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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________

Commission File Number: 001-38033
PRSP-20201002_G1.JPG
PERSPECTA INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 82-3141520
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
14295 Park Meadow Drive, Chantilly, Virginia
20151
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (571) 313-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share PRSP New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐    
Emerging growth company ☐

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

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

160,963,698 shares of common stock, par value $0.01 per share, were outstanding as of October 30, 2020.


TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Index to Condensed Consolidated Financial Statements (unaudited)
Page
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1
PERSPECTA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions, except per share amounts)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Revenue $ 1,142  $ 1,172  $ 2,250  $ 2,279 
Costs of services 912  908  1,811  1,744 
Selling, general and administrative 65  81  127  153 
Depreciation and amortization 96  90  192  191 
Restructuring costs 13  2  31  4 
Separation, transaction and integration-related costs 12  20  27  39 
Interest expense, net 29  36  59  71 
Other (income) expense, net (4) (2) (19) (2)
Total costs and expenses 1,123  1,135  2,228  2,200 
Income before taxes 19  37  22  79 
Income tax expense 3  8  9  19 
Net income $ 16  $ 29  $ 13  $ 60 
Earnings per common share:
Basic $ 0.10  $ 0.18  $ 0.08  $ 0.37 
Diluted $ 0.10  $ 0.18  $ 0.08  $ 0.37 

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

2

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

Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Net income $ 16  $ 29  $ 13  $ 60 
Other comprehensive income, net of taxes:
Change in net unrealized losses on cash flow hedges:
Net unrealized gains (losses) arising during the period, net of tax effect of $0, $2, $2 and $8, respectively
—  (4) (7) (23)
Amounts reclassified to earnings, net of tax effect of $3, $1, $5 and $1, respectively
7  1  14  2 
Other comprehensive income (loss), net of taxes 7  (3) 7  (21)
Comprehensive income $ 23  $ 26  $ 20  $ 39 

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

3

PERSPECTA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share and share amounts) October 2, 2020 March 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 216  $ 147 
Receivables, net of allowance for doubtful accounts of $1 and $1
520  513 
Other receivables 40  45 
Prepaid expenses 68  81 
Other current assets 66  101 
Total current assets 910  887 
Property and equipment, net of accumulated depreciation of $245 and $193
278  307 
Goodwill 2,702  2,671 
Intangible assets, net of accumulated amortization of $629 and $515
1,087  1,193 
Other assets 329  347 
Total assets $ 5,306  $ 5,405 
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt $ 93  $ 89 
Current finance lease obligations 94  111 
Current operating lease obligations 33  39 
Accounts payable 187  218 
Accrued payroll and related costs 219  142 
Accrued expenses 382  385 
Other current liabilities 93  73 
Total current liabilities 1,101  1,057 
Long-term debt, net of current maturities 2,193  2,283 
Non-current finance lease obligations 108  136 
Non-current operating lease obligations 131  129 
Deferred tax liabilities 100  114 
Other long-term liabilities 304  329 
Total liabilities 3,937  4,048 
Commitments and contingencies

Shareholders’ equity:
Common stock, par value $0.01 per share; 750,000,000 shares authorized; 166,533,134 and 166,219,561 shares issued; 160,817,080 and 160,583,052 shares outstanding
2  2 
Additional paid-in capital 2,260  2,266 
Accumulated deficit (700) (713)
Accumulated other comprehensive loss (62) (69)
Treasury shares at cost, 5,716,054 shares and 5,636,509 shares
(131) (129)
Total shareholders’ equity 1,369  1,357 
Total liabilities and shareholders’ equity $ 5,306  $ 5,405 

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

4

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

(in millions, except shares in thousands and per share amounts in ones)
Common Stock
Additional
Paid-in Capital 		Accumulated Deficit Accumulated Other
Comprehensive Loss 		Treasury Shares Total Shareholders’ Equity
Shares Amount
Balance at March 31, 2020 166,220  $ 2  $ 2,266  $ (713) $ (69) $ (129) $ 1,357 
Net loss
—  —  —  (3) —  —  (3)
Share-based compensation
—  —  7  —  —  —  7 
Stock option exercises and other common stock transactions
250  —  —  —  —  (2) (2)
Dividends declared ($0.07 per common share)
—  —  (11) —  —  —  (11)
Balance at July 3, 2020 166,470  2  2,262  (716) (69) (131) 1,348 
Net income
—  —  —  16  —  —  16 
Other comprehensive income, net of tax —  —  —  —  7  —  7 
Share-based compensation
—  —  10  —  —  —  10 
Stock option exercises and other common stock transactions
63  —  —  —  —  —  — 
Dividends declared ($0.07 per common share)
—  —  (12) —  —  —  (12)
Balance at October 2, 2020 166,533 $ 2  $ 2,260  $ (700) $ (62) $ (131) $ 1,369 

(in millions, except shares in thousands and per share amounts in ones)
Common Stock
Additional
Paid-in Capital 		Retained Earnings Accumulated Other
Comprehensive Loss 		Treasury Shares Total Shareholders’ Equity
Shares Amount
Balance at March 31, 2019 165,845  $ 2  $ 2,242  $ 2  $ (23) $ (61) $ 2,162 
Net income
—  —  —  31  —  —  31 
Other comprehensive loss, net of tax
—  —  —  —  (18) —  (18)
Share-based compensation expense
—  —  5  —  —  —  5 
Repurchases of common stock
—  —  —  —  —  (15) (15)
Stock option exercises and other common stock transactions
42  —  —  —  —  —  — 
Dividends declared ($0.06 per common share)
—  —  —  (10) —  —  (10)
Balance at June 30, 2019 165,887  2  2,247  23  (41) (76) 2,155 
Net income
—  —  —  29  —  —  29 
Other comprehensive loss, net of tax
—  —  —  —  (3) —  (3)
Share-based compensation expense
—  —  10  —  —  —  10 
Repurchases of common stock
—  —  —  —  —  (17) (17)
Stock option exercises and other common stock transactions
100  —  —  —  —  (1) (1)
Dividends declared ($0.06 per common share)
—  —  —  (10) —  —  (10)
Balance at September 30, 2019 165,987 $ 2  $ 2,257  $ 42  $ (44) $ (94) $ 2,163 

