during the year ended March 31, 2018 was $1.4 billion, or 50% of our total revenue for the period, and represented an increase of $263 million or 23% as compared to the year ended October 31, 2016. The increase was primarily due to an increase in revenue from new business and increases in ongoing business, in addition to the exclusion of certain USPS consulting activities in the prior period, as mentioned above.

For the year ended March 31, 2019, Defense and Intelligence segment contract awards were $4.7 billion.


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Civilian and Health Care Segment

Our Civilian and Health Care segment revenue during the year ended March 31, 2019 was $1.4 billion, or 36% of our total revenue for the period, and represented an increase of $40 million or 3% as compared to the prior year. The revenue growth is primarily driven by $62 million attributed to the revenue acquired in the Mergers, new contracts and increased scope on existing contracts, partially offset by decreases in contract scope and contract completions.

Our Civilian and Health Care segment revenue during the year ended March 31, 2018 was $1.4 billion, or 50% of our total revenue for the period, and represented a decrease of $176 million or 11% as compared to the year ended October 31, 2016. The decrease was primarily due to contracts that concluded or were renewed at a lower rate in 2018 as to the year ended October 31, 2016, and revenue recognized in the year ended October 31, 2016 associated with a major contract renegotiation.

For the year ended March 31, 2019, Civilian and Health Care segment contract awards were $2.1 billion.

Costs and Expenses for Years Ended March 31, 2019 and March 31, 2018
 
 
Fiscal Year Ended
 
Percentage of Revenue
 
Fiscal Year Ended
 
Percentage of Revenue
 
Change
(in millions)
 
March 31, 2019
 
 
March 31, 2018
 
 
$
 
%
Costs of services
 
$
3,043

 
76
%
 
$
2,155

 
76
 %
 
$
888

 
41
 %
Selling, general and administrative
 
300

 
7
%
 
182

 
6
 %
 
118

 
65
 %
Depreciation and amortization
 
330

 
8
%
 
167

 
6
 %
 
163

 
98
 %
Restructuring costs
 
10

 
%
 
14

 
 %
 
(4
)
 
(29
)%
Separation and integration-related costs
 
106

 
3
%
 
90

 
3
 %
 
16

 
18
 %
Interest expense, net
 
121

 
3
%
 
12

 
 %
 
109

 
908
 %
Other expense, net
 
8

 
%
 

 
 %
 
8

 
NM

Total costs and expenses
 
$
3,918

 
97
%
 
$
2,620

 
93
 %
 
$
1,298

 
50
 %
 
 
 
 
 
 
 
 
 
 

 

Income before taxes
 
$
112

 
3
%
 
$
199

 
7
 %
 
$
(87
)
 
(44
)%
Income tax expense (benefit)
 
40

 
1
%
 
(9
)
 
 %
 
49

 
(544
)%
Net income
 
$
72

 
2
%
 
$
208

 
7
 %
 
$
(136
)
 
(65
)%
Costs of services
Costs of services for the year ended March 31, 2019 were $3.0 billion and increased by $888 million as compared to cost of services for the year ended March 31, 2018. Costs of services as a percentage of revenue was 76% for the year ended March 31, 2019, as compared to 76% for the same period of the prior year due to continued focus on cost discipline and program management on our fixed-price portfolio. We expect that over the long-term, contract mix will continue to move in the direction of fixed price.
Costs of services for the year ended March 31, 2018 were $2.2 billion and increased by $69 million as compared to cost of services for the year ended October 31, 2016. The increase is due to increases in new and ongoing business in addition to the exclusion of certain USPS consulting activities that were historically conducted pursuant to contracts held by HPE, rather than USPS or its subsidiaries. Because those contracts were not novated to USPS until after October 31, 2016, no information regarding USPS consulting activities performed pursuant to those contracts has been presented in USPS’s results of operations for the year ended October 31, 2016. These increases were offset by USPS’s implementation of certain strategic measures to improve efficiencies across multiple clients and programs and the 2016 major contract renegotiation.
Selling, general and administrative
Selling, general and administrative expenses for the year ended March 31, 2019 was $300 million and increased by $118 million as compared to the year ended March 31, 2018. Selling, general and administrative expenses as a percentage of revenue was 7% for the year ended March 31, 2019, as compared to 6% for the comparable periods of the prior year.

