Acquisitions

Spin-Off and Mergers

On May 31, 2018, immediately following the consummation of the Spin-Off, the Company completed the Mergers. As defined in the Merger Agreement, Perspecta issued shares of Perspecta common stock to Veritas Capital and its affiliates, including 18,877,244 shares to The SI Organization Holdings LLC (the “Vencore HC Stockholder”) and 4,396,097 shares to KGS Holding LLC (the “KeyPoint Stockholder,” and, together with the Vencore HC Stockholder, the “Vencore Stockholders”), representing in the aggregate approximately 14% of the outstanding shares of Perspecta common stock immediately following the Mergers. As a result of these transactions, Vencore HC and KGS HC became wholly-owned subsidiaries of Perspecta.

The Spin-Off and Mergers were structured as a “Reverse Morris Trust” transaction, in which Perspecta was deemed the accounting acquirer of Vencore HC and KGS HC and their respective subsidiaries. Purchase consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer. Accordingly, the fair value of the purchase consideration transferred was measured based on the fair value of approximately 14% of shares of the combined business, $400 million cash transferred by Perspecta to the Vencore Stockholders, and approximately $1.0 billion paid to extinguish certain existing Vencore indebtedness.

Under the acquisition method of accounting, total consideration exchanged was:



(in millions)	Amount
Preliminary fair value of equity purchase consideration received by Vencore Stockholders⁽¹⁾	$	578
Preliminary fair value of cash purchase consideration received by Vencore Stockholders	400
Preliminary fair value of cash consideration paid by USPS to extinguish certain existing Vencore indebtedness	994
Consideration transferred	$	1,972

⁽¹⁾

Represents the fair value of consideration received by the Vencore HC Stockholder and the KeyPoint Stockholder for approximately 14% ownership in the combined company. The fair value of the purchase consideration transferred was based on 18,877,244 shares of Perspecta common stock distributed to Vencore HC Stockholder and 4,396,097 shares of Perspecta common stock distributed to the KeyPoint Stockholder as of the close of business on the record date for the Mergers, at the closing price of $24.86 per share on May 31, 2018.

The information presented below represents the allocation of Vencore’s purchase price to the assets acquired and liabilities assumed, including acquiree-related transaction costs of $38 million, as of the acquisition date, May 31, 2018. As of March 31, 2019, the Company has finalized the accounting for the Mergers. The major classes of assets and liabilities to which the purchase price was allocated were as follows:



(in millions)	Fair Value
Current assets	$	333
Property and equipment	35
Intangible assets	753
Other assets	40
Accounts payable, accrued payroll, accrued expenses, and other current liabilities	(194		)
Deferred revenue	(12		)
Deferred tax liabilities	(10		)
Other liabilities	(119		)
Net identifiable assets acquired	826
Goodwill	1,146
Consideration transferred	$	1,972

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the closing date of the Mergers.

The goodwill recognized in the Mergers is attributable to the intellectual capital, the acquired assembled work force and expected cost synergies, none of which qualify for recognition as a separate intangible asset. The goodwill related to the Mergers is not expected to be fully deductible for tax purposes. The goodwill discussed above includes approximately $195 million of tax deductible goodwill. Goodwill arising from the Mergers has been allocated to Perspecta’s reporting units based on the relative fair value of assets acquired.

The Company made certain valuation adjustments to provisional amounts previously recognized. These adjustments resulted in a net $93 million decrease of the goodwill, primarily due to fair value adjustments resulting in an increase in net identifiable assets acquired. As a result, the Company updated the preliminary allocation to Perspecta’s reportable segments as follows: $1.1 billion allocated to Defense and Intelligence and $77 million allocated to Civilian and Health Care.

Intangible assets acquired were as follows:



(in millions, except years)	Weighted-average Amortization Period (in years)	Fair Value
Program assets	13	$	625
Developed technology	6	105
Backlog	1	22
Favorable leases	4	1
Total intangible assets	12	$	753

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents results as if the Spin-Off and the Mergers and the related financing had occurred on April 1, 2017. The historical consolidated financial information of Perspecta has been adjusted in the pro forma information to give effect to the events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The effects of the Spin-Off are primarily attributable to interest expense associated with the incurrence of debt in connection with the Spin-Off. The effects of the Mergers primarily relate to amortization of acquired intangible assets. The consolidated financial information of Perspecta includes merger and integration-related costs that are not expected to recur and impact the combined results over the long-term. The unaudited pro forma results do not reflect future events that have occurred or may occur after the transactions, including but not limited to, the impact of any actual or anticipated synergies expected to result from the Mergers. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on April 1, 2017, nor is it necessarily an indication of future operating results.



