Toggle SGML Header (+)


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

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
399189357_perslogopriblutmrgba08.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

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 Exchange Act).  o Yes  x   No

162,297,312 shares of common stock, par value $0.01 per share, were outstanding as of August 9, 2019.



EXPLANATORY NOTE

On May 31, 2018, Perspecta Inc. (together with its consolidated subsidiaries for all periods following the spin-off defined below, “Perspecta”) became an independent company through the consummation of the spin-off (the “Spin-Off”) of the United States Public Sector business (“USPS”) of DXC Technology Company (“DXC”). Following the Spin-Off and pursuant to an Agreement and Plan of Merger dated October 11, 2017 (the “Merger Agreement”), on May 31, 2018, Perspecta completed the combination of USPS with Vencore Holding Corp. (“Vencore HC”) and KGS Holding Corp. (“KGS HC”) (the “Mergers”). As a result of these transactions, the businesses owned by Vencore HC and KGS HC became wholly owned by Perspecta. For further information about the Mergers, please refer to our Annual Report on Form 10-K for the year ended March 31, 2019.

Because the Spin-Off and the Mergers were not consummated until May 31, 2018, the unaudited Condensed Consolidated Combined Financial Statements presented in this Quarterly Report on Form 10-Q include only the legacy USPS activity for the period from April 1, 2018 to May 31, 2018, and Perspecta, including entities acquired in the Mergers, from June 1, 2018 through June 30, 2018 and April 1, 2019 through June 30, 2019.

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




TABLE OF CONTENTS

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


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Combined Financial Statements (unaudited)
 
Page
 

1

Table of Contents

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

 
 
Three Months Ended
(in millions, except per share amounts)
 
June 30, 2019
 
June 30, 2018
Revenue
 
$
1,107

 
$
793

 
 
 
 
 
Costs of services
 
836

 
597

Selling, general and administrative
 
72

 
61

Depreciation and amortization
 
101

 
64

Restructuring costs
 
2

 

Separation, transaction and integration-related costs
 
19

 
44

Interest expense, net
 
35

 
10

Other income, net
 

 
(24
)
Total costs and expenses
 
1,065

 
752

 
 
 
 
 
Income before taxes
 
42

 
41

Income tax expense
 
11

 
12

Net income
 
$
31

 
$
29

 
 
 
 
 
Earnings per common share:
 
 
 
 
  Basic
 
$
0.19

 
$
0.18

  Diluted
 
$
0.19

 
$
0.17


The accompanying notes are an integral part of these unaudited condensed consolidated combined financial statements.

2


Table of Contents

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

 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Net income
 
$
31

 
$
29

Other comprehensive loss, net of tax:
 
 
 
 
Cash flow hedge adjustments, net of tax
 
(18
)
 
(1
)
Comprehensive income
 
$
13

 
$
28



The accompanying notes are an integral part of these unaudited condensed consolidated combined financial statements.

3


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share and share amounts)
 
June 30, 2019
 
March 31, 2019
ASSETS
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
179

 
$
88

Receivables, net of allowance for doubtful accounts of $1 and $0
 
480

 
484

Other receivables
 
44

 
92

Prepaid expenses
 
111

 
141

Other current assets
 
81

 
73

Total current assets
 
895

 
878

Property and equipment, net of accumulated depreciation of $147 and $148
 
350

 
368

Goodwill
 
3,179

 
3,179

Intangible assets, net of accumulated amortization of $359 and $299
 
1,407

 
1,466

Other assets
 
287

 
192

Total assets
 
$
6,118

 
$
6,083

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

 
$
80

Current finance lease obligations
 
132

 
137

Current operating lease obligations
 
53

 

Accounts payable
 
242

 
246

Accrued payroll and related costs
 
106

 
91

Accrued expenses
 
355

 
396

Other current liabilities
 
67

 
64

Total current liabilities
 
1,035

 
1,014

Long-term debt, net of current maturities
 
2,277

 
2,297

Non-current finance lease obligations
 
161

 
168

Deferred tax liabilities
 
157

 
171

Other long-term liabilities
 
333

 
271

Total liabilities
 
3,963

 
3,921

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, par value $0.01 per share; 750,000,000 shares authorized; 165,886,892 and 165,844,994 shares issued; 162,466,907 and 163,099,080 shares outstanding
 
2

 
2

Additional paid-in capital
 
2,247

 
2,242

Retained earnings
 
23

 
2

Accumulated other comprehensive loss
 
(41
)
 
(23
)
Treasury stock at cost, 3,419,985 shares and 2,745,914 shares
 
(76
)
 
(61
)
Total stockholders’ equity
 
2,155

 
2,162

Total liabilities and stockholders’ equity
 
$
6,118

 
$
6,083


The accompanying notes are an integral part of these unaudited condensed consolidated combined financial statements.

4


Table of Contents

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

(in millions, except shares in thousands and per share amounts in ones)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Loss
Treasury Stock
Total Stockholders’ Equity
Shares
 
Amount
Balance at March 31, 2019
165,845

 
$
2

$
2,242

$
2

$
(23
)
$
(61
)
$
2,162

Net income

 


31



31

Other comprehensive loss, net of tax

 



(18
)

(18
)
Stock-based compensation

 

5




5

Repurchases of common stock

 




(15
)
(15
)
Stock option exercises and other common stock transactions
42

 






Dividends declared ($0.06 per common share)

 


(10
)


(10
)
Balance at June 30, 2019
165,887

 
$
2

$
2,247

$
23

$
(41
)
$
(76
)
$
2,155


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

 
$

$

$

$

$
2,729

$
2,729

Impact of adoption of new accounting standard

 




4

4

Net income

 




49

49

Transfers to Parent, net

 




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

 




2,637

2,637

Dividend to DXC prior to May 31, 2018

 

(984
)



(984
)
Spin-Off activity
142,426

 
2

2,635



(2,637
)

Mergers activity
23,273

 

578




578

Net loss

 


(20
)


(20
)
Other comprehensive loss, net of tax

 



(1
)

(1
)
Dividends declared ($0.05 per common share)

 

(8
)



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

 
$
2

$
2,221

$
(20
)
$
(1
)
$

$
2,202


The accompanying notes are an integral part of these unaudited condensed consolidated combined financial statements.

5


Table of Contents

PERSPECTA INC.
CONDENSED CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
31

 
$
29

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
101

 
64

Stock-based compensation
 
5

 
2

Deferred income taxes
 
(8
)
 

Loss (gain) on sale or disposal of assets
 
8

 
(24
)
Other non-cash charges, net
 
1

 
(14
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
Receivables, net
 
55

 
24

Prepaid expenses and other current assets
 
31

 
(5
)
Accounts payable, accrued expenses and other current liabilities
 
(26
)
 
72

Deferred revenue and advanced contract payments
 
(13
)
 
13

Other assets and liabilities, net
 

 
(1
)
Net cash provided by operating activities
 
185

 
160

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

 
(312
)
Extinguishment of acquired debt and related costs
 

 
(994
)
Proceeds from sale of assets
 

 
24

Purchases of property, equipment and software
 
(1
)
 
(6
)
Payments for outsourcing contract costs
 
(1
)
 
(2
)
Net cash used in investing activities
 
(2
)
 
(1,290
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(22
)
 

Proceeds from debt issuance
 

 
2,500

Payment of debt issuance costs
 

 
(43
)
Proceeds from revolving credit facility
 

 
50

Payments on revolving credit facility
 

 
(50
)
Payments on finance lease obligations
 
(35
)
 
(41
)
Repurchases of common stock
 
(15
)
 

Dividend to DXC
 

 
(984
)
Dividends paid to Perspecta stockholders
 
(8
)
 

Net transfers to Parent
 

 
(88
)
Net cash (used in) provided by financing activities
 
(80
)
 
1,344

Net change in cash and cash equivalents, including restricted
 
103

 
214

Cash and cash equivalents, including restricted, at beginning of period
 
99

 

Cash and cash equivalents, including restricted, at end of period
 
202

 
214

Less restricted cash and cash equivalents included in other current assets
 
23

 
13

Cash and cash equivalents at end of period
 
$
179

 
$
201

Supplemental cash flow disclosures:
 
 
 
 
Interest paid
 
$
32

 
$
8

Income taxes (refunded) paid, net
 
(3
)
 
4

Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
Leased assets acquired through finance lease obligations
 
$
22

 
$
5

Leased assets acquired through operating lease obligations
 

 

Dividends declared but not yet paid
 
10

 
8

Stock issued for the acquisition of Vencore
 

 
578


The accompanying notes are an integral part of these unaudited condensed consolidated combined financial statements.