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Selling, general and administrative expenses for the year ended March 31, 2018 was $182 million and decreased by $25 million as compared to the year ended October 31, 2016. The decrease was largely driven by efficiencies gained as a result of USPS’s implementation of certain strategic measures to improve efficiencies in an effort to reduce expenses.
Depreciation and amortization
Depreciation and amortization for the year ended March 31, 2019 was $330 million and represented 8% of revenue, an increase, on a percentage of revenue basis, from the year ended March 31, 2018, which was largely driven by the Merger resulting in an increase of $96 million of amortization related to acquired intangible assets.
Depreciation and amortization for the year ended March 31, 2018 was $167 million and represented 6% of revenue, a decrease, on a percentage of revenue basis, from the year ended October 31, 2016, which was largely driven by reductions in property and equipment balances in the period associated with acquisition accounting.
Separation and integration-related costs
Separation and integration-related costs for the year ended March 31, 2019 were $106 million and represented 3% of revenue. Separation and integration-related costs were associated with expenses incurred in connection with the Spin-Off and Mergers.
Separation and integration-related costs for the year ended March 31, 2018 were $90 million and represented 3% of revenue. Separation and integration-related costs of $42 million and $48 million were associated with expenses incurred in connection with the strategic combination of CSC with the HPE Enterprise Services business (“HPES”) to form DXC (“HPES Merger”) and the Spin-Off and Mergers, respectively.
Interest expense, net
Interest expense, net for the year ended March 31, 2019 was $121 million, an increase of $109 million as compared to the year ended March 31, 2018, primarily due to the Credit Facilities (as defined in Note 12 – “Debt” to the financial statements), resulting in total indebtedness of approximately $2.4 billion as of March 31, 2019.
Interest expense, net for the year ended March 31, 2018 was $12 million and relates to interest associated with capital lease obligations. Interest expense for the year decreased by $19 million as compared to the year ended October 31, 2016, primarily due to reductions in capital lease balances in the period.
Other expense, net
Other expense, net comprises certain components of the net periodic pension cost for defined benefit pension plans, equity earnings of unconsolidated affiliates and other miscellaneous gains and losses. The $8 million increase in other expense, net for the year ended March 31, 2019 as compared to the prior year was primarily due to a pension remeasurement charge of $35 million in the fourth quarter, partially offset by the $24 million gain on the May 2018 sale of a contract to eliminate a potential organizational conflict of interest that resulted from the Mergers.
Income tax expense (benefit)
Our effective tax rate (“ETR”) on income for the year ended March 31, 2019 was 36%. In fiscal year 2019, the ETR was primarily impacted by discrete items including the revaluation of our state deferred taxes, the posting of a valuation allowance on our Virginia state tax deferred items, and non-deductible transaction costs. Our ETR on income for the year ended March 31, 2018 was (5)%. In fiscal year 2018, the ETR was primarily impacted by the U.S. tax reform legislation enacted in December 2017. A reconciliation of the differences between the U.S. federal statutory rate and the ETR, as well as other information about our income tax provision, is provided in Note 15 – “Income Taxes” to the financial statements.

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Costs and Expenses for Five Months Ended March 31, 2017 and Year Ended October 31, 2016
 
 
Predecessor
 
 
Five Months Ended
 
Percentage of Revenue
 
Fiscal Year Ended
 
Percentage of Revenue
(in millions)
 
March 31, 2017
 
 
October 31, 2016
 
Costs of services
 
$
820

 
76
%
 
$
2,086

 
76
%
Selling, general and administrative
 
77

 
7
%
 
207

 
8
%
Depreciation and amortization
 
73

 
7
%
 
225

 
8
%
Restructuring costs
 

 
%
 
20

 
1
%
Separation costs
 
34

 
3
%
 
34

 
1
%
Interest expense, net
 
10

 
1
%
 
31

 
1
%
Total costs and expenses
 
$
1,014

 
95
%
 
$
2,603

 
95
%
 
 
 
 
 
 
 
 
 
