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Perspecta Announces Financial Results for Second Quarter of Fiscal Year 2020


CHANTILLY, Va., Nov. 13, 2019 /PRNewswire/ -- Perspecta Inc. (NYSE: PRSP), a leading U.S. government services provider, today announced financial results for the second quarter of fiscal year 2020, which ended September 30, 2019.

Perspecta Inc. (PRNewsfoto/Perspecta Inc.)

"I'm pleased to report that our second quarter results reflect continued strong execution across the entire business, highlighted by robust growth in revenue and profit," said Mac Curtis, president and chief executive officer, Perspecta. "We are operating well as One Perspecta and competing successfully in the market. Our recent new business wins point to growth momentum in both of our segments. Each of our employees has a reason to be proud of the progress that we've made as a company and the positive impact that we've had on our customers' vital missions."

Summary operating results (unaudited)



Three Months Ended

(in millions, except margin and per share amounts)


September 30, 2019


September 30, 2018

Revenue


$

1,172


$

1,068

Income before taxes


37


36

Operating Margin


3.2%


3.4%

Net income


29


24

Diluted earnings per share (EPS)


0.18


0.14







Non-GAAP Measures*:





Adjusted Net Income


88


74

Adjusted EBITDA


197


177

Adjusted EBITDA Margin


16.8%


16.5%

Adjusted Diluted EPS


0.54


0.45






* Adjusted Net Income, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS are non-GAAP financial measures. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information provided in accordance with GAAP. See Selected Financial Data and Reconciliation of Non-GAAP Financial Measures at the end of this press release for more information.

On May 31, 2018, Perspecta became an independent company through consummation of the spin-off by DXC Technology Company (DXC) of its U.S. Public Sector Business (USPS) and merger of USPS with Vencore Holding Corp. and KGS Holding Corp. Perspecta provides adjusted results that exclude costs directly associated with the spin-off and mergers and the ongoing integration process. The tables in Selected Financial Data and Reconciliation of Non-GAAP Financial Measures at the end of this press release provide all appropriate reconciliations from adjusted results to GAAP.

Revenue for the quarter was $1.17 billion, up 10% compared to the second quarter of fiscal year 2019, and up 6% compared to the first quarter of fiscal year 2020. Revenue in the quarter included approximately $60 million from transition services and the sale of IT assets to conclude the National Aeronautics and Space Administration (NASA) Agency Consolidated End-user Services contract.

Income before taxes for the second quarter of fiscal year 2020 was $37 million, which was up 3% from the second quarter of fiscal year 2019. Operating margin decreased from 3.4% to 3.2% year-over-year.  Net income was $29 million, or $0.18 per diluted share. Net income was up 21% and diluted EPS was up 29% from the second quarter of fiscal year 2019.

Adjusted net income was $88 million for the second quarter, which was up 19% year-over-year. Adjusted EBITDA was $197 million for the second quarter, up 11% compared to adjusted EBITDA for the second quarter of fiscal year 2019; adjusted EBITDA margin increased from 16.5% to 16.8% over the same period. The year-over-year increase in profitability primarily reflects strong program execution on fixed price programs as well as cost synergies associated with the mergers. Adjusted diluted EPS for the second quarter was $0.54, up 20% compared to adjusted diluted EPS for the second quarter of fiscal year 2019.

Segment operating results (unaudited)

For the three months ended September 30, 2019, Defense and Intelligence segment revenue of $777 million increased by 11%, primarily due to new business wins and growth on existing programs. Civilian and Health Care segment revenue of $395 million increased by 8% compared to revenue from the same period of the prior year, driven by the $60 million NASA transition services and asset sale.

Defense and Intelligence adjusted segment margin for the second quarter of fiscal year 2020 improved to 14.9% from 13.1% in the second quarter of fiscal year 2019. Civilian and Health Care adjusted segment margin for the second quarter of fiscal year 2020 decreased to 10.4% from 12.8% in the second quarter of fiscal year 2019. Total adjusted segment profit for the second quarter of fiscal year 2020 increased to $157 million from $139 million in the second quarter of fiscal year 2019.

Cash management and capital deployment

Perspecta generated $135 million of net cash provided by operating activities in the second quarter of fiscal year 2020. Quarterly adjusted free cash flow was $104 million, or 118% of adjusted net income. During the second quarter of fiscal year 2020, Perspecta paid down $23 million of debt and returned $27 million to shareholders, including $10 million as part of its regular quarterly cash dividend program and $17 million in share repurchases.