6


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



Note 1Overview and Basis of Presentation

Background

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

The accompanying unaudited condensed consolidated combined financial statements and notes present the combined results of operations, financial position, and cash flows of USPS for the periods prior to the completion of the Spin-Off and the combination with Vencore HC and KGS HC. Accordingly, the term “Parent” refers to DXC for periods from April 1, 2018 to May 31, 2018. As used in these notes, “the Company,” “we,” “us,” and “our” refer to the combined businesses of USPS for the period from April 1, 2018 through May 31, 2018, and to Perspecta and its consolidated subsidiaries for the periods from June 1, 2018 through June 30, 2018 and April 1, 2019 through June 30, 2019.

Basis of Presentation

The accompanying unaudited condensed consolidated combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). As discussed above, the Spin-Off and the Mergers were not consummated until May 31, 2018. In the period prior to consummation of the Spin-Off and Mergers, these financial statements include the combined financial statements of USPS, derived from the consolidated combined financial statements and accounting records of Parent as if USPS were operated on a stand-alone basis during the periods presented and were prepared in accordance with GAAP and, subsequent to the Spin-Off and Mergers, these financial statements represent the consolidated financial statements of Perspecta and its subsidiaries. Accordingly, the accompanying unaudited financial statements are presented as described below.
The period prior to the Spin-Off and Mergers includes the combined financial results and cash flows of USPS for the period from April 1, 2018 to May 31, 2018.

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

the consolidated financial statements of Perspecta for the period from June 1, 2018 to June 30, 2018;
the consolidated financial statements of Perspecta for the period from April 1, 2019 to June 30, 2019; and
the consolidated financial position of Perspecta as of June 30, 2019 and March 31, 2019.
 
After the Spin-Off, DXC does not have any beneficial ownership of Perspecta or USPS. The chief executive officer of DXC serves as chairman of the board of directors of Perspecta (the “Board of Directors”). Consequently, transactions between DXC and Perspecta are reflected as related party transactions pursuant to the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures. For additional information about the allocation of expenses from DXC prior to the Spin-Off and certain continuing responsibilities between the Company and DXC, see Note 13 – “Related Party Transactions.”

Principles of Consolidation and Combination

The unaudited condensed consolidated combined financial statements as of and for the three months ended June 30, 2019 reflect the financial position and results of operations of the Company, its consolidated subsidiaries and the joint ventures and partnerships over which the Company has a controlling financial interest. The combined financial statements as of and for periods prior to the consummation of the Spin-Off, reflect the financial position and results of operations of USPS as described above.


7

Table of Contents

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

Prior to consummation of the Spin-Off, USPS generated cash in the normal course of its business. Parent swept the cash USPS generated via transfers to Parent’s cash management system. Parent’s receivables sales facility and long-term debt, other than capital lease obligations, have not been attributed to USPS for the periods prior to consummation of the Spin-Off because Parent’s borrowings were not the legal obligation of USPS.

The unaudited condensed consolidated combined financial statements for prior periods, included herein, may not be indicative of the financial position, results of operations and cash flows of the Company in the future or if USPS had been operated as a consolidated group during all periods presented.
In the opinion of management of the Company, the accompanying unaudited condensed consolidated combined financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our results of operations and cash flows.
Use of Estimates

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

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

Reclassifications

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

Note 2Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) Section A—Leases (“ASU 2016-02”). ASU 2016-02, along with related amendments (“ASC 842”), requires lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term on their balance sheets. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. Management developed a detailed implementation plan, which included, among other things, implementation of a new lease accounting system, an update to our policies, development of disclosures, evaluation of our controls, and application of the guidance across our contract population. The Company adopted the standard on April 1, 2019 using the optional transition method. Under this method, the Company applied the standard through a cumulative-effect adjustment in the period of adoption. In addition, the Company has elected to adopt additional practical expedients, including combining lease and non-lease components, applying the discount rate to a portfolio of leases with similar lease durations based on the original lease duration, and

8

Table of Contents

maintaining prior lease classification upon adoption. The adoption of ASC 842 resulted in the recognition of $114 million and $130 million of ROU assets and lease liabilities, respectively, on our balance sheet related to operating leases. The adoption did not have a material impact on our statements of operations, changes in stockholders’ equity or cash flows.

See Note 10 – “Leases” for further details.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance, along with related amendments, changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is currently assessing the impact that this guidance will have on its trade receivables and financial arrangements when adopted.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350- 40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 provides guidance for determining when a cloud computing arrangement includes a software license and makes changes to the requirements for capitalizing implementation costs incurred in a hosting arrangement that is as a service contract. The amendment is effective for public entities for fiscal years beginning after December 15, 2019, and early adoption is permitted. The update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15 on its financial statements and related disclosures, as well as evaluating the date and method of adoption.

Other recently issued ASUs effective after June 30, 2019 are not expected to have a material effect on Perspecta’s financial statements.

Note 3Acquisitions

The following unaudited pro forma financial information presents results as if the Spin-Off and the Mergers and the related financing had occurred on April 1, 2017. The historical consolidated financial information of Perspecta has been adjusted in the pro forma information to give effect to the events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The effects of the Spin-Off are primarily attributable to interest expense associated with the incurrence of debt in connection with the Spin-Off. The effects of the Mergers primarily relate to amortization of acquired intangible assets. The consolidated financial information of Perspecta includes merger and integration-related costs that are not expected to recur and impact the combined results over the long-term. The unaudited pro forma results do not reflect future events that have occurred or may occur after the transactions, including but not limited to, the impact of any actual or anticipated synergies expected to result from the Mergers. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on April 1, 2017, nor is it necessarily an indication of future operating results.

9

Table of Contents

 
 
Three Months Ended June 30, 2018
Historical
Perspecta(1)
 
Period from April 1, 2018 to May 31, 2018
Historical
Vencore HC and
KGS HC
 
Three Months Ended June 30, 2018
(in millions, except per share amounts)
 
 
 
Effects of the Spin-Off
 
Effects of the Mergers
 
Pro Forma Combined for the Spin-Off and Mergers
Revenue
 
$
793

 
$
244

 
$

 
$

 
$
1,037

Net income (loss)
 
$
29

 
$
(57
)
 
$
(7
)
 
$
12

 
$
(23
)
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share(2):
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.18

 
 
 
 
 
 
 
$
(0.14
)
Diluted
 
$
0.17

 
 
 
 
 
 
 
$
(0.14
)
(1) Revenue and pre-tax income includes $115 million and $1 million associated with Vencore HC and KGS HC, respectively, for the period of June 1, 2018 through June 30, 2018. The pre-tax income excludes amortization of acquired intangible assets, acquisition financing and the allocation of certain corporate overhead costs.
(2) Historical and pro forma combined earnings per common share information is computed based on 165.70 million basic weighted average shares and 165.93 million diluted shares. See Note 5 – “Earnings Per Share.”