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

5

PERSPECTA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Two Fiscal Quarters Ended
(in millions)
October 2, 2020 September 30, 2019
Cash flows from operating activities:
Net income $ 13  $ 60 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 192  191 
Share-based compensation 17  15 
Deferred income taxes (17) (20)
Loss on sale or disposal of assets, net 12  10 
Other non-cash charges, net 11  4 
Changes in assets and liabilities, net of effects of acquisitions:
Receivables, net 25  50 
Prepaid expenses and other current assets 7  46 
Accounts payable, accrued expenses and other current liabilities 37  (16)
Deferred revenue and advanced contract payments 13  (16)
Income taxes payable and liability (7) (2)
Other assets and liabilities, net (7) (2)
Net cash provided by operating activities 296  320 
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (53) (265)
Proceeds from sale of assets 9  — 
Purchases of property, equipment and software (26) (4)
Payments for outsourcing contract costs —  (3)
Net cash used in investing activities (70) (272)
Cash flows from financing activities:
Principal payments on long-term debt (52) (45)
Payments of debt issuance costs —  (3)
Proceeds from revolving credit facility —  175 
Payments on revolving credit facility (50) — 
Payments on finance lease obligations (67) (77)
Repurchases of common stock —  (32)
Repurchases of common stock to satisfy tax withholding obligations (2) — 
Dividends paid (21) (18)
Net cash used in financing activities (192) — 
Net change in cash and cash equivalents, including restricted 34  48 
Cash and cash equivalents, including restricted, at beginning of period 221  99 
Cash and cash equivalents, including restricted, at end of period 255  147 
Less restricted cash and cash equivalents included in other current assets 39  25 
Cash and cash equivalents at end of period $ 216  $ 122 
Supplemental cash flow disclosures:
Interest paid, net $ 54  $ 64 
Income taxes paid (refunded), net 17  12 
Supplemental schedule of non-cash investing and financing activities:
Leased assets acquired through finance lease obligations $ 22  $ 49 
Leased assets acquired through operating lease obligations 17  15 
Dividends declared but not yet paid 12  10 

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

6

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


Note 1 – Overview and Basis of Presentation

Background

Perspecta Inc. (“Perspecta,” “the Company,” “we,” “us,” and “our”) 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Effective April 1, 2020, Perspecta’s fiscal year was modified to end on the Friday nearest March 31 of each year, with each fiscal year generally comprised of four thirteen-week fiscal quarters ending on the Friday nearest the end of calendar months June, September, December and March. As a result, fiscal year 2021 will contain 52 weeks and three days beginning April 1, 2020 and ending April 2, 2021, and this Quarterly Report on Form 10-Q covers the period beginning July 4, 2020 and ending October 2, 2020.

Principles of Consolidation and Combination

The accompanying interim unaudited condensed consolidated financial statements reflect the financial position and results of operations of the Company and its consolidated subsidiaries.

In the opinion of management of the Company, the accompanying interim unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our results of operations and cash flows.

Use of Estimates

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

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

Reclassifications

Certain prior period balances in the accompanying financial statements have been reclassified to conform to the current
period presentation, including the separate reporting of non-current operating lease obligations in the accompanying condensed consolidated balance sheets. These reclassifications had no impact on total assets, total liabilities, total equity, income before taxes or net income.

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Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. Perspecta adopted the standard on April 1, 2020. The adoption of ASU 2016-13 did not have a material impact on Perspecta’s financial statements given the Company’s historically high collection results due to a 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 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 adoption of ASU 2018-15 has not had a material impact thus far, and the future impact on Perspecta'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 (“ASU 2020-04”), 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. The guidance in ASU 2020-04 is expected to have an impact on hedge designation as contract modifications and other changes occur while LIBOR is phased out, but is not expected to have a material impact on Perspecta’s financial statements. The Company is evaluating the expedients and reviewing its financial contracts that utilize LIBOR as the reference rate and will continue its assessment during the LIBOR transition period.

Recently Issued Accounting Pronouncements Not Yet Adopted

Other recently issued ASUs effective after October 2, 2020 are not expected to have a material impact on Perspecta’s financial statements.

Note 3 – Acquisitions

DHPC Technologies, Inc. Acquisition

On May 1, 2020, Perspecta completed the acquisition of DHPC Technologies, Inc. (“DHPC”), a U.S. developer of electronic warfare technologies with market-leading technical solutions and a solid, proven reputation with Army customers. The purchase consideration was approximately $53 million in cash. The Company recognized preliminary fair values of the assets acquired and liabilities assumed and allocated approximately $31 million to goodwill and $20 million to intangible assets, reported in the Defense and Intelligence segment. The intangible assets consist primarily of program assets of $18 million and backlog of $2 million. The estimated fair value attributed to intangible assets is being amortized on an accelerated basis over 20 years for program assets and approximately 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 changes to the purchase price allocation. 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.

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The results of operations of DHPC have been included in the statements of operations beginning May 1, 2020. 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.

Knight Point Systems, LLC

On July 31, 2019, Perspecta acquired all of the equity interests of Knight Point Systems, LLC (“Knight Point”) for $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 environments.

The Company completed the purchase accounting for the Knight Point acquisition in the first quarter of fiscal year 2021, and made no material changes to the fair values of assets acquired and liabilities assumed reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
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. All of the value attributed to goodwill and intangible assets is deductible for income tax purposes.

Note 4 – Revenue

Disaggregated Revenue

Revenue by contract type was as follows:
Fiscal Quarter Ended October 2, 2020 Fiscal Quarter Ended September 30, 2019
(in millions) Defense and
Intelligence 		Civilian and
Health Care 		Total Defense and
Intelligence 		Civilian and
Health Care 		Total
Cost-reimbursable
$ 336  $ 56  $ 392  $ 267  $ 25  $ 292 
Fixed-price
386  211  597  411  251  662 
Time-and-materials
74  79  153  99  119  218 
Total
$ 796  $ 346  $ 1,142  $ 777  $ 395  $ 1,172 
Two Fiscal Quarters Ended October 2, 2020 Two Fiscal Quarters Ended September 30, 2019
(in millions) Defense and
Intelligence 		Civilian and
Health Care 		Total Defense and
Intelligence 		Civilian and
Health Care 		Total
Cost-reimbursable $ 657  $ 108  $ 765  $ 535  $ 51  $ 586 
Fixed-price 765  413  1,178  783  465  1,248 
Time-and-materials 150  157  307  211  234  445 
Total $ 1,572  $ 678  $ 2,250  $ 1,529  $ 750  $ 2,279 

9
Revenue as a prime or subcontractor was as follows:
Fiscal Quarter Ended October 2, 2020 Fiscal Quarter Ended September 30, 2019
(in millions) Defense and
Intelligence 		Civilian and
Health Care 		Total Defense and
Intelligence 		Civilian and
Health Care 		Total
Prime contractor
$ 729  $ 323  $ 1,052  $ 733  $ 372  $ 1,105 
Subcontractor
67  23  90  44  23  67 
Total $ 796  $ 346  $ 1,142  $ 777  $ 395  $ 1,172 
Two Fiscal Quarters Ended October 2, 2020 Two Fiscal Quarters Ended September 30, 2019
(in millions) Defense and
Intelligence 		Civilian and
Health Care 		Total Defense and
Intelligence 		Civilian and
Health Care 		Total
Prime contractor
$ 1,456  $ 630  $ 2,086  $ 1,441  $ 695  $ 2,136 
Subcontractor
116  48  164  88  55  143 
Total $ 1,572  $ 678  $ 2,250  $ 1,529  $ 750  $ 2,279 

Revenue by customer type was as follows:
Fiscal Quarter Ended October 2, 2020 Fiscal Quarter Ended September 30, 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
$ 792  $ 290  $ 1,082  $ 773  $ 322  $ 1,095 
Non-federal (state, local and other) 4  56  60  4  73  77 
Total $ 796  $ 346  $ 1,142  $ 777  $ 395  $ 1,172 
Two Fiscal Quarters Ended October 2, 2020 Two Fiscal Quarters Ended September 30, 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
$ 1,565  $ 563  $ 2,128  $ 1,521  $ 614  $ 2,135 
Non-federal (state, local and other) 7  115  122  8  136  144 
Total $ 1,572  $ 678  $ 2,250  $ 1,529  $ 750  $ 2,279 

Performance Obligations

As of October 2, 2020, approximately $3.40 billion of revenue is expected to be recognized from remaining unsatisfied performance obligations on executed contracts. The Company expects to recognize approximately 75% of these remaining performance obligations as revenue within 12 months and approximately 88% within 24 months, with the remainder recognized thereafter.

