Perspecta Announces Financial Results for First Quarter of Fiscal Year 2019

CHANTILLY, Va., Aug. 14, 2018 /PRNewswire/ -- Perspecta Inc. (NYSE:PRSP), a leading U.S. government services provider, today announced financial results for the first quarter of fiscal year 2019, which ended June 30, 2018. On May 31, 2018, Perspecta became an independent company through consummation of the spin-off by DXC Technology (DXC) of its U.S. Public Sector Business (USPS) and completed its mergers with Vencore Holding Corp. (Vencore) and KGS Holding Corp. (KeyPoint). On June 1, 2018, Perspecta began trading on the New York Stock Exchange under the ticker symbol "PRSP."

"We are excited to begin operating and reporting as Perspecta, a leader in combining enterprise information technology and mission services to serve the needs of the U.S. public sector," said Mac Curtis, Perspecta's president and CEO. "We are committed to delivering robust and sustainable growth as we execute across the entire services pyramid and differentiate through innovation and intellectual property. The first quarter's strong performance across the board positions us well to meet the promises we laid out at our Investor Day and build a solid foundation for the future."

Summary Operating Results (Unaudited)

Results provided in accordance with U.S. generally accepted accounting principles (GAAP) reflect the operations of USPS for the period from April 1, 2018 to June 30, 2018 and Vencore and KeyPoint for the period from June 1, 2018 to June 30, 2018. To aid investors and analysts with year-over-year comparability for the combined businesses of USPS, Vencore and KeyPoint, Perspecta is including certain pro forma financial information that combines the stand-alone USPS, Vencore and KeyPoint financial information as if the acquisition had taken place on April 1, 2017. Adjusted results exclude costs directly associated with the spin-off and mergers and the ongoing integration process. The tables in Reconciliation of Non-GAAP Financial Measures at the end of this press release provide all appropriate reconciliations from pro forma and adjusted results to GAAP.

Revenue for the quarter was $793 million, up 17 percent compared to the first quarter of fiscal year 2018, primarily as a result of the mergers. Pro forma revenue for the quarter was $1.04 billion, up 2 percent from the first quarter of fiscal year 2018. Major drivers of the year-over-year pro forma increase include continued growth in intelligence community support and background investigations, which more than offset the completion of a large engineering support contract for the Kennedy Space Center.

Income before taxes for the first quarter of fiscal year 2019 was $41 million (5.2 percent operating margin). Net income was $29 million, or $0.17 per share, which was down 9 percent from the first quarter of fiscal year 2018.

Pro forma adjusted EBITDA was $195 million for the first quarter, up 37 percent year-over-year, as pro forma adjusted EBITDA margin improved from 13.9 percent to 18.8 percent. Both income before taxes and pro forma adjusted EBITDA benefited from a $24 million gain on the divestiture of a contract to avoid a potential organizational conflict of interest arising from the Vencore merger. Excluding the divestiture gain, pro forma adjusted EBITDA margin was 16.5 percent. Pro forma adjusted diluted earnings per share for the quarter was $0.54, up 50 percent year-over-year, consistent with the increasing revenue and profitability. Excluding the divestiture gain, pro forma adjusted diluted EPS was $0.44, up 22 percent year-over-year.

Cash Management and Capital Deployment

The cash flow statement reflects the foundation of Perspecta's capital structure. On the date of the spin-off and mergers, Perspecta received $2.5 billion of net proceeds from new debt financing and used it to pay off Vencore's and KeyPoint's existing debt and hedges, distribute approximately $984 million in cash to DXC, and distribute the cash portion of merger consideration to Vencore's and KeyPoint's stockholders.

Perspecta generated $160 million of net cash provided by operating activities in the first quarter of fiscal year 2019. Pro forma adjusted free cash flow was $145 million, or about 161 percent of pro forma adjusted net income. The Company deployed $50 million to pay down debt during the first quarter of fiscal year 2019.

At quarter end, the Company had $201 million in cash and cash equivalents, $600 million of undrawn capacity in its revolving credit facility, and $2.8 billion in total debt, including $303 million in capital lease obligations. Management believes Perspecta's steady cash flows and $801 million of total liquidity provides substantial financial flexibility to manage the business.

On June 1, 2018, Perspecta's Board of Directors declared a regular quarterly cash dividend of $0.05 per share on Perspecta's common stock. The first quarterly dividend was paid on July 17, 2018 to Perspecta stockholders of record at the close of business on June 11, 2018. Also on June 1, 2018, the Board authorized up to $400 million for future repurchases of outstanding shares of its common stock with no time limit. The dividend and stock repurchase programs are part of the Perspecta's overall balanced strategy for capital allocation.

On August 14, 2018, the Board of Directors declared that Perspecta would pay a cash dividend of $0.05 per share on October 16, 2018 to Perspecta stockholders of record at the close of business on September 5, 2018.