Note 4Revenue

Disaggregated Revenue

Revenue by contract type was as follows:
 
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(in millions)
 
Defense and
Intelligence
 
Civilian and
Health Care
 
Total
 
Defense and
Intelligence
 
Civilian and
Health Care
 
Total
Cost-reimbursable
 
$
268

 
$
26

 
$
294

 
$
111

 
$
21

 
$
132

Fixed-price
 
372

 
214

 
586

 
291

 
301

 
592

Time-and-materials
 
112

 
115

 
227

 
35

 
34

 
69

Total
 
$
752

 
$
355

 
$
1,107

 
$
437

 
$
356

 
$
793

 
 
 
 
 
 
 
Revenue by prime or subcontractor was as follows:
 
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
Prime contractor
 
$
708

 
$
323

 
$
1,031

 
$
417

 
$
335

 
$
752

Subcontractor
 
44

 
32

 
76

 
20

 
21

 
41

Total
 
$
752

 
$
355

 
$
1,107

 
$
437

 
$
356

 
$
793

 
 
 
 
 
 
 
Revenue by customer type was as follows:
 
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
(in millions)
 
Defense and Intelligence
 
Civilian and
Health Care
 
Total
 
Defense and
Intelligence
 
Civilian and
Health Care
 
Total
U.S. federal government, including independent agencies
 
$
748

 
$
292

 
$
1,040

 
$
436

 
$
293

 
$
729

Non-federal (state, local and other)
 
4

 
63

 
67

 
1

 
63

 
64

Total
 
$
752

 
$
355

 
$
1,107

 
$
437

 
$
356

 
$
793

 
 
 
 
 
 
 
Performance Obligations

As of June 30, 2019, approximately $3.31 billion of revenue is expected to be recognized from remaining unsatisfied performance obligations on executed contracts. The Company expects to recognize approximately 65% of these remaining performance obligations as revenue within 12 months and approximately 79% within 24 months, with the remainder recognized thereafter.

10

Table of Contents


Contract Balances

Contract assets and contract liabilities were as follows:
(in millions)
 
Balance Sheets Line Item
 
June 30, 2019
 
March 31, 2019
Contract assets:
 
 
 
 
 
 
Unbilled receivables
 
Receivables, net of allowance for doubtful accounts
 
$
298

 
$
301

Contract liabilities:
 
 
 
 
 
 
Current portion of deferred revenue and advance contract payments
 
Other current liabilities
 
$
26

 
$
33

Non-current portion of deferred revenue and advance contract payments
 
Other long-term liabilities
 
7

 
12


Contract assets decreased $3 million during the three months ended June 30, 2019. There were no significant impairment losses related to the Company’s contract assets during the three months ended June 30, 2019.

Contract liabilities decreased $12 million during the three months ended June 30, 2019, primarily due to revenue recognized in excess of payments received. During the three months ended June 30, 2019, the Company recognized $24 million of the deferred revenue and advance contract payments at March 31, 2019 as revenue. During the three months ended June 30, 2018, the Company recognized $10 million of the deferred revenue and advance contract payments at April 1, 2018 as revenue.

Note 5Earnings Per Share

Basic earnings per common share (“EPS”) for the three months ended June 30, 2019 is computed using the weighted average number of shares of common stock outstanding. Diluted EPS reflects the incremental shares issuable upon the assumed exercise of stock options and vesting of other equity awards. EPS for the three months ended June 30, 2018 is computed using the weighted average number of shares of common stock outstanding between the date of the Spin-Off and Mergers and the end of the period. Diluted EPS reflects the incremental shares issuable upon the assumed exercise of stock options and vesting of other equity awards. There were no significant anti-dilutive equity awards excluded from the calculation of EPS for the three-month periods ended June 30, 2019 and 2018.
The following table reflects the calculation of basic and diluted EPS:


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

June 30, 2019
 
June 30, 2018
Net income
 
$
31

 
$
29

Common share information:
 
 
 
 
Weighted average common shares outstanding for basic EPS
 
162.80

 
165.70

Dilutive effect of equity awards
 
0.49

 
0.23

Weighted average common shares outstanding for diluted EPS
 
163.29

 
165.93

Earnings per common share:
 
 
 
 
     Basic
 
$
0.19

 
$
0.18

     Diluted
 
$
0.19

 
$
0.17


Note 6Sale of Receivables

During each of the three-month periods ended June 30, 2019 and 2018, the Company sold approximately $690 million of billed and unbilled receivables under our receivables sales facility. The amount outstanding at June 30, 2019 and March 31, 2019 was $178 million and $146 million, respectively. As of June 30, 2019 and March 31, 2019, collections not remitted to the financial institutions corresponding to these receivables sales were $23 million and $11 million, respectively. These amounts represent restricted cash recorded by the Company within the other current assets caption of the balance sheets.
 
 
 
 
 

11

Table of Contents

Note 7Fair Value

The Company estimates the fair value of its long-term debt primarily using an expected present value technique, which is based on observable market inputs, using interest rates currently available to the Company for instruments with similar terms and remaining maturities. The estimated fair value of the Company’s long-term debt, excluding finance leases and unamortized debt issuance costs, was $2.34 billion and $2.35 billion as of June 30, 2019 and March 31, 2019, respectively, as compared with the gross carrying value of $2.38 billion and $2.40 billion, respectively. If measured at fair value, long-term debt, excluding finance lease liabilities, would be classified in Level 2 of the fair value hierarchy.
Non-financial assets such as goodwill, tangible assets, intangible assets and other contract related long-lived assets are reduced to fair value in the period an impairment charge is recognized. The fair value measurements, in such instances, would be classified in Level 3. There were no significant impairments recorded during the three months ended June 30, 2019 and 2018, respectively.

Note 8Derivative Instruments

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

As of June 30, 2019, the Company had interest rate swap agreements with a total notional amount of $1.60 billion. The Company initially accounted for all changes in fair value of its interest rate swaps on the statements of operations until designation as a cash flow hedge of interest rate risk on June 22, 2018. As a result, the Company recorded a gain of $5 million included in interest expense, net on the statement of operations for the three months ended June 30, 2018.

Following the June 22, 2018 cash flow hedge designation, all changes in the hedging instruments’ fair value are recorded in accumulated other comprehensive loss (“AOCL”) and subsequently reclassified into earnings in the period during which the hedged transactions are recognized in earnings. The pre-tax impact of loss on derivatives designated for hedge accounting recognized in other comprehensive loss was $24 million ($18 million, net of tax) and $1 million ($1 million, net of tax) for the three months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, we expect amounts of approximately $15 million pertaining to cash flow hedges to be reclassified from AOCL into earnings over the next 12 months.

All derivatives are recorded at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. As of June 30, 2019, the gross fair value of our derivative liabilities in interest rate swaps designated for hedge accounting is $50 million, of which $13 million is presented as other current liabilities and $37 million is presented as other liabilities on the balance sheet. As of March 31, 2019, the gross fair value of our derivative liabilities in interest rate swaps designated for hedge accounting was $26 million, of which $4 million is presented in other current liabilities and $22 million is presented in other liabilities on the balance sheet. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs.


