PERSPECTA INC. The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this document and with our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . The statements in this discussion regarding industry outlook, expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements." Some of these risks and uncertainties include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , as updated periodically through our subsequent quarterly reports on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements. Overview We are a leading provider of end-to-end enterprise IT services to government customers acrossU.S. federal, state and local markets. Using our market-leading enterprise offerings and solutions, we help our government customers implement modern collaborative workplaces, hybrid cloud platforms and integrated digital systems of engagement with their enterprise management systems. By delivering these modern enterprise solutions, often while ensuring interoperability with mission critical legacy systems, we believe we have helped our government customers better realize the benefits of technology, which will ultimately enable them to fulfill their mission objectives and achieve their desired business outcomes. In addition to providing substantial benefits through increased efficiencies and capabilities, we believe demand for our services is also driven by the technological advances that already reinvented commercial industries, which are now exerting a similar evolutionary effect on government customers. In response to these pressures, we believe government customers are increasingly turning to outside partners, such asPerspecta , to help guide them through their digital transformation. We believe our breadth of contracts and customers in theU.S. government, and our longstanding history of having partnered with our public sector customers for more than 50 years via our legacy companies, provides us with a competitive advantage. For example, we have existing contracts with a range of public sector entities including theDoD , theU.S. Department of Veterans Affairs , to theU.S. Postal Service , theU.S. Food and Drug Administration and large state and local government customers such as the county ofSan Diego, California . Based on this breadth of experience and our expertise, we believe we are well positioned to help ourU.S. government customers continue their ongoing digital transformation journey.Perspecta became an independent company following consummation of the Spin-Off from DXC onMay 31, 2018 . OnOctober 29, 2019 , the Company filed for arbitration against DXC to resolve certain disputed items related to the Spin-Off. After completion of the Spin-Off, the Company began assessing the respective rights, responsibilities and obligations of DXC and the Company under the SDA and other related Spin-Off agreements. Based on this assessment, and in accordance with the provisions of the agreements, the Company disputed certain transactions that were effected by DXC in connection with the Spin-Off. The Company has been addressing these matters with DXC pursuant to the terms of the SDA, including its confidentiality provisions and dispute resolution provisions that require executive escalation, mediation and binding arbitration. Based on the status of the arbitration, we currently are unable to predict the impact of any resolutions of these matters on the Company.
Acquisition
OnMay 1, 2020 ,Perspecta completed the acquisition of DHPC, aU.S. developer of electronic warfare technologies with market-leading technical solutions and a solid, proven reputation with Army customers. The purchase consideration was approximately$53 million in cash. See Note 3 - "Acquisitions" to the financial statements for additional details. 21
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Table of Contents
Segments and Services
Our reportable segments are (1) Defense and Intelligence, which provides services to theDoD , intelligence community, branches of theU.S. Armed Forces, and otherDoD agencies, and (2) Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, andHealth and Human Services , as well as other federal civilian and state and local government agencies. Segment information is included in Note 14 - "Segment Information" to the financial statements. Backlog Total contract value ("TCV") backlog is our estimate of the remaining revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under ID/IQ contracts. TCV backlog can include award fees, incentive fees, or other variable consideration estimated at the most likely amount to which the Company is expected to be entitled to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur. TCV backlog includes