Income before taxes
 
$
59

 
5
%
 
$
129

 
5
%
Income tax expense
 
23

 
2
%
 
49

 
2
%
Net income
 
$
36

 
3
%
 
$
80

 
3
%

Costs of services
Costs of services for the five months ended March 31, 2017 was $820 million and represented 76% of revenue, which was the same, on a percentage of revenue basis, as the year ended October 31, 2016.
Selling, general and administrative
Selling, general and administrative expenses for the five months ended March 31, 2017 were $77 million and represented 7% of revenue, a 1% decrease, on a percentage of revenue basis, from the year ended October 31, 2016.
Depreciation and amortization
Depreciation and amortization for the five months ended March 31, 2017 was $73 million and represented 7% of revenue, a 1% decrease, on a percentage of revenue basis, from the year ended October 31, 2016, which was largely driven by reductions in property and equipment balances in the period.
Separation costs
Separation costs for the five months ended March 31, 2017 were $34 million and represented 3% of revenue. Separation costs were associated with expenses incurred in connection with the HPES Merger. Separation costs for the year ended October 31, 2016 were $34 million and mainly related to the separation of HPE from HPI in early 2016.
Interest expense, net
Interest expense, net for the five months ended March 31, 2017 was $10 million or 1% of revenue, which was the same, on a percentage of revenue basis, as the year ended October 31, 2016. Interest expense relates to interest associated with capital lease obligations.
Liquidity and Capital Resources
Following the Spin-Off and Mergers, existing cash and cash equivalents and cash generated by operations continue to be our primary sources of liquidity, as well as available borrowings under our Revolving Credit Facility (as defined in Note 12 – “Debt” to the financial statements) and sales of receivables under a U.S. federal government obligor receivables purchase facility established pursuant to a Master Accounts Receivable Purchase Agreement, dated July 14, 2017, by and among PES LLC, our wholly-owned subsidiary, and certain financial institutions (the MARPA Facility). Our primary cash needs will continue to be for working capital, capital expenditures and other discretionary investments, as well as to service our outstanding indebtedness, including borrowings under our Credit Facilities; however, our capital structure and liquidity profile have changed because we are no longer a part of DXC. Our ability to fund our future operating needs depends, in part, on our ability to continue to generate positive cash flows from operations and, if necessary, raise cash in the capital markets. Based upon our history of generating strong cash flows, it is our belief that we will be able to meet our short-term liquidity and cash needs, including debt servicing, through the combination of cash flows from operating

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activities, available cash balances, available borrowings under our Revolving Credit Facility and sales of receivables under our MARPA Facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities, although there can be no assurance that we will able to obtain such financing on acceptable terms (or at all) in the future.
Upon completion of the Spin-Off on May 31, 2018, we (i) closed on financing of an aggregate of $2.0 billion under our Term Loan A Facilities and $500 million under our the Term Loan B Facility, net of $34 million of debt issuance costs, and (ii) drew $50 million in borrowings under our Revolving Credit Facility, net of $9 million of debt issuance costs. Proceeds were used by Perspecta to pay a distribution of approximately $984 million in cash to DXC and to pay transaction costs associated with the Spin-Off and Mergers. Proceeds also funded the $400 million cash consideration paid to Veritas Capital for the Mergers and approximately $1.0 billion repayment of existing Vencore debt.
In July 2017, the Financial Conduct Authority (the authority that regulates the London Interbank Offered Rate, or “LIBOR”) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.
Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts when transition and transformation costs are incurred. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.
See Note 20 – “Commitments and Contingencies” to the financial statements for discussion of general purpose of guarantees and commitments.
The anticipated sources of funds to fulfill such commitments are listed below:
(in millions)
 
March 31, 2019
Cash and cash equivalents
 
$
88

Available borrowings under our Revolving Credit Facility
 
600

Total liquidity 
 
$
688

Cash and Cash Equivalents and Cash Flows
Prior to the Spin-Off and Mergers we reflected transfers of cash to and from Parent’s cash management system as a component of Parent company investment on the balance sheet. The following table summarizes our cash flow activity:
 
 
Successor
 
 
Predecessor
 
 
Fiscal Years Ended
 
 
Fiscal Year Ended
(in millions)
 
March 31, 2019
 
March 31, 2018
 
 
October 31, 2016
Net cash provided by operating activities
 
$
462

 
$
530

 
 
$
495

Net cash used in investing activities
 
(1,318
)
 
(34
)
 
 
(21
)
Net cash provided by (used in) financing activities
 
955

 
(496
)
 
 
(474
)
Net increase in cash and cash equivalents, including restricted
 
99

 

 
 

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

 

 
 

Cash and cash equivalents, including restricted, at end of year
 
99

 

 
 

Less restricted cash and cash equivalents included in other current assets
 
11

 

 
 

Cash and cash equivalents at end of year
 
$
88

 
$

 
 
