Stock-based Compensation

In May 2018, prior to the Spin-Off and Mergers, the Board of Directors approved the Perspecta Inc. 2018 Omnibus Incentive Plan (the “2018 Employee Equity Plan”) and 2018 Non-employee Director Incentive Plan (the “2018 Director Equity Plan”). Both plans will continue in effect for 10 years. The terms of the 2018 Employee Equity Plan and 2018 Director Equity Plan are substantially similar to the terms of DXC equity plans.

The 2018 Employee Equity Plan allows the Company to grant an aggregate of 9,500,000 shares of its common stock, which includes any shares resulting from the adjustment of the DXC outstanding equity awards. All Perspecta employees are eligible to participate under this plan. The Human Resources and Compensation Committee of the Board of Directors has the broad authority to grant awards and administer the plan. The Board of Directors has the authority to amend the plan, subject to stockholders’ approval for material modifications. The 2018 Employee Equity Plan allows the Company to grant restricted stock awards, RSUs, PSUs, stock options, stock appreciation rights (“SARs”) and other stock-based awards. At March 31, 2019, the Company had approximately 7,345,900 shares available to grant under the 2018 Employee Equity Plan.

The 2018 Director Equity Plan provides for granting restricted stock and RSUs to non-employee directors. Any non-employee director is eligible to participate. The maximum aggregate number of shares that may be issued under the 2018 Director Equity Plan is 310,000. The plan is administered by the Board of Directors or in the Board of Directors’ discretion, the Human Resources and Compensation Committee of the Board of Directors. As of March 31, 2019, the Company had approximately 254,400 shares available to grant under the 2018 Director Equity Plan.

Equity awards generally vest one to three years from the date of grant and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. During the vesting period, ownership of the award cannot be transferred. RSUs and PSUs do not have the voting rights of common stock and the underlying shares are not considered issued and outstanding upon grant. RSUs and PSUs have forfeitable dividend equivalent rights equal to the dividend paid on common stock, which are paid upon vesting.

Parent’s Stock-based Incentive Compensation Plans

Prior to the Spin-Off and Mergers, certain of USPS’s employees participated in stock-based compensation plans sponsored by Parent. Parent’s stock-based compensation plans included incentive compensation plans and an employee stock purchase plan (“ESPP”). All awards granted under the plans were based on Parent’s common shares and, as such, are not reflected on the statements of equity. Stock-based compensation expense included expense attributable to USPS based on the awards and terms previously granted under the incentive compensation plan to USPS’s employees and an allocation of Parent’s corporate and shared functional employee expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that USPS would have experienced as an independent company for the periods presented.

Parent’s stock-based incentive compensation plans included equity plans adopted in 2017, 2015, 2004 and 2000, as amended (“Principal Equity Plans”). Stock-based awards granted from the Principal Equity Plans included restricted stock awards, stock options, and performance-based awards. Employees who meet certain employment qualifications were eligible to receive stock-based awards. For equity incentive awards granted by Parent under Parent equity incentive plans prior to the Spin-Off and Mergers, outstanding stock options and unvested RSUs and PSUs were converted upon the Spin-Off and Mergers into economically equivalent Perspecta stock options, RSUs and PSUs, with terms and conditions substantially similar to the terms of such awards prior to the Spin-Off and Mergers. There was no incremental stock compensation expense recognized as a result of this modification of the awards. Restricted stock awards were accounted for the same as under the Perspecta Employee Equity Plan.

Stock options granted under the Principal Equity Plans were generally non-qualified stock options, but the Principal Equity Plans permitted certain options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vested over three to four years from the date of grant. The exercise price of a stock option was equal to the closing price of Parent’s stock on the option grant date.

Perspecta does not offer an ESPP.

Stock-based Compensation Expense

Stock-based compensation expense and the resulting tax benefits recognized were as follows:



	Successor				Predecessor
	Fiscal Years Ended				Five Months Ended		Fiscal Year Ended
(in millions)	March 31, 2019		March 31, 2018		March 31, 2017		October 31, 2016
Stock-based compensation expense	$	11	$	6	$	7	$	20
Income tax benefit	3		2		3		8
Stock-based compensation expense, net of tax	$	8	$	4	$	4	$	12

Cash received from option exercises was less than $1 million during the fiscal year ended March 31, 2019. Cash received from option exercises and purchases under Parent’s ESPP by USPS employees was $3 million, zero and $4 million during the fiscal year ended March 31, 2018, the five months ended March 31, 2017 and the fiscal year ended October 31, 2016, respectively. The net effect of this transaction is reflected within transfers (to) from Parent, net on the statements of cash flows for the fiscal years ended March 31, 2018 and October 31, 2016.

The total grant date fair value of restricted stock unit awards vested for USPS employees for the fiscal year ended March 31, 2018, the five months ended March 31, 2017 and the fiscal year ended October 31, 2016 was $3 million, $15 million and $2 million, respectively, net of taxes.

