NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS
Note 1 – Overview and Summary of Significant Accounting Policies
Background
Perspecta is a leading provider of end-to-end enterprise information technology (“IT”), mission, and operations-related services across the United States (“U.S.”) federal government to the Department of Defense (“DoD”), the intelligence community, and homeland security, civilian and health care agencies, as well as to certain state and local government agencies through two reportable segments: (1) Defense and Intelligence, which provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies, and (2) Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.
On May 31, 2018, DXC Technology Company (“DXC”) completed the spin-off of its U.S. Public Sector (“USPS”) business (the “Spin-Off”) and mergers with Vencore Holding Corp (“Vencore HC”) and KGS Holding Corp. (“KGS HC”) (the “Mergers”), which became wholly-owned subsidiaries of Perspecta. As consideration for the Mergers, Perspecta paid affiliates of Veritas Capital Fund Management L.L.C. (“Veritas Capital”) $400 million in cash and approximately 14% of the total number of shares of Perspecta common stock outstanding immediately after the Mergers (on a fully diluted basis, excluding certain unvested equity incentive awards). See Note 2 – “Acquisitions.”
Perspecta’s Amendment No. 3 to the Registration Statement on Form 10 (the “Registration Statement”), filed with the Securities and Exchange Commission (“SEC”) on April 30, 2018, was declared effective on May 2, 2018. Perspecta’s common stock began regular-way trading on the New York Stock Exchange on June 1, 2018 under the ticker symbol “PRSP.”
The accompanying 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 the period from April 1, 2017 to May 31, 2018. As used in these Notes, the “Company,” “we,” “us,” and “our” refer to the combined businesses of USPS for the period from April 1, 2017 through May 31, 2018, and to Perspecta and its consolidated subsidiaries beginning June 1, 2018 and for the period from June 1, 2018 through March 31, 2020.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the SEC. In the opinion of management of the Company, the accompanying financial statements of Perspecta and its subsidiaries contain all adjustments, including normal recurring adjustments, necessary to present fairly Perspecta’s financial position as of March 31, 2020 and 2019 and its results of operations and cash flows during the fiscal years ended March 31, 2020, 2019 and 2018.
Prior to the Spin-Off and Mergers, the Parent maintained various benefit and share-based compensation plans at a corporate level and other benefit plans at a subsidiary level. USPS’s employees participate in those programs and a portion of the cost of those plans are allocated and included on the statement of operations. However, the balance sheets do not include any net benefit plan obligations as the pension plans were accounted as multiemployer benefit plans.
After the Spin-Off, DXC does not have any beneficial ownership of Perspecta or USPS. The chairman of the board of directors of Perspecta (the “Board of Directors”) is the former chief executive officer of DXC and served as the chairman of the DXC board of directors until December 31, 2019. Consequently, transactions prior to December 31, 2019 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 17 – “Related Party Transactions.”
Principles of Consolidation and Combination
The financial statements as of and for the fiscal year ended March 31, 2020, and the period from June 1, 2018 to March 31, 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 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. All intercompany transactions and accounts within the combined businesses of USPS have been eliminated.
Intercompany transactions between USPS and Parent other than leases with Hewlett Packard Enterprise Company’s (“HPE”) wholly-owned leasing subsidiary (“HPE Financial Services”) were considered to be effectively settled in the combined financial statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany transactions is reflected in the combined statements of cash flows within financing activities.
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 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.
Business Segment Information
The Company reports separately information about each of its operating segments that engage in business activities from which revenue is recognized and expenses are incurred, and for which discrete financial information is available. These operating results are regularly reviewed by the Company’s chief operating decision maker, who is the Chief Executive Officer. The two reportable segments are aligned with the Company’s industries:
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Defense and Intelligence - provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies.
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Civilian and Health Care - provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies.
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The segment information for the period prior to the Spin-Off has been recast to reflect the Company’s current reportable segment structure. There is no impact on the Company’s previously reported consolidated combined statements of operations, balance sheets or statements of cash flows resulting from these segment changes.
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, intangible assets, goodwill, fair value, certain deferred costs, valuation allowances on deferred tax assets, loss accruals for litigation, and inputs used for computing share-based compensation. These estimates are based on management’s best knowledge of historical experience, current events, and various other assumptions that management considers reasonable under the circumstances.
Reclassifications
Certain prior period balances in the accompanying financial statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on total assets, total liabilities, total equity, income before taxes or net income.
Revenue Recognition
The Company’s revenue from contracts with customers is derived from its primary service offerings, including technology and business solutions, systems engineering and integration, cybersecurity, applied research and big data analytics, and investigative and risk mitigation services to the U.S. government and its agencies. The Company also serves various state and local governments.
The Company performs under various types of contracts, which include (1) fixed price contracts, such as firm-fixed-price (“FFP”), (2) cost reimbursable contracts such as cost-plus-fixed-fee, cost-plus-award-fee and cost-plus-incentive-fee, and (3) time-and-materials (“T&M”) contracts, including fixed-price-level-of-effort (“FP-LOE”) contracts.
To determine the proper revenue recognition, the Company first evaluates whether it has a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable. The Company also evaluates whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an indefinite delivery/indefinite quantity award. In addition, the Company assesses contract modifications to determine whether the changes to existing contracts should be accounted for as part of the original contract or as a separate contract. Contract modifications for the Company may relate to changes in contract specifications and requirements and do not add distinct services, and therefore are accounted for as part of the original contract. If contract modifications add distinct goods or services and increase the contract value by the stand-alone selling price, those modifications are accounted for as separate contracts.
For each contract, the Company assesses if multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation. The Company generally separates multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined and accounted for as a single performance obligation.
The Company’s contracts with the U.S. federal government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract. The Company accounts for renewal options as separate contracts when they include distinct goods or services at stand-alone selling prices.
Contracts with the U.S. federal government are generally subject to the Federal Acquisition Regulation (“FAR”) and priced on an estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. federal government and its agencies. Each contract is competitively priced and bid separately. Pricing for non-U.S. federal government agencies is based on specific negotiations with each customer. The Company excludes any taxes collected or imposed when determining the transaction price.
Certain of the Company’s contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. The Company estimates variable consideration at the expected value amount to which it expects to be entitled based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.
The Company allocates the transaction price of a contract to its performance obligations in the proportion of such obligation’s stand-alone selling price. The stand-alone selling prices of the Company’s performance obligations are generally based on an expected cost-plus margin approach. For certain product sales, the Company uses prices from other stand-alone sales. Substantially none of the Company’s contracts contain a significant financing component that would require an adjustment to the transaction price of the contract.
The Company recognizes revenue on our service contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the Company performs the promised services. For U.S. federal government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process.
The Company’s IT and business process outsourcing arrangements typically have a single performance obligation that are a series of distinct goods or services that are substantially the same and are provided over a period of time using the same measure of progress. Revenue derived from IT and business process outsourcing arrangements is generally comprised of a series of distinct services, and thus, is recognized over time based upon the level of services delivered in the distinct periods in which they are provided using an input method based on time increments. IT outsourcing arrangements may include nonrefundable upfront fees billed for activities to familiarize us with the client’s operations, take control over their administration and operation, and adapt them to the Company’s solutions. These activities typically do not qualify as separate performance obligations, and the related revenue is allocated to the relevant performance obligation and satisfied over time as the performance obligation is satisfied.
On FFP contracts, revenue recognized over time generally uses a method that measures the extent of progress toward completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method). Under the cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion (“EAC”). The cost-to-cost method best depicts the Company’s performance and transferring control of services promised to the customer. A performance obligation’s EAC includes all direct costs such as materials, labor, subcontract costs, overhead, and a ratable portion of general and administrative costs. In addition, the Company includes in an EAC future losses of a performance obligation estimated to be incurred on onerous contracts, as and when known, and the most likely amount of transaction price (revenue) that the Company expects to receive for unpriced change orders (modifications). On certain other contracts, principally T&M, FP-LOE, and cost-plus-fixed-fee, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer.
When a performance obligation is not satisfied over time, the Company recognizes revenue when it satisfies the performance obligation at a point in time. To determine the point in time at which a performance obligation is satisfied, the Company considers indicators of the transfer of control in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), including delivery of services to the customer, acceptance of services by the customer and having present right to payment.
Billed Receivables
Amounts billed and due from the Company’s customers, primarily the U.S. federal government, are classified as receivables, net of allowance for doubtful accounts on the balance sheets.
Contract Balances
Contract assets consist of unbilled receivables, which result from services provided under contracts when revenue is recognized over time, revenue recognized exceeds the amounts billed to the customer, and right to payment is not just subject to the passage of time. Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Payment to employees and third parties for services provided to customers is generally immediate, while the related billing is generally within 90 days. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer in the event the Company does not perform on our obligations under the contract.
Contract liabilities include advance contract payments and billings in excess of revenue recognized. Under certain contracts, the Company receives advances and milestone payments from its customers that exceed revenue earned to date, resulting in contract liabilities. Advances typically are not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the Company from the customer failing to adequately complete some or all of its obligations under the contract.
Costs to Obtain a Contract
Certain sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions are deferred and amortized on a straight-line basis over the term of the contract, not to exceed five years. The closing balance of the associated asset and expense was not material as of and during the fiscal year ended March 31, 2020.
Costs to Fulfill a Contract
Costs incurred to fulfill a contract include costs that are directly related to a contract or an anticipated contract that generate or enhance resources to be used in satisfying performance obligations and are expected to be recovered. These costs are recognized as an asset in accordance with ASC Topic 340, Other Assets and Deferred Costs, and are recognized on a systematic basis that is consistent with the transfer to the customer of the services to which the asset relates. The closing balance of the associated asset and expense was not material as of and during the fiscal year ended March 31, 2020.
Share-based Compensation Expense
The Company provides different forms of share-based compensation to its employees and non-employee directors. This includes time-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and stock options. The Company accounts for share-based compensation in accordance with ASC Topic 718 Compensation—Stock Compensation, which requires the use of a valuation model to calculate the fair value of certain share-based awards. The fair value of the RSUs and the PSUs awards is determined on the grant date, based on the Company’s closing stock price. Share-based awards generally vest one to three years from the date of grant and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. We expense the fair value of share-based awards on a straight-line basis over the service period during which the restrictions lapse. The Company accounts for forfeitures as they occur.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would not be able to realize the deferred tax assets in the future equal to their net recorded amount, the Company would record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
The Company records accruals for uncertain tax positions in accordance with ASC Topic 740, Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties. Interest and penalties related to unrecognized tax benefits are recognized and included in the provision for income taxes on the accompanying statements of operations. Accrued interest and penalties are included in the related tax liability on the balance sheets.
Prior to the Spin-Off and Mergers, the Company's operations were included in the tax returns filed by the respective Parent entities of which USPS’s businesses were a part. Income tax expense and other income tax related information for those periods contained in these financial statements are presented on a separate return basis as if USPS filed its own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if USPS were a separate taxpayer and a standalone enterprise for the periods presented. Current income tax liabilities were assumed to be settled with Parent on the last day of the reporting periods and were relieved through the Parent company investment account and the transfers from (to) Parent, net on the statements of cash flows.
Cash and Cash Equivalents
The Company considers investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
The Company accounts for amounts collected associated with its MARPA Facility and unremitted to the Financial Institutions as restricted cash within our other current assets caption on the balance sheet, as well as any other cash balances that are contractually restricted from use in operations. See Note 5 – “Receivables” for additional information and definitions of MARPA Facility and Financial Institutions.
Concentrations of Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of receivables from trade customers and financing receivables. Perspecta performs ongoing credit evaluations of the financial condition of its customers. The Company’s receivables are primarily with the U.S. federal government, and thus the Company does not have material credit risk exposure.
Property and Equipment
Property and equipment, which includes assets under finance lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the asset or the remaining lease term, whichever is shorter.
The estimated useful lives of the Company’s property and equipment are as follows:
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Property and Equipment
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Estimated Useful Lives
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Buildings
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Up to 40 years
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Computers and related equipment
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4 to 5 years
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Furniture and other equipment
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2 to 15 years
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Land
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Not a depreciable asset
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Leasehold improvements
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Shorter of lease term or useful life
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Leases
The Company leases certain real and personal property under non-cancelable operating leases. Lease assets under finance leases are 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, if so, whether the lease should be classified as an operating or a finance lease. The Company recognizes a right-of-use (“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 March 31, 2020, 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.