$

Operating Cash Flow
Net cash provided by operating activities for the year ended March 31, 2019 was $462 million, as compared to $530 million for the year ended March 31, 2018. The decrease of $68 million included decreases in net cash of

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$134 million from movements in working capital assets and liabilities, partially offset by a $66 million increase in net income adjusted for non-cash items.
Net cash provided by operating activities for the year ended March 31, 2018 was $530 million, as compared to $495 million for the year ended October 31, 2016. The increase of $35 million was driven by an increase in net income of $128 million, partially offset by decreases in adjustments to net income of $89 million and decreases in net cash from movements in working capital of $4 million.
Investing Cash Flow
Net cash used in investing activities for the year ended March 31, 2019 was $1.3 billion, as compared to $34 million during the year ended March 31, 2018. The increase of $1.3 billion was predominantly due to acquisitions of $312 million and payments of acquired debt of $994 million in the year ended March 31, 2019, as compared to no cash paid for acquisitions or acquired debt in the comparable period of the prior fiscal year.
Net cash used in investing activities for the year ended March 31, 2018 was $34 million, as compared to $21 million during the year ended October 31, 2016. This increase of $13 million in cash used in investing activities was driven by higher purchases of property and equipment and higher payments for outsourcing contract costs.
Financing Cash Flow
Net cash provided by financing activities for the year ended March 31, 2019 was $955 million, as compared to net cash used in financing activities of $496 million during the year ended March 31, 2018. The increase in cash provided by financing activities of $1.5 billion was primarily due to issuance of long-term debt of $2.5 billion in connection with the Spin-Off and Mergers, partially offset by net transfers to Parent prior to the Spin-Off.
Net cash used in financing activities for the year ended March 31, 2018 was $496 million, as compared to $474 million during the year ended October 31, 2016. The increase was due to higher cash transfers to Parent, which are mainly associated with higher cash provided by operating activities.
Capital Resources
The following table summarizes our total debt:
(in millions)
 
March 31, 2019
 
March 31, 2018
Current maturities of long-term debt
 
$
80

 
$

Long-term debt, net of current maturities
 
2,297

 

Total debt
 
$
2,377

 
$


The $2.4 billion increase in total debt as of March 31, 2019, as compared to total debt as of March 31, 2018, was attributed to the Credit Facilities obtained to fund the Spin-Off and Mergers.

As discussed above, on May 31, 2018, we closed on financing of approximately $2.6 billion, of which $50 million related to amounts drawn on the Revolving Credit Facility. During the year ended March 31, 2019, we repaid $220 million of debt, including $170 million in term loans, of which $104 million were voluntary repayments, and the $50 million Revolving Credit Facility balance. At March 31, 2019, our $600 million Revolving Credit Facility remains unused.

We were in compliance with all financial covenants associated with our borrowings as of March 31, 2019. For more information on our debt, see Note 12 – “Debt” to the financial statements.


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The following table summarizes our capitalization ratios:
(in millions)
 
March 31, 2019
 
March 31, 2018
Total debt and capital leases
 
$
2,682

 
$
304

Cash and cash equivalents
 
88

 

Net debt(1)
 
$
2,594

 
$
304

 
 
 
 
 
Total debt and capital leases
 
$
2,682

 
$
304

Equity
 
2,162

 
2,729

Total capitalization
 
$
4,844

 
$
3,033

 
 
 
 
 
Debt-to-total capitalization
 
55
%
 
10
%
Net debt-to-total capitalization(1)
 
54
%
 
10
%
(1) Net debt is total debt less cash and cash equivalents. Net debt and net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone.

The increase in our total capitalization as of March 31, 2019, as compared to total debt as of March 31, 2018, was primarily due to a $2.3 billion increase in net debt, partially offset by a $567 million decrease in equity, which were primarily a result of the effects of the Spin-Off and Mergers.