In addition, Perspecta paid $250 million plus customary purchase price adjustments, totaling an estimated purchase price of $265 million, to acquire Knight Point Systems, LLC (Knight Point), an end-to-end managed services and solutions provider focused on modernizing IT systems, protecting critical networks and driving digital transformation. Perspecta also entered into the Second Amendment to its Credit Agreement to provide greater operational and financial flexibility. The Second Amendment provides for, among other things: a $46 million increase in the Term Loan A Tranche 2, the proceeds of which were used to reduce Term Loan A Tranche 1; an extension of both tranches of Term Loan A by 15 months; and a $150 million increase in the revolving credit facility to $750 million and an extension of its maturity to August 31, 2024.

At quarter end, Perspecta had $122 million in cash and cash equivalents, $575 million of undrawn capacity in its revolving credit facility, and $2.8 billion in total debt, including $283 million in finance lease obligations. On November 12, 2019, the Perspecta Board of Directors declared that Perspecta will pay a cash dividend of $0.06 per share on January 14, 2020 to Perspecta stockholders of record at the close of business on December 4, 2019.

Contract awards

Contract awards (bookings) totaled $2.3 billion in the second quarter of fiscal year 2020, representing a book-to-bill ratio of 2.0x. Included in the quarterly bookings were several particularly important single-award prime contracts:

In addition, Perspecta won a large multiple-award indefinite delivery/indefinite quantity (ID/IQ) contract that is not included in bookings but supports future growth:

Perspecta's backlog of signed business orders at the end of second quarter of fiscal year 2020 was $12.7 billion; funded backlog at the end of the second quarter was $2.0 billion.

Forward guidance

Perspecta is raising its previously announced fiscal year 2020 guidance to reflect strong second quarter results. The table below provides the current and previous guidance ranges for revenue, adjusted EBITDA margin, adjusted diluted EPS, and adjusted free cash flow conversion (as a percentage of adjusted net income). All forward-looking non-GAAP measures exclude estimates for amortization of intangible assets; stock-based compensation expenses; restructuring, separation, transaction and integration-related costs; mark-to-market changes associated with pension and other post-retirement benefit plans; and other non-recurring items. Perspecta is unable to provide a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis without unreasonable effort due to the overall high variability and low visibility of most of the excluded items. Material changes to any one of these items could have a significant effect on future GAAP results.

Measure

Current FY20 Guidance

Prior FY20 Guidance

Revenue (millions)

$4,425 - $4,500

$4,400 - $4,500

Adjusted EBITDA Margin

17.0% - 18.0%

17.0% - 18.0%

Adjusted Diluted EPS

$2.10 - $2.18

$2.08 - $2.18

Adjusted Free Cash Flow Conversion

105%+

95%+

John Kavanaugh, senior vice president and chief financial officer of Perspecta, commented, "Our strong financial and business development results enabled us to again raise our guidance for the fiscal year. We are already seeing the benefits of the Knight Point acquisition and believe that our balanced capital allocation model is driving value for our long-term shareholders."

Conference call

Perspecta executive management will hold a conference call on November 13, 2019, 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 888-348-3873 (domestic), 855-669-9657 (Canada), or 412-902-4234 (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 270+ 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 more than 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 and assumptions in this press release 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 intentions, expectations, beliefs or projections, 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, guidance, contract value, revenue acceleration, profitability and revenue generation. 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, (i) any issue that compromises our relationships with the U.S. federal government, or any state or local governments, or damages our professional reputation; (ii) 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; (iii) any delay in completion of the U.S. federal government's budget process; (iv) failure to comply with numerous laws, regulations and rules, including regarding procurement, anti-bribery and organizational conflicts of interest; (v) failure by us or our employees to obtain and maintain necessary security clearances or certifications; (vi) 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; (vii) our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts; (viii) 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; (ix) failure of third parties to deliver on commitments under contracts with us; (x) misconduct or other improper activities from our employees or subcontractors; (xi) delays, terminations, or cancellations of our major contract awards, including as a result of our competitors protesting such awards; (xii) failure of our internal control over financial reporting to detect fraud or other issues; (xiii) failure or disruptions to our systems, due to cyber-attack, service interruptions or other security threats; (xiv) failure to be awarded task orders under our indefinite delivery/indefinite quantity contracts; (xv) changes in government procurement, contract or other practices or the adoption by the government of new laws, rules and regulations in a manner adverse to us; and (xvi) uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; 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, 2019, 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 press release or to reflect the occurrence of unanticipated events except as required by law.