12

Table of Contents

Note 9Debt
The following is a summary of the Company’s outstanding debt:
(in millions)
 
Interest Rates
 
Maturities
 
June 30, 2019
 
March 31, 2019
Revolving Credit Facility
 
LIBOR + 1.50%
 
May 2023
 
$

 
$

Term Loan A Facilities (Tranche 1)
 
LIBOR + 1.375%
 
May 2021
 
246

 
246

Term Loan A Facilities (Tranche 2)
 
LIBOR + 1.50%
 
May 2023
 
1,568

 
1,588

Term Loan B Facility
 
LIBOR + 2.25%
 
May 2025
 
495

 
497

Subtotal senior secured credit facilities
 
 
 
 
 
2,309

 
2,331

Senior unsecured EDS Notes
 
7.45%
 
October 2029
 
66

 
66

Total debt
 
 
 
 
 
2,375

 
2,397

Less: current maturities of long-term debt, net(1)
 
 
 
 
 
(80
)
 
(80
)
Less: unamortized debt issuance costs and premiums(2)
 
 
 
 
 
(18
)
 
(20
)
Total long-term debt, net of current maturities
 
 
 
 
 
$
2,277

 
$
2,297

(1) Current maturities of long-term debt are presented net of $8 million of debt issuance costs associated with the Term Loan A Facilities and Term Loan B Facility as of June 30, 2019 and March 31, 2019.
(2) Includes $11 million and $12 million as of June 30, 2019 and March 31, 2019, respectively, of unamortized premiums on the assumed Electronic Data Systems Corporation (“EDS”) Notes.
Expected maturities of long-term debt are as follows:
Fiscal Year
 
(in millions)

Remainder of fiscal year 2020
 
$
66

2021
 
88

2022
 
334

2023
 
88

2024
 
1,263

Thereafter
 
536

Total
 
$
2,375


Note 10Leases

As described in Note 2 – “Recent Accounting Pronouncements,” effective April 1, 2019, we adopted ASC 842 using the optional transition method. In accordance with the optional transition method, we did not recast the prior period financial statements, and all prior period amounts and disclosures are presented under ASC 840.

The Company leases certain real and personal property under non-cancelable operating leases. Lease assets under finance leases is comprised primarily of computers and related equipment. Finance lease obligations primarily consist of contractual arrangements with HPE Financial Services.

Under ASC 842, an arrangement is determined to be a lease at inception if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At inception, we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a finance lease. The Company recognizes a ROU asset and a lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date, adjusted for any lease incentives, initial direct costs, and potential impairment. At the commencement date, a single discount rate is applied to a group of leases with the same durations. The rate is updated quarterly for new leases that commence during the period, unless a triggering event occurs requiring more frequent reassessment. We define the initial lease term to include renewal options determined to be reasonably certain. Lease assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets.

Certain leases require us to pay property taxes, insurance and routine maintenance, which are included in variable lease expense. At June 30, 2019, the Company did not have any lease agreements with residual value guarantees or material restrictions or covenants. The Company's lessor arrangements with its customers are immaterial to the results of operations and cash flows.


13

Table of Contents

The components of lease expense were as follows:
(in millions)
 
Statement of Operations Line Item(s)
 
Three Months Ended June 30, 2019
Finance lease expense
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 
$
36

Interest on lease obligations
 
Interest expense, net
 
5

Total finance lease expense
 
 
 
41

Operating lease expense
 
Cost of services and selling, general and administrative
 
14

Variable lease expense
 
Cost of services and selling, general and administrative
 
2

Sublease income
 
Cost of services and selling, general and administrative
 
(1
)
Total lease expense, net
 
 
 
$
56


Supplemental balance sheet information related to leases was as follows:
(in millions)
 
Balance Sheet Line Item
 
June 30, 2019
Assets
 
 
 
 
Finance lease assets
 
Property and equipment, net of accumulated depreciation of $124
 
$
267

Operating lease assets
 
Other assets
 
100

Total lease assets
 
 
 
$
367

Liabilities
 
 
 
 
Current
 
 
 
 
Finance leases
 
Current finance lease obligations
 
$
132

Operating leases
 
Current operating lease obligations
 
53

Non-current
 
 
 
 
Finance leases
 
Non-current finance lease obligations
 
161

Operating leases
 
Other long-term liabilities
 
65

Total lease liabilities
 
 
 
$
411


Supplemental cash flow information related to leases was as follows:
(in millions)
 
Three Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease obligations:
 
 
Operating cash flows from operating leases
 
$
13

Operating cash flows from finance leases
 
3

Financing cash flows from finance leases
 
35


The Company includes both the amortization of operating lease assets and changes in the lease liabilities in changes in other assets and liabilities, net on the statement of cash flows.

The weighted average remaining lease terms and discount rates were as follows:
 
 
June 30, 2019
Weighted average remaining lease term (in years):
 
 
Finance leases
 
2.6

Operating leases
 
3.2

Weighted average discount rate:
 
 
Finance leases
 
6.93
%
Operating leases
 
4.60
%

14

Table of Contents

As of June 30, 2019, future minimum lease payments required to be made under leases were as follows:
Fiscal Year (in millions)
 
Operating Leases
 
Finance Leases
Remainder of fiscal year 2020
 
$
47

 
$
121

2021
 
37

 
103

2022
 
19

 
67

2023
 
15

 
25

2024
 
6

 
3

Thereafter
 
6

 

Total minimum lease payments
 
130

 
319

Less: Amount representing interest
 
(12
)
 
(26
)
Present value of net minimum lease payments
 
$
118

 
$
293


As of June 30, 2019, the Company has aggregate rent obligations of $57 million for operating leases and $6 million for finance leases, for leases that have not commenced, with terms ranging from three to 10 years.

Note 11Pension and Other Benefit Plans

The Company offers a defined benefit pension plan, a retiree medical plan, life insurance benefits, deferred compensation plans and defined contribution plans. The Company’s defined benefit pension and retiree medical plans are not admitting new participants; therefore, changes to pension and other postretirement benefit liabilities are primarily due to market fluctuations of investments, actuarial assumptions for the measurement of liabilities and changes in interest rates.
The Company did not contribute to the defined benefit pension and other postretirement benefit plans during the three months ended June 30, 2019, and does not expect to contribute during the remainder of fiscal year 2020.
The components of net periodic pension expense (benefit) were:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Service cost
 
$
1

 
$

Interest cost
 
4

 
1

Expected return on assets
 
(7
)
 
(2
)
Net periodic pension benefit
 
$
(2
)
 
$
(1
)
 
 
 
Net periodic benefit cost for the Company’s retiree medical plan was not significant for the three-month periods ended June 30, 2019 and 2018.

Note 12Income Taxes

The Company’s effective tax rate (“ETR”) was approximately 26% and 29% for the three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019, the primary drivers of our ETR were state income taxes, the release of certain indemnified liabilities for uncertain tax benefits and the absence of non-deductible transaction expenses. For the three months ended June 30, 2018, the primary drivers of our ETR were state income taxes and non-deductible transaction expenses.

The Tax Matters Agreement entered into with DXC in connection with the Spin-Off (the “TMA”) states each company’s rights and responsibilities with respect to payment of taxes, tax return filings and control of tax examinations. The Company is generally only responsible for tax assessments, penalties and interest allocable to periods (or portions of periods) related to USPS beginning after the Spin-Off and Mergers. The Company has income tax refunds receivable from the Internal Revenue Service (“IRS”) and various state tax authorities of approximately $76 million at June 30, 2019, for which it must remit to DXC under the TMA, and has recorded a corresponding payable. These amounts are included in other receivables and the related indemnification is included in accrued expenses and other current liabilities.


15

Table of Contents

The Company’s entities included in the Spin-Off are currently under examination or in appeals in several tax jurisdictions. The calendar year 2008 and fiscal year 2010 and forward tax years remain open under applicable statutes of limitations, and are currently under review by the IRS and other taxing authorities. The IRS is not currently examining Vencore HC or KGS HC for any open years, but entities related to these businesses are open to examination in various state and local jurisdictions.

Note 13Related Party Transactions

Allocation of Corporate Expenses

The statement of operations for the three months ended June 30, 2018 included corporate allocations of $24 million recorded within costs of services and selling, general and administrative. These allocations were for the period from April 1 to May 31, 2018 for general corporate expenses from Parent for certain management and support functions that were provided on a centralized basis within Parent prior to the Spin-Off.