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.
Acquisition Accounting and Goodwill
When the Company acquires a controlling financial interest through a business combination, it uses the acquisition method of accounting to allocate the purchase consideration to the assets acquired and liabilities assumed, which are
recorded at fair value as measured on the date of acquisition. Any excess of purchase consideration over the fair value of the assets acquired and liabilities assumed is recognized as goodwill.
Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. The results of operations of acquired businesses are included in the financial statements from the acquisition date.
In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, the Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our stock price, significant decreases in federal government appropriations or funding for our contracts, the loss of significant business or significant underperformance relative to historical or projected future operating results.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. The Company engages a third-party valuation specialist to estimate the fair value of the reporting units using both an income approach and a market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to a present value using a discount rate. Cash flow projections are based on management’s estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating income, capital expenditures, and working capital requirements. The results of these approaches are used to corroborate the conclusion.
The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2019, did not result in an impairment charge. Subsequently, the U.S. Navy announced on February 5, 2020 that Perspecta was not awarded the NGEN-R SMIT contract. The Company performed an interim impairment assessment in the fourth quarter of fiscal year 2020, resulting in the impairment charge discussed further in Note 8 – “Goodwill,” as well as impairment charges discussed further in Note 9 – “Intangible Assets.”
Intangible Assets
The estimated useful lives for finite-lived intangible assets are shown below:
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Intangible Assets
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Estimated Useful Lives
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Acquired backlog
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1 year
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Software
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2 to 10 years
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Developed technology
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6 to 7 years
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Program assets
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4 to 14 years
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Outsourcing contract costs
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Contract life, excluding option years
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Acquired backlog intangible assets represent the funded economic value of predominantly long-term contracts, less the amount of revenue already recognized on those contracts. Acquired backlog was valued using the excess earnings approach, amortized over a one year period. Software is amortized predominantly using the straight-line method. Developed technology intangible assets represent acquired intellectual property and were valued using the relief from royalty method. Program assets are acquired customer relationships and are amortized in proportion to the estimated undiscounted cash flows projected over the estimated life of the asset or on a straight-line basis if such cash flows cannot be reliably estimated. Costs of outsourcing contracts, including costs incurred for bid and proposal activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed on a straight-line basis over the contract life, excluding option years. These costs represent incremental external costs or certain specific internal costs primarily associated with assuming control over customer IT operations and transforming them consistent with contract specifications.
Long-Lived Asset Impairment
The Company reviews intangible assets with finite lives and long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is impaired. We measure the amount of impairment loss, if any, as the difference between the carrying amount of the asset and its fair value using an income approach or, when available and appropriate, using a market approach.
Fair Value
The Company accounts for recurring and non‑recurring fair value measurements in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.
Level 3 - Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity - e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security. If a change in Level 3 inputs occurs, the resulting amount might result in a significantly higher or lower fair value measurement.
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the ASC 820 hierarchy.
Derivative 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.
The Company uses interest rate swap agreements designated as cash flow hedges to mitigate its exposure to interest rate risk associated with the variability of cash outflows for interest payments on certain floating interest rate debt, which effectively converted the debt into fixed interest rate debt. The Company 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 fiscal year ended March 31, 2019.
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 effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges is recorded in AOCL, net of taxes, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings along with the related tax effects. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in AOCL related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
For the year ended March 31, 2020, the Company performed both retrospective and prospective hedge effectiveness analyses for the interest rate swaps designated as cash flow hedges. The Company applied the long-haul method outlined in ASC Topic 815, Derivatives and Hedging, to assess retrospective and prospective effectiveness of the interest rate swaps. A quantitative effectiveness analysis assessment of the hedging relationship was performed using regression analysis. As of March 31, 2020, the Company determined that the hedging relationship was highly effective.
Pension and Other Benefit Plans
The Company accounts for its pension, other postretirement employee benefit (“OPEB”), defined contribution and deferred compensation plans using the guidance of ASC Topic 710, Compensation—General, and ASC Topic 715, Compensation—Retirement Benefits. The Company recognizes actuarial gains and losses and changes in fair value of plan assets in earnings at the time of plan remeasurement as a component of net periodic benefit cost, included in other expense, net on our statements of operations. Plan remeasurement typically occurs on the last day of each fiscal year. The remaining components of net periodic benefit cost, primarily current period interest costs and expected return on plan assets, are recorded on a monthly basis.
Inherent in the application of the actuarial methods are key assumptions including, but not limited to, discount rates, expected long-term rates of return on plan assets, mortality rates, rates of compensation increases, and medical cost trend rates. Company management evaluates these assumptions annually and updates assumptions as necessary. The fair value of plan assets is determined based on the prevailing market prices or estimated fair value of investments when quoted prices are not available.
We recognize on a plan-by-plan basis the funded status of our postretirement benefit plans under GAAP as either an asset recorded within other non-current assets or a liability recorded within non-current liabilities on our consolidated balance sheets. The GAAP funded status is measured as the difference between the fair value of the plan’s assets and the projected benefit obligation of the plan. The funded status under the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, is calculated on a different basis than under GAAP.
Parent Company Investment
Parent company investment on the statements of changes in equity represented Parent’s historical investment in the Company, the net effect of transactions with and allocations from Parent and our accumulated earnings through the date of the Spin-Off and Mergers.
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 ROU asset for the right to use the underlying asset for the lease term on their balance sheets. 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 to all classes of leased assets, 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 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 shareholders’ equity or cash flows. See Note 7 – “Leases” for further details.
Recently Issued Accounting Pronouncements
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 April 1, 2020 for Perspecta. The Company has determined that ASU 2016-13 will not have a material effect on
Perspecta’s financial statements upon adoption on April 1, 2020, given the concentration of receivables with the U.S. government.
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 Company adopted ASU 2018-15 on April 1, 2020 and will apply it to implementation costs incurred after the date of adoption. The impact on the Company’s financial statements and disclosures will depend on the volume of cloud-based solutions implemented.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The optional expedients may be applied to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 and may be adopted using a prospective approach through December 31, 2022. We are currently evaluating the impact of the reference rate reform on the Company’s financial statements and related disclosures.
Other recently issued ASUs effective after March 31, 2020 are not expected to have a material effect on Perspecta’s financial statements.
Note 2 – Acquisitions
Knight Point Systems, LLC
On July 31, 2019, Perspecta acquired all of the equity interests of Knight Point Systems, LLC (“Knight Point”) for $250 million plus customary purchase price adjustments, initially estimated at a total of $265 million and currently estimated at $264 million. Knight Point delivers end-to-end managed services and solutions focused on modernizing IT systems, protecting critical networks and driving digital transformation to improve customer transparency and operational efficiency. Knight Point leverages a portfolio of intellectual property to solve complex customer challenges in cloud, cybersecurity and agile development and operations (“DevOps”) environments.
The Company recognized preliminary fair values of the assets acquired and liabilities assumed and allocated $116 million to goodwill and $125 million to intangible assets. The goodwill is largely attributable to the assembled workforce of Knight Point and expected synergies between the Company and Knight Point. The Company’s preliminary allocation of goodwill to Perspecta’s reportable segments was as follows: $22 million allocated to Defense and Intelligence and $94 million allocated to Civilian and Health Care. The intangible assets consist primarily of program assets of $102 million, developed technology of $18 million and backlog of $5 million. The estimated fair value attributed to intangible assets is being amortized on an accelerated basis over a range of 10 to 12 years for program assets, seven years for developed technology and one year for backlog. The fair value attributed to the intangible assets acquired was based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques. All of the value attributed to goodwill and intangible assets is deductible for income tax purposes. The fair values of assets acquired and liabilities assumed are preliminary and based on a valuation using estimates and assumptions that are subject to change, which could result in material changes to the purchase price allocation. The final purchase price allocation is expected to be completed by the first quarter of fiscal year 2021, pending analysis of certain tax adjustments.
The results of operations of Knight Point have been included in the statements of operations beginning August 1, 2019. Pro forma results of operations for this acquisition have not been presented as it is not material to the consolidated results of operations. The acquisition was considered an asset purchase for tax purposes.
Acquisition Subsequent to Period End
On May 1, 2020, Perspecta acquired certain assets of DHPC Technologies, a U.S. developer of electronic warfare technologies. The purchase consideration was approximately $53 million in cash, subject to customary purchase price adjustments. The fair values of the assets acquired and liabilities assumed and the results of operations are not material to the operations of Perspecta. The final purchase price allocation is expected to be completed during fiscal year 2021.
Fiscal 2019 Spin-Off and Mergers
On May 31, 2018, immediately following the consummation of the Spin-Off, the Company completed the Mergers. As defined in the Merger Agreement, Perspecta issued shares of Perspecta common stock to Veritas Capital and its affiliates, including 18,877,244 shares to The SI Organization Holdings LLC (the “Vencore HC Stockholder”) and 4,396,097 shares to KGS Holding LLC (the “KeyPoint Stockholder,” and, together with the Vencore HC Stockholder, the “Vencore Stockholders”), representing in the aggregate approximately 14% of the outstanding shares of Perspecta common stock immediately following the Mergers. As a result of these transactions, Vencore HC and KGS HC became wholly-owned subsidiaries of Perspecta.
The Spin-Off and Mergers were structured as a “Reverse Morris Trust” transaction, in which Perspecta was deemed the accounting acquirer of Vencore HC and KGS HC and their respective subsidiaries. Purchase consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer. Accordingly, the fair value of the purchase consideration transferred was measured based on the fair value of approximately 14% of shares of the combined business, $400 million cash transferred by Perspecta to the Vencore Stockholders, and approximately $994 million paid to extinguish certain existing Vencore indebtedness.
Under the acquisition method of accounting, total consideration exchanged was:
|
|
|
|
|
|
(in millions)
|
|
Amount
|
Preliminary fair value of equity purchase consideration received by Vencore Stockholders(1)
|
|
$
|
578
|
|
Preliminary fair value of cash purchase consideration received by Vencore Stockholders
|
|
400
|
|
Preliminary fair value of cash consideration paid by USPS to extinguish certain existing Vencore indebtedness
|
|
994
|
|
Consideration transferred
|
|
$
|
1,972
|
|
|
|
(1)
|
Represents the fair value of consideration received by the Vencore HC Stockholder and the KeyPoint Stockholder for approximately 14% ownership in the combined company. The fair value of the purchase consideration transferred was based on 18,877,244 shares of Perspecta common stock distributed to Vencore HC Stockholder and 4,396,097 shares of Perspecta common stock distributed to the KeyPoint Stockholder as of the close of business on the record date for the Mergers, at the closing price of $24.86 per share on May 31, 2018.
|
The information presented below represents the allocation of Vencore’s purchase price to the assets acquired and liabilities assumed, including acquiree-related transaction costs of $38 million, as of the acquisition date, May 31, 2018. As of March 31, 2019, the Company finalized the accounting for the Mergers. The major classes of assets and liabilities to which the purchase price was allocated were as follows:
|
|
|
|
|
|
(in millions)
|
|
Fair Value
|
Current assets
|
|
$
|
333
|
|
Property and equipment
|
|
35
|
|
Intangible assets
|
|
753
|
|
Other assets
|
|
40
|
|
Accounts payable, accrued payroll, accrued expenses, and other current liabilities
|
|
(194
|
)
|
Deferred revenue
|
|
(12
|
)
|
Deferred tax liabilities
|
|
(10
|
)
|
Other liabilities
|
|
(119
|
)
|
Net identifiable assets acquired
|
|
826
|
|
Goodwill
|
|
1,146
|
|
Consideration transferred
|
|
$
|
1,972
|
|
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the closing date of the Mergers, and is attributable to the intellectual capital, the acquired assembled work force and expected cost synergies, none of which qualify for recognition as a separate intangible asset. The goodwill discussed above includes approximately $195 million of goodwill that is deductible for tax purposes. Goodwill arising from the Mergers has been allocated to Perspecta’s reporting units based on the relative fair value of assets acquired, with $1.07 billion allocated to the Defense and Intelligence segment and $77 million allocated to the Civilian and Health Care segment.
