Perspecta announces financial results for first quarter of fiscal year 2021

CHANTILLY, Va., Aug. 6, 2020 /PRNewswire/ -- Perspecta Inc. (NYSE:PRSP), a leading U.S. government services provider, today announced financial results for the first quarter of fiscal year 2021, which ended July 3, 2020.

"We are off to a solid start this fiscal year and our first quarter results continue to demonstrate solid execution across the enterprise, delivering on our revenue, adjusted diluted earnings per share and free cash flow conversion expectations," said Mac Curtis, chairman and chief executive officer of Perspecta. "I am pleased with both our operational performance and business development efforts during these challenging market conditions. Additionally, our new business wins build on the positive momentum in both of our segments and we remain dedicated to meeting our customers' needs and generating value for all our stakeholders."

Summary operating results (unaudited)


                                                                                 Fiscal Quarters Ended


        (in millions, except
         margin and per share
         amounts)                                           July 3, 2020                                          June 30, 2019



       Revenue                                                             $
            1,108                                               $
        1,107


        Income before taxes                                                     $
            3                                                  $
        42


        Operating margin                                     0.3
          %                                                        3.8
        %


        Net (loss) income                                                     $
            (3)                                                 $
        31


        Diluted (loss)
         earnings per share
         (EPS)                                                             $
            (0.02)                                               $
        0.19




        Non-GAAP Measures*:


        Adjusted Net Income                                                    $
            76                                                  $
        85


        Adjusted EBITDA                                                       $
            167                                                 $
        204


        Adjusted EBITDA Margin                              15.1
          %                                                             18.4
                                                                                                                                        %


        Adjusted Diluted EPS                                                 $
            0.47                                                $
        0.52




        * 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.

    ---

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 $1.11 billion, up slightly compared to the first quarter of fiscal year 2020, and up 1% compared to the fourth quarter of fiscal year 2020. The sequential increase in revenue was primarily driven by contract growth and the in-quarter acquisition of DHPC Technologies, Inc., and was partially offset by the COVID-19 impact of approximately $23 million.

Income before taxes for the first quarter of fiscal year 2021 was $3 million, which was down 93% compared to the first quarter of fiscal year 2020. Operating margin decreased from 3.8% to 0.3% year-over-year. Net loss was $3 million, or a loss of $0.02 per diluted share.

Adjusted net income was $76 million for the first quarter of fiscal year 2021, down 11% year-over-year. Adjusted EBITDA was $167 million for the first quarter of fiscal year 2021, down 18% compared to adjusted EBITDA for the first quarter of fiscal year 2020; adjusted EBITDA margin decreased from 18.4% to 15.1% over the same period. The year-over-year decrease in profitability was primarily due to lower asset intensity, an increased mix of cost-reimbursable programs and an $8 million COVID-19 impact. Adjusted diluted EPS for the first quarter of fiscal year 2021 was $0.47, down 10% compared to adjusted diluted EPS for the first quarter of fiscal year 2020.

Segment operating results (unaudited)

For the fiscal quarter ended July 3, 2020, Defense and Intelligence segment revenue of $776 million increased by 3% compared to the first quarter of fiscal year 2020, primarily due to new business wins and growth on existing programs. Civilian and Health Care segment revenue of $332 million decreased by 6% compared to the segment's revenue from the comparable period of the prior year due to NASA Agency Consolidated End-User Services and other program wind downs.

Defense and Intelligence adjusted segment profit margin for the first quarter of fiscal year 2021 decreased to 12.6% from 15.7% in the first quarter of fiscal year 2020. Civilian and Health Care adjusted segment profit margin for the first quarter of fiscal year 2021 improved to 10.2% from 9.3% in the first quarter of fiscal year 2020. Total adjusted segment profit for the first quarter of fiscal year 2021 decreased to $132 million from $151 million in the first quarter of fiscal year 2020.

Cash management and capital deployment

Perspecta generated $132 million of net cash provided by operating activities in the first quarter of fiscal year 2021. Quarterly adjusted free cash flow was $102 million, or 134% of adjusted net income. During the first quarter of fiscal year 2021, Perspecta used $26 million to make permanent debt repayments, used $50 million to repay revolver borrowings and returned $10 million to shareholders in the form of its regular quarterly cash dividend program.

At quarter end, Perspecta had $122 million in cash and cash equivalents, $750 million of undrawn capacity in its revolving credit facility, and $2.5 billion in total debt, including $229 million in finance lease obligations. On August 5, 2020, the Perspecta Board of Directors declared that Perspecta will pay a cash dividend of $0.07 per share on October 15, 2020 to Perspecta shareholders of record at the close of business on August 26, 2020.