Parent Company Investment
Parent company investment on the statements of cash flows and equity for the period from April 1 to May 31, 2018 represents Parent’s historical investment in USPS, the net effect of transactions with and allocations from Parent and USPS’s accumulated earnings prior to consummation of the Spin-Off.

Related Party Transactions with DXC

The Company recognized $6 million and $2 million of related party revenue from DXC and incurred obligations of $57 million and $2 million for related party transactions with DXC during the three months ended June 30, 2019 and 2018, respectively.

Note 14 Stockholders' Equity

Cash Dividends

During the three months ended June 30, 2019 and 2018, the Board of Directors declared cash dividends to our stockholders of approximately $10 million ($0.06 per common share) and $8 million ($0.05 per common share), respectively, which were paid on July 16, 2019 and July 17, 2018, respectively.

On August 13, 2019, the Board of Directors declared a dividend of $0.06 per common share payable on October 15, 2019 to common stockholders of record at the close of business on September 4, 2019.

Share Repurchase Program
During the three months ended June 30, 2019, the Company repurchased 665,294 shares of its common stock for aggregate cost of $15 million, of which $1 million was settled subsequent to the end of the period. The shares are reported as treasury stock at cost. The total remaining authorization for future common stock repurchases under the share repurchase program was $325 million as of June 30, 2019.

Stock-based Compensation
The Company recognized $5 million in stock-based compensation expense during the three months ended June 30, 2019. During the three months ended June 30, 2019, the Company granted approximately 495 thousand time-based restricted stock units (“RSUs”) and approximately 917 thousand performance-based restricted stock units (“PSUs”). The RSUs and PSUs are valued using the closing price on the trading day of the grant. The weighted average grant date fair value of the RSUs and PSUs granted during the three months ended June 30, 2019 was $22.99 and $23.01, respectively.


16

Table of Contents

Note 15Segment Information

We operate based on two reportable segments: (1) Defense and Intelligence, and (2) Civilian and Health Care. Our reportable segments and their respective operations are defined as follows:
Defense and Intelligence

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

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

Civilian and Health Care

Through its Civilian and Health Care business, Perspecta provides enterprise IT transformation and modernization, application development and modernization, enterprise security, risk decision support, operations and sustainment, systems engineering, applied research, cyber services, and cloud transformation to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.
Segment Measures
The following table summarizes operating results regularly provided to the chief operating decision maker by reportable segment and a reconciliation to the financial statements:
(in millions)
 
Defense and Intelligence
 
Civilian and Health Care
 
Total Reportable Segments
Three Months Ended June 30, 2019
 
 
 
 
 
 
Revenue
 
$
752

 
$
355

 
$
1,107

Segment profit
 
118

 
33

 
151

Depreciation and amortization(1)
 
25

 
28

 
53

 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
Revenue
 
$
437

 
$
356

 
$
793

Segment profit(2)
 
36

 
61

 
97

Depreciation and amortization(1)
 
19

 
20

 
39

(1) Depreciation and amortization as presented excludes amortization of acquired intangible assets of $48 million and $25 million for the three months ended June 30, 2019 and 2018, respectively.
(2) The segment profit for the three months ended June 30, 2018 was revised to reflect the change to exclude the amortization expense on intangible assets acquired in business combinations as disclosed in Note 19 – “Segment Information” to the financial statements of our Annual Report on Form 10‑K for the year ended March 31, 2019.
 
 
 
 
 
 
 
Reconciliation of Reportable Segment Profit to the Statements of Operations

The Company’s management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenue less segment cost of services, selling, general and administrative and depreciation and amortization, excluding amortization of acquired intangible assets. The Company does not allocate to its segments certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, stock-based compensation expense, amortization of acquired intangible assets, certain nonrecoverable restructuring costs, separation, transaction and integration-related costs and net periodic benefit cost.

17

Table of Contents

 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
Total profit for reportable segments
 
$
151

 
$
97

Less:
 
 
 
 
Stock-based compensation
 
(5
)
 
(2
)
Amortization of acquired intangible assets
 
(48
)
 
(25
)
Restructuring costs
 
(2
)
 

Separation, transaction and integration-related costs
 
(19
)
 
(44
)
Interest expense, net
 
(35
)
 
(10
)
Other unallocated, net
 

 
25

Income before taxes
 
$
42

 
$
41


Management does not use total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment and therefore, total assets by segment is not disclosed.

Note 16Commitments and Contingencies

The Company is a party to or has responsibility under various lawsuits, claims, investigations and proceedings involving disputes or potential disputes related to commercial, employment and regulatory matters that arise in the ordinary course of business. The Separation and Distribution Agreement (the “SDA”) between Perspecta and DXC includes provisions that allocate liability and financial responsibility for litigation involving DXC and the Company and that provide for cross-indemnification of the parties for liabilities a party may incur that are allocated to the other party under the SDA. In addition, under the SDA, DXC and the Company have agreed to cooperate with each other in managing litigation that relates to both parties’ businesses. The SDA also contains provisions that allocate liability and financial responsibility for such litigation. The Company records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. The Company reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, the Company believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. The Company believes it has recorded adequate provisions for any such matters and, as of June 30, 2019, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

Litigation, Proceedings and Investigations

Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise: This purported class and collective action was filed on August 18, 2016 in the U.S. District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise Company (“HPE”) alleging violations of the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code. Plaintiffs filed an amended complaint on December 19, 2016. Plaintiffs seek to certify a nationwide class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a work force reduction (“WFR”) plan on or after December 9, 2014 (deferral states) and April 8, 2015 (non-deferral states), and who were 40 years of age or older at the time of termination. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. The case has remained stayed while the parties have engaged in mediation with opt-in plaintiffs who are subject to mandatory, individual arbitration agreements. Two mediation sessions have taken place. In October 2018, a settlement was reached with 16 named and opt-in plaintiffs; that settlement has been completed. On June 26-27, 2019, a second mediation was held, involving 145 opt-in plaintiffs. Discussions continue. Former business units of HPE now owned by the Company will be liable in this matter for any recovery by plaintiffs previously associated with the USPS business of HPE.

In addition to the matter noted above, the Company is currently subject in the normal course of business to various claims and contingencies arising from, among other things, disputes with customers, vendors, employees, contract counter parties and other parties, and inquiries and investigations by regulatory authorities and government agencies. Some of

18

Table of Contents

these disputes involve or may involve litigation. The financial statements reflect the treatment of claims and contingencies based on management’s view of the expected outcome. The Company consults with outside legal counsel on issues related to litigation and regulatory compliance and seeks input from other experts and advisors with respect to matters in the ordinary course of business. Although the outcome of these and other matters cannot be predicted with certainty, and the impact of the final resolution of these and other matters on the Company’s results of operations in a particular subsequent reporting period could be material and adverse, management does not believe, based on information currently available to the Company, that the resolution of any of the matters currently pending against the Company will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due. Unless otherwise noted, the Company is unable to determine at this time a reasonable estimate of a possible loss or range of losses associated with the foregoing disclosed contingent matters.

Guarantees

The Company uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies, which are cash collateralized. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations on these policies. The Company’s stand-by letters of credit outstanding were less than $1 million as of June 30, 2019. As of June 30, 2019, the Company had $34 million in outstanding surety bonds, of which $1 million expire in fiscal year 2020 and $33 million expire in fiscal year 2022.
 
 
 
 
 
 
 
 
 
Note 17Subsequent Events

On July 31, 2019, Perspecta completed the acquisition of Knight Point Systems, LLC (“Knight Point”) for a purchase price of $250 million in cash, subject to customary purchase price adjustments. Knight Point is an end-to-end managed services and solutions provider focused on modernizing information technology, protecting critical networks and driving digital transformation. Knight Point leverages a scalable portfolio of intellectual property to solve complex customer challenges in cloud, cybersecurity and agile DevOps environments. The company’s unique managed services delivery frameworks drive customer transparency and operational excellence, while providing rapid and efficient solution delivery.