 

Condensed Consolidated Statements of Operations

(preliminary and unaudited)





Three Months Ended

(in millions, except per share amounts)


September 30, 2019


September 30, 2018

Revenue


$

1,172



$

1,068







Costs of services


908



813


Selling, general and administrative


81



89


Depreciation and amortization


90



74


Restructuring costs


2



2


Separation, transaction and integration-related costs


20



21


Interest expense, net


36



37


Other income, net


(2)



(4)


Total costs and expenses


1,135



1,032







Income before taxes


37



36


Income tax expense


8



12


Net income


$

29



$

24







Earnings per common share:





  Basic


$

0.18



$

0.15


  Diluted


$

0.18



$

0.14



 

 

Selected Condensed Consolidated Balance Sheet Data

(preliminary and unaudited)



(in millions)


September 30, 2019


March 31, 2019

ASSETS





Current assets:





Cash and cash equivalents


$

122



$

88


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


570



484


Other receivables


33



92


Prepaid expenses


102



141


Assets held for sale


49



23


Other current assets


58



50


Total current assets


934



878


Property and equipment, net of accumulated depreciation of $141 and $148


333



368


Goodwill


3,295



3,179


Intangible assets, net of accumulated amortization of $414 and $299


1,478



1,466


Other assets


279



192


Total assets


$

6,319



$

6,083







LIABILITIES and STOCKHOLDERS' EQUITY





Current liabilities:





Current maturities of long-term debt


$

87



$

80


Current finance lease obligations


119



137


Current operating lease obligations


40



?


Accounts payable


285



246


Accrued payroll and related costs


131



91


Accrued expenses


344



396


Other current liabilities


72



64


Total current liabilities


1,078



1,014


Long-term debt, net of current maturities


2,435



2,297


Non-current finance lease obligations


164



168


Deferred tax liabilities


143



171


Other long-term liabilities


336



271


Total liabilities


4,156



3,921


Commitments and contingencies





Total stockholders' equity


2,163



2,162


Total liabilities and stockholders' equity


$

6,319



$

6,083



 

 

Condensed Consolidated Combined Statements of Cash Flows

(preliminary and unaudited)





Three Months Ended


Six Months Ended

(in millions)


September 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Cash flows from operating activities:









Net income


$

29



$

24



$

60



$

53


Adjustments to reconcile net income to net cash 
     provided by operating activities:









Depreciation and amortization


90



74



191



138


Stock-based compensation


10



1



15



3


Deferred income taxes


(12)



(11)



(20)



(11)


Loss (gain) on sale or disposal of assets


2



(1)



10



(25)


Other non-cash charges, net


3



?



4



(14)


Changes in assets and liabilities, net of effects of 
     acquisitions:









Receivables, net


(5)



(28)



50



(4)


Prepaid expenses and other current assets


15



(13)



46



(18)


Accounts payable, accrued expenses and other
current liabilities


10



20



(16)



92


Deferred revenue and advanced contract payments


(3)



?



(16)



13


Income taxes payable and income tax liability


(3)



6



(2)



6


Other assets and liabilities, net


(1)



4



(2)



3


Net cash provided by operating activities


135



76



320



236


Cash flows from investing activities:









Payments for acquisitions, net of cash acquired


(265)



?



(265)



(312)


Extinguishment of acquired debt and related costs


?



?



?



(994)


Proceeds from sale of assets


?



?



?



24


Purchases of property, equipment and software


(3)



(5)



(4)



(11)


Payments for outsourcing contract costs


(2)



(4)



(3)



(6)


Net cash used in investing activities


(270)



(9)



(272)



(1,299)


Cash flows from financing activities:









Principal payments on long-term debt


(23)



(50)



(45)



(50)


Proceeds from debt issuance


?



?



?



2,500


Payments of debt issuance costs


(3)



?



(3)



(43)


Proceeds from revolving credit facility


175



?



175



50


Payments on revolving credit facility


?



?



?



(50)


Payments on finance lease obligations


(42)



(41)



(77)



(82)


Repurchases of common stock


(17)



(21)



(32)



(21)


Dividend to DXC


?



?



?



(984)


Dividends paid to Perspecta stockholders


(10)



(8)



(18)



(8)


Net transfers to Parent


?



?



?



(88)


Net cash provided by (used in) financing activities


80



(120)



?



1,224


Net change in cash and cash equivalents, including 
     restricted


(55)



(53)



48



161


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


179



201



99



?