Contract awards

Contract awards (bookings) totaled $1.2 billion in the first quarter of fiscal year 2021, representing a book-to-bill ratio of 1.1x. Included in the quarterly bookings were several particularly important single-award prime contracts:

    --  U.S. Army Training and Doctrine Command Army Training Information System
        (ATIS) contract: Perspecta was awarded an Other Transaction Agreement
        from the U.S. Army Training and Doctrine Command to deliver Phase II of
        the ATIS program including the development, integration, delivery,
        operation and maintenance of an enterprise capability for Army training
        and education information. The Perspecta solution will consolidate 28
        legacy systems, implement proven processes and migrate data into a
        single-entry, integrated, cloud-based system. This will provide the Army
        with a real-time understanding of combat readiness with reduced cost and
        complexity. The four-year fixed-price program, which represents new work
        for Perspecta, has a ceiling value of $237 million.
    --  Received multiple awards on classified systems engineering and
        integration programs in our Defense and Intelligence segment: Perspecta
        will provide support to various U.S. government customers. The total
        potential contract value of these awards is $370 million with a period
        of performance of up to eight years.
    --  U.S. Department of Homeland Security (DHS) new Data Center Two (DC2)
        Support Services contract: Perspecta will provide DHS headquarters and
        all authorized components with full scope managed services including
        baseline data center hosting and engineering services, as well as
        application and system migration, planning and execution support. The
        indefinite delivery / indefinite quantity fixed-price contract has a
        two-year base with two six-month option periods and a ceiling value of
        $112 million.
    --  Defense Advanced Research Projects Agency (DARPA) Fast Network Interface
        Cards (FastNICs) program: DARPA awarded Perspecta Labs a contract on the
        FastNICs program, with an objective of speeding up complex computing
        applications, such as the distributed training of machine learning
        classifiers and video analysis applications, by 100x through the
        development, implementation, integration and validation of innovative
        networking approaches. Perspecta Labs will research, design, develop and
        demonstrate new network interface hardware that operates at a
        10-terabits-per-second speed, and the associated system and programming
        software to manage and utilize the new hardware. The award, which
        represents new work for the company, has a total ceiling value of $37
        million and a four-year period of performance if all options are
        exercised.

Perspecta's backlog of signed business orders at the end of the first quarter of fiscal year 2021 was $13.5 billion; funded backlog at the end of the first quarter was $1.9 billion.

Forward guidance

The table below provides fiscal year 2021 guidance ranges for revenue, adjusted EBITDA margin, adjusted diluted EPS, and adjusted free cash flow conversion (as a percentage of adjusted net income). The table below provides information about the estimated financial impact of the network component of the existing U.S. Navy Next Generation Enterprise Network contract (NGEN SMIT), for which we are under contract through December 31, 2020. 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 
     
           Fiscal Year 2021  
       
            NGEN SMIT Information


                            
         Guidance              
         Estimated NGEN SMIT            
        Perspecta excluding Estimated
                                                               Impact                              NGEN SMIT Impact


            Revenue
           (millions)         
           $4,260 - $4,410       
           ~ $600                     
            ~ $3,660 - $3,810


           Adjusted
             EBITDA                     15.0% - 16.0%                                ~ 0.5%                                 ~ 15.5% - 16.5%
       Margin


           Adjusted
          Diluted EPS           
           $1.90 - $2.03       
           ~ $0.30                     
            ~ $1.60 - $1.73


         Adjusted Free
              Cash                              100+%                                 ~ 100%                                         ~ 100+%
        Flow
     Conversion

        ---

John Kavanaugh, chief financial officer of Perspecta, commented, "We are pleased to begin FY21 with strong results. We remain dedicated to delivering a consistent track record of execution. Our first quarter performance reinforces our efforts of continuing to deliver on our commitments."

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 first 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 at near full capacity. For the fiscal quarter ended July 3, 2020, the overall impact of the COVID-19 pandemic on our results of operations was approximately $23 million lower revenue, $8 million lower adjusted EBITDA and a liquidity benefit due to a $20 million deferral of payroll tax payments afforded by the Coronavirus Aid, Relief and Economic Security Act. 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. Our fiscal year 2021 guidance above accounts for a potential impact of the COVID-19 pandemic of approximately $75 million in revenue and $20 million in adjusted EBITDA.