Interest Rate Swaps

We use interest rate swaps to reduce our exposure to increases in interest rates on our variable rate debt. The interest rate swaps effectively convert our floating interest rate debt into fixed interest rate debt. Each swap agreement is designated as a cash flow hedge. We pay a stream of fixed interest payments for the term of the swap, and in turn, receive variable interest payments based on one-month LIBOR. At March 31, 2019, one-month LIBOR was 2.50%. The net receipt or payment from the interest rate swap agreements is included on the statements of operations as interest expense. Beginning in 2021, there is expected to be a transition from LIBOR as an interest rate benchmark. We are currently evaluating the implications of the LIBOR transition for our swap arrangements.
The following table summarizes our interest rate swaps at March 31, 2019:
Inception
  
Maturity
  
Notional Amount
(in millions)
 
Weighted-
Average Interest
Rate Paid
May 2018
  
May 2021
  
$
400

  
2.57
%
May 2018
  
May 2022
  
500

  
2.61
%
October 2018
 
October 2022
 
200

 
2.92
%
May 2018
  
May 2023
  
500

  
2.68
%
Total / Weighted-average interest rate
  
 
  
$
1,600

  
2.66
%

Share Repurchases

On June 1, 2018, Perspecta’s Board of Directors authorized up to $400 million for future repurchases of outstanding shares of our 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 fiscal year ended March 31, 2019, 2.7 million shares were purchased at an aggregate purchase price of $60 million, of which $1 million was settled subsequent to the end of the year.

Dividends
During the fiscal year ended March 31, 2019, the Board of Directors declared cash dividends to our stockholders of approximately $33 million in the aggregate, of which $25 million had been paid as of March 31, 2019 and $8 million of which was paid on April 16, 2019.

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On May 21, 2019, the Board of Directors declared a dividend of $0.06 per common share payable on July 16, 2019 to common stockholders of record at the close of business on June 5, 2019.
Off-Balance Sheet Arrangements
We are party to a receivables sales arrangement with off-balance sheet risk. See Note 5 – “Receivables” to the financial statements for information about our receivables sales arrangement.
Contractual Obligations

Our contractual obligations as of March 31, 2019 were as follows:
(in millions)
 
Less than
1 year
 
2-3 years
 
4-5 years
 
More than
5 years
 
Total
Debt(1)
 
$
88

 
$
422

 
$
1,351

 
$
536

 
$
2,397

Capitalized lease obligations(2)
 
137

 
146

 
22

 

 
305

Operating leases
 
57

 
55

 
19

 
5

 
136

Purchase obligations(3)
 
18

 
71

 

 

 
89

Interest payments(4)
 
127

 
207

 
123

 
37

 
494

Totals(5)(6)
 
$
427

 
$
901

 
$
1,515

 
$
578

 
$
3,421

(1) Amounts represent scheduled principal cash payments of long-term debt.
(2) Amounts represent scheduled principal cash payments of capital lease obligations.
(3) Includes long-term purchase and separate services agreements with DXC for the purchase of certain hardware, software, and support services as well as the provision of certain outsourced IT services and excludes agreements that are cancellable without penalty. If we cancel the purchase agreements prior to their natural expiration, we will be required to pay to DXC any required shortfall. If we cancel the services agreements for any reason other than for cause, we will have to pay DXC significant termination fees, which will vary, depending on the date and manner of termination. Purchase obligations assumed from DXC will reflect a significant increase as a result of newly executed contracts.
(4) Amounts represent scheduled interest payments on long-term debt and capital lease obligations.
(5) See Note 14 – “Pension and Other Benefit Plans” for the estimated liability related to estimated future benefit payments under our pension and other postretirement plans that have been omitted from this table.
(6) We have excluded obligations for uncertain tax positions of $52 million, as the timing of such payments, if any, cannot be reasonably estimated.
Critical Accounting Policies and Estimates
The preparation of the financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider the following policies to be critical because of their complexity and the high degree of judgment involved in implementing them: revenue recognition, acquisition accounting and income taxes.

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 ID/IQ 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

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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 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 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,

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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.

The Company has contracts to provide services that will be delivered under distinct and individual performance obligations. Revenue for contracts in which control of services provided does not transfer until delivery to the customer is recognized at a point in time.

Acquisition Accounting

When we acquire a controlling financial interest through a business combination, we use 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 net 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. We test 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. government appropriations or other significant adverse changes in industry or market conditions.