Contract Balances

Contract assets and contract liabilities were as follows:
(in millions) Balance Sheets Line Item October 2, 2020 March 31, 2020
Contract assets:  
Unbilled receivables
Receivables, net of allowance for doubtful accounts
$ 351  $ 341 
Contract liabilities:  
Current portion of deferred revenue and advance contract payments
Other current liabilities
$ 43  $ 25 
Non-current portion of deferred revenue and advance contract payments
Other long-term liabilities
$ —  $ 2 
10

Contract assets increased $10 million during the two fiscal quarters ended October 2, 2020, primarily due to the timing of billings. There were no significant impairment losses related to the Company’s contract assets during the two fiscal quarters ended October 2, 2020.

Contract liabilities increased $16 million during the two fiscal quarters ended October 2, 2020, primarily due to payments received in excess of revenue recognized. During the fiscal quarter and two fiscal quarters ended October 2, 2020, the Company recognized $2 million and $16 million, respectively, of the deferred revenue and advance contract payments at March 31, 2020 as revenue. During the fiscal quarter and two fiscal quarters ended September 30, 2019, the Company recognized $5 million and $29 million, respectively, of the deferred revenue and advance contract payments at March 31, 2019 as revenue.

Note 5 – Earnings Per Share

Basic earnings per common share (“EPS”) 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. There were no significant anti-dilutive equity awards excluded from the calculation of EPS for the fiscal quarters and two fiscal quarters ended October 2, 2020 or September 30, 2019.

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

Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions, except per share amounts)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Net income $ 16  $ 29  $ 13  $ 60 
Common share information:
Basic weighted average common shares outstanding
160.79  162.22  160.72  162.51 
Dilutive effect of equity awards
1.11  0.68  1.08  0.58 
Diluted weighted average common shares outstanding
161.90  162.90  161.80  163.09 
Earnings per common share:
Basic
$ 0.10  $ 0.18  $ 0.08  $ 0.37 
Diluted $ 0.10  $ 0.18  $ 0.08  $ 0.37 

Note 6 – Sale of Receivables

During the fiscal quarters ended October 2, 2020 and September 30, 2019, we sold $922 million and $720 million, respectively, of billed and unbilled receivables under our accounts receivable sales facility. During the two fiscal quarters ended October 2, 2020 and September 30, 2019, we sold $1.81 billion and $1.41 billion, respectively, of billed and unbilled receivables under our accounts receivable sales facility. Collections on sold receivables were $887 million and $749 million during the fiscal quarters ended October 2, 2020 and September 30, 2019, respectively. During the two fiscal quarters ended October 2, 2020 and September 30, 2019, collections on sold receivables were $1.76 billion and $1.41 billion, respectively.

The amounts outstanding at October 2, 2020 and March 31, 2020 were $300 million and $255 million, respectively. As of October 2, 2020 and March 31, 2020, there were $21 million and $63 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 7 – 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 $2.26 billion and $2.18 billion as of October 2, 2020 and March 31, 2020, respectively, as compared with the gross carrying value of $2.30 billion and $2.39 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.

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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 periods ended October 2, 2020 or September 30, 2019.

Note 8 – 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’s derivative instruments are designated as cash flow hedges, and therefore, 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.

As of October 2, 2020, the Company had interest rate swap agreements with a total notional amount of $2.50 billion. As of October 2, 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.

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 follow:
(in millions) Balance Sheets Line Item October 2, 2020 March 31, 2020
Derivative liabilities:
Interest rate swaps Other current liabilities $ 38  $ 37 
Interest rate swaps Other liabilities 41  50 
Total derivative liabilities $ 79  $ 87 

Note 9 – Debt
The following is a summary of the Company’s outstanding debt:
(in millions)
Interest Rates
Maturities October 2, 2020 March 31, 2020
Revolving Credit Facility
LIBOR + 1.50%
August 2024 $ —  $ 50 
Term Loan A Facilities (Tranche 1)
LIBOR + 1.375%
August 2022 200  200 
Term Loan A Facilities (Tranche 2)
LIBOR + 1.50%
August 2024 1,510  1,552 
Term Loan B Facility
LIBOR + 2.25%
May 2025 489  491 
Subtotal senior secured credit facilities 2,199  2,293 
Other secured borrowings Various Various 14  12 
Total secured debt 2,213  2,305 
Other unsecured borrowings Various Various 20  18 
Senior unsecured EDS Notes 7.45% October 2029 66  66 
Total debt 2,299  2,389 
Less: current maturities of long-term debt, net(1)
(93) (89)
Less: unamortized debt issuance costs and premiums, net(2)
(13) (17)
Total long-term debt, net of current maturities $ 2,193  $ 2,283 
(1) Current maturities of long-term debt are presented net of $6 million of debt issuance costs as of October 2, 2020 and March 31, 2020 associated with the Term Loan A Facilities and Term Loan B Facility.
(2) Includes $10 million and $11 million of unamortized premiums as of October 2, 2020 and March 31, 2020, respectively, on the assumed Electronic Data Systems Corporation (“EDS”) Notes.
12

Expected maturities of long-term debt are as follows:
Fiscal Year (in millions)
Remainder of fiscal year 2021 $ 51 
2022 98 
2023 294 
2024 93 
2025 1,230 
Thereafter 533 
Total $ 2,299 

Note 10 – Leases

The components of lease expense were as follows:
Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions) Statement of Operations Line Item(s) October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Finance lease expense
Amortization of leased assets
Depreciation and amortization $ 26  $ 29  $ 53  $ 65 
Interest on lease obligations
Interest expense, net 3  5  7  10 
Total finance lease expense
29  34  60  75 
Operating lease expense
Cost of services and selling, general and administrative
11  16  22  30 
Variable lease expense
Cost of services and selling, general and administrative
4  2  7  4 
Sublease income
Cost of services and selling, general and administrative
(1) (1) (2) (2)
Total lease expense, net $ 43  $ 51  $ 87  $ 107 

The weighted average remaining lease terms and discount rates were as follows:
October 2, 2020 September 30, 2019
Weighted average remaining lease term (in years):
Finance leases 2.5 2.8
Operating leases 5.4 4.2
Weighted average discount rate:
Finance leases 6.04  % 6.57  %
Operating leases 4.35  % 4.71  %
13

As of October 2, 2020, future minimum lease payments required to be made under leases were as follows:
Fiscal Year (in millions)
Operating Leases Finance
Leases
Remainder of fiscal year 2021 $ 19  $ 55 
2022 40  87 
2023 36  48 
2024 26  19 
2025 22  7 
Thereafter 43  1 
Total minimum lease payments 186  217 
Less: Amount representing interest (22) (15)
Present value of net minimum lease payments $ 164  $ 202 

As of October 2, 2020, the Company had aggregate rent obligations of $17 million for operating leases and $1 million for finance leases, for leases that have not commenced, with terms ranging from three to eight years.