	Fiscal Year Ended March 31, 2019 Historical Perspecta ⁽¹⁾		Period from April 1, 2018 to May 31, 2018 Historical Vencore HC and KGS HC			Fiscal Year Ended March 31, 2019
(in millions, except per share amounts)	Fiscal Year Ended March 31, 2019 Historical Perspecta ⁽¹⁾					Effects of the Spin-Off			Effects of the Mergers		Pro Forma Combined for the Spin-Off and Mergers
Revenue	$	4,030	$	244		$	—		$	—	$	4,274
Net income (loss)	$	72	$	(57	)	$	(7	)	$	20	$	28

Earnings per common share⁽²⁾:
Basic	$	0.44									$	0.17
Diluted	$	0.44									$	0.17

⁽¹⁾Revenue and pre-tax income includes $1.3 billion and $185 million, respectively, associated with Vencore HC and KGS HC for the period of June 1, 2018 through March 31, 2019. The pre-tax income excludes amortization of acquired intangible assets, acquisition financing and the allocation of certain corporate overhead costs.

⁽²⁾ Historical and pro forma combined earnings per common share information is computed based on 164.56 million basic weighted average shares and 164.82 million diluted shares. See Note 4 – “Earnings Per Share.”



	Fiscal Year Ended March 31, 2018
(in millions, except per share amounts)	Historical Perspecta		Historical Vencore HC and KGS HC		Effects of the Spin-Off			Effects of the Mergers			Pro Forma Combined for the Spin-Off and Mergers
Revenue	$	2,819	$	1,384	$	—		$	—		$	4,203
Net income (loss)	$	208	$	33	$	(1	)	$	(112	)	$	128

Earnings per common share⁽³⁾:
Basic	$	1.46									$	0.77
Diluted	$	1.46									$	0.77

⁽³⁾Historical earnings per common share information for the year ended March 31, 2018 is computed using the 142.43 million shares of Perspecta common stock resulting from the Distribution. See Note 4 – “Earnings Per Share.” Pro forma combined earnings per common share includes the shares issued by Perspecta in connection with the Mergers on May 31, 2018. As a result, both basic and diluted; pro forma combined earnings per common share information is computed based on 165.70 million shares of Perspecta common stock as Perspecta did not operate as a stand-alone entity during the period, and therefore, no Perspecta common stock, stock options or other equity awards were outstanding and no dividends were declared or paid by Perspecta.

HPES Merger

On April 1, 2017, Computer Sciences Corporation (“CSC”), HPE, Everett SpinCo, Inc. (“Everett”), and New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett (“Merger Sub”), completed the strategic combination of CSC with the HPE Enterprise Services business (“HPES”) to form DXC (the “HPES Merger”). At the time of the HPES Merger, Everett was renamed DXC, and as a result of the HPES Merger, CSC became a direct wholly owned subsidiary of DXC. The transaction was determined to be a reverse merger and CSC was determined to be the accounting acquirer of DXC. Therefore, for accounting purposes DXC, and in turn USPS, was subject to purchase price allocation adjustments as of April 1, 2017.

The information presented in this note represents allocation of USPS’s purchase price to the assets acquired and liabilities assumed as of the acquisition date, April 1, 2017. The total fair value of consideration transferred for USPS was approximately $2.9 billion. The purchase price was determined based on the enterprise value of USPS estimated as part of the purchase price allocation related to the HPES Merger compared to the total value of all shares issued by DXC.

The allocation of purchase price was completed as of March 31, 2018. The major classes of assets and liabilities to which the purchase price was allocated were as follows:



(in millions)	Fair Value
Cash and cash equivalents	$	—
Accounts receivable	403
Prepaid expenses	86
Other current assets	22
Total current assets	511
Property and equipment	183
Intangible assets	976
Other assets	28
Total assets acquired	1,698
Current capital lease obligations, accounts payable, accrued payroll, accrued expenses, and other current liabilities	418
Deferred revenue	71
Non-current capital lease liability	162
Non-current deferred tax liabilities	204
Other liabilities	15
Total liabilities assumed	870
Net identifiable assets acquired	828
Goodwill	2,022
Total estimated consideration transferred	$	2,850

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. The goodwill is not deductible for tax purposes.

As of the period ended March 31, 2018, the Company made a number of refinements to the April 1, 2017 preliminary purchase price allocation as reported September 30, 2017. These refinements were primarily driven by the Company recording valuation adjustments to certain preliminary estimates of fair values which resulted in an increase in net assets of $5 million. Total assets increased by $10 million, primarily driven by a $70 million increase in intangible assets, and a $9 million increase in current assets, which was partially offset by a $68 million decrease in property and equipment. Liabilities increased by $5 million primarily driven by increases in current capital lease liability, accrued payroll, accrued expenses, and other current liabilities, as well as non-current capital lease liabilities.

Unaudited Pro Forma Results of Operations

The following table provides unaudited supplemental pro forma results of operations for fiscal year 2016:



(in millions)	Predecessor Fiscal Year Ended October 31, 2016
Revenue	$	2,732
Net income	$	103

These results have been derived from our historical financial statements and have been prepared to give effect to the HPES Merger, assuming that the HPES Merger occurred on November 1, 2015. The unaudited pro forma information presented is for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Merger been consummated at November 1, 2015, nor is it necessarily indicative of future operating results.