Intangible assets acquired were as follows:
|
|
|
|
|
|
|
|
(in millions, except years)
|
|
Weighted-average Amortization Period (in years)
|
|
Fair Value
|
Program assets
|
|
13
|
|
$
|
625
|
|
Developed technology
|
|
6
|
|
105
|
|
Backlog
|
|
1
|
|
22
|
|
Favorable leases
|
|
4
|
|
1
|
|
Total intangible assets
|
|
12
|
|
$
|
753
|
|
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents results as if the Spin-Off and the Mergers and the related financing had occurred on April 1, 2017. The historical consolidated financial information of Perspecta has been adjusted in the pro forma information to give effect to the events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The effects of the Spin-Off are primarily attributable to interest expense associated with the incurrence of debt in connection with the Spin-Off. The effects of the Mergers primarily relate to amortization of acquired intangible assets. The consolidated financial information of Perspecta includes merger and integration-related costs that are not expected to recur and impact the combined results over the long-term. The unaudited pro forma results do not reflect future events that have occurred or may occur after the 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2019
Historical
Perspecta (1)
|
|
Period from April 1, 2018 to May 31, 2018
Historical
Vencore
|
|
Fiscal Year Ended March 31, 2019
|
(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
|
|
$
|
4,030
|
|
|
$
|
244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,274
|
|
Net income (loss)
|
|
$
|
72
|
|
|
$
|
(57
|
)
|
|
$
|
(7
|
)
|
|
$
|
20
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share(2):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
(1) Revenue and pre-tax income includes $1.27 billion and $185 million, respectively, associated with Vencore HC and KGS HC for the period of June 1, 2018 through March 31, 2019. 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 164.56 million basic weighted average shares and 164.82 million diluted shares. See Note 4 – “(Loss) Earnings Per Share.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2018
|
(in millions, except per share amounts)
|
|
Historical Perspecta
|
|
Historical Vencore
|
|
Effects of the Spin-Off
|
|
Effects of the Mergers
|
|
Pro Forma Combined for the Spin-Off and Mergers
|
Revenue
|
|
$
|
2,819
|
|
|
$
|
1,384
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,203
|
|
Net income
|
|
$
|
208
|
|
|
$
|
33
|
|
|
$
|
(1
|
)
|
|
$
|
(112
|
)
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share(3):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
$
|
0.77
|
|
Diluted
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
$
|
0.77
|
|
(3) Historical earnings per common share information for the year ended March 31, 2018 is computed using the 142.43 million shares of Perspecta common stock resulting from the Distribution. See Note 4 – “(Loss) Earnings Per Share.” Pro forma combined earnings per common share includes the shares issued by Perspecta in connection with the Mergers on May 31, 2018. As a result, both basic and diluted; pro forma combined earnings per common share information is computed based on 165.70 million shares of Perspecta common stock as Perspecta did not operate as a stand-alone entity during the period, and therefore, no Perspecta common stock, stock options or other equity awards were outstanding and no dividends were declared or paid by Perspecta.
Fiscal 2018 HPES Merger
On April 1, 2017, Computer Sciences Corporation (“CSC”), HPE, Everett SpinCo, Inc. (“Everett”), and New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett (“Merger Sub”), completed the strategic combination of CSC with the HPE Enterprise Services business (“HPES”) to form DXC (the “HPES Merger”). At the time of the HPES Merger, Everett was renamed DXC, and as a result of the HPES Merger, CSC became a direct wholly owned subsidiary of DXC. The transaction was determined to be a reverse merger and CSC was determined to be the accounting acquirer of DXC. Therefore, for accounting purposes DXC, and in turn USPS, was subject to purchase price allocation adjustments as of April 1, 2017.
The information presented represents allocation of USPS’s purchase price to the assets acquired and liabilities assumed as of the acquisition date, April 1, 2017. The total fair value of consideration transferred for USPS was approximately $2.85 billion. The purchase price was determined based on the enterprise value of USPS estimated as part of the purchase price allocation related to the HPES Merger compared to the total value of all shares issued by DXC.
The allocation of purchase price was completed as of March 31, 2018. The major classes of assets and liabilities to which the purchase price was allocated were as follows:
|
|
|
|
|
|
(in millions)
|
|
Fair Value
|
Cash and cash equivalents
|
|
$
|
—
|
|
Accounts receivable
|
|
403
|
|
Prepaid expenses
|
|
86
|
|
Other current assets
|
|
22
|
|
Total current assets
|
|
511
|
|
Property and equipment
|
|
183
|
|
Intangible assets
|
|
976
|
|
Other assets
|
|
28
|
|
Total assets acquired
|
|
1,698
|
|
Current finance lease obligations, accounts payable, accrued payroll, accrued expenses, and other current liabilities
|
|
418
|
|
Deferred revenue
|
|
71
|
|
Non-current finance lease obligations
|
|
162
|
|
Deferred tax liabilities
|
|
204
|
|
Other liabilities
|
|
15
|
|
Total liabilities assumed
|
|
870
|
|
Net identifiable assets acquired
|
|
828
|
|
Goodwill
|
|
2,022
|
|
Total estimated consideration transferred
|
|
$
|
2,850
|
|
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. The goodwill is not deductible for tax purposes. Goodwill arising from the HPES Merger has been allocated to Perspecta’s reporting units based on the relative fair value of assets acquired, with $977 million allocated to the Defense and Intelligence segment and $1.05 billion allocated to the Civilian and Health Care segment.
Note 3 – Revenue
We disaggregate our revenue from contracts with customers by contract-type, whether the Company performs on the contract as the prime contractor or subcontractor, and customer-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Revenue by contract type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
|
Fiscal Year Ended March 31, 2019
|
(in millions)
|
|
Defense and
Intelligence
|
|
Civilian and
Health Care
|
|
Total
|
|
Defense and
Intelligence
|
|
Civilian and
Health Care
|
|
Total
|
Cost-reimbursable
|
|
$
|
1,100
|
|
|
$
|
107
|
|
|
$
|
1,207
|
|
|
$
|
830
|
|
|
$
|
90
|
|
|
$
|
920
|
|
Fixed-price
|
|
1,602
|
|
|
837
|
|
|
2,439
|
|
|
1,365
|
|
|
916
|
|
|
2,281
|
|
Time-and-materials
|
|
399
|
|
|
459
|
|
|
858
|
|
|
392
|
|
|
437
|
|
|
829
|
|
Total
|
|
$
|
3,101
|
|
|
$
|
1,403
|
|
|
$
|
4,504
|
|
|
$
|
2,587
|
|
|
$
|
1,443
|
|
|
$
|
4,030
|
|
Revenue by prime or subcontractor was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
|
Fiscal Year Ended March 31, 2019
|
(in millions)
|
|
Defense and
Intelligence
|
|
Civilian and
Health Care
|
|
Total
|
|
Defense and
Intelligence
|
|
Civilian and
Health Care
|
|
Total
|
Prime contractor
|
|
$
|
2,915
|
|
|
$
|
1,300
|
|
|
$
|
4,215
|
|
|
$
|
2,431
|
|
|
$
|
1,343
|
|
|
$
|
3,774
|
|
Subcontractor
|
|
186
|
|
|
103
|
|
|
289
|
|
|
156
|
|
|
100
|
|
|
256
|
|
Total
|
|
$
|
3,101
|
|
|
$
|
1,403
|
|
|
$
|
4,504
|
|
|
$
|
2,587
|
|
|
$
|
1,443
|
|
|
$
|
4,030
|
|
Revenue by customer type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
|
Fiscal Year Ended March 31, 2019
|
(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
|
|
$
|
3,084
|
|
|
$
|
1,141
|
|
|
$
|
4,225
|
|
|
$
|
2,574
|
|
|
$
|
1,185
|
|
|
$
|
3,759
|
|
Non-federal (state, local and other)
|
|
17
|
|
|
262
|
|
|
279
|
|
|
13
|
|
|
258
|
|
|
271
|
|
Total
|
|
$
|
3,101
|
|
|
$
|
1,403
|
|
|
$
|
4,504
|
|
|
$
|
2,587
|
|
|
$
|
1,443
|
|
|
$
|
4,030
|
|
Performance Obligations
As of March 31, 2020, approximately $3.84 billion of revenue is expected to be recognized from remaining unsatisfied performance obligations on executed contracts. The Company expects to recognize approximately 79% of these remaining performance obligations as revenue within one year and approximately 89% within two years, with the remainder recognized thereafter.
Contract Balances
Contract assets and contract liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance Sheets Line Item
|
|
March 31, 2020
|
|
March 31, 2019
|
Contract assets:
|
|
|
|
|
|
|
Unbilled receivables
|
|
Receivables, net
|
|
$
|
341
|
|
|
$
|
301
|
|
Contract liabilities:
|
|
|
|
|
|
|
Current portion of deferred revenue and advance contract payments
|
|
Other current liabilities
|
|
$
|
25
|
|
|
$
|
33
|
|
Non-current portion of deferred revenue and advance contract payments
|
|
Other long-term liabilities
|
|
2
|
|
|
12
|
|
Contract assets increased $40 million during the fiscal year ended March 31, 2020, primarily due to the timing of billings and the acquisition of Knight Point. Contract assets were net of $12 million and $31 million of advance contract payments as of March 31, 2020 and 2019, respectively. There were no significant impairment losses related to the Company’s contract assets during the fiscal year ended March 31, 2020.
Contract liabilities decreased $18 million during the fiscal year ended March 31, 2020, primarily due to revenue recognized in excess of payments received. During the fiscal year ended March 31, 2020, the Company recognized $32 million of the deferred revenue and advance contract payments at March 31, 2019 as revenue. During the fiscal year ended March 31, 2019, the Company recognized $25 million of the deferred revenue and advance contract payments at April 1, 2018 as revenue.
Note 4 – (Loss) Earnings Per Share
Basic (loss) earnings per common share (“EPS”) for the fiscal year ended March 31, 2020 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 fiscal year ended March 31, 2019 is computed using the weighted average number of shares of common stock outstanding between the date of the Distribution and the end of the period. EPS for the fiscal year ended March 31, 2018 is computed using the shares of Perspecta common stock resulting from the Distribution, as we did not operate as a stand-alone entity and therefore, no common stock, stock options or other equity awards were outstanding. Diluted loss per common share for the fiscal year ended March 31, 2020 did not include the impact of potentially dilutive stock awards because the result would have been anti-dilutive. The aggregate number of anti-dilutive equity awards excluded from the calculation of EPS for each of the fiscal years ended March 31, 2019 and 2018 was insignificant.
The following table reflects the calculation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions, except per share amounts)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Net (loss) income
|
|
$
|
(676
|
)
|
|
$
|
72
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
Common share information:
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
161.99
|
|
|
164.56
|
|
|
142.43
|
|
Dilutive effect of equity awards
|
|
—
|
|
|
0.26
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
161.99
|
|
|
164.82
|
|
|
142.43
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.17
|
)
|
|
$
|
0.44
|
|
|
$
|
1.46
|
|
Diluted
|
|
$
|
(4.17
|
)
|
|
$
|
0.44
|
|
|
$
|
1.46
|
|
Note 5 – Receivables
Receivables, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
Billed trade receivables
|
|
$
|
173
|
|
|
$
|
183
|
|
Unbilled receivables
|
|
341
|
|
|
301
|
|
Receivables, gross
|
|
514
|
|
|
484
|
|
Allowance for doubtful accounts
|
|
(1
|
)
|
|
—
|
|
Receivables, net
|
|
$
|
513
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
U.S. federal government, including independent agencies
|
|
$
|
468
|
|
|
$
|
430
|
|
Non-federal (state, local and other)
|
|
45
|
|
|
54
|
|
Receivables, net
|
|
$
|
513
|
|
|
$
|
484
|
|
Receivables Sales Facility
On July 14, 2017, Enterprise Services LLC, a wholly-owned subsidiary of the Company, which has since been renamed Perspecta Enterprise Solutions LLC (“PES LLC”), entered into a Master Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with certain financial institutions (the “Financial Institutions”). The Purchase Agreement established a U.S. federal government obligor receivables purchase facility (the “MARPA Facility”), which is an off-balance sheet facility. Concurrently, Parent entered into a guaranty made in favor of the Financial Institutions, that guarantees the obligations of the sellers and servicers of receivables under the Purchase Agreement. The guaranty does not cover any credit losses under the receivables. In connection with the Spin-Off of USPS, Parent entered into certain amendments to the guaranty whereby Parent can request to terminate its guaranty at the time of the separation of USPS from DXC. On May 31, 2018, the Parent’s guaranty was terminated and Perspecta entered into a new guaranty of PES LLC’s obligations under the Purchase Agreement.