Conference call

Perspecta executive management will hold a conference call on August 6, 2020, 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, 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 280+ 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 nearly 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, share repurchases, dividend payments, 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) 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; (ii) any issue that compromises our relationships with the U.S. federal government, or any state or local governments, or damages our professional reputation; (iii) 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; (iv) any delay in completion of the U.S. federal government's budget process; (v) failure to comply with numerous laws, regulations and rules, including regarding procurement, anti-bribery and organizational conflicts of interest; (vi) failure by us or our employees to obtain and maintain necessary security clearances or certifications; (vii) 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; (viii) our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts; (ix) 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; (x) failure of third parties to deliver on commitments under contracts with us; (xi) misconduct or other improper activities from our employees or subcontractors; (xii) delays, terminations, or cancellations of our major contract awards, including as a result of our competitors protesting such awards; (xiii) failure of our internal control over financial reporting to detect fraud or other issues; (xiv) failure or disruptions to our systems, due to cyber-attack, service interruptions or other security threats; (xv) failure to be awarded task orders under our indefinite delivery/indefinite quantity contracts; (xvi) 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 (xvii) uncertainty from the expected discontinuance of the London Interbank Offered Rate 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 fiscal year ended March 31, 2020, 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)




                                                                                    Fiscal Quarters Ended


      (in millions, except per
       share amounts)                                            July 3, 2020                             June 30, 2019



     Revenue                                                                  $
           1,108                                 $
       1,107




      Costs of services                                                   899                                             836


      Selling, general and
       administrative                                                      62                                              72


      Depreciation and
       amortization                                                        96                                             101


      Restructuring costs                                                  18                                               2


      Separation, transaction and
       integration-related costs                                           15                                              19


      Interest expense, net                                                30                                              35


      Other (income) expense, net                                        (15)


      Total costs and expenses                                          1,105                                           1,065




      Income before taxes                                                   3                                              42


      Income tax expense                                                    6                                              11


      Net (loss) income                                                          $
           (3)                                   $
       31




      (Loss) earnings per common
       share:



     Basic                                                                   $
           (0.02)                                 $
       0.19



     Diluted                                                                 $
           (0.02)                                 $
       0.19



     
                Selected Condensed Consolidated Balance Sheet Data



     (preliminary and unaudited)





     (in millions)                                                   July 3, 2020                   March 31, 2020



     ASSETS



     Current assets:



     Cash and cash equivalents                                                      $
        122                 $
         147


      Receivables, net of allowance for
       doubtful accounts of $1 and $1                                          566               513



     Other receivables                                                         33                45



     Prepaid expenses                                                          62                81



     Other current assets                                                      78               101



     Total current assets                                                     861               887


      Property and equipment, net of
       accumulated depreciation of $220 and
       $193                                                                    299               307



     Goodwill                                                               2,701             2,671


      Intangible assets, net of accumulated
       amortization of $566 and $515                                         1,149             1,193



     Other assets                                                             320               347



     Total assets                                                                 $
        5,330               $
         5,405




      LIABILITIES and SHAREHOLDERS' EQUITY



     Current liabilities:


      Current maturities of long-term debt                                            $
        89                  $
         89


      Current finance lease obligations                                        106               111


      Current operating lease obligations                                       38                39



     Accounts payable                                                         158               218


      Accrued payroll and related costs                                        174               142



     Accrued expenses                                                         459               385



     Other current liabilities                                                 85                73



     Total current liabilities                                              1,109             1,057


      Long-term debt, net of current
       maturities                                                            2,213             2,283


      Non-current finance lease
       obligations                                                             123               136


      Non-current operating lease
       obligations                                                             126               129



     Deferred tax liabilities                                                  99               114


      Other long-term liabilities                                              312               329



     Total liabilities                                                      3,982             4,048


      Commitments and contingencies



     Total shareholders' equity                                             1,348             1,357


      Total liabilities and shareholders'
       equity                                                                      $
        5,330               $
         5,405



     
                Condensed Consolidated Statements of Cash Flows



     (preliminary and unaudited)




                                                                                   Fiscal Quarters Ended



     (in millions)                                                July 3, 2020                          June 30, 2019


      Cash flows from operating
       activities:



     Net (loss) income                                                         $
         (3)                                   $
     31


      Adjustments to reconcile net
       (loss) income to net cash
       provided by operating activities:


      Depreciation and amortization                                          96                                          101


      Share-based compensation                                                7                                            5



     Deferred income taxes                                                (16)                                         (8)


      Loss on sale or disposal of
       assets, net                                                            7                                            8


      Other non-cash charges, net                                             4                                            1


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



     Receivables, net                                                     (18)                                          55


      Prepaid expenses and other current
       assets                                                                24                                           31


      Accounts payable, accrued expenses
       and other current liabilities                                         38                                         (26)


      Deferred revenue and advanced
       contract payments                                                      1                                         (13)


      Income taxes payable and liability                                    (1)