On August 13, 2019, the Company entered into the Second Amendment to its Credit Agreement (the “Amendment”) to provide greater operational and financial flexibility to the Company. Pursuant to the Amendment, with MUFG Bank, Ltd. as Lead Left Arranger and Administrative Agent, Bank of America, N.A. as Syndication Agent, JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and PNC Bank, National Association as Documentation Agents, and MUFG Bank, Ltd., BofA Securities, Inc., JPMorgan Chase Bank, N.A., PNC Capital Markets, LLC and Mizuho Bank, Ltd. as Lead Arrangers, the maturities of the Pro-Rata Facilities (Term Loan A Facilities and the Revolving Credit Facility) were extended by 15 months each. The Amendment also provides for, among other things:

a.
changes to certain terms and conditions, including modifying the financial covenant total net leverage ratio to a maximum of 4.50x (unchanged), with a stepdown to 4.25x (previously 3.75x) after 12 months, and, thereafter, with a step up to 4.50x (previously 4.00x) for a 12 month period following a Permitted Acquisition greater than $100 million;
b.
a $46 million increase in the Term Loan A Tranche 2 from $1,568 million to $1,614 million, the proceeds of which are being used to prepay Term Loan A Tranche 1 from $246 million to $200 million;
c.
an extension of the maturity of the Term Loan A Tranche 1 from May 31, 2021 to August 31, 2022;
d.
an extension of the maturity of the Term Loan A Tranche 2 from May 31, 2023 to August 31, 2024; and
e.
a $150 million increase in the Revolving Credit Facility to $750 million and an extension of the maturity from May 31, 2023 to August 31, 2024.

19

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements and assumptions contained in this Quarterly Report on Form 10-Q and in the documents incorporated by reference 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;
uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; and
the other factors described in Part I, Item 1A “Risk Factors” of Perspecta’s Annual Report on Form 10-K for the year ended March 31, 2019.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the section titled “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 Quarterly Report on Form 10-Q in the context of these risks and uncertainties. Our public filings may be accessed through our investor relations website, https://investors.perspecta.com, or through the website maintained by the SEC at https://www.sec.gov.

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 Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.


20

Table of Contents

ITEM 2. 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.
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 U.S. Department of Veterans Affairs, 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. See Note 1 – “Overview and Basis of Presentation” 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 three months ended June 30, 2019. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes.

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 Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and

21

Table of Contents

state and local government agencies. Segment information is included in Note 15 – “Segment Information” to the financial statements. For a discussion of risks associated with our operations, see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2019.

Backlog

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 June 30, 2019 was as follows:
(in millions)
 
Defense and
Intelligence
 
Civilian and
Health Care
 
Total
Funded backlog
 
$
891

 
$
998

 
$
1,889

Unfunded backlog
 
5,484

 
3,050

 
8,534

Total contract value backlog
 
$
6,375

 
$
4,048

 
$
10,423


For the three months ended June 30, 2019, contract awards were $669 million in the Defense and Intelligence segment and $332 million in the Civilian and Health Care segment.
Results of Operations

On May 31, 2018, we completed the strategic combination of USPS with Vencore to form Perspecta. See Note 1 – “Overview and Basis of Presentation” and Note 3 – “Acquisitions” to the financial statements. Accordingly, the financial results of Perspecta for the period ending June 1, 2018 only include the financial results of Vencore for one month, and therefore, are not directly comparable.

Selected financial information is presented in the table below:
 
 
Three Months Ended
(in millions, except per share amounts)
 
June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
Revenue
 
$
1,107

 
$
793

 
$
314

 
40
 %
Total costs and expenses
 
1,065

 
752

 
313

 
42
 %
Income before income taxes
 
42

 
41

 
1

 
2
 %
Income tax expense
 
11

 
12

 
(1
)
 
(8
)%
Net income
 
$
31

 
$
29

 
$
2

 
7
 %
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.19

 
$
0.17

 

 


22

Table of Contents

 
 
 
 
 
 
 
 
 

Revenue

Revenue for the three months ended June 30, 2019 and June 30, 2018 were:
 
 
Three Months Ended
(in millions)
 
June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
Defense and Intelligence
 
$
752

 
$
437

 
$
315

 
72
 %
Civilian and Health Care
 
355

 
356

 
(1
)
 
 %
Total
 
$
1,107

 
$
793

 
$
314

 
40
 %
 
 
 
 
 
 
 
 
 
Defense and Intelligence Segment

Our Defense and Intelligence segment revenue during the three months ended June 30, 2019 increased by $315 million, or 72%, as compared to the same period of the prior year. Including the $230 million of Vencore revenue in April and May of 2018, Defense and Intelligence grew $85 million, or 13%, due to new business wins coupled with growth on existing programs.

Civilian and Health Care Segment

For the three months ended June 30, 2019, our Civilian and Health Care segment revenue decreased by $1 million, or 0%, as compared to the same period of the prior year. Including the $14 million of Vencore revenue in April and May of 2018, Civilian and Health Care declined $15 million, or 4%, due to completions of several programs.

Costs and Expenses

Our total costs and expenses are shown in the table below:
 
 
Three Months Ended
 
Percentage of Revenue
 
 
 
 
(in millions)
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
Change
 
Percentage Change
Costs of services
 
$
836

 
$
597

 
76
%
 
75
 %
 
$
239

 
40
 %
Selling, general and administrative
 
72

 
61

 
7
%
 
8
 %
 
11

 
18
 %
Depreciation and amortization
 
101

 
64

 
9
%
 
8
 %
 
37

 
58
 %
Restructuring costs
 
2

 

 
%
 
 %
 
2

 
NM

Separation, transaction and integration-related costs
 
19

 
44

 
2
%
 
6
 %
 
(25
)
 
(57
)%
Interest expense, net
 
35

 
10

 
3
%
 
1
 %
 
25

 
250
 %
Other income, net
 

 
(24
)
 
%
 
(3
)%
 
24

 
(100
)%
Total costs and expenses
 
$
1,065

 
$
752

 
96
%
 
95
 %
 
$
313

 
42
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of Services

For the three months ended June 30, 2019, costs of services as a percentage of revenue was 76%, as compared to 75% for the same period of the prior year, due to continued focus on cost discipline and program management on our fixed-price portfolio offset by start-up costs associated with new contract wins. We expect that over the long-term, contract mix will continue to move in the direction of fixed price. Our cost-reimbursable and time-and-materials contracts typically have consistent margins, whereas the margin on our fixed price contracts is dependent upon management’s ability to control the costs of providing the services.


23

Table of Contents

Selling, General and Administrative

Selling, general and administrative expense (“SG&A”) was $72 million for the three months ended June 30, 2019, as compared to $61 million in the same period of the prior year. SG&A as a percentage of revenue was 7% for the three months ended June 30, 2019, as compared to 8% for the same period of the prior year primarily due to the absence in the current quarter of allocated DXC corporate costs.

Depreciation and Amortization

Depreciation and amortization expense (“D&A”) was $101 million for the three months ended June 30, 2019, as compared to $64 million in the same period of the prior year. The increase of $37 million in D&A was primarily attributed to the assets acquired in the Mergers that impacted all three months of the current quarter, compared to only impacting one month of the prior-year quarter.

Interest Expense, Net

Interest expense, net for the three months ended June 30, 2019 was $35 million, as compared to $10 million during the same period of the prior fiscal year. The increase of $25 million in interest expense was primarily attributable to the debt incurred to fund the Spin-Off and Mergers on June 1, 2018.