In accordance with the terms of the Purchase Agreement, on January 23, 2018, the Purchase Agreement was amended to increase the aggregate facility limit from $200 million to $300 million (the first amendment), and on May 31, 2018, the Purchase Agreement was amended to increase the aggregate facility limit to $450 million (the second amendment). Effective October 31, 2018, the Company completed the third amendment to the MARPA Facility, reducing the aggregate facility limit to $300 million. Effective October 31, 2019, the Company completed the fourth amendment to the MARPA Facility to extend the term of the MARPA Facility through October 31, 2020.
Under the MARPA Facility, the Company sells eligible U.S. federal government and certain state government obligor receivables, including both billed and certain unbilled receivables. The MARPA Facility has a one-year term, but the Purchase Agreement provides for optional extensions, if agreed to by the Financial Institutions, in each case for an additional six month duration.
The Company accounts for these receivable transfers as sales and removes the sold receivables from its balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature. The Company estimated that its servicing fee was at fair value and therefore, no servicing asset or liability related to these services was recognized as of March 31, 2020. Sold receivables are presented as a change in receivables within operating activities on the statements of cash flows.
During the fiscal year ended March 31, 2020, the Company sold $3.42 billion of billed and unbilled receivables, as compared to $2.71 billion during the fiscal year ended March 31, 2019. Collections on sold receivables were $3.31 billion and $2.75 billion during the fiscal years ended March 31, 2020 and 2019, respectively. The amounts outstanding as of March 31, 2020 and 2019 were $255 million and $146 million, respectively. As of March 31, 2020 and 2019, there were $63 million and $11 million, respectively, of cash collected by the Company, but not remitted to the Financial Institutions, which represents restricted cash recorded by the Company within the other current assets caption on the accompanying balance sheets.
Note 6 – Property and Equipment
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
Land, buildings and leasehold improvements
|
|
$
|
32
|
|
|
$
|
58
|
|
Computers and related equipment
|
|
412
|
|
|
409
|
|
Furniture and other equipment
|
|
56
|
|
|
49
|
|
Total property and equipment, gross
|
|
500
|
|
|
516
|
|
Less: accumulated depreciation and amortization
|
|
(193
|
)
|
|
(148
|
)
|
Property and equipment, net
|
|
$
|
307
|
|
|
$
|
368
|
|
Depreciation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Depreciation expense for owned property and equipment
|
|
$
|
23
|
|
|
$
|
9
|
|
|
$
|
12
|
|
Amortization expense for property and equipment under finance lease
|
|
122
|
|
|
117
|
|
|
57
|
|
Total depreciation and amortization expense for property and equipment
|
|
$
|
145
|
|
|
$
|
126
|
|
|
$
|
69
|
|
Note 7 – Leases
As described in Note 1 – “Overview and Summary of Significant Accounting Policies” under the heading “Recently Adopted 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 components of lease expense were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
Statement of Operations Line Item(s)
|
|
Fiscal Year Ended March 31, 2020
|
Finance lease expense
|
|
|
|
|
Amortization of leased assets
|
|
Depreciation and amortization
|
|
$
|
122
|
|
Interest on lease obligations
|
|
Interest expense, net
|
|
17
|
|
Total finance lease expense
|
|
|
|
139
|
|
Operating lease expense
|
|
Cost of services and selling, general and administrative
|
|
54
|
|
Variable lease expense
|
|
Cost of services and selling, general and administrative
|
|
11
|
|
Sublease income
|
|
Cost of services and selling, general and administrative
|
|
(4
|
)
|
Total lease expense, net
|
|
|
|
$
|
200
|
|
Under ASC 840, rental expense was approximately $56 million and $44 million during the fiscal years ended March 31, 2019 and 2018, respectively. Also under ASC 840, net interest expense on finance lease obligations was $20 million and $12 million for the fiscal years ended March 31, 2019 and 2018, respectively.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance Sheet Line Item
|
|
March 31, 2020
|
|
March 31, 2019
|
Assets
|
|
|
|
|
|
|
Finance lease assets, gross
|
|
Property and equipment, net
|
|
$
|
395
|
|
|
$
|
377
|
|
Accumulated depreciation
|
|
Property and equipment, net
|
|
(168
|
)
|
|
(130
|
)
|
Finance lease assets, net
|
|
Property and equipment, net
|
|
227
|
|
|
247
|
|
Operating lease assets
|
|
Other assets
|
|
157
|
|
|
—
|
|
Total lease assets
|
|
|
|
$
|
384
|
|
|
$
|
247
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Finance leases
|
|
Current finance lease obligations
|
|
$
|
111
|
|
|
$
|
137
|
|
Operating leases
|
|
Other current liabilities
|
|
39
|
|
|
—
|
|
Non-current
|
|
|
|
|
|
|
Finance leases
|
|
Non-current finance lease obligations
|
|
136
|
|
|
168
|
|
Operating leases
|
|
Other long-term liabilities
|
|
129
|
|
|
—
|
|
Total lease liabilities
|
|
|
|
$
|
415
|
|
|
$
|
305
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
(in millions)
|
|
Fiscal Year Ended March 31, 2020
|
Cash paid for amounts included in the measurement of lease obligations:
|
|
|
Operating cash flows from operating leases
|
|
$
|
51
|
|
Operating cash flows from finance leases
|
|
18
|
|
Financing cash flows from finance leases
|
|
141
|
|
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:
|
|
|
|
|
|
|
March 31, 2020
|
Weighted average remaining lease term (in years):
|
|
|
Finance leases
|
|
2.8
|
|
Operating leases
|
|
5.6
|
|
Weighted average discount rate:
|
|
|
Finance leases
|
|
6.26
|
%
|
Operating leases
|
|
4.32
|
%
|
As of March 31, 2020, future minimum lease payments required to be made under leases were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year (in millions)
|
|
Operating
Leases
|
|
Finance
Leases
|
2021
|
|
$
|
45
|
|
|
$
|
123
|
|
2022
|
|
35
|
|
|
82
|
|
2023
|
|
30
|
|
|
42
|
|
2024
|
|
22
|
|
|
16
|
|
2025
|
|
18
|
|
|
4
|
|
Thereafter
|
|
41
|
|
|
—
|
|
Total minimum lease payments
|
|
191
|
|
|
267
|
|
Less: Amount representing interest
|
|
(23
|
)
|
|
(20
|
)
|
Present value of net minimum lease payments
|
|
$
|
168
|
|
|
$
|
247
|
|
As of March 31, 2020, the Company had aggregate rent obligations of $27 million for operating leases and $5 million for finance leases, for leases that have not commenced, with terms ranging from less than one to eight years.
On October 4, 2019, we completed a sale and leaseback transaction of our Herndon, Virginia facility. The land and buildings sold had a carrying value of $23 million, which was included in other current assets on our balance sheet as of March 31, 2019. We recognized a pre-tax gain on sale of assets of $33 million included in other (income) expense, net on the statements of operations for the year ended March 31, 2020. The leaseback period will facilitate the Company’s exit from the facility.
On December 13, 2019, we completed a sale and leaseback transaction of our Clarksville, Virginia facility. The land and building sold had a carrying value of $26 million, which was included in property and equipment, net on our balance sheet as of March 31, 2019. We recognized an insignificant gain on the sale. The future minimum lease payments required to be made under the leaseback are approximately $15 million over seven years.
Note 8 – Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Defense and Intelligence
|
|
Civilian and Health Care
|
|
Total
|
Balance as of March 31, 2018
|
|
$
|
977
|
|
|
$
|
1,045
|
|
|
$
|
2,022
|
|
Additions
|
|
1,074
|
|
|
83
|
|
|
1,157
|
|
Balance as of March 31, 2019
|
|
2,051
|
|
|
1,128
|
|
|
3,179
|
|
Additions
|
|
22
|
|
|
94
|
|
|
116
|
|
Impairment charges
|
|
(624
|
)
|
|
—
|
|
|
(624
|
)
|
Balance as of March 31, 2020
|
|
$
|
1,449
|
|
|
$
|
1,222
|
|
|
$
|
2,671
|
|
Goodwill is stated net of accumulated impairment losses of $624 million at March 31, 2020. The additions to goodwill were primarily due to the Mergers described in Note 2 – “Acquisitions.”
The U.S. Navy announced on February 5, 2020 that Perspecta was not awarded the NGEN-R SMIT contract, the re-compete of the NGEN contract currently held by the Company. The NGEN contract was scheduled to expire on September 30, 2020, but three one-month options were exercised by the U.S. Navy, extending the contract through December 31, 2020. In connection with the April 1, 2017 merger of CSC with HPES to form DXC, the reporting unit with the NGEN contract was allocated $624 million of goodwill. As a result of the U.S. Navy’s decision not to award the NGEN-R SMIT contract to us, we tested this goodwill for impairment in the fourth quarter of fiscal year 2020 and deemed it fully impaired.
Note 9 – Intangible Assets
Intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
(in millions)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Program assets
|
|
$
|
1,458
|
|
|
$
|
(367
|
)
|
|
$
|
1,091
|
|
|
$
|
1,525
|
|
|
$
|
(194
|
)
|
|
$
|
1,331
|
|
Software
|
|
73
|
|
|
(62
|
)
|
|
11
|
|
|
87
|
|
|
(58
|
)
|
|
29
|
|
Developed technology
|
|
123
|
|
|
(48
|
)
|
|
75
|
|
|
105
|
|
|
(22
|
)
|
|
83
|
|
Backlog
|
|
28
|
|
|
(26
|
)
|
|
2
|
|
|
22
|
|
|
(18
|
)
|
|
4
|
|
Outsourcing contract costs
|
|
26
|
|
|
(12
|
)
|
|
14
|
|
|
25
|
|
|
(7
|
)
|
|
18
|
|
Favorable leases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total intangible assets
|
|
$
|
1,708
|
|
|
$
|
(515
|
)
|
|
$
|
1,193
|
|
|
$
|
1,765
|
|
|
$
|
(299
|
)
|
|
$
|
1,466
|
|
In connection with the April 1, 2017 merger of CSC with HPES to form DXC, the reporting unit with the NGEN contract was allocated $299 million of intangible assets. We incurred a non-cash, pre-tax impairment charge of approximately $172 million in the fourth quarter of fiscal year 2020, primarily related to program assets and outsourcing contract costs that are reflected in accumulated amortization in the table above, as a result of the U.S. Navy’s decision not to award the NGEN-R SMIT contract to us, as discussed further in Note 8 – “Goodwill.”
Amortization expense during the fiscal years ended March 31, 2020, 2019 and 2018 was $229 million, $204 million and $98 million, respectively.
Estimated future amortization related to intangible assets as of March 31, 2020 was as follows:
|
|
|
|
|
|
Fiscal Year
|
|
(in millions)
|
2021
|
|
$
|
230
|
|
2022
|
|
151
|
|
2023
|
|
137
|
|
2024
|
|
123
|
|
2025
|
|
104
|
|
Thereafter
|
|
448
|
|
Total future amortization
|
|
$
|
1,193
|
|
Note 10 – Debt
The Company’s outstanding debt as of March 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Interest Rates
|
|
Maturities
|
|
March 31, 2020
|
|
March 31, 2019
|
Revolving Credit Facility
|
|
LIBOR + 1.50%
|
|
August 2024
|
|
$
|
50
|
|
|
$
|
—
|
|
Term Loan A Facilities (Tranche 1)
|
|
LIBOR + 1.375%
|
|
August 2022
|
|
200
|
|
|
246
|
|
Term Loan A Facilities (Tranche 2)
|
|
LIBOR + 1.50%
|
|
August 2024
|
|
1,552
|
|
|
1,588
|
|
Term Loan B Facility
|
|
LIBOR + 2.25%
|
|
May 2025
|
|
491
|
|
|
497
|
|
Subtotal senior secured credit facilities
|
|
|
|
|
|
2,293
|
|
|
2,331
|
|
Other secured borrowings
|
|
Various
|
|
Various
|
|
12
|
|
|
—
|
|
Total secured debt
|
|
|
|
|
|
2,305
|
|
|
2,331
|
|
Other unsecured borrowings
|
|
Various
|
|
Various
|
|
18
|
|
|
—
|
|
Senior unsecured EDS Notes
|
|
7.45%
|
|
October 2029
|
|
66
|
|
|
66
|
|
Total debt
|
|
|
|
|
|
2,389
|
|
|
2,397
|
|
Less: current maturities of long-term debt, net (1)
|
|
|
|
|
|
(89
|
)
|
|
(80
|
)
|
Less: unamortized debt issuance costs and premiums, net (2)
|
|
|
|
|
|
(17
|
)
|
|
(20
|
)
|
Total long-term debt, net of current maturities
|
|
|
|
|
|
$
|
2,283
|
|
|
$
|
2,297
|
|
(1) Current maturities of long-term debt are presented net of $6 million and $8 million of debt issuance costs as of March 31, 2020 and 2019, respectively, associated with the Term Loan A Facilities and Term Loan B Facility.