both funded and unfunded future revenue under government contracts. We define funded backlog as estimated future revenue under government contracts and task orders for which funding has been appropriated byCongress and authorized for expenditure by the applicable agency. Funded backlog does not include the full potential value of the Company's contracts becauseCongress often appropriates funds to be used by an agency for a particular program of a contract on a yearly or quarterly basis even though the contract may call for performance over a number of years. As a result, contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and untilCongress makes subsequent appropriation and the procuring agency allocates funding to the contract. A variety of circumstances or events may cause changes in the amount of our TCV backlog and funded backlog, including the execution of new contracts, the extension of existing contracts, the non-renewal or completion of current contracts, the early termination of contracts, and adjustment to estimates for previously included contracts. Changes in the amount of our funded backlog also are affected by the funding cycles of the government. The estimated value of our TCV backlog as ofOctober 2, 2020 was as follows: Total TCV (in millions) Funded Backlog Unfunded Backlog Backlog Defense and Intelligence$ 1,045 $ 7,540$ 8,585 Civilian and Health Care 749 4,558 5,307 Total backlog$ 1,794 $ 12,098$ 13,892
The contract awards during the fiscal quarter and two fiscal quarters ended
Fiscal Quarter Ended Two Fiscal Quarters Ended
September 30, September 30,
(in millions) October 2, 2020 2019 October 2, 2020 2019
Defense and Intelligence $ 1,019 $ 1,934 $ 1,882 $ 2,603
Civilian and Health Care 751 372 1,064 704
Total contract awards $ 1,770 $ 2,306 $ 2,946 $ 3,307
Results of Operations
Impact of the COVID-19 Pandemic
The fourth quarter of fiscal year 2020 marked the beginning of the COVID-19 pandemic inthe United States , and the pandemic has continued through the second 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 near full capacity. The overall impact of the COVID-19 pandemic on our results of operations was approximately$18 million and$41 million of 22 -------------------------------------------------------------------------------- Table of Contents lower revenue for the fiscal quarter and two fiscal quarters endedOctober 2, 2020 , respectively, and a year-to-date liquidity benefit of$40 million due to deferral of payroll tax payments as afforded by the Coronavirus Aid, Relief and Economic Security ("CARES") Act, discussed below. 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. We are continuing to monitor the ongoing COVID-19 pandemic. We have experienced and expect to continue to experience certain disruptions in our operations and impact to our workforce and subcontractor workforce due to illness, quarantines, shelter-in-place orders, closures of our facilities, closures of our customers' facilities and other restrictions or government actions in connection with the COVID-19 pandemic. At the outset of the pandemic, we deployed our Crisis and Business Continuity Plan, which provides an integrated and coordinated crisis management and continuity of operations framework for all personnel during a crisis, and we have implemented new protocols including telework or other means of remote work for our employees. With respect to our impacted programs that, by their nature, cannot be supported remotely, we have accommodated those customers who have implemented shiftwork or other mitigation protocols by maintaining our workforce in a "mission ready" state such that the workforce is able to mobilize in a timely manner. OnMarch 27, 2020 , the CARES Act was enacted. The CARES Act is a$2 trillion stimulus package meant to combat the economic impacts of the COVID-19 pandemic. The CARES Act includes a provision under which government contractors can seek reimbursement for amounts related to keeping the employee base in a ready state during disruptions such as closed facilities, reduced work schedules or mandated quarantines to support social distancing. In these situations, we are able to recover our costs associated with this ready state workforce, but we are not able to bill any associated fee. The relevant provision of the CARES Act is in effect untilDecember 11, 2020 . We continue to evaluate this and other provisions of the CARES Act, as well as any other legislative or regulatory initiatives that seek to address the impact of the COVID-19 pandemic on our business. For additional discussion of the risks associated with the COVID-19 pandemic, see Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 .