In response to the coronavirus disease 2019 (“COVID-19”) pandemic, we implemented telework initiatives in the fourth quarter of fiscal year 2020. Due to the success of those initiatives and a decision to utilize increased telework arrangements, we evaluated our real estate footprint and implemented a facility rationalization restructuring plan during the fiscal quarter ended July 3, 2020, identifying 20 facilities that would no longer be utilized. During the fiscal quarter ended October 2, 2020, we identified an additional four facilities that would no longer be utilized, bringing the total to 24 facilities. Restructuring charges of $13 million and $31 million were recognized during the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively, including $21 million of right-of-use assets that were abandoned. At October 2, 2020, $21 million of this restructuring liability remained unpaid, primarily included in operating lease obligations.

Note 11 – 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 other postretirement benefit liabilities are primarily due to market fluctuations of investments, actuarial assumptions for the measurement of liabilities and changes in interest rates.

The Company contributed $0 million and $7 million to the defined benefit pension and other postretirement benefit plans during the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively. The Company did not contribute to the defined benefit pension and other postretirement benefit plans during the fiscal quarter and two fiscal quarters ended September 30, 2019. The Company does not expect to contribute during the remainder of fiscal year 2021.

The components of net periodic pension expense (benefit) were:
Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions) October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Service cost
$ —  $ —  $ —  $ 1 
Interest cost 5  5  9  9 
Expected return on assets (6) (8) (12) (15)
Net periodic pension benefit $ (1) $ (3) $ (3) $ (5)
Net periodic benefit cost for the Company’s retiree medical plan was not significant for the fiscal quarters and two fiscal quarters ended October 2, 2020 or September 30, 2019.

14
Note 12 – Income Taxes

The Company’s effective tax rate (“ETR”) was approximately 16% and 41% for the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively, as compared to 22% and 24% for the fiscal quarter and two fiscal quarters ended September 30, 2019, respectively. For the fiscal quarter and two fiscal quarters ended October 2, 2020, the primary drivers of our ETR were state income taxes, the reversal of an indemnified tax receivable and limitations on executive compensation deductions. For the fiscal quarter and two fiscal quarters ended September 30, 2019, the primary drivers of our ETR were state income taxes, non-deductible transaction expenses and the release of certain indemnified liabilities for unrecognized tax benefits.

The Company is bound by a Tax Matters Agreement (“TMA”) with DXC Technology Company (“DXC”), executed as of May 31, 2018, the date when Perspecta became an independent company through the consummation of the spin-off of the DXC U.S. Public Sector (“USPS”) business (the “Spin-Off”), and mergers with Vencore Holding Corp. (“Vencore HC”) and KGS Holding Corp. (“KGS HC”) (the “Mergers”). 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 June 1, 2018, we may have joint and several liability with DXC, Hewlett Packard Enterprise Company (“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. 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 the Company is 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 June 1, 2018. 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 income tax refunds receivable from the IRS and various state tax authorities of approximately $55 million at October 2, 2020, for which it must remit to DXC under the TMA and has recorded a corresponding payable. The receivable is included in other receivables and other assets and the payable is included in accrued expenses on our balance sheet.

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. Tax years remaining open for IRS and/or state taxing authority examination or review under applicable statutes of limitations are calendar years 2007 and 2008, fiscal year 2010, and fiscal years 2016 and forward. The IRS is not currently examining Perspecta Inc., Vencore HC or KGS HC for any open years, but entities related to these businesses remain open to examination federally and in various state and local jurisdictions.

Note 13 – Shareholders’ Equity

Cash Dividends

During the fiscal quarters ended October 2, 2020 and September 30, 2019, the Board of Directors declared cash dividends to our shareholders of approximately $12 million ($0.07 per common share) and $10 million ($0.06 per common share), respectively. During the two fiscal quarters ended October 2, 2020 and September 30, 2019, the Board of Directors declared cash dividends to our shareholders of approximately $23 million ($0.14 per common share) and $20 million ($0.12 per common share), respectively. The cash dividends were paid in the fiscal quarter following their declaration.

On November 9, 2020, the Board of Directors declared a dividend of $0.07 per common share payable on January 15, 2021 to common shareholders of record at the close of business on November 24, 2020.

Share-based Compensation

The Company recognized $10 million in share-based compensation expense during each of the fiscal quarters ended October 2, 2020 and September 30, 2019. The Company recognized $17 million and $15 million in share-based compensation for the two fiscal quarters ended October 2, 2020 and September 30, 2019, respectively. During the two fiscal quarters ended October 2, 2020, the Company granted approximately 1.1 million time-based restricted stock units
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(“RSUs”) and approximately 916 thousand performance-based restricted stock units (“PSUs”). The RSUs and PSUs are valued using the closing price on the trading day of the grant. The weighted average grant date fair value of the RSUs and PSUs granted during the two fiscal quarters ended October 2, 2020 was $23.81 and $23.98, respectively.

Employee Stock Purchase Plan

On August 5, 2020, the Company’s shareholders approved the Perspecta Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code and has been allocated 5,000,000 shares. The purchase price will be 95% of the Fair Market Value (as defined in the ESPP) of our common stock on the purchase date, and in any event will never be lower than the lower of 85% of the Fair Market Value of our common stock on the grant date or the purchase date. The first quarterly offering period under the ESPP is October 1, 2020 through December 31, 2020.

Note 14 – Segment Information

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

Defense and Intelligence

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

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

Civilian and Health Care

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

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Segment Measures
The following tables summarize operating results regularly provided to the chief operating decision maker by reportable segment:
Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions) October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Revenue
Defense and Intelligence $ 796  $ 777  $ 1,572  $ 1,529 
Civilian and Health Care 346  395  678  750 
Total revenue $ 1,142  $ 1,172  $ 2,250  $ 2,279 
Segment profit
Defense and Intelligence $ 101  $ 113  $ 189  $ 231 
Civilian and Health Care 38  40  69  73 
Total segment profit $ 139  $ 153  $ 258  $ 304 
Depreciation and amortization
Defense and Intelligence $ 25  $ 24  $ 49  $ 49 
Civilian and Health Care 11  16  22  44 
Amortization of acquired intangible assets 60  50  121  98 
Total depreciation and amortization $ 96  $ 90  $ 192  $ 191 

Reconciliation of Reportable Segment Profit to the Statements of Operations

The Company’s management uses segment profit as the measure for assessing performance of its segments. Segment profit is defined as segment revenue less segment cost of services, selling, general and administrative and depreciation and amortization, excluding 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.
Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Total segment profit $ 139  $ 153  $ 258  $ 304 
Not allocated to segments:
Share-based compensation (10) (10) (17) (15)
Amortization of acquired intangible assets (60) (50) (121) (98)
Restructuring costs (13) (2) (31) (4)
Separation, transaction and integration-related costs (12) (20) (27) (39)
Interest expense, net (29) (36) (59) (71)
Other income and expense, net 4  2  19  2 
Income before taxes $ 19  $ 37  $ 22  $ 79 