(2) Includes $11 million and $12 million of unamortized premiums as of March 31, 2020 and 2019, respectively, on the assumed Electronic Data Systems Corporation (“EDS”) Notes.
Term Loan Facilities and Revolving Credit Facility
The Company has secured credit facilities at March 31, 2020 consisting of (1) senior secured term loan credit facilities with an aggregate principal amount of $1.75 billion (the “Term Loan A Facilities”) and $491 million (the “Term Loan B Facility”), net of $27 million of debt issuance costs and (2) a senior secured revolving credit facility in an available principal amount of $750 million (the “Revolving Credit Facility,” and, together with the Term Loan A Facilities and Term Loan B Facility, the “Credit Facilities”), net of $7 million of original debt issuance costs. As of March 31, 2020, $700 million of available credit remained undrawn under the Revolving Credit Facility.
The Credit Facilities contain negative covenants customary for financings of this type, including covenants that place limitations on the incurrence of additional indebtedness; the creation of liens; the payment of dividends or other restricted payments such as share repurchases; sales of assets; fundamental changes, including mergers and acquisitions; loans and investments; negative pledges; transactions with affiliates; restrictions affecting subsidiaries; modification to charter documents in a manner materially adverse to the lenders; changes in fiscal year and limitations on conduct of business. The Credit Facilities also contain affirmative covenants and representations and warranties customary for financings of this type. Perspecta was in compliance with all applicable covenants as of March 31, 2020.
In addition, the Revolving Credit Facility and Term Loan A Facilities contain financial maintenance covenants requiring, as of the end of any fiscal quarter, (a) a ratio of consolidated total net debt to consolidated EBITDA (as defined in the debt agreement) not in excess of 4.50:1.00, stepping down to 4.25:1.00 at the end of the quarter ending September 30, 2020, and thereafter stepping up to 4.50:1.00 during the twelve-month period following the consummation of a permitted acquisition that involves consideration with a fair market value in excess of $100 million and (b) a ratio of consolidated EBITDA to interest expense of not less than 3.00:1.00. Perspecta was in compliance with these covenants at March 31, 2020.
In addition, on May 31, 2018, Perspecta and each of the other grantors party thereto (the “Grantors”) entered into a Collateral Agreement (the “Collateral Agreement”) with MUFG Bank, Ltd. (“MUFG”), in its capacity as administrative agent, and MUFG Union Bank, N.A., in its capacity as collateral agent. Pursuant to the terms of the Collateral Agreement, each of the Grantors granted a perfected first priority security interest in substantially all of its assets to secure its obligations under the Credit Agreement and related documents to which it is a party, subject to certain customary exceptions.
Interest on the Company’s term loans is payable monthly or quarterly in arrears. The Company fully and unconditionally guaranteed term loans issued by its 100% owned subsidiaries. Interest on the Company’s senior notes is payable semi-
annually in arrears. Generally, the Company’s notes are redeemable at the Company’s discretion at the then-applicable redemption prices plus accrued interest.
Expected maturities of long-term debt as of March 31, 2020 are as follows:
|
|
|
|
|
|
Fiscal Year
|
|
(in millions)
|
2021
|
|
$
|
97
|
|
2022
|
|
95
|
|
2023
|
|
293
|
|
2024
|
|
92
|
|
2025
|
|
1,279
|
|
Thereafter
|
|
533
|
|
Total
|
|
$
|
2,389
|
|
Note 11 – Fair 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 $2.18 billion and $2.35 billion as of March 31, 2020 and 2019, as compared with the gross carrying value of $2.39 billion and $2.40 billion, respectively. If measured at fair value, long-term debt, excluding finance lease obligations, 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 fiscal years ended March 31, 2020 or 2019.
Note 12 – Derivative Instruments
The Company entered into $1.40 billion of notional interest rate swap agreements concurrently with its Credit Facilities (as defined under Note 10 – “Debt”), on May 31, 2018, and $200 million of notional interest rate swap agreements in October 2018. As of March 31, 2020, the Company had interest rate swap agreements with a total notional amount of $1.60 billion.
The pre-tax impact of loss on derivatives designated for hedge accounting recognized in other comprehensive income (loss) was $59 million ($44 million, net of tax) and $31 million ($23 million, net of tax) during the fiscal years ended March 31, 2020 and 2019, respectively. We reclassified $11 million ($8 million, net of tax) and $8 million ($6 million, net of tax) from AOCL into earnings during the fiscal years ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we expect amounts of approximately $39 million pertaining to cash flow hedges to be reclassified from AOCL into earnings over the next 12 months.
Fair Value of Derivative Instruments
All derivatives are recorded at fair value on a recurring basis. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The fair value of interest rate swaps is estimated based on valuation models that use interest rate yield curves as Level 2 inputs. The gross fair value of our derivative liabilities in interest rate swaps designated for hedge accounting were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance Sheets Line Item
|
|
March 31, 2020
|
|
March 31, 2019
|
Derivative liabilities:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
37
|
|
|
$
|
4
|
|
Interest rate swaps
|
|
Other liabilities
|
|
50
|
|
|
22
|
|
Total derivative liabilities
|
|
|
|
$
|
87
|
|
|
$
|
26
|
|
Other risks
The Company is exposed to the risk of losses in the event of non-performance by counter parties to its derivative contracts. To mitigate counter party credit risk, the Company regularly reviews its credit exposure and the creditworthiness
of counter parties. The Company also enters into enforceable master netting arrangements with some of its counter parties. However, for financial reporting purposes, it is Company policy not to offset derivative assets and liabilities despite the existence of enforceable master netting arrangements with some of its counter parties.
Note 13 – Income Taxes
The provision (benefit) for taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
U.S. federal taxes:
|
|
|
|
|
|
|
Current
|
|
$
|
(14
|
)
|
|
$
|
13
|
|
|
$
|
16
|
|
Deferred
|
|
(30
|
)
|
|
8
|
|
|
(38
|
)
|
State taxes:
|
|
|
|
|
|
|
Current
|
|
15
|
|
|
19
|
|
|
3
|
|
Deferred
|
|
(25
|
)
|
|
—
|
|
|
10
|
|
Total income tax expense (benefit)
|
|
$
|
(54
|
)
|
|
$
|
40
|
|
|
$
|
(9
|
)
|
Our effective tax rate was 7%, 36% and (5)% for fiscal years ended March 31, 2020, 2019 and 2018, respectively. The Company’s effective tax rate for the fiscal year ended March 31, 2020 differs from the U.S. federal statutory rate primarily due to the impairment of non-deductible goodwill and intangibles related to the loss of the NGEN re-compete and the release of indemnified liabilities for unrecognized tax benefits. The differences between the U.S. federal statutory income tax rate and our effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
U.S. federal statutory rate
|
|
21
|
%
|
|
21
|
%
|
|
32
|
%
|
State income taxes, net of federal impact
|
|
1
|
%
|
|
5
|
%
|
|
4
|
%
|
Non-deductible transaction costs
|
|
—
|
%
|
|
3
|
%
|
|
4
|
%
|
Goodwill impairment
|
|
(18
|
)%
|
|
—
|
%
|
|
—
|
%
|
Remeasurement of state deferred income tax items
|
|
—
|
%
|
|
5
|
%
|
|
—
|
%
|
State valuation allowance
|
|
—
|
%
|
|
3
|
%
|
|
—
|
%
|
Research and development credit
|
|
—
|
%
|
|
(3
|
)%
|
|
—
|
%
|
Unrecognized tax benefits
|
|
4
|
%
|
|
1
|
%
|
|
—
|
%
|
Interest on federal tax refund, net of tax expense
|
|
—
|
%
|
|
(2
|
)%
|
|
—
|
%
|
Impact of Tax Act
|
|
—
|
%
|
|
1
|
%
|
|
(44
|
)%
|
Other items, net
|
|
(1
|
)%
|
|
2
|
%
|
|
(1
|
)%
|
Effective tax rate
|
|
7
|
%
|
|
36
|
%
|
|
(5
|
)%
|
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). As a fiscal year taxpayer with an October 31 tax year-end, the Company was not subject to many of the tax law provisions until fiscal year 2019; however, GAAP principles required the Company to revalue its deferred tax assets and liabilities with resulting tax effects accounted for in the reporting period of enactment including retroactive effects during fiscal year 2018. Perspecta’s fiscal year ended March 31, 2019 contained multiple tax years, one of which began prior to the enactment of the Tax Act and ended upon the Spin-Off on May 31, 2018 and, therefore, the Company was required to blend its federal tax rate to take into account a differing applicable federal tax rate for the portion of the fiscal year preceding the Spin-Off and the portion thereafter. The Company’s net income before taxes for the fiscal year ended March 31, 2019 relating to the period prior to the Spin-Off was subject to federal tax on DXC’s tax return at an applicable federal tax rate of 23.3% under Section 15 of the Code. The Company computed a weighted federal tax rate based upon the number of days that the Company’s fiscal year would be taxed at 23.3% and the number of days that the Company’s federal tax rate was reduced to 21%. For fiscal year 2019, the Company had an estimated blended corporate U.S. federal income tax rate of approximately 21.4%.
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. For certain of our tax years ending prior to the Spin-Off, we may have joint and several liability with DXC, HPE and/or HP Inc. to the Internal Revenue Service (“IRS”) for the consolidated U.S. federal income taxes of DXC or predecessor consolidated
groups relating to the taxable periods in which we were part of that group. However, the TMA specifies the portion, if any, of this tax liability for which we would bear responsibility, and DXC agrees to indemnify us against any amounts for which we are not responsible. Except for Vencore HC and KGS HC, the Company is generally only responsible for tax assessments, penalties and interest allocable to periods (or portions of periods) beginning after the Spin-Off and Mergers. The TMA also provides special rules for allocating tax liabilities in the event the Spin-Off is determined not to be tax-free. Though valid as between the parties, the TMA is not binding on the IRS.
The Company had receivables for income tax refunds from the IRS and various state tax authorities of approximately $70 million at March 31, 2020, for which it must remit to DXC under the TMA and has a corresponding payable. The receivable is included in other receivables and other assets and the payable is included in accrued expenses on our balance sheets.
Deferred Income Taxes
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The significant components of deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
Deferred tax assets:
|
|
|
|
|
Loss carryovers
|
|
$
|
83
|
|
|
$
|
91
|
|
Employee and retiree benefits
|
|
105
|
|
|
54
|
|
Accrued liabilities
|
|
15
|
|
|
22
|
|
Finance lease obligations
|
|
2
|
|
|
16
|
|
Operating lease obligations
|
|
45
|
|
|
—
|
|
Interest expense carryforward
|
|
11
|
|
|
11
|
|
Other
|
|
1
|
|
|
4
|
|
Deferred tax assets, gross
|
|
262
|
|
|
198
|
|
Valuation allowance
|
|
(18
|
)
|
|
(13
|
)
|
Deferred tax assets, net of valuation allowance
|
|
244
|
|
|
185
|
|
Deferred tax liabilities:
|
|
|
|
|
Purchased intangible assets
|
|
233
|
|
|
312
|
|
Fixed assets
|
|
53
|
|
|
30
|
|
Operating lease assets
|
|
42
|
|
|
—
|
|
Other
|
|
3
|
|
|
1
|
|
Deferred tax liabilities
|
|
331
|
|
|
343
|
|
Net deferred tax liabilities
|
|
$
|
87
|
|
|
$
|
158
|
|
As of March 31, 2020 and 2019, deferred tax assets in the aggregate amount of $27 million and $13 million are included in other assets on the accompanying balance sheets related to individual tax jurisdictions with net deferred tax assets.