Selected Results of Operations
Selected financial information is presented in the tables below:
Fiscal Quarter Ended Change
(in millions, except per share September 30,
amounts) October 2, 2020 2019 $ %
Revenue $ 1,142 $ 1,172 $ (30) (3) %
Total costs and expenses 1,123 1,135 (12) (1) %
Income before income taxes 19 37 (18) (49) %
Income tax expense 3 8 (5) (63) %
Net income $ 16 $ 29 $ (13) (45) %
Diluted earnings per share $ 0.10 $ 0.18
Two Fiscal Quarters Ended Change
(in millions, except per share September 30,
amounts) October 2, 2020 2019 $ %
Revenue $ 2,250 $ 2,279 $ (29) (1) %
Total costs and expenses 2,228 2,200 28 1 %
Income before income taxes 22 79 (57) (72) %
Income tax expense 9 19 (10) (53) %
Net income $ 13 $ 60 $ (47) (78) %
Diluted earnings per share $ 0.08 $ 0.37
23-------------------------------------------------------------------------------- Table of Contents Revenue
Revenue by segment for the fiscal quarter and two fiscal quarters ended
Fiscal Quarter Ended Change
(in millions) October 2, 2020 September 30, 2019 $ % Defense and Intelligence$ 796 $ 777$ 19 2 % Civilian and Health Care 346 395 (49) (12) % Total$ 1,142 $ 1,172$ (30) (3) % Two Fiscal Quarters Ended Change (in millions) October 2, 2020 September 30, 2019 $ % Defense and Intelligence$ 1,572 $
1,529
Civilian and Health Care 678 750 (72) (10) % Total$ 2,250 $ 2,279$ (29) (1) %
Defense and Intelligence Segment
Our Defense and Intelligence segment revenue during the fiscal quarter endedOctober 2, 2020 increased by$19 million , or 2%, as compared to the comparable period of the prior year primarily due to new business wins coupled with growth on existing programs. Our Defense and Intelligence segment revenue during the two fiscal quarters endedOctober 2, 2020 increased by$43 million , or 3%, as compared to the comparable period of the prior year primarily due to new business wins coupled with growth on existing programs.
Civilian and Health Care Segment
Our Civilian and Health Care segment revenue during the fiscal quarter endedOctober 2, 2020 decreased by$49 million , or 12%, as compared to the comparable period of the prior year primarily due to a large, one-time asset sale in the second quarter of fiscal year 2020. Our Civilian and Health Care segment revenue during the two fiscal quarters endedOctober 2, 2020 decreased by$72 million , or 10%, as compared to the comparable period of the prior year primarily due to the one-time asset sale and completion and wind down of certain programs in fiscal year 2020.
Costs and Expenses
Our total costs and expenses are shown in the tables below:
Fiscal Quarter Ended Percentage of Revenue Change
September 30, September 30,
(in millions) October 2, 2020 2019 October 2, 2020 2019 $ %
Costs of services $ 912 $ 908 80 % 77 % $ 4 - %
Selling, general and
administrative 65 81 6 % 7 % (16) (20) %
Depreciation and amortization 96 90 8 % 8 % 6 7 %
Restructuring costs 13 2 1 % - % 11 550 %
Separation, transaction and
integration-related costs 12 20 1 % 2 % (8) (40) %
Interest expense, net 29 36 3 % 3 % (7) (19) %
Other (income) expense, net (4) (2) - % - % (2) 100 %
Total costs and expenses $ 1,123 $ 1,135 98 % 97 % $ (12) (1) %
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Two Fiscal Quarters Ended Percentage of Revenue Change
September 30, September 30,
(in millions) October 2, 2020 2019 October 2, 2020 2019 $ %
Costs of services $ 1,811 $ 1,744 80 % 77 % $ 67 4 %
Selling, general and
administrative 127 153 6 % 7 % (26) (17) %
Depreciation and amortization 192 191 9 % 8 % 1 1 %
Restructuring costs 31 4 1 % - % 27 675 %
Separation, transaction and
integration-related costs 27 39 1 % 2 % (12) (31) %
Interest expense, net 59 71 3 % 3 % (12) (17) %
Other (income) expense, net (19) (2) (1) % - % (17) 850 %
Total costs and expenses $ 2,228 $ 2,200 99 % 97 % $ 28 1 %
Costs of Services
For the fiscal quarter ended October 2, 2020 , costs of services as a percentage
of revenue was 80%, as compared to 77% for the comparable period of the prior
year. For the two fiscal quarters ended October 2, 2020 , cost of services as a
percentage of revenue was 80%, as compared to 77% for the comparable period of
the prior year. Margins were negatively impacted by the inability to bill fee on
our mission ready workforce idled by the COVID-19 pandemic, the completion and
wind down of certain fixed price programs in the prior fiscal year and start-up
costs associated with new contract wins, partially offset by continued focus on
cost discipline and program management of our portfolio. Our cost-reimbursable
and time-and-materials contracts typically have consistent margins, whereas the
margin on our fixed price contracts is dependent upon management's ability to
control the costs of providing the services. We expect our contract mix to
remain relatively stable over the long term.