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

Note 15 – 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 (the “SDA”) between Perspecta and DXC includes provisions that allocate liability and financial responsibility for litigation involving DXC and the Company and that provide for cross-indemnification of the parties for liabilities a party may incur that are allocated to the other party under the SDA. In
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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 October 2, 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 are seeking to certify a nationwide class action under the ADEA comprised of certain 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 certain 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. 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; that settlement also has been completed. 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 was 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”). If the Company, however, had not met or exceeded the Annual Minimum Purchase Amounts by that date, it was required to pay DXC the amount of the shortfall. The combined two-year Annual Minimum Purchase Amounts commitment totaled approximately $141 million. 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. That dispute relating to the appropriate crediting of eligible purchases involves approximately half of the total two-year Annual Minimum Purchase Amounts. 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
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DXC any amount of shortfall not addressed in or otherwise subject to the arbitration or covered by other possible defenses.

Guarantees

The Company uses stand-by letters of credit, in lieu of cash, to support various risk management insurance policies, which are cash collateralized. These letters of credit represent a contingent liability and the Company would only be liable if it defaults on its payment obligations on these policies. The Company’s stand-by letters of credit outstanding were less than $1 million as of October 2, 2020. As of October 2, 2020, the Company had $40 million in outstanding surety bonds, of which $7 million expire in fiscal year 2021, and $33 million expire in fiscal year 2022.

Note 16 – Subsequent Events

Effective October 30, 2020, the Company completed the Amended and Restated Master Accounts Receivable Purchase Agreement to increase the limit to $325 million, extend the maturity of the facility through October 29, 2021 and to amend certain other terms.



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

•various risks related to health epidemics, pandemics and similar outbreaks, such as the COVID-19 pandemic, which may have material adverse effects on our business, financial position, results of operations and/or cash flows;
•any issue that compromises our relationships with the U.S. federal government, or any state or local governments, or damages our professional reputation;
•changes in the U.S. federal, state and local governments’ spending and mission priorities that shift expenditures away from agencies or programs that we support;
•any delay in completion of the U.S. federal government’s budget process;
•failure to comply with numerous laws, regulations and rules, including regarding procurement, anti-bribery and organizational conflicts of interest;
•failure by us or our employees to obtain and maintain necessary security clearances or certifications;
•our ability to compete effectively in the competitive bidding process and delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us;
•our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts;
•problems or delays in the development, delivery and transition of new products and services or the enhancement of existing products and services to meet customer needs and respond to emerging technological trends;
•failure of third parties to deliver on commitments under contracts with us;
•misconduct or other improper activities from our employees or subcontractors;
•delays, terminations or cancellations of our major contract awards, including as a result of our competitors
protesting such awards;
•failure of our internal control over financial reporting to detect fraud or other issues;
•failure or disruptions to our systems, due to cyber-attack, service interruptions or other security threats;
•failure to be awarded task orders under our indefinite delivery/indefinite quantity (“ID/IQ”) contracts;
•changes in government procurement, contract or other practices or the adoption by the government of new laws, rules and regulations in a manner adverse to us;
•uncertainty from the expected discontinuance of the London Interbank Offered Rate (“LIBOR”) and transition to any other interest rate benchmark; and
•the other factors described in Part I, Item 1A “Risk Factors” of Perspecta’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in other information we publicly disclose from time to time. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. Our public filings may be accessed through our investor relations website, https://investors.perspecta.com, or through the website maintained by the SEC at https://www.sec.gov.

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this document and with our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

The statements in this discussion regarding industry outlook, expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Some of these risks and uncertainties include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, as updated periodically through our subsequent quarterly reports on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

Overview

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

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

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

Perspecta became an independent company following consummation of the Spin-Off from DXC on May 31, 2018. On October 29, 2019, the Company filed for arbitration against DXC to resolve certain disputed items related to the Spin-Off. After completion of the Spin-Off, the Company began assessing the respective rights, responsibilities and obligations of DXC and the Company under the SDA and other related Spin-Off agreements. Based on this assessment, and in accordance with the provisions of the agreements, the Company disputed certain transactions that were effected by DXC in connection with the Spin-Off. The Company has been addressing these matters with DXC pursuant to the terms of the SDA, including its confidentiality provisions and dispute resolution provisions that require executive escalation, mediation and binding arbitration. Based on the status of the arbitration, we currently are unable to predict the impact of any resolutions of these matters on the Company.

Acquisition

On May 1, 2020, Perspecta completed the acquisition of DHPC, a U.S. developer of electronic warfare technologies with market-leading technical solutions and a solid, proven reputation with Army customers. The purchase consideration was approximately $53 million in cash. See Note 3 – “Acquisitions” to the financial statements for additional details.
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Segments and Services

Our reportable segments are (1) Defense and Intelligence, which provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies, and (2) Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies. Segment information is included in Note 14 – “Segment Information” to the financial statements.

Backlog

Total contract value (“TCV”) backlog is our estimate of the remaining revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under ID/IQ contracts. TCV backlog can include award fees, incentive fees, or other variable consideration estimated at the most likely amount to which the Company is expected to be entitled to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur. TCV backlog includes both funded and unfunded future revenue under government contracts.

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

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

The estimated value of our TCV backlog as of October 2, 2020 was as follows:
(in millions) Funded Backlog Unfunded Backlog Total TCV
Backlog
Defense and Intelligence $ 1,045  $ 7,540  $ 8,585 
Civilian and Health Care 749  4,558  5,307 
Total backlog $ 1,794  $ 12,098  $ 13,892 

The contract awards during the fiscal quarter and two fiscal quarters ended October 2, 2020 and September 30, 2019 were as follows:
Fiscal Quarter Ended Two Fiscal Quarters Ended
(in millions)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019
Defense and Intelligence
$ 1,019  $ 1,934  $ 1,882  $ 2,603 
Civilian and Health Care 751  372  1,064  704 
Total contract awards $ 1,770  $ 2,306  $ 2,946  $ 3,307 

Results of Operations

Impact of the COVID-19 Pandemic

The fourth quarter of fiscal year 2020 marked the beginning of the COVID-19 pandemic in the United States, and the pandemic has continued through the second quarter of fiscal year 2021. Due to the mission-critical nature of the majority of our business, substantially all of the services we provide to our government customers have been considered essential services, which has allowed them to continue, and the Company has maintained its workforce near full capacity. The overall impact of the COVID-19 pandemic on our results of operations was approximately $18 million and $41 million of
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lower revenue for the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively, and a year-to-date liquidity benefit of $40 million due to deferral of payroll tax payments as afforded by the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, discussed below. We continue to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.