The Company has federal net operating loss (“NOL”) carryforwards of $260 million, $55 million net of tax, which will begin to expire in 2033 and state NOL carryforwards of $28 million which will begin to expire in 2024. There is no valuation allowance against the federal NOL.
Unrecognized Tax Benefits
The following table summarizes the activity related to the Company’s unrecognized tax benefits (excluding interest and penalties and related tax attributes), included in other long-term liabilities on the accompanying balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Balance at beginning of year
|
|
$
|
52
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Decrease for prior-year tax positions
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
Decrease for transfers to Parent
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Increase for prior-year tax positions
|
|
12
|
|
|
45
|
|
|
—
|
|
Increase for current year tax positions
|
|
—
|
|
|
1
|
|
|
—
|
|
Balance at end of year
|
|
$
|
39
|
|
|
$
|
52
|
|
|
$
|
8
|
|
Up to $39 million, $52 million and $8 million of the Company’s unrecognized tax benefits as of March 31, 2020, 2019 and 2018, respectively, would affect our effective tax rate if realized. During the year ended March 31, 2020, $25 million of indemnified pre-Spin-Off uncertain tax positions were considered effectively settled per Company policy and released as a benefit to income tax expense in the current year.
The Company believes it is reasonably possible that certain liabilities for unrecognized tax benefits, all of which were transferred from Parent, may decrease by approximately $5 million during next year resulting from the settlement of appeals in fiscal year 2008 and 2012 related to the USPS entities. Any amounts that would be recognized are offset by changes to indemnification assets.
The Company accrues interest related to uncertain tax positions and penalties as a component of income tax expense. Interest related to open tax exam years before the Spin-Off is fully indemnified under the TMA. The company recognized interest of approximately $8 million, $9 million and $1 million for the fiscal years ended March 31, 2020, 2019 and 2018 (carve-out basis), respectively.
For the periods prior to the Spin-Off, the unrecognized tax benefits reflected in the financial statements were determined using the separate return method. As a result of the Spin-Off, the Company recognized $52 million of liabilities for unrecognized tax benefits determined on an asset and liability method that stay with the legal entities included in the Spin-Off of the USPS business from DXC, which were recorded through Parent company investment, net of corresponding indemnification assets.
The Company engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. The Company is subject to income tax in the U.S. at the federal and state level and is subject to routine corporate income tax audits in these jurisdictions. 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 2012 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.
The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal and state tax audits. We regularly assess the likely outcomes of these audits in consultation with the indemnifying parties to determine the appropriateness of unrecognized tax benefits. We adjust our unrecognized tax benefits to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a specific audit. Income tax audits, however, are inherently unpredictable and the Company may not accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the provision (benefit) for taxes on the statements of operations and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.
Note 14 – Share-based Compensation
In May 2018, prior to the Spin-Off and Mergers, the Board of Directors approved the Perspecta Inc. 2018 Omnibus Incentive Plan (the “2018 Employee Equity Plan”) and 2018 Non-employee Director Incentive Plan (the “2018 Director Equity Plan”). Both plans will continue in effect for 10 years. The terms of the 2018 Employee Equity Plan and 2018 Director Equity Plan are substantially similar to the terms of DXC equity plans.
The 2018 Employee Equity Plan allows the Company to grant an aggregate of 9,500,000 shares of its common stock, which includes any shares resulting from the adjustment of the DXC outstanding equity awards. All Perspecta employees are eligible to participate under this plan. The Human Resources and Compensation Committee of the Board of Directors has the broad authority to grant awards and administer the plan. The Board of Directors has the authority to amend the plan, subject to shareholders’ approval for material modifications. The 2018 Employee Equity Plan allows the Company to grant restricted stock awards, RSUs, PSUs, stock options, stock appreciation rights (“SARs”) and other share-based awards. At March 31, 2020, the Company had approximately 6,126,834 shares available to grant based on the number of target equity awards outstanding under the 2018 Employee Equity Plan.
The 2018 Director Equity Plan provides for granting restricted stock and RSUs to non-employee directors. Any non-employee director is eligible to participate. The maximum aggregate number of shares that may be issued under the 2018
Director Equity Plan is 310,000. The plan is administered by the Board of Directors or in the Board of Directors’ discretion, the Human Resources and Compensation Committee of the Board of Directors. As of March 31, 2020, the Company had approximately 203,400 shares available to grant under the 2018 Director Equity Plan.
Equity awards generally vest one to three years from the date of grant and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. During the vesting period, ownership of the award cannot be transferred. RSUs and PSUs do not have the voting rights of common stock and the underlying shares are not considered issued and outstanding upon grant. RSUs and PSUs have forfeitable dividend equivalent rights equal to the dividend paid on common stock, which are paid upon vesting. Perspecta does not offer an employee stock purchase plan (“ESPP”).
Parent’s Share-based Incentive Compensation Plans
Prior to the Spin-Off and Mergers, certain of USPS’s employees participated in share-based compensation plans sponsored by Parent. Parent’s share-based compensation plans included incentive compensation plans and an ESPP. All awards granted under the plans were based on Parent’s common shares and, as such, are not reflected on the statements of equity. Share-based compensation expense included expense attributable to USPS based on the awards and terms previously granted under the incentive compensation plan to USPS’s employees and an allocation of Parent’s corporate and shared functional employee expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that USPS would have experienced as an independent company for the periods presented.
Parent’s share-based incentive compensation plans included equity plans adopted in 2017, 2015, 2004 and 2000, as amended (“Principal Equity Plans”). Share-based awards granted from the Principal Equity Plans included restricted stock awards, stock options, and performance-based awards. Employees who meet certain employment qualifications were eligible to receive share-based awards. The outstanding stock options and unvested RSUs and PSUs granted under the Principal Equity Plans were converted upon the Spin-Off and Mergers into economically equivalent Perspecta stock options, RSUs and PSUs, with terms and conditions substantially similar to the terms of such awards prior to the Spin-Off and Mergers. There was no incremental share-based compensation expense recognized as a result of this modification of the awards. Restricted stock awards were accounted for the same as under the 2018 Employee Equity Plan.
Stock options granted under the Principal Equity Plans were generally non-qualified stock options, but the Principal Equity Plans permitted certain options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vested over three to four years from the date of grant. The exercise price of a stock option was equal to the closing price of Parent’s stock on the option grant date.
Share-based Compensation Expense
Share-based compensation expense and the resulting tax benefits recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Share-based compensation expense
|
|
$
|
23
|
|
|
$
|
11
|
|
|
$
|
6
|
|
Income tax benefit
|
|
5
|
|
|
3
|
|
|
2
|
|
Share-based compensation expense, net of tax
|
|
$
|
18
|
|
|
$
|
8
|
|
|
$
|
4
|
|
Time-based Restricted Stock Units
Perspecta grants RSUs to its employees and non-employee directors. RSUs generally vest one to three years from the date of grant and are subject to forfeiture if employees or non-employee directors terminate prior to the lapse of the restrictions. One RSU represents the right to receive one share of Perspecta common stock upon vesting, plus any dividend equivalents accrued during the vesting period.
A summary of RSU activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
(in thousands, except per share amounts)
|
|
Shares
|
|
Weighted Average Grant Date Fair Value Per Share
|
Outstanding at beginning of year
|
|
1,343
|
|
|
$
|
23
|
|
Granted
|
|
628
|
|
|
23
|
|
Vested
|
|
(318
|
)
|
|
24
|
|
Forfeited
|
|
(164
|
)
|
|
23
|
|
Outstanding at end of year
|
|
1,489
|
|
|
$
|
23
|
|
Unrecognized compensation expense for RSUs as of March 31, 2020 was $22 million, expected to be recognized over a weighted-average period of 1.7 years. The total vesting date fair value of RSUs vested for the fiscal years ended March 31, 2020 and 2019 was $8 million and $3 million, respectively. The total grant date fair value of restricted stock unit awards vested for the fiscal years ended March 31, 2020, 2019 and 2018 was $8 million, $1 million and $3 million, respectively.
Performance-based Restricted Stock Units
The Company grants PSUs under the 2018 Employee Equity Plan. The number of PSUs that the employees will receive depends on the Company’s achievement of two performance goals during the three year performance periods. The performance goals under the Program are based on (i) the Company’s adjusted EPS at the end of the performance period, and (ii) the Company’s cumulative adjusted free cash flow for the performance period. The PSUs will only be eligible to vest following the expiration of the three-year performance period. Actual shares vested will be subject to both continued employment by the Company (barring certain exceptions allowing for partial performance periods) and actual financial measures achieved. The actual number of shares of common stock that will be issued to each participant at the end of the applicable performance period will be determined and are subject to a minimum and maximum performance level. The performance period for PSUs granted during fiscal year 2018 ended on March 31, 2020. Performance achievements were measured against pre-determined performance goals resulting in the vesting of 187% of the target fiscal year 2018 award in the first quarter of fiscal year 2021, as certified by the Compensation Committee on May 20, 2020. As of March 31, 2020, shares granted during fiscal years 2020 and 2019 are within year one and year two of the performance period, respectively, and therefore have not vested.
A summary of PSU activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
(in thousands, except per share amounts)
|
|
Shares
|
|
Weighted Average Grant Date Fair Value Per Share
|
Outstanding at beginning of year
|
|
558
|
|
|
$
|
24
|
|
Granted
|
|
923
|
|
|
23
|
|
Forfeited
|
|
(114
|
)
|
|
24
|
|
Outstanding at end of year
|
|
1,367
|
|
|
$
|
24
|
|
Unrecognized compensation expense for PSUs as of March 31, 2020 was $13 million, expected to be recognized over a weighted-average period of 1.6 years. No PSUs vested for the fiscal year ended March 31, 2020.
Stock Options
All remaining outstanding stock options were issued by Parent prior to the Spin-Off and Mergers, upon which they were converted to options to purchase Perspecta stock.
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
(in millions, except shares in thousands and per share amounts in ones)
|
|
Shares
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Remaining Contractual Term in Years
|
|
Intrinsic Value
|
Outstanding at beginning of year
|
|
162
|
|
|
$
|
12
|
|
|
|
|
|
Exercised
|
|
(57
|
)
|
|
10
|
|
|
|
|
|
Forfeited
|
|
(3
|
)
|
|
11
|
|
|
|
|
|
Outstanding, vested and exercisable at end of year
|
|
102
|
|
|
$
|
13
|
|
|
2.7
|
|
$
|
520
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that certain option holders would have realized had all option holders exercised their options on the last trading day of fiscal year ended March 31, 2020. The aggregate intrinsic value is the difference between Perspecta’s closing share price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised by certain employees during the fiscal years ended March 31, 2020, 2019 and 2018 was $1 million, less than $1 million and $3 million, respectively.
Cash received from option exercises was less than $1 million during both fiscal years ended March 31, 2020 and 2019, respectively. Cash received from option exercises and purchases under Parent’s ESPP by USPS employees was $3 million during the fiscal year ended March 31, 2018. The net effect of this transaction is reflected within transfers to Parent, net on the statement of cash flows for the fiscal year ended March 31, 2018.
Note 15 – Restructuring
Restructuring charges of $17 million, $10 million and $14 million have been recorded by the Company during the fiscal years ended March 31, 2020, 2019 and 2018, respectively, based on restructuring activities impacting certain employees and infrastructure. We recorded restructuring charges based on estimated employee terminations and site closure and consolidation plans. We accrued for severance and other employee separation costs under these actions when it was probable that benefits would be paid and the amount was reasonably estimable. The rates used in determining severance accruals were based on existing plans, historical experiences and negotiated settlements.
Fiscal 2020 Restructuring Plan
In connection with the corporate systems integration and rationalization, management approved a restructuring plan (the “2020 Plan”) in the fourth quarter of fiscal year 2020 to reduce our operating cost structure, improve competitiveness and facilitate the achievement of acceptable and sustainable profitability. The restructuring initiatives include consolidation of infrastructure to achieve operating efficiencies, optimize utilization of facilities and infrastructure, and strengthen the Company’s competitiveness. The 2020 Plan also focuses on transitioning the Company’s leveraged legacy delivery model to a customer-focused model that will facilitate a more effective decision-making process tailored to our customer needs. There were no related liabilities for this plan at March 31, 2020.
Acquired Restructuring Plan
As a result of the Mergers, the Company acquired deferred costs of $7 million associated with restructuring initiatives from prior years that were reimbursable as agreed upon by the Defense Contract Management Agency. During the fiscal year ended March 31, 2019, these remaining costs were recognized as restructuring expense.