Income Taxes
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”). As a fiscal year taxpayer with an October 31 tax year-end, the Company was not subject to many of the tax law provisions until fiscal year 2019; however, GAAP principles required the Company to revalue its deferred tax assets and liabilities with resulting tax effects accounted for in the reporting period of enactment including retroactive effects during fiscal year 2018. Perspecta’s fiscal year ended March 31, 2019 contains multiple tax years, one of which began prior to the enactment of the Tax Act and ended upon the Spin-Off on May 31, 2018 and, therefore, the Company was required to blend its federal tax rate to take into account a differing applicable federal tax rate for the portion of the fiscal year preceding the Spin-Off and the portion thereafter. The Company’s net income before taxes for the fiscal year ended March 31, 2019 relating to the period prior to the Spin-Off is subject to federal tax on DXC’s tax return at an applicable federal tax rate of 23.3% under Section 15 of the Code. The Company computed a weighted federal tax rate based upon the number of days that the Company’s fiscal year would be taxed at 23.3% and the number of days that the Company’s federal tax rate was reduced to 21%. For fiscal year 2019, the Company has an estimated blended corporate U.S. federal income tax rate of approximately 21.4%.

Under SEC staff issued Staff Accounting Bulletin No 118, the Company made reasonable estimates and recorded provisional amounts during the Company’s fiscal year ended March 31, 2018. The Company has not made any adjustments to the provisional amounts recorded. As of December 22, 2018, we have completed the accounting for all the impacts of the Tax Act. Parent is still in the process of calculating return to provision adjustments for USPS for tax years ending prior to the enactment of the Tax Act. The Company will recognize the return to provision adjustments in the period in which they are finalized and provided by Parent.

For years ending prior to the Spin-Off and Mergers, our operations were historically included in the tax returns filed by the respective Parent entities of which our businesses have been a part. The Company’s tax balances as of the beginning of the fiscal year, as well as our tax provisions for the pre-merger period contained in the financial statements included elsewhere in this Annual Report on Form 10-K, are presented on a separate return basis as if USPS filed its own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods presented.

We recognize 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

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are expected to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

We record accruals for uncertain tax positions in accordance with Accounting Standards Codification Topic 740, Income Taxes, on the basis of a two-step process in which (1) we determine 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, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We make adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We actively monitor our exposures to potential loss arising from adverse changes in market rates and prices and manage such risks through our regular operating and financing activities or the use of derivative financial instruments.

Our exposure to market risk for changes in interest rates relates primarily to our $2.4 billion of outstanding debt. We present the fair value of our long-term debt using an expected present value technique, which is based on currently observable market inputs, using interest rates currently available to us for instruments with similar terms and remaining maturities. However, the fair value of our debt will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. See Note 7 – “Fair Value” to the financial statements for more information. The interest expense associated with our Term Loan A Facilities, Term Loan B Facility, and any loans under our Revolving Credit Facility will vary with market rates.

Our exposure to financial risk from changes in interest rates relates primarily to our $2.3 billion of debt outstanding under our senior secured credit facilities. Pursuant to our interest rate risk management strategies, during the year ended March 31, 2019, we used interest rate cash flow hedges to add stability to our interest expense and to manage our exposure to interest rate increases. The gross notional amount of the Company’s interest rate swaps at March 31, 2019 was $1.6 billion. Net of the benefit from our interest-rate derivatives, a hypothetical 1% increase in interest rates would increase the interest expense incurred under our senior secured loan facilities by approximately $7 million for the next twelve months following March 31, 2019, and likewise decrease our net income and cash flows. We have not entered into any hedging transactions for speculative or trading purposes. Prior to the Spin-Off, DXC managed the risk related to interest rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Combined Financial Statements
Page
 
 
 
 
Notes to Consolidated Combined Financial Statements
 
 
 

All financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the financial statements or related notes.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Perspecta Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated combined balance sheets of Perspecta Inc. (the “Company”) (formerly the U.S. Public Sector Business of DXC Technology Company) as of March 31, 2019 and March 31, 2018, the related consolidated combined statements of operations, comprehensive income, cash flows, and changes in stockholders’ equity for the fiscal years ended March 31, 2019 and 2018, the five months ended March 31, 2017 and the fiscal year ended October 31, 2016 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for the fiscal years ended March 31, 2019 and 2018, the five months ended March 31, 2017 and the fiscal year ended October 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of a Matter

As discussed in Note 1 to the financial statements, DXC Technology Company (“DXC”) acquired the Company through the merger of Computer Sciences Corporation and the Enterprise Services Business of Hewlett-Packard Enterprise Company (“HPE”) on April 1, 2017. These combined financial statements of the Company were derived from the consolidated and combined financial statements and accounting records of DXC for the period from April 1, 2018 to May 31, 2018 and the fiscal year ended March 31, 2018 and HPE for the five months ended March 31, 2017 and the fiscal year ended October 31, 2016 as if the Company were operated on a standalone basis during the periods presented. The consolidated combined statements of operations of the Company reflect allocations of general corporate expenses of DXC and HPE. These allocations may not reflect the expense the Company would have incurred as a standalone company for the periods presented.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia
June 6, 2019

We have served as the Company’s auditor since 2017.