Other Income, Net

Other income, net for the three months ended June 30, 2019 included a $6 million reduction of a DXC indemnification receivable related to a liability for uncertain tax positions. The corresponding tax reserves were reduced by the same amount, resulting in a $6 million reduction of income tax expense in accordance with ASC Topic 740, Income Taxes. Other income, net for the three months ended June 30, 2019 also included certain components of the net periodic pension cost for defined benefit pension plans, equity in earnings of unconsolidated affiliates and other miscellaneous gains and losses. Other income, net was $24 million during the same period of the prior fiscal year primarily due to a gain on the sale of a contract to eliminate a potential organizational conflict of interest that resulted from the Mergers.

Taxes

Income tax expense was $11 million and $12 million for the three months ended June 30, 2019 and 2018, respectively. Tax expense in the current quarter included a benefit of $6 million from the reduction of tax reserves discussed above. The ETR was approximately 26% for the three months ended June 30, 2019, as compared to 29% for the three months ended June 30, 2018. For the three months ended June 30, 2019, the primary drivers of our ETR were state income taxes, the release of certain indemnified liabilities for uncertain tax benefits and the absence of non-deductible transaction expenses. For the three months ended June 30, 2018, the primary drivers of our ETR were state income taxes and non-deductible transaction expenses.

The Company is subject to income taxes in the U.S. (federal and state). Significant judgment is required in determining the provision for income taxes, analyzing the income tax reserves and the determination of the likelihood of recoverability of deferred tax assets and adjustment of valuation allowances. In addition, the Company’s tax returns are routinely audited and settlements of issues raised in these audits sometimes affect the tax provisions. Potential liabilities or refunds resulting from these audits are covered by the TMA between Perspecta and DXC.

The TMA with DXC governs the respective rights, responsibilities and obligations of DXC and the Company after the Spin-Off with respect to all tax matters and includes restrictions designed to preserve the tax-free status of the Distribution. As a subsidiary of DXC, the Company had (and the Company continues to have following the Spin-Off) several liability to the IRS for the full amount of the consolidated U.S. federal income taxes of the DXC consolidated group relating to the taxable periods in which the Company was part of that group. However, the TMA specifies the portion, if any, of this tax liability for which the Company will bear responsibility. The Company agrees to indemnify DXC against any amounts for which the Company is responsible and DXC agrees to indemnify the Company against any amounts for which the Company is not responsible. The TMA also provides special rules for allocating tax liabilities in the event that the Spin-Off is not tax-free. The TMA provides for certain covenants that may restrict the ability of the Company to pursue strategic or other transactions that otherwise could maximize the value of the business and may discourage or delay a change of control. Pursuant to the TMA, the Company has agreed to indemnify DXC for any tax liabilities resulting from a breach of such covenants or certain other actions. Though valid as between the parties, the TMA will not be binding on the IRS.

24

Table of Contents


Liquidity and Capital Resources

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 of our Annual Report on Form 10-K for the year ended March 31, 2019) and sales of receivables under a U.S. federal government obligor receivables purchase facility established pursuant to the MARPA Facility (as defined in Note 5 – “Receivables” of our Annual Report on Form 10-K for the year ended March 31, 2019).

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. 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 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.
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. 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 16 – “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)
 
June 30, 2019
Cash and cash equivalents
 
$
179

Available borrowings under our Revolving Credit Facility
 
600

Total liquidity 
 
$
779


Cash and Cash Equivalents and Cash Flows

As of June 30, 2019, our cash and cash equivalents were $179 million. Cash and cash equivalents increased $91 million during the quarter, primarily due to strong operational cash flows.

The following table summarizes our cash flow activity:
 
 
Three Months Ended
 
 
(in millions)
 
June 30, 2019
 
June 30, 2018
 
Change
Net cash provided by operating activities
 
$
185

 
$
160

 
$
25

Net cash used in investing activities
 
(2
)
 
(1,290
)
 
1,288

Net cash (used in) provided by financing activities
 
(80
)
 
1,344

 
(1,424
)
Net change in cash and cash equivalents, including restricted
 
103

 
214

 
(111
)
Cash and cash equivalents, including restricted, at beginning of period
 
99

 

 
99

Cash and cash equivalents, including restricted, at end of period
 
202

 
214

 
(12
)
Less restricted cash and cash equivalents included in other current assets
 
23

 
13

 
10

Cash and cash equivalents at end of period
 
$
179

 
$
201

 
$
(22
)

Net cash provided by operating activities during the three months ended June 30, 2019 was $185 million, as compared to $160 million during the comparable period of the prior fiscal year. The increase of $25 million included an $81 million increase in net income adjusted for non-cash items, partially offset by movements in working capital of $56 million.

Net cash used in investing activities during the three months ended June 30, 2019 was $2 million, as compared to $1.29 billion during the comparable period of the prior fiscal year. The decrease was due to acquisitions of $312 million and payments of acquired debt of $994 million during the three months ended June 30, 2018, with no such transactions in the current period.

25

Table of Contents


Net cash used in financing activities during the three months ended June 30, 2019 was $80 million, as compared to net cash provided by financing activities of $1.34 billion during the comparable period of the prior fiscal year. The prior year included significant financing activities related to the Spin-Off and Mergers, as compared to the current period’s ongoing lease payments, dividend payments and the Company’s share repurchase program, which began in the second quarter of fiscal 2019.
Capital Resources

The following table summarizes our total debt:
(in millions)
 
June 30, 2019
 
March 31, 2019
Short-term debt and current maturities of long-term debt
 
$
80

 
$
80

Long-term debt, net of current maturities
 
2,277

 
2,297

Total debt
 
$
2,357

 
$
2,377


The $20 million decrease in total debt as of June 30, 2019, as compared to total debt as of March 31, 2019, resulted primarily from mandatory principal payments. During the three months ended June 30, 2019, we repaid $22 million of term loans. At June 30, 2019, our $600 million Revolving Credit Facility remained unused.

We were in compliance with all financial covenants associated with our borrowings as of June 30, 2019. For more information on our debt, see Note 9 – “Debt” to the financial statements.

The following table summarizes our capitalization ratios:
(in millions)
 
June 30, 2019
 
March 31, 2019
Total debt and finance leases
 
$
2,650

 
$
2,682

Cash and cash equivalents
 
179

 
88

Net debt(1)
 
$
2,471

 
$
2,594

 
 
 
 
 
Total debt and finance leases
 
$
2,650

 
$
2,682

Equity
 
2,155

 
2,162

Total capitalization
 
$
4,805

 
$
4,844

 
 
 
 
 
Debt-to-total capitalization
 
55
%
 
55
%
Net debt-to-total capitalization(1)
 
51
%
 
54
%
(1) 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 decrease in net debt-to-total capitalization as of June 30, 2019, as compared to March 31, 2019, was primarily due to an increase in cash and cash equivalents.

Interest Rate Swaps

We use interest rate swaps to manage the amount of our floating rate debt in order to reduce our exposure to variable rate interest payments associated with our floating interest 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 June 30, 2019, one-month LIBOR was 2.40%. The net receipt or payment from the interest rate swap agreements is included in the statements of operations as interest expense.

26

Table of Contents

The following table summarizes our interest rate swaps at June 30, 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

During the three months ended June 30, 2019, 665,294 shares were purchased at an aggregate cost of $15 million, of which $1 million was settled subsequent to the end of the period, and are reported as treasury stock at cost.
Dividends

During the three months ended June 30, 2019 and 2018, the Board of Directors declared cash dividends to our stockholders of approximately $10 million ($0.06 per common share) and $8 million ($0.05 per common share), respectively, which were paid on July 16, 2019 and July 17, 2018, respectively.