Selling, General and Administrative
Selling, general and administrative expense ("SG&A") was $65 million for the
fiscal quarter ended October 2, 2020 , as compared to $81 million for the
comparable period of the prior year. SG&A as a percentage of revenue for the
fiscal quarter ended October 2, 2020 was 6%, as compared to 7% for the
comparable period of the prior year, with the decrease in the current fiscal
year primarily due to reduced costs as a result of restructuring activities in
prior quarters, and indirect cost management. SG&A was $127 million for the two
fiscal quarters ended October 2, 2020 , as compared to $153 million for the
comparable period of the prior year. SG&A as a percentage of revenue for the two
fiscal quarters ended October 2, 2020 was 6%, as compared to 7% for the
comparable period of the prior year, with the decrease in the current fiscal
year primarily due to indirect cost management and reduced costs as a result of
restructuring activities taken in fiscal year 2020.
Depreciation and Amortization
Depreciation and amortization expense was$96 million for the fiscal quarter endedOctober 2, 2020 , as compared to$90 million for the comparable period of the prior year. The$6 million increase during the fiscal quarter endedOctober 2, 2020 was primarily attributed to depreciation and amortization associated with contract-related assets. Depreciation and amortization expense was$192 million for the two fiscal quarters endedOctober 2, 2020 , as compared to$191 million for the comparable period of the prior year.
Restructuring Costs
During the fiscal quarter endedOctober 2, 2020 , restructuring activities resulted in costs of$13 million , as compared to$2 million during the comparable period of the prior year. During the two fiscal quarters endedOctober 2, 2020 , restructuring activities resulted in costs of$31 million , as compared to$4 million during the comparable period of the prior year. See Note 10 - "Leases" for a description of the facility rationalization restructuring plan that has been executed throughout the first half of fiscal year 2021. 25 --------------------------------------------------------------------------------
Interest Expense, Net
Interest expense, net for the fiscal quarter endedOctober 2, 2020 was$29 million , as compared to$36 million during the comparable period of the prior year. The decrease of$7 million in interest expense for the fiscal quarter endedOctober 2, 2020 was primarily attributed to a lower LIBOR rate during the current period. Interest expense, net for the two fiscal quarters endedOctober 2, 2020 was$59 million , as compared to$71 million during the comparable period of the prior year. The decrease of$12 million in interest expense for the two fiscal quarters endedOctober 2, 2020 was primarily attributed to a lower LIBOR rate during the current period.