      Other assets and liabilities, net                                     (7)


      Net cash provided by operating
       activities                                                           132                                          185


      Cash flows from investing
       activities:


      Payments for acquisitions, net of
       cash acquired                                                       (53)


      Proceeds from sale of assets                                            9


      Purchases of property, equipment
       and software                                                        (15)                                         (1)


      Payments for outsourcing contract
       costs                                                                                                            (1)


      Net cash used in investing
       activities                                                          (59)                                         (2)


      Cash flows from financing
       activities:


      Principal payments on long-term
       debt                                                                (26)                                        (22)


      Payments on revolving credit
       facility                                                            (50)


      Payments on finance lease
       obligations                                                         (28)                                        (35)


      Repurchases of common stock                                                                                      (15)


      Repurchases of common stock to
       satisfy tax withholding
       obligations                                                          (2)



     Dividends paid                                                       (10)                                         (8)


      Net cash used in financing
       activities                                                         (116)                                        (80)


      Net change in cash and cash
       equivalents, including restricted                                   (43)                                         103


      Cash and cash equivalents,
       including restricted, at
       beginning of period                                                  221                                           99


      Cash and cash equivalents,
       including restricted, at end of
       period                                                               178                                          202


      Less restricted cash and cash
       equivalents included in other
       current assets                                                        56                                           23


      Cash and cash equivalents at end
       of period                                                                $
         122                                   $
     179

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.

Revenue Excluding NGEN SMIT (Unaudited)


                              Fiscal Quarters Ended


     (in
      millions)   July 3, 2020                          June 30, 2019


     Revenue                     $
              1,108              $
        1,107


     Less NGEN
      SMIT impact          214                      197


     Revenue
      excluding
      NGEN SMIT
      impact                       $
              894                $
        910

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 costs, 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.


                                                                                                       Fiscal Quarters Ended



     (in millions, except margin and per share amounts)                          July 3, 2020                               June 30, 2019



     
                Net (loss) income                                                            $
       
                (3)                              $
       
       31



     Income tax expense                                                                     6                                                 11



     Interest expense, net                                                                 30                                                 35



     Depreciation and amortization                                                         96                                                101



     
                EBITDA                                                                  129                                                178



     Restructuring costs                                                                   18                                                  2



     Separation, transaction and integration-related costs                                 15                                                 19



     Share-based compensation                                                               7                                                  5



     Other                                                                                (2)



     
                Adjusted EBITDA                                                         167                                                204



     
                
                  Adjusted EBITDA margin (a)                              15.1                                               18.4


                                                                                             %                                                 %



     
                Adjusted EBITDA, excluding NGEN SMIT (b)                                144                                                180



     
                
                  Adjusted EBITDA margin, excluding NGEN SMIT (b)         16.1                                               19.8


                                                                                             %                                                 %



     Depreciation and amortization                                                       (96)                                             (101)



     Amortization of acquired intangibles                                                  61                                                 48



     Interest expense, net                                                               (30)                                              (35)



     
                Adjusted earnings before taxes                                          102                                                116



     Income tax expense (c)                                                                26                                                 31



     
                Adjusted net income                                                           $
       
                76                               $
       
       85



     
                Adjusted diluted EPS (d)                                                    $
       
                0.47                             $
       
       0.52



     
                Adjusted net income, excluding NGEN SMIT (e)                                  $
       
                60                               $
       
       68



     
                Adjusted diluted EPS, excluding NGEN SMIT (e)                               $
       
                0.37                             $
       
       0.42




              
                Notes:


               (a)                               Adjusted EBITDA
                                                  margin is
                                                  calculated as
                                                  the ratio of
                                                  adjusted
                                                  EBITDA to
                                                  revenue for
                                                  the fiscal
                                                  quarters ended
                                                  July 3, 2020
                                                  and June 30,
                                                  2019.


               (b)                               Excludes the
                                                  impact of NGEN
                                                  SMIT. Adjusted
                                                  EBITDA,
                                                  excluding NGEN
                                                  SMIT is
                                                  defined as
                                                  revenue less
                                                  cost of
                                                  services,
                                                  selling,
                                                  general and
                                                  administrative
                                                  and excludes
                                                  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-
                                                  relate costs,
                                                  net periodic
                                                  benefit cost
                                                  and gain or
                                                  loss on sale
                                                  of assets.
                                                  Adjusted
                                                  EBITDA margin,
                                                  excluding NGEN
                                                  SMIT is
                                                  calculated as
                                                  the ratio of
                                                  adjusted
                                                  EBITDA,
                                                  excluding NGEN
                                                  SMIT to
                                                  revenue
                                                  excluding NGEN
                                                  SMIT for the
                                                  fiscal
                                                  quarters ended
                                                  July 3, 2020
                                                  and June 30,
                                                  2019.