Fiscal 2019 Restructuring Plan
In connection with the Spin-Off and Mergers, management approved a restructuring plan (the “2019 Plan”) in November 2018 to better align Perspecta to its mission and business objectives. The restructuring initiatives included a reduction in workforce as well as consolidation of infrastructure to achieve operating efficiencies, optimize utilization of facilities, and strengthen the Company’s competitiveness. The 2019 Plan also focused on transitioning the Company’s legacy delivery model from a centralized, services-focused model to a decentralized, customer-focused model that facilitated a more effective decision-making process tailored to our customer needs. During the fiscal year ended March 31, 2019, expenses of $3 million were recognized and paid under this plan.
Fiscal 2018 Restructuring Plan
On June 30, 2017, Parent approved a restructuring plan (the “2018 Plan”). The restructuring initiatives were intended to reduce Parent’s cost structure and related operating costs, improve its competitiveness, and facilitate the achievement of acceptable and sustainable profitability. The 2018 Plan focuses mainly on optimizing specific aspects of workforce and re-balancing the pyramid structure. Additionally, this plan included facility restructuring.
Note 16 – Pension 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 OPEB liabilities are primarily due to market fluctuations of investments, actuarial assumptions for the measurement of liabilities and changes in interest rates.
Defined Benefit Plans
As a result of the Mergers, the Company sponsors defined benefit pension and retiree medical plans for the benefit of eligible employees acquired in the Mergers. At the date of the Mergers, the net projected benefit obligations and assets were $489 million and $419 million, respectively, of which $7 million was recorded in other assets and $77 million in other long-term liabilities. The Company did not contribute to the defined benefit pension and other postretirement benefit plans during the fiscal years ended March 31, 2020 and 2019.
The following table provides a reconciliation of the Company’s benefit obligation, plan assets and funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
|
Fiscal Year Ended March 31, 2019
|
(in millions)
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Projected benefit obligation at beginning of year
|
|
$
|
491
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Benefit obligation assumed as a result of the Mergers
|
|
—
|
|
|
—
|
|
|
482
|
|
|
7
|
|
Service cost
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest cost
|
|
18
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Actuarial loss
|
|
35
|
|
|
—
|
|
|
13
|
|
|
1
|
|
Plan participant contributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Benefits paid
|
|
(21
|
)
|
|
—
|
|
|
(20
|
)
|
|
(2
|
)
|
Projected benefit obligation at end of year
|
|
523
|
|
|
7
|
|
|
491
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
388
|
|
|
13
|
|
|
—
|
|
|
—
|
|
Assets assumed as a result of the Mergers
|
|
—
|
|
|
—
|
|
|
405
|
|
|
14
|
|
Actual return on plan assets
|
|
(8
|
)
|
|
(1
|
)
|
|
3
|
|
|
—
|
|
Plan participant contributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Expenses paid
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(21
|
)
|
|
—
|
|
|
(20
|
)
|
|
(2
|
)
|
Fair value of plan assets at end of year
|
|
357
|
|
|
12
|
|
|
388
|
|
|
13
|
|
(Unfunded) funded status at end of year
|
|
$
|
(166
|
)
|
|
$
|
5
|
|
|
$
|
(103
|
)
|
|
$
|
6
|
|
The following table provides amounts recognized on our balance sheet for the funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
(in millions)
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Other assets
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Other long-term liabilities
|
|
166
|
|
|
—
|
|
|
103
|
|
|
—
|
|
Accumulated other comprehensive loss
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
The components of net periodic benefit cost recognized in other expense, net on our statement of operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
|
Fiscal Year Ended March 31, 2019
|
(in millions)
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
18
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Expected return on plan assets
|
|
(28
|
)
|
|
—
|
|
|
(24
|
)
|
|
(1
|
)
|
Recognition of net actuarial loss
|
|
72
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Net periodic benefit cost (benefit)
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
(1
|
)
|
The weighted-average rates used to determine the benefit obligation at March 31, 2020 and net periodic benefit cost for the subsequent year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Discount rate
|
|
3.7
|
%
|
|
3.5
|
%
|
|
4.1
|
%
|
|
4.0
|
%
|
Expected long-term rate of return on assets
|
|
7.4
|
%
|
|
6.2
|
%
|
|
7.8
|
%
|
|
6.7
|
%
|
Plan Asset Allocations
The Company has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. The objectives for the assets of the defined benefit pension and retiree medical plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long‑term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach, and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
Pursuant to the investment policies established, the following target asset allocations have been established and will be utilized for the qualified defined benefit pension plan assets as of March 31, 2020:
|
|
|
|
|
|
|
|
Asset Category
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Cash
|
|
2.5
|
%
|
|
5.0
|
%
|
Equity funds
|
|
37.5
|
%
|
|
50.0
|
%
|
Fixed income
|
|
17.5
|
%
|
|
45.0
|
%
|
Real estate funds
|
|
10.0
|
%
|
|
—
|
%
|
Other
|
|
32.5
|
%
|
|
—
|
%
|
Fair Value of Plan Assets
The rules related to accounting for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not included on our balance sheets. The following table presents the fair value of our defined benefit pension plan and retiree medical plan assets at March 31, 2019 by asset category and their level within the fair value hierarchy, which has three levels based on the uncertainty of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. Certain other investments are measured at fair value using their net asset value (“NAV”) per share and do not have readily determined values and are thus not subject to leveling in the fair value hierarchy. The NAV is the total value of the fund divided by the number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investments measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Equity funds
|
|
17
|
|
|
43
|
|
|
—
|
|
|
60
|
|
|
18
|
|
|
104
|
|
|
—
|
|
|
122
|
|
Fixed income
|
|
29
|
|
|
6
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Real estate funds
|
|
—
|
|
|
—
|
|
|
46
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
53
|
|
Hedge funds
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
Total investments measured at fair value
|
|
$
|
46
|
|
|
$
|
55
|
|
|
$
|
54
|
|
|
155
|
|
|
$
|
18
|
|
|
$
|
151
|
|
|
$
|
78
|
|
|
247
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity funds
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
20
|
|
Fixed income
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
32
|
|
Hedge funds
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
102
|
|
Total investments measured at NAV
|
|
|
|
|
|
|
|
214
|
|
|
|
|
|
|
|
|
154
|
|
Total investments
|
|
|
|
|
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
$
|
401
|
|
Changes in fair value measurements of level 3 investments for the defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Real Estate Funds
|
|
Hedge Funds
|
|
Total
|
Balance at April 1, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets assumed as a result of the Mergers
|
|
49
|
|
|
28
|
|
|
77
|
|
Actual return on plan assets held at the reporting date
|
|
5
|
|
|
(3
|
)
|
|
2
|
|
Purchases, sales and settlements
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance at March 31, 2019
|
|
53
|
|
|
25
|
|
|
78
|
|
Actual return on plan assets held at the reporting date
|
|
2
|
|
|
(1
|
)
|
|
1
|
|
Purchases, sales and settlements
|
|
(9
|
)
|
|
(16
|
)
|
|
(25
|
)
|
Balance at March 31, 2020
|
|
$
|
46
|
|
|
$
|
8
|
|
|
$
|
54
|
|
Valuation Techniques
Cash equivalents are mostly comprised of short‑term money‑market instruments and are valued at cost, which approximates fair value.
Equity funds are categorized as Level 1 if the securities trade on national or international exchanges and are valued at their last reported closing price. Equity assets in commingled funds reporting a NAV are categorized as Level 2 and valued using published quotes of securities with similar characteristics. Certain commingled equity funds, consisting of equity mutual funds, are valued using the NAV.
Fixed income funds are categorized as Level 2 if investments in corporate bonds are primarily investment grade bonds, generally priced using model-based pricing methods that use observable market data as inputs. Broker dealer bids or quotes of securities with similar characteristics may also be used. Certain fixed income commingled funds, consisting of emerging market bonds, are valued using NAV.
The real estate and hedge funds categorized as Level 3 are valued using nominal methods based on valuation models that include significant unobservable inputs and cannot be corroborated using verifiable observable market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity. If a change in Level 3 inputs occur, the resulting amount might result in a significantly higher or lower fair value measurement. Valuations for hedge funds are valued by independent administrators. Certain hedge funds are valued using NAV and are generally based on the valuation of the underlying investments. Investments in hedge funds have no discernible concentration in nature of risk.
Expected Future Contributions and Benefit Payments
|
|
|
|
|
|
|
|
|
|
Fiscal Year (in millions)
|
|
Defined Benefit Pension Plan
|
|
Retiree Medical Plan
|
Employer contributions:
|
|
|
|
|
2021
|
|
$
|
7
|
|
|
$
|
—
|
|
Benefit payments:
|
|
|
|
|
2021
|
|
$
|
26
|
|
|
$
|
1
|
|
2022
|
|
25
|
|
|
—
|
|
2023
|
|
26
|
|
|
1
|
|
2024
|
|
26
|
|
|
—
|
|
2025
|
|
27
|
|
|
1
|
|
2025 - 2029
|
|
144
|
|
|
2
|
|
Total
|
|
$
|
274
|
|
|
$
|
5
|
|
Defined Contribution Plans
The Company offers various defined contribution plans for employees. We match most employees’ eligible contributions at rates specified in the plan documents. Our defined contribution expense was $44 million, $33 million and $15 million during the fiscal years ended March 31, 2020, 2019 and 2018, respectively. In April 2019, the Company terminated two acquired defined contribution plans and transferred the employees and their related assets into the legacy USPS 401(k). That plan was subsequently amended and is now the primary defined contribution plan, aligning benefits across Perspecta. Subsequent to the amendment, the Company’s matching contributions are deposited in a participant’s account twice per year based on each participant’s contributions during the preceding period. The Company matches 100% of the participant’s contributions up to the first 3% of the participant’s annual salary, and 50% on the next 2% of the participant’s annual salary, subject to statutory limitations.
Deferred Compensation Plans
On October 9, 2018, Perspecta’s Board of Directors, upon the recommendation of its Human Resources and Compensation Committee, adopted a framework for a new, Company-sponsored non-qualified deferred compensation plan (the “Plan”), to replace the existing deferred compensation plans. The Plan was effective January 1, 2019.
The Plan is an unfunded, non-qualified deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees of the Company, including the Company’s principal executive officer, principal financial officer and other “named executive officers.” Non-employee directors of the Company are also eligible to participate and defer their cash fees under the Plan.
The Plan is an account-based plan that allows participants to defer voluntarily the payment of current compensation to future years. The Plan permits each participant to defer cash compensation up to any limits set forth in the Plan, which amounts are credited to a bookkeeping account established for the participant under the Plan. The amounts credited to a participant’s account are fully vested. The Plan does not provide for any employer contributions.
Amounts credited to a participant’s account are indexed to one or more deemed investment alternatives chosen by the participant from a range of alternatives available under the Plan. Each participant’s account is adjusted to reflect gains and losses based on the performance of the selected investment alternatives. None of the deemed investment options provide for an above-market or preferential rate of return.
A participant may receive distributions from the Plan upon separation from service or on in-service dates specified by the participant, in the form of distribution elected by the participant available under the Plan. There will be a six-month delay for commencement of payment upon termination of employment to any “specified employee” as defined under Internal Revenue Code Section 409A. The Human Resources and Compensation Committee (or its authorized delegate) will be the administrator of the Plan.
Under the deferred compensation plans described above, certain management and highly compensated employees are eligible to defer up to 75% of their regular salary that exceeds the limitation set forth in the Internal Revenue Code of 1986 (the “Code”) Section 401(a)(17) and all or a portion of their incentive compensation. Non-employee directors are eligible to defer up to 100% of their cash compensation. As of March 31, 2020 and 2019, a deferred compensation liability of $12 million and $13 million, respectively, was included in other long-term liabilities on the accompanying balance sheets.
Note 17 – Related Party Transactions
Allocation of Corporate Expenses
The statements of operations include an allocation of general corporate expenses from Parent, recorded within costs of services and selling, general and administrative, for certain management and support functions which were provided on a centralized basis within Parent. These allocations were $24 million and $158 million for the period from April 1, 2018 to May 31, 2018 and the fiscal year ended March 31, 2018, respectively.