We are continuing to monitor the ongoing COVID-19 pandemic. We have experienced and expect to continue to experience certain disruptions in our operations and impact to our workforce and subcontractor workforce due to illness, quarantines, shelter-in-place orders, closures of our facilities, closures of our customers’ facilities and other restrictions or government actions in connection with the COVID-19 pandemic. At the outset of the pandemic, we deployed our Crisis and Business Continuity Plan, which provides an integrated and coordinated crisis management and continuity of operations framework for all personnel during a crisis, and we have implemented new protocols including telework or other means of remote work for our employees. With respect to our impacted programs that, by their nature, cannot be supported remotely, we have accommodated those customers who have implemented shiftwork or other mitigation protocols by maintaining our workforce in a “mission ready” state such that the workforce is able to mobilize in a timely manner.

On March 27, 2020, the CARES Act was enacted. The CARES Act is a $2 trillion stimulus package meant to combat the economic impacts of the COVID-19 pandemic. The CARES Act includes a provision under which government contractors can seek reimbursement for amounts related to keeping the employee base in a ready state during disruptions such as closed facilities, reduced work schedules or mandated quarantines to support social distancing. In these situations, we are able to recover our costs associated with this ready state workforce, but we are not able to bill any associated fee. The relevant provision of the CARES Act is in effect until December 11, 2020. We continue to evaluate this and other provisions of the CARES Act, as well as any other legislative or regulatory initiatives that seek to address the impact of the COVID-19 pandemic on our business.

For additional discussion of the risks associated with the COVID-19 pandemic, see Part I, Item 1A “Risk Factors” of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Selected Results of Operations

Selected financial information is presented in the tables below:
Fiscal Quarter Ended Change
(in millions, except per share amounts) October 2, 2020 September 30, 2019 $
%
Revenue $ 1,142  $ 1,172  $ (30) (3) %
Total costs and expenses 1,123  1,135  (12) (1) %
Income before income taxes 19  37  (18) (49) %
Income tax expense 3  8  (5) (63) %
Net income $ 16  $ 29  $ (13) (45) %
Diluted earnings per share $ 0.10  $ 0.18 

Two Fiscal Quarters Ended Change
(in millions, except per share amounts) October 2, 2020 September 30, 2019 $ %
Revenue $ 2,250  $ 2,279  $ (29) (1) %
Total costs and expenses 2,228  2,200  28  1  %
Income before income taxes 22  79  (57) (72) %
Income tax expense 9  19  (10) (53) %
Net income $ 13  $ 60  $ (47) (78) %
Diluted earnings per share $ 0.08  $ 0.37 

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Revenue

Revenue by segment for the fiscal quarter and two fiscal quarters ended October 2, 2020 and September 30, 2019 was:
Fiscal Quarter Ended Change
(in millions)
October 2, 2020 September 30, 2019
$
%
Defense and Intelligence
$ 796  $ 777  $ 19  2  %
Civilian and Health Care
346  395  (49) (12) %
Total $ 1,142  $ 1,172  $ (30) (3) %

Two Fiscal Quarters Ended Change
(in millions)
October 2, 2020 September 30, 2019 $ %
Defense and Intelligence
$ 1,572  $ 1,529  $ 43  3  %
Civilian and Health Care 678  750  (72) (10) %
Total $ 2,250  $ 2,279  $ (29) (1) %

Defense and Intelligence Segment

Our Defense and Intelligence segment revenue during the fiscal quarter ended October 2, 2020 increased by $19 million, or 2%, as compared to the comparable period of the prior year primarily due to new business wins coupled with growth on existing programs. Our Defense and Intelligence segment revenue during the two fiscal quarters ended October 2, 2020 increased by $43 million, or 3%, as compared to the comparable period of the prior year primarily due to new business wins coupled with growth on existing programs.

Civilian and Health Care Segment

Our Civilian and Health Care segment revenue during the fiscal quarter ended October 2, 2020 decreased by $49 million, or 12%, as compared to the comparable period of the prior year primarily due to a large, one-time asset sale in the second quarter of fiscal year 2020. Our Civilian and Health Care segment revenue during the two fiscal quarters ended October 2, 2020 decreased by $72 million, or 10%, as compared to the comparable period of the prior year primarily due to the one-time asset sale and completion and wind down of certain programs in fiscal year 2020.

Costs and Expenses

Our total costs and expenses are shown in the tables below:
Fiscal Quarter Ended
Percentage of Revenue
Change
(in millions)
October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019 $ %
Costs of services $ 912  $ 908  80  % 77  % $ 4  —  %
Selling, general and administrative 65  81  6  % 7  % (16) (20) %
Depreciation and amortization 96  90  8  % 8  % 6  7  %
Restructuring costs 13  2  1  % —  % 11  550  %
Separation, transaction and integration-related costs
12  20  1  % 2  % (8) (40) %
Interest expense, net 29  36  3  % 3  % (7) (19) %
Other (income) expense, net (4) (2) —  % —  % (2) 100  %
Total costs and expenses $ 1,123  $ 1,135  98  % 97  % $ (12) (1) %

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Two Fiscal Quarters Ended Percentage of Revenue Change
(in millions) October 2, 2020 September 30, 2019 October 2, 2020 September 30, 2019 $ %
Costs of services $ 1,811  $ 1,744  80  % 77  % $ 67  4  %
Selling, general and administrative 127  153  6  % 7  % (26) (17) %
Depreciation and amortization 192  191  9  % 8  % 1  1  %
Restructuring costs 31  4  1  % —  % 27  675  %
Separation, transaction and integration-related costs
27  39  1  % 2  % (12) (31) %
Interest expense, net 59  71  3  % 3  % (12) (17) %
Other (income) expense, net (19) (2) (1) % —  % (17) 850  %
Total costs and expenses $ 2,228  $ 2,200  99  % 97  % $ 28  1  %

Costs of Services

For the fiscal quarter ended October 2, 2020, costs of services as a percentage of revenue was 80%, as compared to 77% for the comparable period of the prior year. For the two fiscal quarters ended October 2, 2020, cost of services as a percentage of revenue was 80%, as compared to 77% for the comparable period of the prior year. Margins were negatively impacted by the inability to bill fee on our mission ready workforce idled by the COVID-19 pandemic, the completion and wind down of certain fixed price programs in the prior fiscal year and start-up costs associated with new contract wins, partially offset by continued focus on cost discipline and program management of our portfolio. Our cost-reimbursable and time-and-materials contracts typically have consistent margins, whereas the margin on our fixed price contracts is dependent upon management’s ability to control the costs of providing the services. We expect our contract mix to remain relatively stable over the long term.

Selling, General and Administrative

Selling, general and administrative expense (“SG&A”) was $65 million for the fiscal quarter ended October 2, 2020, as compared to $81 million for the comparable period of the prior year. SG&A as a percentage of revenue for the fiscal quarter ended October 2, 2020 was 6%, as compared to 7% for the comparable period of the prior year, with the decrease in the current fiscal year primarily due to reduced costs as a result of restructuring activities in prior quarters, and indirect cost management. SG&A was $127 million for the two fiscal quarters ended October 2, 2020, as compared to $153 million for the comparable period of the prior year. SG&A as a percentage of revenue for the two fiscal quarters ended October 2, 2020 was 6%, as compared to 7% for the comparable period of the prior year, with the decrease in the current fiscal year primarily due to indirect cost management and reduced costs as a result of restructuring activities taken in fiscal year 2020.