               (c)                               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 were 25%
                                                  for the fiscal
                                                  quarter ended
                                                  July 3, 2020,
                                                  and 27% for
                                                  the fiscal
                                                  quarter ended
                                                  June 30, 2019.


               (d)                               Represents
                                                  adjusted net
                                                  income divided
                                                  by the
                                                  weighted
                                                  average common
                                                  shares on a
                                                  diluted basis
                                                  of 161.70
                                                  million and
                                                  163.29 million
                                                  for the fiscal
                                                  quarters ended
                                                  July 3, 2020
                                                  and June 30,
                                                  2019,
                                                  respectively.


               (e)                               Excludes the
                                                  impact of NGEN
                                                  SMIT. Adjusted
                                                  net income
                                                  excluding NGEN
                                                  SMIT is
                                                  adjusted
                                                  EBITDA,
                                                  excluding NGEN
                                                  SMIT less NGEN
                                                  SMIT
                                                  depreciation
                                                  and imputed
                                                  income tax at
                                                  25%. Adjusted
                                                  diluted EPS,
                                                  excluding NGEN
                                                  SMIT is
                                                  adjusted net
                                                  income,
                                                  excluding NGEN
                                                  SMIT divided
                                                  by the
                                                  weighted-
                                                  average common
                                                  shares on a
                                                  diluted basis
                                                  of 161.70
                                                  million and
                                                  163.29 million
                                                  for the fiscal
                                                  quarters ended
                                                  July 3, 2020
                                                  and June 30,
                                                  2019,
                                                  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.


                                     Fiscal Quarters Ended


     (in
      millions)      July 3, 2020                          June 30, 2019


     Net
      cash
      provided
      by
      operating
      activities                  $
         132                                   $
     185


      Purchases
      of
      property,
      equipment
      and
      software               (15)                                         (1)


      Payments
      on
      finance
      lease
      obligations            (28)                                        (35)


      Payments
      on
      restructuring,
      separation,
      transaction
      and
      integration-
      related
      costs                    13                                           12


      Adjusted
      free
      cash
      flow                        $
         102                                   $
     161

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 U.S. 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 reportable segment profit and reconciliation of reportable segment profit to income before taxes:


                                                                                                              
              
             Selected Segment Measures (Unaudited)




                                                                                                      
      
       Fiscal Quarters Ended


                                                                      
         
        July 3, 2020                                         
              
                June 30, 2019



     (in millions, except profit margin)             Defense and                        Civilian and                        Total                                        Defense and                Civilian and  Total
                                          Intelligence                        Health Care                                                                 Intelligence                Health Care



     Revenue                                                     $
        776                                       $
              332                                                               $
              1,108              $
     752        $
      355 $
       1,107





     Segment profit                                               $
        88                                        $
              31                                                                 $
              119              $
     118         $
      33   $
       151



     Non-GAAP adjustments (a)                                 10                                          3                                 13



     Adjusted segment profit (b)                                  $
        98                                        $
              34                                                                 $
              132              $
     118         $
      33   $
       151



     Segment profit margin                                  11.3                                        9.3                               10.7                                                               15.7         9.3          13.6

                                                                %                                         %                                 %                                                                 %          %            %



     Adjusted segment profit margin (b)                     12.6                                       10.2                               11.9                                                               15.7         9.3          13.6

                                                                %                                         %                                 %                                                                 %          %            %




              Notes:


               (a)                     Non-GAAP adjustments include non-
                                        operating net periodic pension
                                        benefit, and certain separation-
                                        related and other costs.


               (b)                     Adjusted results represent non-
                                        GAAP financial measures, and it
                                        should be considered in addition
                                        to, but not as substitute for,
                                        the information provided in
                                        accordance with GAAP.


                             
     
     Reconciliation of Reportable Segment Profit to Income Before Taxes (Unaudited)




                                                                        Fiscal Quarters Ended


     (in millions)                               July 3, 2020                                             June 30, 2019


     Total profit for
      reportable segments                                       $
              119                                              $
      151


     Not allocated to
      segments:


     Share-based
      compensation                                        (7)                                                            (5)


     Amortization of
      acquired intangible
      assets                                             (61)                                                           (48)


     Restructuring costs                                 (18)                                                            (2)


     Separation, transaction
      and integration-
      related costs                                      (15)                                                           (19)


     Interest expense, net                               (30)                                                           (35)


     Other income and
      expense, net                                         15


     Income before taxes                                          $
              3                                               $
      42

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SOURCE Perspecta Inc.