Time-based Restricted Stock Units

Perspecta grants RSUs to its employees and non-employee directors. RSUs generally vest one to three years from the date of grant and are subject to forfeiture if employees or non-employee directors terminate prior to the lapse of the restrictions. One RSU represents the right to receive one share of Perspecta common stock upon vesting, plus any dividend equivalents accrued during the vesting period.

A summary of RSU activity is presented below:



	Fiscal Year Ended
	March 31, 2019
(in thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	67		$	61
DXC awards replaced by Perspecta awards due to Spin-Off⁽¹⁾	(67	)	61
Perspecta awards replacing DXC awards due to Spin-Off⁽¹⁾	225		17
Granted	1,301		23
Vested	(128	)	12
Forfeited	(55	)	24
Outstanding at end of Year	1,343		$	23

⁽¹⁾ In connection with the Spin-Off, USPS employees with outstanding former Parent restricted stock awards received Perspecta replacement restricted stock awards upon the separation.

Unrecognized compensation expense for RSUs as of March 31, 2019 was $26 million, expected to be recognized over a period of 3 years. The total grant date fair value of RSUs vested for the fiscal year ended March 31, 2019 was $1 million.

Performance-based Restricted Stock Units

The Company grants PSUs under the “2018 Employee Equity Plan.” The number of PSUs that the employees will receive depends on the Company’s achievement of two performance goals during the three year performance periods. The performance goals under the Program are based on (i) the Company’s adjusted EPS at the end of the performance period, and (ii) the Company’s cumulative free cash flow for the performance period. The PSUs will only be eligible to vest following the expiration of the three-year performance period. Actual shares vested will be subject to both continued employment by the Company (barring certain exceptions allowing for partial performance periods) and actual financial measures achieved. The actual number of shares of common stock that will be issued to each participant at the end of the applicable performance period will be determined and are subject to a minimum and maximum performance level. As of March 31, 2019, shares granted during fiscal years 2019 and 2018 are within year one and year two of the performance period, respectively, and therefore have not vested.

A summary of PSU activity is presented below:



	Fiscal Year Ended
	March 31, 2019
(in thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	15		$	79
DXC awards replaced by Perspecta awards due to Spin-Off⁽¹⁾	(15	)	79
Perspecta awards replacing DXC awards due to Spin-Off⁽¹⁾	49		22
Granted	521		25
Vested	—		—
Forfeited	(12	)	24
Outstanding at end of Year	558		$	24

⁽¹⁾ In connection with the Spin-Off, USPS employees with outstanding former Parent restricted stock awards received Perspecta replacement restricted stock awards upon the separation.

Unrecognized compensation expense for PSUs as of March 31, 2019 was $10 million, expected to be recognized over a period of 3 years. No PSUs vested for the fiscal year ended March 31, 2019.

Stock Options

All remaining outstanding stock options were issued by Parent prior to the Spin-Off and Mergers, upon which they were converted to options to purchase Perspecta stock.

The weighted-average fair value and the assumptions used to measure fair value were:



	Predecessor
	Five Months Ended			Fiscal Year Ended
	March 31, 2017			October 31, 2016
Weighted average fair value⁽¹⁾	$	4		$	4
Expected volatility⁽²⁾	31.1		%	31.1		%
Risk-free interest rate⁽³⁾	1.7		%	1.7		%
Expected dividend yield⁽⁴⁾	1.5		%	1.5		%
Expected term in years⁽⁵⁾	5.4			5.4

⁽¹⁾The weighted-average fair value was based on stock options granted during the period. No options were granted in fiscal years 2019 and 2018.

⁽²⁾ The expected volatility was estimated using average historical volatility of selected Parent peer companies.

⁽³⁾ The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.

⁽⁴⁾ The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option.

⁽⁵⁾ For options granted subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No 110, since it was HPE’s first fiscal year as a separate stand-alone company.

A summary of stock option activity is presented below:



	Fiscal Year Ended
	March 31, 2019
(in millions, except shares in thousands and per share amounts in ones)	Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at beginning of year	148		$	45
DXC awards replaced by Perspecta awards due to Spin-Off⁽¹⁾	(148	)	45
Options converted to RSUs due to Spin-Off and Mergers⁽¹⁾	181		12
Exercised	(18	)	12
Forfeited	(1	)	11
Outstanding, vested and exercisable at end of year	162		$	12	3	$	1

⁽¹⁾ In connection with the Spin-Off, USPS employees with outstanding former Parent restricted stock awards received Perspecta replacement restricted stock awards upon the separation.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that certain option holders would have realized had all option holders exercised their options on the last trading day of fiscal year ended March 31, 2019. The aggregate intrinsic value is the difference between Perspecta’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised by certain employees during the fiscal year ended March 31, 2019 was less than $1 million, compared to $3 million, $1 million and $2 million for the fiscal year ended March 31, 2018, the five months ended March 31, 2017 and the fiscal year ended October 31, 2016, respectively.