Other (Income) Expense, Net
Other (income) expense, net for the fiscal quarter endedOctober 2, 2020 was$(4) million , as compared to$(2) million during the comparable period of the prior year, and$(19) million for the two fiscal quarters endedOctober 2, 2020 , as compared to$(2) million during the comparable period of the prior year. Other (income) expense, net for the two fiscal quarters endedOctober 2, 2020 included a$7 million reduction of a DXC indemnification liability related to an income tax receivable. The corresponding income tax receivable was reduced by the same amount, resulting in a$7 million increase to income tax expense as discussed below. Other (income) expense, net for the two fiscal quarters endedSeptember 30, 2019 included a$7 million reduction of a DXC indemnification receivable related to a liability for uncertain tax positions. The corresponding tax reserves were reduced by the same amount, resulting in a$7 million reduction of income tax expense in accordance with ASC Topic 740, Income Taxes. Other (income) expense, net for both the fiscal quarter and two fiscal quarters endedOctober 2, 2020 andSeptember 30, 2019 also included certain components of the net periodic pension cost for defined benefit pension plans, equity in earnings of unconsolidated affiliates and other miscellaneous gains and losses. Taxes Income tax expense was$3 million and$9 million for the fiscal quarter and two fiscal quarters endedOctober 2, 2020 , respectively, as compared to$8 million and$19 million for the comparable period of the prior year. The ETR was approximately 16% and 41% for the fiscal quarter and two fiscal quarters endedOctober 2, 2020 , respectively, as compared to 22% and 24% for the fiscal quarter and two fiscal quarters endedSeptember 30, 2019 , respectively. For the fiscal quarter and two fiscal quarters endedOctober 2, 2020 , the primary drivers of our ETR were state income taxes, the reversal of an indemnified tax receivable in the first quarter and limitations on executive compensation deductions. For the fiscal quarter and two fiscal quarters endedSeptember 30, 2019 , the primary drivers of our ETR were state income taxes, non-deductible transaction expenses, and the release of certain indemnified liabilities for unrecognized tax benefits. The Company is subject to income taxes in theU.S. (federal and state). Significant judgment is required in determining the provision for income taxes, analyzing the income tax reserves and the determination of the likelihood of recoverability of deferred tax assets and adjustment of valuation allowances. In addition, the Company's tax returns are routinely audited and settlements of issues raised in these audits sometimes affect the tax provisions. Potential liabilities or refunds resulting from these audits are covered by the TMA betweenPerspecta and DXC. The TMA with DXC governs the respective rights, responsibilities and obligations of DXC and the Company after the Spin-Off with respect to all tax matters and includes restrictions designed to preserve the tax-free status of the Distribution (as defined in the SDA). As a subsidiary of DXC, the Company had (and the Company continues to have following the Spin-Off) several liability to theIRS for the full amount of the consolidatedU.S. federal income taxes of the DXC consolidated group relating to the taxable periods in which the Company was part of that group. However, the TMA specifies the portion, if any, of this tax liability for which the Company will bear responsibility. The Company agrees to indemnify DXC against any amounts for which the Company is responsible and DXC agrees to indemnify the Company against any amounts for which the Company is not responsible. The TMA also provides special rules for allocating tax liabilities in the event that the Spin-Off is not tax-free. The TMA provides for certain covenants that may restrict the ability of the Company to pursue strategic or other transactions that otherwise could maximize the value of the business and may discourage or delay a change of control. Pursuant to the TMA, the Company has agreed to indemnify DXC for any tax liabilities resulting from a breach of such covenants or certain other actions. Though valid as between the parties, the TMA will not be binding on theIRS . 26 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We pursue a cash management and capital deployment strategy that balances funding our current operating needs with growing our business. Existing cash and cash equivalents and cash generated by operations continue to be our primary sources of liquidity, as well as available borrowings under our Revolving Credit Facility (as defined in Note 10 - "Debt" to the financial statements of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 ) and sales of receivables under aU.S. federal government obligor receivables purchase facility established pursuant to the Master Accounts Receivable Purchase Agreement ("MARPA Facility") (as defined in Note 5 - "Receivables" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 ). Our primary cash needs are expected to be for working capital, capital expenditures, acquisitions, the return of cash to shareholders through share repurchases and dividend payments, and other discretionary investments, as well as to service our outstanding indebtedness, including borrowings under our Credit Facilities. Our ability to fund our future operating needs depends, in part, on our ability to continue to generate positive cash flows from operations and, if necessary, raise cash in the capital markets. Based upon our history of generating strong cash flows, it is our belief that we will be able to meet our short-term liquidity and cash needs, including debt servicing, through the combination of cash flows from operating activities, available cash balances, available borrowings under our Revolving Credit Facility and sales of receivables under our MARPA Facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities, although there can be no assurance that we will able to obtain such financing on acceptable terms (or at all) in the future. InJuly 2017 , theFinancial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The Company has material contracts that are indexed to LIBOR and is continuing to monitor this activity and evaluate the related risks. Our exposure to operational liquidity risk is primarily from long-term contracts which require significant investment of cash during the initial phases of the contracts. The recovery of these investments is over the life of the contract and is dependent upon our performance as well as customer acceptance.