Depreciation and Amortization

Depreciation and amortization expense was $96 million for the fiscal quarter ended October 2, 2020, as compared to $90 million for the comparable period of the prior year. The $6 million increase during the fiscal quarter ended October 2, 2020 was primarily attributed to depreciation and amortization associated with contract-related assets. Depreciation and amortization expense was $192 million for the two fiscal quarters ended October 2, 2020, as compared to $191 million for the comparable period of the prior year.

Restructuring Costs

During the fiscal quarter ended October 2, 2020, restructuring activities resulted in costs of $13 million, as compared to $2 million during the comparable period of the prior year. During the two fiscal quarters ended October 2, 2020, restructuring activities resulted in costs of $31 million, as compared to $4 million during the comparable period of the prior year. See Note 10 – “Leases” for a description of the facility rationalization restructuring plan that has been executed throughout the first half of fiscal year 2021.

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Interest Expense, Net

Interest expense, net for the fiscal quarter ended October 2, 2020 was $29 million, as compared to $36 million during the comparable period of the prior year. The decrease of $7 million in interest expense for the fiscal quarter ended October 2, 2020 was primarily attributed to a lower LIBOR rate during the current period. Interest expense, net for the two fiscal quarters ended October 2, 2020 was $59 million, as compared to $71 million during the comparable period of the prior year. The decrease of $12 million in interest expense for the two fiscal quarters ended October 2, 2020 was primarily attributed to a lower LIBOR rate during the current period.

Other (Income) Expense, Net

Other (income) expense, net for the fiscal quarter ended October 2, 2020 was $(4) million, as compared to $(2) million during the comparable period of the prior year, and $(19) million for the two fiscal quarters ended October 2, 2020, as compared to $(2) million during the comparable period of the prior year. Other (income) expense, net for the two fiscal quarters ended October 2, 2020 included a $7 million reduction of a DXC indemnification liability related to an income tax receivable. The corresponding income tax receivable was reduced by the same amount, resulting in a $7 million increase to income tax expense as discussed below. Other (income) expense, net for the two fiscal quarters ended September 30, 2019 included a $7 million reduction of a DXC indemnification receivable related to a liability for uncertain tax positions. The corresponding tax reserves were reduced by the same amount, resulting in a $7 million reduction of income tax expense in accordance with ASC Topic 740, Income Taxes. Other (income) expense, net for both the fiscal quarter and two fiscal quarters ended October 2, 2020 and September 30, 2019 also included certain components of the net periodic pension cost for defined benefit pension plans, equity in earnings of unconsolidated affiliates and other miscellaneous gains and losses.

Taxes

Income tax expense was $3 million and $9 million for the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively, as compared to $8 million and $19 million for the comparable period of the prior year. The ETR was approximately 16% and 41% for the fiscal quarter and two fiscal quarters ended October 2, 2020, respectively, as compared to 22% and 24% for the fiscal quarter and two fiscal quarters ended September 30, 2019, respectively. For the fiscal quarter and two fiscal quarters ended October 2, 2020, the primary drivers of our ETR were state income taxes, the reversal of an indemnified tax receivable in the first quarter and limitations on executive compensation deductions. For the fiscal quarter and two fiscal quarters ended September 30, 2019, the primary drivers of our ETR were state income taxes, non-deductible transaction expenses, and the release of certain indemnified liabilities for unrecognized tax benefits.

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

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

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Liquidity and Capital Resources

We pursue a cash management and capital deployment strategy that balances funding our current operating needs with growing our business. Existing cash and cash equivalents and cash generated by operations continue to be our primary sources of liquidity, as well as available borrowings under our Revolving Credit Facility (as defined in Note 10 – “Debt” to the financial statements of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020) and sales of receivables under a U.S. federal government obligor receivables purchase facility established pursuant to the Master Accounts Receivable Purchase Agreement (“MARPA Facility”) (as defined in Note 5 – “Receivables” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020).

Our primary cash needs are expected to be for working capital, capital expenditures, acquisitions, the return of cash to shareholders through share repurchases and dividend payments, and other discretionary investments, as well as to service our outstanding indebtedness, including borrowings under our Credit Facilities. Our ability to fund our future operating needs depends, in part, on our ability to continue to generate positive cash flows from operations and, if necessary, raise cash in the capital markets. Based upon our history of generating strong cash flows, it is our belief that we will be able to meet our short-term liquidity and cash needs, including debt servicing, through the combination of cash flows from operating activities, available cash balances, available borrowings under our Revolving Credit Facility and sales of receivables under our MARPA Facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities, although there can be no assurance that we will able to obtain such financing on acceptable terms (or at all) in the future.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The Company has material contracts that are indexed to LIBOR and is continuing to monitor this activity and evaluate the related risks.

Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.

See Note 15 – “Commitments and Contingencies” to the financial statements for discussion of the general purpose of guarantees and commitments.

The anticipated sources of funds to fulfill such commitments are listed below:
(in millions) October 2, 2020
Cash and cash equivalents
$ 216 
Available borrowings under our Revolving Credit Facility 750 
Total liquidity
$ 966 

Cash and Cash Equivalents and Cash Flows

As of October 2, 2020, our cash and cash equivalents were $216 million. Cash and cash equivalents increased $69 million, as compared to $147 million at March 31, 2020, driven by cash flow generation through working capital management.

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The following table summarizes our cash flow activity:
Two Fiscal Quarters Ended
(in millions) October 2, 2020 September 30, 2019
Change
Net cash provided by operating activities $ 296  $ 320  $ (24)
Net cash used in investing activities (70) (272) 202 
Net cash used in financing activities (192) —  (192)
Net change in cash and cash equivalents, including restricted 34  48  (14)
Cash and cash equivalents, including restricted, at beginning of period 221  99  122 
Cash and cash equivalents, including restricted, at end of period 255  147  108 
Less restricted cash and cash equivalents included in other current assets 39  25  14 
Cash and cash equivalents at end of period $ 216  $ 122  $ 94 

Net cash provided by operating activities during the two fiscal quarters ended October 2, 2020 was $296 million, as compared to $320 million during the comparable period of the prior year. The decrease of $24 million was impacted by a $32 million decrease in net income adjusted for noncash items, driven by lost revenue of approximately $41 million from the COVID-19 pandemic as discussed above, partially offset by $8 million of favorable movements in working capital primarily due to timing associated with accounts receivable and the deferral of payment of the employer portion of payroll tax afforded under the CARES Act.

Net cash used in investing activities during the two fiscal quarters ended October 2, 2020 was $70 million, as compared to $272 million during the comparable period of the prior year. The decrease was primarily due to the acquisition of DHPC compared to the larger acquisition of Knight Point in the prior year period, as discussed in Note 3 – “Acquisitions” to the financial statements.