Contract Awards

Pro forma contract awards (bookings) totaled $1.3 billion in the first quarter of fiscal year 2019, representing a pro forma book-to-bill ratio of 1.3x. New business awards constituted about one-quarter of the total awards in the first quarter.

Included in the quarterly bookings were several particularly important single-award prime contracts:

• County of San Diego IT Outsourcing. Perspecta recognized the $607 million, five-year option for its contract with the County of San Diego to provide IT and telecommunications services, including data center hosting, desktop support, networks, applications, and cross-functional services. The contract, one of the largest of its kind, offers many leading-edge approaches, such as migrating to cloud-based platforms and services, increasing mobility, enhancing user experience, and co-funding an innovation incubator.
• Center for Medicare & Medicaid Services (CMS) Virtual Data Center Claims Processing. Under a five-year, $149 million task order from CMS, Perspecta will provide enterprise mainframe application hosting services for three Medicare Fee-For-Service (FFS) applications. As part of its broader support to CMS, Perspecta also provides operations and maintenance support for the Medicare FFS Part A and Part B claims processing systems that adjudicate more than one billion claims annually as well as the Integrated Data Repository that is the centerpiece of the CMS Enterprise Data Warehouse Strategy.
• Army Materiel Systems Analysis Activity (AMSAA) Sample Data Collection and Analysis (SDC&A). AMSAA awarded Vencore, a Perspecta company, a five-year, $96 million SDC&A follow-on contract to provide data collection and review services on selected models of U.S. Army aviation and ground combat systems, tactical wheeled vehicles and ground support equipment. Additionally, Vencore, a Perspecta company, will assist AMSAA in performing health usage monitoring and operational sustainment analysis support functions.

In addition, Perspecta won several large multiple-award, indefinite delivery, indefinite quantity contracts that are not included in bookings but support future growth, including:

• United States Postal Service Enterprise Information Technology Program (EITP). The Postal Service awarded Perspecta a prime position on its EITP Technical Support Services contract to enable the agency to provide reliable and efficient services that are critical to U.S. businesses and the day-to-day lives of citizens. On the seven-year contract, which has a ceiling value of $467 million, Perspecta will provide applications development and modernization services, DevOps support, information and data engineering, systems integration support, testing support and enterprise solutions.

Perspecta's backlog of signed business orders at the end of first quarter of fiscal year 2019 was $9.0 billion, of which $2.0 billion was funded.

Forward Guidance

Perspecta is reaffirming its previously announced guidance ranges for pro forma revenue, pro forma adjusted EBITDA margin, pro forma adjusted diluted EPS, and pro forma adjusted free cash flow conversion (as a percentage of pro forma adjusted net income) as specified in the table below. Perspecta elects to provide guidance for certain non-GAAP metrics because it cannot make reasonable estimates of key elements of certain GAAP metrics.

John Kavanaugh, Perspecta CFO, commented, "The team's performance out of the gate has been outstanding, and we are on course and speed to deliver on our full year guidance. Our cash performance enabled us to pay off our revolver and enhance our financial flexibility. With a robust volume of submitted proposals and strong market positioning, we look forward to accelerating new business wins while maintaining our industry-leading profitability and strong cash generation."

Conference Call

Perspecta executive management will hold a conference call on August 14, 2018, at 5 p.m. Eastern to discuss the financial results and outlook and answer questions. Analysts and investors may participate on the conference call by dialing 888-317-6016 (domestic), 855-669-9657 (Canada), or 412-317-6016 (international). The conference call will be webcast simultaneously through a link on the Investor Relations section of the Perspecta website. A replay of the conference call will be available on the Investor Relations section of the Perspecta website approximately two hours after the conclusion of the call.

About Perspecta Inc.

At Perspecta (NYSE: PRSP), we question, we seek and we solve. Perspecta brings a diverse set of capabilities to our U.S. government customers in defense, intelligence, civilian, health care and state and local markets. Our 260+ issued, licensed and pending patents are more than just pieces of paper, they tell the story of our innovation. With offerings in mission services, digital transformation and enterprise operations, our team of 14,000 engineers, analysts, investigators and architects work tirelessly to not only execute the mission, but build and support the backbone that enables it. Perspecta was formed to take on big challenges. We are an engine for growth and success and we enable our customers to build a better nation. For more information about Perspecta, visit perspecta.com.

Forward-looking Statements

All statements in this press release that do not directly and exclusively relate to historical facts constitute "forward-looking statements." These statements represent current intentions, expectations, beliefs or projections, and no assurance can be given that the results described in such statements will be achieved. These 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, including, but not limited to, risks relating to (i) our relationships with the U.S. federal government, or any state or local governments or changes in such governments' spending and mission priorities that shift expenditures away from agencies or programs that we support; (ii) delay in completion of the U.S. federal government's budget process; (iii) failure by us or our employees to obtain and maintain necessary security clearances or certifications; (iv) our ability to compete effectively in the competitive bidding process; (v) delays, contract terminations or cancellations of our major contract awards; (vi) our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts; (vii) problems or delays in the development, delivery, transition or enhancement of products and services; (viii) failure of third parties to deliver on commitments under contracts with us; (ix) failure to be awarded task orders under our indefinite delivery, indefinite quantity contracts; and (x) changes in government procurement, contract or other practices or the adoption by the government of new laws, rules and regulations adverse to us; as well as the matters described in the "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" sections of Perspecta's Annual Report on Form 10-K for the year ended March 31, 2018, as may be updated or supplemented in our Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission, which discuss these and other factors that could adversely affect our results. Readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this presentation or to reflect the occurrence of unanticipated events except as required by law.