See Note 15 - "Commitments and Contingencies" to the financial statements for discussion of the general purpose of guarantees and commitments.
The anticipated sources of funds to fulfill such commitments are listed below: (in millions) October 2, 2020 Cash and cash equivalents $ 216 Available borrowings under our Revolving Credit Facility 750 Total liquidity $ 966
Cash and Cash Equivalents and Cash Flows
As ofOctober 2, 2020 , our cash and cash equivalents were$216 million . Cash and cash equivalents increased$69 million , as compared to$147 million atMarch 31, 2020 , driven by cash flow generation through working capital management. 27 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our cash flow activity: Two Fiscal Quarters Ended September 30, (in millions) October 2, 2020 2019 Change Net cash provided by operating activities $ 296$ 320 $ (24) Net cash used in investing activities (70) (272) 202 Net cash used in financing activities (192) - (192) Net change in cash and cash equivalents, including 34 48 (14)
restricted
Cash and cash equivalents, including restricted, at beginning of period
221 99 122
Cash and cash equivalents, including restricted, at 255 147 108
end of period Less restricted cash and cash equivalents included in other current assets
39 25 14
Cash and cash equivalents at end of period $ 216 Net cash provided by operating activities during the two fiscal quarters endedOctober 2, 2020 was$296 million , as compared to$320 million during the comparable period of the prior year. The decrease of$24 million was impacted by a$32 million decrease in net income adjusted for noncash items, driven by lost revenue of approximately$41 million from the COVID-19 pandemic as discussed above, partially offset by$8 million of favorable movements in working capital primarily due to timing associated with accounts receivable and the deferral of payment of the employer portion of payroll tax afforded under the CARES Act.
Net cash used in investing activities during the two fiscal quarters ended
Net cash used in financing activities during the two fiscal quarters endedOctober 2, 2020 was$192 million , as compared to$0 million during the comparable period of the prior year. In the comparable period of the prior year,$175 million was drawn on the Revolving Credit Facility to partially finance the acquisition ofKnight Point , which was fully offset by routine financing transactions, including lease payments, share repurchases and dividend payments. We repaid$50 million of our Revolving Credit Facility during the two fiscal quarters endedOctober 2, 2020 and incurred routine financing transactions, including lease payments and dividend payments that were comparable to the prior year when combined. No common shares were repurchased under the Company's share repurchase program during the two fiscal quarters endedOctober 2, 2020 . AtOctober 2, 2020 , our$750 million Revolving Credit Facility remained unused.
Capital Resources
The following table summarizes our total debt: (in millions) October 2, 2020 March 31, 2020 Short-term debt and current maturities of long-term debt $ 93 $ 89 Long-term debt, net of current maturities 2,193 2,283 Total debt $ 2,286$ 2,372 The decrease in total debt as ofOctober 2, 2020 , as compared to total debt as ofMarch 31, 2020 , resulted primarily from the$50 million payment on the Revolving Credit Facility and permanent principal payments. AtOctober 2, 2020 ,$750 million was available under our Revolving Credit Facility. We were in compliance with all financial covenants associated with our borrowings as ofOctober 2, 2020 . For more information on our debt, see Note 9 - "Debt" to the financial statements. 28 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our capitalization ratios: (in millions) October 2, 2020 March 31,
2020
Total debt and finance leases$ 2,488 $ 2,619 Cash and cash equivalents 216 147 Net debt(1)$ 2,272 $ 2,472 Total debt and finance leases$ 2,488 $ 2,619 Total shareholders' equity 1,369 1,357 Total capitalization$ 3,857 $ 3,976 Debt-to-total capitalization 65 % 66 % Net debt-to-total capitalization(1) 59 %
62 %
(1) Net debt and net debt-to-total capitalization are non-GAAP measures used by management to assess our ability to service our debts using only our cash and cash equivalents. We present these non-GAAP measures to assist investors in analyzing our capital structure in a more comprehensive way compared to gross debt based ratios alone. The net debt-to-total capitalization as ofOctober 2, 2020 is consistent withMarch 31, 2020 , driven by strong operating results while meeting scheduled debt obligations and returning value to shareholders.