On August 13, 2019, the Board of Directors declared a dividend of $0.06 per common share payable on October 15, 2019 to common stockholders of record at the close of business on September 4, 2019.

Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet arrangements reported under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2019.

Contractual Obligations
There have been no material changes to our contractual obligations from those reported under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2019.
Critical Accounting Policies and Estimates

The preparation of consolidated 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. These estimates may change in the future if underlying assumptions or factors change. 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. Our critical accounting policies and estimates are more fully discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2019, under the heading “Critical Accounting Policies and Estimates.”

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10‑K for the year ended March 31, 2019, 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 exposures to market and financial risk have not changed materially since March 31, 2019. See Note 7 – “Fair Value” and Note 8 – “Derivative Instruments” to the financial statements for additional discussion.


27

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (2) accumulated and communicated to management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


28

Table of Contents

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 16 – “Commitments and Contingencies” to the financial statements for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

There were no sales of unregistered equity securities during the quarter ended June 30, 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 June 30, 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)
April 1, 2019 to April 30, 2019
 
192,515

 
$
21.91

 
192,515

 
$
336

May 1, 2019 to May 31, 2019
 
195,703

 
$
22.51

 
195,703

 
$
331

June 1, 2019 to June 30, 2019
 
277,076

 
$
23.02

 
277,076

 
$
325

Total
 
665,294

 
$
22.55

 
665,294

 
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.


29

Table of Contents

ITEM 6. EXHIBITS

Exhibit
Number
Description of Exhibit
10.1
10.2
31.1
31.2
32.1*
32.2*
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
 
 
* Furnished, not filed

30

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
Perspecta Inc.
 
 
 
 
Dated:
August 14, 2019
By:
/s/ William G. Luebke
 
 
Name:
William G. Luebke
 
 
Title:
Senior Vice President, Principal Accounting Officer and Controller
 


31
(Back To Top)

Section 2: EX-10.1 (SECOND AMENDMENT TO CREDIT AGREEMENT)

Exhibit
Exhibit 10.1

EXECUTION VERSION

SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of August 13, 2019 (this “Amendment”), is entered into by and among Perspecta Inc., a Nevada corporation (the “Company”), the Guarantors listed on the signature pages hereto, MUFG Bank, Ltd., a member of MUFG, a global financial group (“MUFG”), as administrative agent for the Lenders (in such capacity, the “Administrative Agent”), the Incremental Tranche A2 Lenders (as defined below) party hereto, the Incremental Revolving Lenders (as defined below) party hereto and the Lenders party hereto. Unless otherwise indicated, all capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Credit Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, dated as of May 31, 2018 (as amended by that certain First Amendment, dated as of December 12, 2018, and as further amended, restated, amended and restated, supplemented or otherwise modified from time to time prior to the date hereof, the “Credit Agreement”; and the Credit Agreement, as amended by this Amendment, the “Amended Credit Agreement”), among the Company, the Guarantors party thereto, the Lenders party thereto, the Administrative Agent, MUFG Union Bank, N.A., as collateral agent for the Secured Parties (in such capacity, the “Collateral Agent”), and the other Persons party thereto, the Lenders named therein have extended certain credit facilities to the Company;
WHEREAS, the Company has appointed (i) MUFG Bank, Ltd., (ii) BofA Securities, Inc., (iii) JPMorgan Chase Bank, N.A. and (iv) Mizuho Bank, Ltd., as joint lead arrangers and joint bookrunners (collectively, the “Lead Arrangers”), to arrange (x) Incremental Revolving Commitments in an aggregate principal amount of $150,000,000 (the “Incremental Revolving Commitments”) pursuant to Section 2.20(a) of the Credit Agreement, the proceeds of which will be used for general corporate purposes and (y) Incremental Tranche A2 Advances in an aggregate principal amount of $46,000,000 (the “Incremental Tranche A2 Advances”) pursuant to Section 2.20(b) of the Credit Agreement, the proceeds of which will be used to make a voluntary prepayment of a corresponding aggregate principal amount of the existing Tranche A1 Advances outstanding immediately prior to the Second Amendment Effective Date (as defined below) (the “Existing Tranche A1 Advances”);
WHEREAS, each institution listed on Schedule I hereto as an Incremental Revolving Lender (each, an “Incremental Revolving Lender”) (i) has agreed, on the terms and conditions set forth herein and in the Credit Agreement, to provide the amount of the Incremental Revolving Commitments set forth opposite its name under the heading “Incremental Revolving Commitment” on Schedule I hereto (the “Incremental Revolving Commitment”) and (ii) by executing a signature page to this Amendment, approves of the amendments to the Credit Agreement pursuant to Section 3 hereof;
WHEREAS, each institution listed on Schedule II hereto as an Incremental Tranche A2 Lender (each, an “Incremental Tranche A2 Lender”) (i) has agreed, on the terms and conditions set forth herein and in the Credit Agreement, to provide the amount of the Incremental Tranche A2 Commitments set forth opposite its name under the heading “Incremental Tranche A2



Commitment” on Schedule II hereto (the “Incremental Tranche A2 Commitment”) and (ii) by executing a signature page to this Amendment, approves of the amendments to the Credit Agreement pursuant to Section 3 hereof;
WHEREAS, the Company has requested that each of the Revolving Lenders and each of the Swing Line Banks agree to extend the Revolving Commitment Termination Date as set forth herein, and subject to the terms and conditions hereof, each of the Revolving Lenders and each of the Swing Line Banks is willing to do so;
WHEREAS, the Company has requested that each of the Tranche A1 Lenders agree to extend the Tranche A1 Maturity Date as set forth herein, and subject to the terms and conditions hereof, each of the Tranche A1 Lenders is willing to do so;
WHEREAS, the Company has requested that each of the Tranche A2 Lenders agree to extend the Tranche A2 Maturity Date as set forth herein, and subject to the terms and conditions hereof, each of the Tranche A2 Lenders is willing to do so;
WHEREAS, the Company has requested that Majority Facility Lenders under the Pro Rata Facilities amend the financial covenant under the Credit Agreement as set forth herein, and subject to the terms and conditions hereof, the Majority Facility Lenders are willing to do so;
WHEREAS, the Company has requested that the Majority Facility Lenders under the Term Loan B Facility and the Majority Lenders (x) waive the Specified Defaults and the Specified Prepayment (each as defined below) and (y) amend the Credit Agreement to provide that the Company shall receive credit for voluntary prepayments of the Term Loan A Facilities in the applicable fiscal year for purposes of determining the Excess Cash Flow mandatory prepayment required thereunder as set forth herein, and subject to the terms and conditions hereof, the Majority Facility Lenders under the Term Loan B Facility and the Majority Lenders are willing to do so; and
WHEREAS, the Company has requested that the Majority Lenders and the Administrative Agent amend certain provisions of the Credit Agreement as set forth herein, and subject to the terms and conditions hereof, the Majority Lenders and the Administrative Agent are willing to do so.
NOW THEREFORE, in consideration of the premises, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1.Incremental Revolving Commitments.
(a)Subject to the terms and conditions set forth herein, each Incremental Revolving Lender agrees to provide Incremental Revolving Commitments to the Company on the Second Amendment Effective Date in a principal amount equal to its Incremental Revolving Commitment.
(b)Commencing on the Second Amendment Effective Date, for all purposes under the Amended Credit Agreement and the other Loan Documents (as defined in the Amended

2


Credit Agreement), (i) the Incremental Revolving Commitments shall be “Revolving Commitments” and (ii) each Incremental Revolving Lender shall be a “Revolving Lender” with outstanding “Revolving Commitments” under the Amended Credit Agreement. The Incremental Revolving Commitments shall be on identical terms as the Revolving Commitments provided on the Closing Date and shall, together with the Revolving Commitments provided on the Closing Date, constitute a single Class of Revo