Segment Operating Results (Unaudited)

Perspecta delivers IT, mission, and operations-related services across the U.S. federal government through two reportable segments--Defense and Intelligence, which provides services to the Department of Defense (DoD), intelligence community, branches of the U.S. Armed Forces, and other DoD agencies; and Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies. The following tables summarize revenue and segment operating income by reportable segment:

For the three months ended June 30, 2018, pro forma Defense and Intelligence segment revenues increased by $65 million, or 11 percent compared to the same period of the prior year. Major drivers of the year-over-year increase include continued growth in intelligence community support and background investigations. Pro forma Civilian and Health Care segment revenues decreased by $46 million, or 11 percent year-over-year. The primary driver of the decline was the completion of a large engineering support contract for the Kennedy Space Center.

Defense and Intelligence segment operating margin for the quarter improved to 12.3 percent from 10.0 percent in the first quarter of fiscal year 2019. Civilian and Health Care segment operating margin improved to 18.9 percent from 14.9 percent in the first quarter of fiscal year 2019. Profitability increases across both segments derived primarily from increased operational efficiencies implemented throughout fiscal year 2018 as well as the cost synergy actions taken in the first quarter of fiscal year 2019.

Reconciliation of Non-GAAP Financial Measures

To aid investors and analysts with year-over-year comparability for the combined businesses of USPS and Vencore and KeyPoint, Perspecta is including certain pro forma financial information that combines the stand-alone USPS and Vencore and KeyPoint financial information as if the acquisition had taken place on April 1, 2017. Pro forma adjusted results include a full period of Vencore and KeyPoint results; assess the impact of interest, depreciation and amortization, recurring elements of pension income, and other costs as if the spin-off and mergers had occurred at the beginning of the period; and exclude costs directly associated with the spin-off and mergers and the ongoing integration process.

The following tables reconcile non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Perspecta management believes that these non-GAAP financial measures provide useful additional information to investors regarding Perspecta's results of operations as they provide another measure of the Company's profitability and ability to service its debt and are considered important to financial analysts covering Perspecta's industry.

These non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance with GAAP. Perspecta's non-GAAP measures may be calculated differently than similarly named measures reported by other companies. In addition, using non-GAAP measures may have limited value as they exclude certain items that may have a material impact on reported financial results and cash flows. When analyzing Perspecta's performance, it is important to evaluate each adjustment in the reconciliation and use adjusted measures in addition to, and not as an alternative to, GAAP measures.

Pro Forma Revenue (Unaudited)

Pro Forma Adjusted EBITDA, EBITDA Margin, Net Income, and Diluted Earnings Per Share (Unaudited)

Pro forma adjusted EBITDA and pro forma adjusted EBITDA margin exclude the following items: mark-to-market adjustments to the pension and other post-employment benefit (OPEB) programs, stock-based compensation, and the 2018 start-up costs associated with the National Background Investigations Bureau (NBIB) program. There were no mark-to-market changes in either the current or year-ago quarterly periods. Pro forma adjusted net income and pro forma adjusted diluted earnings per share also exclude acquisition-related intangible amortization.

Previously, in its Current Report on Form 8-K filed on July 19, 2018, the Company provided separate reconciliations of (1) pro forma adjusted EBITDA and pro forma adjusted EBITDA margin and (2) pro forma adjusted net income and pro forma adjusted diluted earnings per share to net income. Perspecta has updated this presentation to combine the separate reconciliations and to apply a pro forma effective tax rate of 34 percent in the reconciliations for pro forma adjusted net income and pro forma adjusted diluted earnings per share for fiscal year 2018.

This change adjusts for the effects of implementing the Tax Cuts and Jobs Act of 2017 for purposes of comparison to the financial results for fiscal year 2019. For the three months ended June 30, 2017, the presentation change resulted in an increase of $4 million in pro forma adjusted net income and $0.02 in pro forma adjusted diluted EPS.

Free Cash Flow (Unaudited)

Perspecta defines free cash flow as the sum of net cash provided by operating activities and net cash used in investing activities adjusted for certain items, such as (i) payments on lease liabilities, (ii) business acquisitions, dispositions, and investments, (iii) payments and amortization related to restructuring activities, (iv) payments on restructuring, transaction and integration-related costs, (v) the impact arising from the initial sale of accounts receivables under the Master Accounts Receivable Purchase Agreement, and (vi) other non-recurring payments.

SOURCE Perspecta Inc.