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


124



148



147



161


Less restricted cash and cash equivalents included 
     in other current assets


2



22



25



35


Cash and cash equivalents at end of period


$

122



$

126



$

122



$

126



Selected Financial Data and Reconciliation of Non-GAAP Financial Measures

The following tables present selected financial data, including the reconciliation of 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 Perspecta'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, diluted EPS 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 tables and use adjusted measures in addition to, and not as an alternative to, GAAP measures.

Adjusted EBITDA, Net Income, and Diluted EPS (Unaudited)

Adjusted EBITDA excludes the following items: interest, income taxes, depreciation and amortization, restructuring, separation, transaction and integration-related cost, mark-to-market adjustments to the pension and other post-employment benefit programs, stock-based compensation, and other non-recurring items. There were no mark-to-market changes in either the current or year-ago quarterly periods. Adjusted net income and adjusted diluted EPS also exclude acquisition-related intangible amortization.




Three Months Ended

(in millions)


September 30, 2019


September 30, 2018

Net income


$

29


$

24

Income tax expense


8


12

Interest expense, net


36


37

Depreciation and amortization


90


74

EBITDA


163


147

Effects of Spin-Off and Mergers


?


5

Restructuring costs


2


?

Separation, transaction and integration-related costs


20


21

Stock-based compensation


10


1

Separation related cost


2


3

Adjusted EBITDA


197


177

Adjusted EBITDA margin (a)


16.8%


16.5%

Depreciation and amortization


(90)


(74)

Amortization of acquired intangibles


50


36

Interest expense, net


(36)


(37)

Adjusted earnings before taxes


121


102

Income tax expense (b)


33


28

Adjusted net income


$

88


$

74

Adjusted diluted EPS (c)


$

0.54


$

0.45










Notes:

(a)

Adjusted EBITDA margin is calculated as the ratio of adjusted EBITDA to revenue for both quarters ended
September 30, 2019 and 2018.

(b)

Represents income tax expense utilizing an adjusted effective tax rate that adjusts for non-GAAP measures
including: transaction costs, integration costs, and tax add backs for non-deductible prior-merger goodwill
amortization. Adjusted effective tax rates are 27% for both quarters ended September 30, 2019 and 2018.

(c)

Represents adjusted net income divided by the weighted average common shares on a diluted basis of
162.90 million and 165.79 million for the quarters ended September 30, 2019 and 2018, respectively.

Adjusted Free Cash Flow (Unaudited)

Perspecta defines adjusted free cash flow as net cash provided by operating activities less purchases of property, equipment and software, and adjusted for certain items, such as (i) payments on finance lease obligations, (ii) business acquisitions, dispositions, and investments, (iii) restructuring payments, (iv) payments on separation, 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.




Three Months Ended

(in millions)


September 30, 2019


September 30, 2018

Net cash provided by operating activities


$

135



$

76


Purchases of property, equipment and software


(3)



(5)


Payments on finance lease obligations


(42)



(41)


Payments on restructuring, separation, transaction and
integration-related costs


14



75


Adjusted free cash flow


$

104



$

105


Segment Revenue and Profit (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 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 reportable segment profit:

RECONCILIATION OF REPORTABLE SEGMENT PROFIT TO INCOME BEFORE TAXES (Unaudited)








Three Months Ended

(in millions)


September 30, 2019


September 30, 2018

Total segment profit


$

153



$

128


Not allocated to segments:





Stock-based compensation


(10)



(1)


Amortization of acquired intangible assets


(50)



(36)


Restructuring costs


(2)



?


Separation, transaction and integration-related costs


(20)



(21)


Interest expense, net


(36)



(37)


Other unallocated, net


2



3


Income before taxes


$

37



$

36


 

 

REVENUE AND ADJUSTED SEGMENT PROFIT (Unaudited)










Three Months Ended

(in millions)


September 30, 2019


September 30, 2018

Revenue





Defense and Intelligence


$

777



$

702


Civilian and Health Care


395



366


Total revenue


$

1,172



$

1,068







Segment profit





Defense and Intelligence


$

113



$

87


Non-GAAP adjustments for the period (a)


3



5


Adjusted segment profit


$

116



$

92







Civilian and Health Care


$

40



$

41


Non-GAAP adjustments for the period (a)


1



6


Adjusted segment profit


$

41



$

47







Total segment profit


$

153



$

128


Total adjusted segment profit


$

157



$

139









Notes:

(a)

Includes adjustments for certain separation-related and other costs, which are included in the
segment results of operations.

 

 

SOURCE Perspecta Inc.


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