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PERSPECTA INC.
CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
 
 
Successor
 
 
Predecessor
 
 
Fiscal Years Ended
 
 
Five Months Ended
March 31,
2017
 
Fiscal Year Ended
October 31,
2016
(in millions, except per share amounts)
 
March 31, 2019
 
March 31, 2018
 
 
 
Revenue
 
$
4,030

 
$
2,819

 
 
$
1,073

 
$
2,732

 
 
 
 
 
 
 
 
 
 
Costs of services
 
3,043

 
2,155

 
 
820

 
2,086

Selling, general and administrative
 
300

 
182

 
 
77

 
207

Depreciation and amortization
 
330

 
167

 
 
73

 
225

Restructuring costs
 
10

 
14

 
 

 
20

Separation and integration-related costs
 
106

 
90

 
 
34

 
34

Interest expense, net
 
121

 
12

 
 
10

 
31

Other expense, net
 
8

 

 
 

 

Total costs and expenses
 
3,918

 
2,620

 
 
1,014

 
2,603

 
 
 
 
 
 
 
 
 
 
Income before taxes
 
112

 
199

 
 
59

 
129

Income tax expense (benefit)
 
40

 
(9
)
 
 
23

 
49

Net income
 
$
72


$
208

 
 
$
36

 
$
80

 
 
 
 
 
 
 
 
 
 
Earnings per common share(1):
 
 
 
 
 
 
 
 
 
  Basic
 
$
0.44

 
$
1.46

 
 
$
0.25

 
$
0.56

  Diluted
 
$
0.44

 
$
1.46

 
 
$
0.25

 
$
0.56

(1) Earnings per common share information for the fiscal year ended March 31, 2018, the five months ended March 31, 2017, and the fiscal year ended October 31, 2016 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 consolidated combined financial statements.
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PERSPECTA INC.
CONSOLIDATED COMBINED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Successor
 
 
Predecessor
 
 
Fiscal Years Ended
 
 
Five Months Ended
March 31,
2017
 
Fiscal Year Ended
October 31,
2016
(in millions)
 
March 31, 2019
 
March 31, 2018
 
 
 
Net income
 
$
72

 
$
208

 
 
$
36

 
$
80

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
 
Cash flow hedge adjustment, net of tax benefit of $8, $0, $0 and $0
 
(23
)
 

 
 

 

Comprehensive income
 
$
49

 
$
208

 
 
$
36

 
$
80


The accompanying notes are an integral part of these consolidated combined financial statements.
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PERSPECTA INC.
CONSOLIDATED COMBINED BALANCE SHEETS
(in millions, except share and per share amounts)
 
March 31, 2019
 
March 31, 2018
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
88

 
$

Receivables, net
 
484

 
354

Other receivables
 
92

 

Prepaid expenses
 
141

 
74

Deferred contract costs
 
35

 
21

Other current assets
 
38

 

Total current assets
 
878

 
449

Property and equipment, net
 
368

 
290

Goodwill
 
3,179

 
2,022

Intangible assets, net
 
1,466

 
897

Other assets
 
192

 
21

Total assets
 
$
6,083

 
$
3,679

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

 
$

Current capital lease obligations
 
137

 
160

Accounts payable
 
246

 
195

Accrued payroll and related costs
 
91

 
17

Accrued expenses
 
396

 
137

Deferred revenue and advance contract payments
 
33

 
53

Other current liabilities
 
31

 
43

Total current liabilities
 
1,014

 
605

Long-term debt, net of current maturities
 
2,297

 

Non-current capital lease obligations
 
168

 
144

Deferred tax liabilities
 
171

 
176

Other long-term liabilities
 
271

 
25

Total liabilities
 
3,921

 
950

Commitments and contingencies
 


 


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

 
2,729

Common stock, par value $0.01 per share; authorized 750,000,000; 165,844,994 issued and 163,099,080 outstanding at March 31, 2019 and 0 shares issued and outstanding at March 31, 2018
 
2

 

Additional paid-in capital
 
2,242

 

Retained earnings
 
2