Management of the Company and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, USPS. These allocations may not, however, reflect the expense USPS would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if USPS had been a standalone 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.
Transfers to Parent, net
Transfers to Parent, net are included within Parent company investment. The components of the transfers to Parent, net on the statements of changes in equity for periods presented prior to the Spin-Off and Mergers were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Two Months Ended May 31, 2018
|
|
Fiscal Year Ended
March 31, 2018
|
Cash pooling and general financing activities
|
|
$
|
(176
|
)
|
|
$
|
(506
|
)
|
Corporate allocations
|
|
24
|
|
|
158
|
|
Income taxes
|
|
7
|
|
|
19
|
|
Transfers to Parent, net
|
|
$
|
(145
|
)
|
|
$
|
(329
|
)
|
Related Party Transactions
For the fiscal years ended March 31, 2020 and 2019, the Company recognized related party revenue from DXC of $12 million and $13 million, respectively, and incurred related party obligations to DXC of $113 million and $74 million, respectively.
See Note 13 – “Income Taxes” for a description of the TMA between Perspecta and DXC.
Note 18 – Shareholders’ Equity
Description of Capital Stock
The Company has authorized share capital consisting of 750 million shares of common stock, par value $0.01 per share, and 1 million shares of preferred stock, par value $0.01 per share.
Each share of common stock is equal in all respects to every other share of common stock of the Company. Each share of common stock is entitled to one vote per share at each annual or special meeting of shareholders for the election of
directors and upon any other matter coming before such meeting. Subject to all the rights of the preferred stock, dividends may be paid to holders of common stock as and when declared by the Board of Directors.
Cash Dividends
During the fiscal year ended March 31, 2020, the Board of Directors declared cash dividends to our shareholders of approximately $39 million in the aggregate, of which approximately $30 million had been paid as of March 31, 2020 and approximately $10 million of which was paid on April 15, 2020. During the fiscal year ended March 31, 2019, the Board of Directors declared cash dividends to our shareholders of approximately $33 million in the aggregate, of which $25 million had been paid as of March 31, 2019 and $8 million of which was paid on April 16, 2019.
On May 21, 2020, the Board of Directors declared a dividend of $0.07 per common share payable on July 15, 2020 to common shareholders of record at the close of business on June 11, 2020.
Share Repurchase Program
On June 1, 2018, the Board of Directors authorized up to $400 million for future repurchases of outstanding shares of Perspecta’s common stock. Repurchases may be made at the Company’s discretion from time to time on the open market depending on market conditions. The repurchase program has no time limit, does not obligate the Company to make any repurchases and may be suspended for periods or discontinued at any time. During the fiscal years ended March 31, 2020 and 2019, the Company repurchased 2.8 million and 2.7 million shares, respectively, of its common stock for aggregate consideration of $65 million and $60 million, respectively. The shares are reported as treasury shares at cost on the accompanying balance sheets. The total remaining authorization for future common share repurchases under the share repurchase program was $275 million as of March 31, 2020.
Note 19 – Segment Information
The Company’s chief operating decision maker, the Chief Executive Officer, evaluates Perspecta’s consolidated operations based on two reportable segments: (1) Defense and Intelligence, and (2) Civilian and Health Care. 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.
In the following tables, certain corporate activity is reported separately to reconcile the Company’s segment information to the statements of operations. The accounting policies of the reportable segments are the same as those described herein in Note 1 – “Overview and Summary of Significant Accounting Policies.”
Segment Measures
The following tables summarize operating results regularly provided to the chief operating decision maker by reportable segment and a reconciliation of those reporting results to the statements of operations for the relevant periods.
Revenue
Our revenue by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Defense and Intelligence
|
|
$
|
3,101
|
|
|
$
|
2,587
|
|
|
$
|
1,416
|
|
Civilian and Health Care
|
|
1,403
|
|
|
1,443
|
|
|
1,403
|
|
Total revenue
|
|
$
|
4,504
|
|
|
$
|
4,030
|
|
|
$
|
2,819
|
|
Segment Profit
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 certain operating expenses managed at the corporate level. These unallocated costs include certain corporate function costs, share-based compensation expense, amortization of acquired intangible assets, impairment charges, certain nonrecoverable restructuring costs, separation, transaction and integration-related costs, net periodic benefit cost and gain or loss on sale of assets.
Our segment profit by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Defense and Intelligence
|
|
$
|
444
|
|
|
$
|
331
|
|
|
$
|
168
|
|
Civilian and Health Care
|
|
152
|
|
|
196
|
|
|
222
|
|
Total segment profit
|
|
596
|
|
|
527
|
|
|
390
|
|
Not allocated to segments:
|
|
|
|
|
|
|
Share-based compensation
|
|
(23
|
)
|
|
(11
|
)
|
|
(6
|
)
|
Amortization of acquired intangible assets
|
|
(206
|
)
|
|
(165
|
)
|
|
(69
|
)
|
Impairment charges
|
|
(796
|
)
|
|
—
|
|
|
—
|
|
Restructuring costs
|
|
(17
|
)
|
|
(4
|
)
|
|
(14
|
)
|
Separation, transaction and integration-related costs
|
|
(85
|
)
|
|
(106
|
)
|
|
(90
|
)
|
Interest expense, net
|
|
(137
|
)
|
|
(121
|
)
|
|
(12
|
)
|
Other unallocated, net
|
|
(62
|
)
|
|
(8
|
)
|
|
—
|
|
(Loss) income before taxes
|
|
$
|
(730
|
)
|
|
$
|
112
|
|
|
$
|
199
|
|
We incurred non-cash, pre-tax impairment charges of approximately $796 million in the fourth quarter of fiscal year 2020 as a result of the loss of the NGEN re-compete discussed further in Note 8 – “Goodwill” and Note 9 – “Intangible Assets.” These charges were recognized at a corporate level and were not allocated to the segments.
Total Assets by Segment
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.
Depreciation and Amortization
Our depreciation and amortization expense by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in millions)
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2018
|
Defense and Intelligence
|
|
$
|
66
|
|
|
$
|
74
|
|
|
$
|
34
|
|
Civilian and Health Care
|
|
102
|
|
|
91
|
|
|
64
|
|
Amortization of acquired intangible assets
|
|
206
|
|
|
165
|
|
|
69
|
|
Total depreciation and amortization
|
|
$
|
374
|
|
|
$
|
330
|
|
|
$
|
167
|
|
Note 20 – Commitments 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 between Perspecta and DXC (“SDA”) 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 March 31, 2020, 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 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. On December 23, 2019, a settlement was reached with 142 of the 145 opt-in plaintiffs. 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 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.
Commitments
In connection with the Spin-Off, the Company is obligated to purchase or license from DXC a specified amount of products and services each year for a two-year period ending July 31, 2020 (“Annual Minimum Purchase Amounts”). The Company is in the second and final year of that purchase obligation and continues to make purchases of products and services. If the Company, however, has not met or exceeded the Annual Minimum Purchase Amounts by that date, it must pay DXC the amount of the shortfall. In October 2019, the Company submitted a demand for arbitration claiming, among other things, that DXC breached its obligations under the relevant Spin-Off agreements by failing to properly apply credit against the Annual Minimum Purchase Amounts for eligible items purchased by the Company. The relevant agreements require such disagreements to be treated in a confidential manner through executive escalation, mediation and binding arbitration. Based on the status of the arbitration, we currently are unable to predict the impact of any resolution of this matter. Notwithstanding the arbitration claims, the Company would be obligated to pay DXC any amount of shortfall not addressed in or otherwise subject to the arbitration or covered by other possible defenses.
Guarantees
In the ordinary course of business, the Company may issue performance guarantees to certain of its clients, customers and other parties pursuant to which it has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, the Company would be obligated to perform over the term of the guarantee if a specified triggering event occurs as defined by the guarantee. The Company believes the likelihood of having to perform under a material guarantee is remote.
The Company has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of the Company’s non-performance under the contract or failure to comply with the terms of the financing arrangement, the Company could, under certain circumstances, be required to acquire certain assets related to the service contract. The Company believes the likelihood of having to acquire a material amount of assets under these arrangements is remote.
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 March 31, 2020. As of March 31, 2020, the Company had $40 million in outstanding surety bonds, of which less than $7 million expire in fiscal year 2021, and $33 million expire in fiscal year 2022.
Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. The Company also provides indemnifications to certain vendors and customers against claims of intellectual property infringement made by third parties arising from the use by such vendors and customers of the Company’s software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Note 21 – Subsequent Events
On May 21, 2020, the Company’s board of directors approved a change in the Company’s fiscal year end from March 31 to the Friday nearest March 31 of each year. As a result, fiscal year 2021 will contain 52 weeks and three days beginning April 1, 2020 and ending April 2, 2021. Future fiscal quarters will generally have 13 weeks, each ending on the Friday nearest the end of calendar months June, September, December and March.
Supplementary Data – Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2020
|
(in millions)
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Revenue
|
|
$
|
1,107
|
|
|
$
|
1,172
|
|
|
$
|
1,126
|
|
|
$
|
1,099
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
836
|
|
|
908
|
|
|
863
|
|
|
853
|
|
Selling, general and administrative
|
|
72
|
|
|
81
|
|
|
77
|
|
|
73
|
|
Depreciation and amortization
|
|
101
|
|
|
90
|
|
|
92
|
|
|
91
|
|
Impairment charges (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
796
|
|
Restructuring costs
|
|
2
|
|
|
2
|
|
|
—
|
|
|
13
|
|
Separation, transaction and integration-related costs
|
|
19
|
|
|
20
|
|
|
20
|
|
|
26
|
|
Interest expense, net
|
|
35
|
|
|
36
|
|
|
34
|
|
|
32
|
|
Other (income) expense, net
|
|
—
|
|
|
(2
|
)
|
|
(35
|
)
|
|
99
|
|
Total costs and expenses
|
|
1,065
|
|
|
1,135
|
|
|
1,051
|
|
|
1,983
|
|
Income (loss) before taxes
|
|
42
|
|
|
37
|
|
|
75
|
|
|
(884
|
)
|
Income tax expense
|
|
11
|
|
|
8
|
|
|
22
|
|
|
(95
|
)
|
Net income (loss)
|
|
$
|
31
|
|
|
$
|
29
|
|
|
$
|
53
|
|
|
$
|
(789
|
)
|
Earnings (loss) per common share(2):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.33
|
|
|
$
|
(4.89
|
)
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.33
|
|
|
$
|
(4.89
|
)
|
Cash dividends per common share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2019
|
(in millions)
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Revenue
|
|
$
|
793
|
|
|
$
|
1,068
|
|
|
$
|
1,075
|
|
|
$
|
1,094
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
597
|
|
|
813
|
|
|
816
|
|
|
817
|
|
Selling, general and administrative
|
|
61
|
|
|
89
|
|
|
76
|
|
|
74
|
|
Depreciation and amortization
|
|
64
|
|
|
74
|
|
|
76
|
|
|
116
|
|
Restructuring costs
|
|
—
|
|
|
2
|
|
|
1
|
|
|
7
|
|
Separation, transaction and integration-related costs
|
|
44
|
|
|
21
|
|
|
19
|
|
|
22
|
|
Interest expense, net
|
|
10
|
|
|
37
|
|
|
37
|
|
|
37
|
|
Other (income) expense, net
|
|
(24
|
)
|
|
(4
|
)
|
|
2
|
|
|
34
|
|
Total costs and expenses
|
|
752
|
|
|
1,032
|
|
|
1,027
|
|
|
1,107
|
|
Income (loss) before taxes
|
|
41
|
|
|
36
|
|
|
48
|
|
|
(13
|
)
|
Income tax expense
|
|
12
|
|
|
12
|
|
|
10
|
|
|
6
|
|
Net income (loss)
|
|
$
|
29
|
|
|
$
|
24
|
|
|
$
|
38
|
|
|
$
|
(19
|
)
|
Earnings (loss) per common share(2):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.15
|
|
|
$
|
0.23
|
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.23
|
|
|
$
|
(0.12
|
)
|
Cash dividends per common share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
(1) Impairment charges of $796 million were incurred during the quarter ended March 31, 2020 due to the loss of the NGEN re-compete as discussed in Note 8 – “Goodwill” and Note 9 – “Intangible Assets.”
(2) Earnings per common share are computed independently for each of the quarters presented and therefore may not sum to the totals for fiscal years 2020 and 2019 included on our statements of operations.