Net cash used in financing activities during the two fiscal quarters ended October 2, 2020 was $192 million, as compared to $0 million during the comparable period of the prior year. In the comparable period of the prior year, $175 million was drawn on the Revolving Credit Facility to partially finance the acquisition of Knight Point, which was fully offset by routine financing transactions, including lease payments, share repurchases and dividend payments. We repaid $50 million of our Revolving Credit Facility during the two fiscal quarters ended October 2, 2020 and incurred routine financing transactions, including lease payments and dividend payments that were comparable to the prior year when combined. No common shares were repurchased under the Company’s share repurchase program during the two fiscal quarters ended October 2, 2020. At October 2, 2020, our $750 million Revolving Credit Facility remained unused.

Capital Resources

The following table summarizes our total debt:
(in millions) October 2, 2020 March 31, 2020
Short-term debt and current maturities of long-term debt $ 93  $ 89 
Long-term debt, net of current maturities 2,193  2,283 
Total debt $ 2,286  $ 2,372 

The decrease in total debt as of October 2, 2020, as compared to total debt as of March 31, 2020, resulted primarily from the $50 million payment on the Revolving Credit Facility and permanent principal payments. At October 2, 2020, $750 million was available under our Revolving Credit Facility. We were in compliance with all financial covenants associated with our borrowings as of October 2, 2020. For more information on our debt, see Note 9 – “Debt” to the financial statements.

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The following table summarizes our capitalization ratios:

(in millions) October 2, 2020 March 31, 2020
Total debt and finance leases $ 2,488  $ 2,619 
Cash and cash equivalents 216  147 
Net debt(1)
$ 2,272  $ 2,472 
Total debt and finance leases $ 2,488  $ 2,619 
Total shareholders’ equity 1,369  1,357 
Total capitalization $ 3,857  $ 3,976 
Debt-to-total capitalization 65  % 66  %
Net debt-to-total capitalization(1)
59  % 62  %

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

The net debt-to-total capitalization as of October 2, 2020 is consistent with March 31, 2020, driven by strong operating results while meeting scheduled debt obligations and returning value to shareholders.

Interest Rate Swaps

We use interest rate swaps to manage the amount of our floating rate debt in order to reduce our exposure to variable rate interest payments associated with our floating interest rate debt. The interest rate swaps effectively convert our floating interest rate debt into fixed interest rate debt. Each swap agreement is designated as a cash flow hedge. We pay a stream of fixed interest payments for the term of the swap, and in turn, receive variable interest payments based on one-month LIBOR. At October 2, 2020, the one-month LIBOR rate applicable to the swap agreements was 0.15%. The net receipt or payment from the interest rate swap agreements is included in the statements of operations as interest expense.

The following table summarizes our interest rate swaps at October 2, 2020:
Start Date    Maturity Date   
Notional
Amount
(in millions)
  Weighted Average
Interest Rate Paid
May 2018    May 2021    $ 400     2.57  %
May 2018    May 2022    500     2.61  %
October 2018 October 2022 200  2.92  %
May 2018    May 2023    500     2.68  %
Swaps in effect 1,600  2.66  %
May 2021 May 2024 400 0.50 %
May 2022 May 2025 500 0.69  %
Total Swaps       $ 2,500    

Cash Dividends and Share Repurchase Programs

On May 21, 2020, the Company increased the quarterly cash dividend on its common stock by 17% to $0.07 per common share from $0.06 per common share. The payment of future quarterly dividends is subject to approval by the Board of Directors. Due to the uncertainty and volatility of the financial markets resulting from the COVID-19 pandemic, we did not repurchase any of our common shares during the fiscal quarter ended October 2, 2020. However, our liquidity and financial flexibility are strong, and share repurchases will continue to be a key part of our capital deployment strategy. See Note 13 – “Shareholders’ Equity” to the financial statements for a discussion, including the amounts, of the cash returned to shareholders. For additional discussion of our share repurchase program, see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

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Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet arrangements reported under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Contractual Obligations

There have been no material changes to our contractual obligations from those reported under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider certain policies to be critical because of their complexity and the high degree of judgment involved in implementing them, including policies related to: revenue recognition, acquisition accounting, valuation of goodwill and income taxes. Our critical accounting policies and estimates are more fully discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, under the heading “Critical Accounting Policies and Estimates.”

Valuation of Goodwill

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.

Based on the results of the annual assessment, we concluded that no impairment of goodwill existed at July 4, 2020. As noted above, a significant decrease in cash flows or a loss of a significant contract would negatively impact the estimated fair value of a reporting unit and could necessitate an interim impairment assessment of goodwill associated with that reporting unit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, we actively monitor our exposures to potential loss arising from adverse changes in market rates and prices and manage such risks through our regular operating and financing activities or the use of derivative financial instruments. Our exposures to market and financial risk have not changed materially since March 31, 2020. See Note 7 – “Fair Value” and Note 8 – “Derivative Instruments” to the financial statements for additional discussion.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Remediation Efforts to Address Material Weakness in Internal Control over Financial Reporting

As described more fully in Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, we identified a material weakness in our internal control over financial reporting in the area of revenue recognition that existed as of March 31, 2020. Management has taken the following steps to address the underlying causes of the material weakness and remediate the material weakness:

•A new enterprise resource planning system is being utilized throughout the revenue recognition process.
•The Company added additional personnel with U.S. GAAP revenue recognition knowledge and experience.
•Additional revenue recognition training was provided to responsible staff.
•New policies and procedures, including standardized templates, were implemented to govern the execution and review of certain calculations for revenue recognition purposes.
•The Company enhanced controls over the revenue recognition checklist process to include expanded documentation requirements supporting revenue recognition methodology conclusions, additional levels of review and approval for revenue recognition checklists, and new system reporting capabilities to eliminate the need for certain manual control activities.

Management has been testing the Company’s enhanced controls to determine whether they operate effectively over time. From this testing, management believes that the enhanced controls are operating effectively and the deficiencies that contributed to the material weakness have been remediated. Management will continue its evaluation of these controls through the end of the fiscal year, at which time our internal controls will be evaluated by Deloitte & Touche LLP in connection with their audit of the Company’s internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

Other than the changes described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended October 2, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 15 – “Commitments and Contingencies” to the financial statements for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

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

Unregistered Sales of Equity Securities

There were no sales of unregistered equity securities during the fiscal quarter ended October 2, 2020.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

On June 1, 2018, our Board of Directors authorized up to $400 million for future repurchases of outstanding shares of our common stock. Repurchases may be made at the Company’s discretion from time to time on the open market depending on market conditions. The repurchase program has no time limit, does not obligate the Company to make any repurchases and may be suspended for periods or discontinued at any time. No share repurchases were made under the Company’s share repurchase program during the fiscal quarter ended October 2, 2020. The total remaining authorization for future common stock repurchases under the share repurchase program was $275 million as of October 2, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit
Number 		Description of Exhibit
10.1
10.2*
10.3*
10.4*
10.5*
31.1
31.2
32.1**
32.2**
101 The following financial information from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104 The cover page from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2020, formatted in inline XBRL (included as Exhibit 101).
* Management contract or compensatory plan or agreement
** Furnished, not filed

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SIGNATURE

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

Perspecta Inc.
Date: November 10, 2020 By: /s/ William G. Luebke
Name: William G. Luebke
Title: Senior Vice President, Principal Accounting Officer and Controller

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