Interest Rate Swaps
We use interest rate swaps to manage the amount of our floating rate debt in order to reduce our exposure to variable rate interest payments associated with our floating interest rate debt. The interest rate swaps effectively convert our floating interest rate debt into fixed interest rate debt. Each swap agreement is designated as a cash flow hedge. We pay a stream of fixed interest payments for the term of the swap, and in turn, receive variable interest payments based on one-month LIBOR. AtOctober 2, 2020 , the one-month LIBOR rate applicable to the swap agreements was 0.15%. The net receipt or payment from the interest rate swap agreements is included in the statements of operations as interest expense.
The following table summarizes our interest rate swaps at
Notional
Amount Weighted Average
Start Date Maturity Date (in millions) Interest Rate Paid
May 2018 May 2021 $ 400 2.57 %
May 2018 May 2022 500 2.61 %
October 2018 October 2022 200 2.92 %
May 2018 May 2023 500 2.68 %
Swaps in effect 1,600 2.66 %
May 2021 May 2024 400 0.50 %
May 2022 May 2025 500 0.69 %
Total Swaps $ 2,500 Cash Dividends and Share Repurchase Programs
OnMay 21, 2020 , the Company increased the quarterly cash dividend on its common stock by 17% to$0.07 per common share from$0.06 per common share. The payment of future quarterly dividends is subject to approval by the Board of Directors. Due to the uncertainty and volatility of the financial markets resulting from the COVID-19 pandemic, we did not repurchase any of our common shares during the fiscal quarter endedOctober 2, 2020 . However, our liquidity and financial flexibility are strong, and share repurchases will continue to be a key part of our capital deployment strategy. See Note 13 - "Shareholders' Equity" to the financial statements for a discussion, including the amounts, of the cash returned to shareholders. For additional discussion of our share repurchase program, see Part II, Item 2 "Unregistered Sales ofEquity Securities and Use of Proceeds." 29 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements
reported under Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the fiscal year ended
Contractual Obligations
There have been no material changes to our contractual obligations from those reported under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 .
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. These estimates may change in the future if underlying assumptions or factors change. Accordingly, actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider certain policies to be critical because of their complexity and the high degree of judgment involved in implementing them, including policies related to: revenue recognition, acquisition accounting, valuation of goodwill and income taxes. Our critical accounting policies and estimates are more fully discussed in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , under the heading "Critical Accounting Policies and Estimates."
Valuation of
In accordance with ASC Topic 350,Goodwill and Other Intangible Assets, the Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our stock price, significant decreases in federal government appropriations or funding for our contracts, the loss of significant business or significant underperformance relative to historical or projected future operating results. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. The Company engages a third-party valuation specialist to estimate the fair value of the reporting units using both an income approach and a market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to a present value using a discount rate. Cash flow projections are based on management's estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating income, capital expenditures, and working capital requirements. The results of these approaches are used to corroborate the conclusion. Based on the results of the annual assessment, we concluded that no impairment of goodwill existed atJuly 4, 2020 . As noted above, a significant decrease in cash flows or a loss of a significant contract would negatively impact the estimated fair value of a reporting unit and could necessitate an interim impairment assessment of goodwill associated with that reporting unit.
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