Perspecta announces financial results for second quarter of fiscal year 2021

CHANTILLY, Va., Nov. 10, 2020 /PRNewswire/ -- Perspecta Inc. (NYSE:PRSP), a leading U.S. government services provider, today announced financial results for the second quarter of fiscal year 2021, which ended October 2, 2020.

"Since our inception, we have consistently achieved solid execution across the enterprise, and this quarter is no exception. Once again, we delivered on our revenue, adjusted diluted earnings per share and free cash flow conversion expectations," said Mac Curtis, chairman and chief executive officer of Perspecta. "We continue to accomplish these strong results, quarter after quarter, because of our dedication and commitment to mission execution and operational excellence.  With strategic awards and significant milestones in the areas of cyber, 5G and cloud migration, we remain steadfast in supporting our customers during this unprecedented time."

Summary operating results (unaudited)

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 $1.14 billion, down 3% compared to the second quarter of fiscal year 2020, and up 3% compared to the first quarter of fiscal year 2021. The year-over-year decline in revenue was due to the one-time $60 million asset sale related to the NASA Agency Consolidated End-User Services (NASA ACES) program closeout that we recognized in the second quarter of fiscal year 2020 and the COVID-19 impact of approximately $18 million in the second quarter of fiscal year 2021. Excluding the impacts of the asset sale and the COVID-19 pandemic, revenue for the quarter grew 4% year-over-year. 

Income before taxes for the second quarter of fiscal year 2021 was $19 million, which was down 49% compared to the second quarter of fiscal year 2020. Operating margin decreased from 3.2% to 1.7% year-over-year. Net income was $16 million, or $0.10 per diluted share.

Adjusted net income was $86 million for the second quarter of fiscal year 2021, down 2% year-over-year. Adjusted EBITDA was $179 million for the second quarter of fiscal year 2021, down 9% compared to adjusted EBITDA for the second quarter of fiscal year 2020. The as-expected year-over-year decrease in profitability was primarily due to lower asset intensity, an increased mix of cost-reimbursable programs and a $5 million COVID-19 impact. Adjusted diluted EPS for the second quarter of fiscal year 2021 was $0.53, down 2% compared to adjusted diluted EPS for the second quarter of fiscal year 2020.

Segment operating results (unaudited)

For the fiscal quarter ended October 2, 2020, Defense and Intelligence segment revenue of $796 million increased by 2% compared to the second quarter of fiscal year 2020, primarily due to new business wins and growth on existing programs. Civilian and Health Care segment revenue of $346 million decreased by 12% compared to the segment's revenue from the comparable period of the prior year due to the one-time $60 million asset sale related to the NASA ACES program closeout that we recognized in the second quarter of fiscal year 2020.

Defense and Intelligence adjusted segment profit margin for the second quarter of fiscal year 2021 decreased to 13.1% from 14.9% in the second quarter of fiscal year 2020. Civilian and Health Care adjusted segment profit margin for the second quarter of fiscal year 2021 improved to 11.3% from 10.4% in the second quarter of fiscal year 2020.

Cash management and capital deployment

Perspecta generated $164 million of net cash provided by operating activities in the second quarter of fiscal year 2021. Quarterly adjusted free cash flow was $134 million, or 156% of adjusted net income. During the second quarter of fiscal year 2021, Perspecta used $26 million to make debt repayments and returned $11 million to shareholders in the form of its regular quarterly cash dividend program.

At quarter end, Perspecta had $216 million in cash and cash equivalents, $750 million of undrawn capacity in its revolving credit facility, and $2.5 billion in total debt, including $202 million in finance lease obligations. On November 9, 2020, the Perspecta Board of Directors declared that Perspecta will pay a cash dividend of $0.07 per share on January 15, 2020 to Perspecta shareholders of record at the close of business on November 24, 2020.

Contract awards

Contract awards (bookings) totaled $1.8 billion in the second quarter of fiscal year 2021, representing a book-to-bill ratio of 1.6x. Included in the quarterly bookings were several particularly important single-award prime contracts:

• Received multiple awards on classified systems engineering and integration programs in our Defense and Intelligence segment: Perspecta will provide support to U.S. government customers' missions through the delivery of high-end systems engineering and integration, data analytics, cybersecurity, cloud/IT services and software development. The total contract value of these awards is $519 million.
• Defense Advanced Research Projects Agency (DARPA) Open, Programmable, Secure 5G (OPS-5G) program: Perspecta Labs received two awards on DARPA's OPS-5G program for work to improve security of 5G networks. Perspecta Labs' solution implements a zero-trust, distributed security architecture that operates across the entire scale of Internet of Things and network devices, with emphasis on reducing the burden of remote attestation and cryptographic computation on resource-constrained endpoints. Perspecta Labs' solution will also leverage in-line programmable network elements and virtualized network functions to enable real-time, distributed defense against cyberattacks through the programmable mitigation of distributed denial of service attacks, real-time response and restoration and proactive deception-based defenses. The awards, which represent new work for the company, have a combined total ceiling value of $25 million if all options are exercised.
• California State Teachers Retirement System Data Center hosting and migration services contract: Perspecta will use agile teams to migrate critical financial and benefits applications to a cloud-based solution. Perspecta will maintain the hosted solution delivering cloud operations, security, disaster recovery, information technology service management and program management services. The award, which represents new work for the company, has a total contract value of $43 million if all options are exercised.

Perspecta's backlog of signed business orders at the end of the second quarter of fiscal year 2021 was $13.9 billion; funded backlog at the end of the second quarter was $1.8 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. We anticipate a sole source six- to nine-month extension from the U.S. Navy on this contract. 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.

John Kavanaugh, chief financial officer of Perspecta, commented, "We are pleased with the solid performance we delivered in the first half of FY2021. We continue to demonstrate our ability to execute and deliver on our commitments and, as a result, we are raising guidance for the fiscal year."

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 October 2, 2020, the overall impact of the COVID-19 pandemic on our results of operations was approximately $18 million lower revenue, $5 million lower adjusted EBITDA and a year-to-date liquidity benefit of $40 million due to a 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 November 10, 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.

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)

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.

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.

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:

SOURCE Perspecta Inc.

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