Share-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 shareholders’ 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 share-based awards. At March 31, 2020, the Company had approximately 6,126,834 shares available to grant based on the number of target equity awards outstanding 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, 2020, the Company had approximately 203,400 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. Perspecta does not offer an employee stock purchase plan (“ESPP”).

Parent’s Share-based Incentive Compensation Plans

Prior to the Spin-Off and Mergers, certain of USPS’s employees participated in share-based compensation plans sponsored by Parent. Parent’s share-based compensation plans included incentive compensation plans and an 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. Share-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 share-based incentive compensation plans included equity plans adopted in 2017, 2015, 2004 and 2000, as amended (“Principal Equity Plans”). Share-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 share-based awards. The outstanding stock options and unvested RSUs and PSUs granted under the Principal Equity Plans 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 share-based compensation expense recognized as a result of this modification of the awards. Restricted stock awards were accounted for the same as under the 2018 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.

Share-based Compensation Expense

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



	Fiscal Years Ended
(in millions)	March 31, 2020		March 31, 2019		March 31, 2018
Share-based compensation expense	$	23	$	11	$	6
Income tax benefit	5		3		2
Share-based compensation expense, net of tax	$	18	$	8	$	4

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, 2020
(in thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	1,343		$	23
Granted	628		23
Vested	(318	)	24
Forfeited	(164	)	23
Outstanding at end of year	1,489		$	23

Unrecognized compensation expense for RSUs as of March 31, 2020 was $22 million, expected to be recognized over a weighted-average period of 1.7 years. The total vesting date fair value of RSUs vested for the fiscal years ended March 31, 2020 and 2019 was $8 million and $3 million, respectively. The total grant date fair value of restricted stock unit awards vested for the fiscal years ended March 31, 2020, 2019 and 2018 was $8 million, $1 million and $3 million, respectively.

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 adjusted 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. The performance period for PSUs granted during fiscal year 2018 ended on March 31, 2020. Performance achievements were measured against pre-determined performance goals resulting in the vesting of 187% of the target fiscal year 2018 award in the first quarter of fiscal year 2021, as certified by the Compensation Committee on May 20, 2020. As of March 31, 2020, shares granted during fiscal years 2020 and 2019 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, 2020
(in thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	558		$	24
Granted	923		23
Forfeited	(114	)	24
Outstanding at end of year	1,367		$	24

Unrecognized compensation expense for PSUs as of March 31, 2020 was $13 million, expected to be recognized over a weighted-average period of 1.6 years. No PSUs vested for the fiscal year ended March 31, 2020.

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.

A summary of stock option activity is presented below:



	Fiscal Year Ended March 31, 2020
(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	Intrinsic Value
Outstanding at beginning of year	162		$	12
Exercised	(57	)	10
Forfeited	(3	)	11
Outstanding, vested and exercisable at end of year	102		$	13	2.7	$	520

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, 2020. The aggregate intrinsic value is the difference between Perspecta’s closing share 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 years ended March 31, 2020, 2019 and 2018 was $1 million, less than $1 million and $3 million, respectively.

Cash received from option exercises was less than $1 million during both fiscal years ended March 31, 2020 and 2019, respectively. Cash received from option exercises and purchases under Parent’s ESPP by USPS employees was $3 million during the fiscal year ended March 31, 2018. The net effect of this transaction is reflected within transfers to Parent, net on the statement of cash flows for the fiscal year ended March 31, 2018.