Company Quick10K Filing
Engility
Price34.41 EPS-1
Shares38 P/E-38
MCap1,300 P/FCF19
Net Debt897 EBIT112
TEV2,197 TEV/EBIT20
TTM 2018-09-28, in MM, except price, ratios
10-Q 2018-09-28 Filed 2018-10-31
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10-K 2016-12-31 Filed 2017-03-09
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10-K 2012-12-31 Filed 2013-03-21
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10-Q 2012-06-29 Filed 2012-08-13
8-K 2019-01-14
8-K 2019-01-11
8-K 2018-12-31
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8-K 2018-09-10
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8-K 2018-05-24
8-K 2018-05-02
8-K 2018-03-21
8-K 2018-02-28
8-K 2018-01-05

EGL 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.2 egl-ex102_124.htm
EX-10.3 egl-ex103_125.htm
EX-31.1 egl-ex311_8.htm
EX-31.2 egl-ex312_6.htm
EX-32.1 egl-ex321_7.htm

Engility Earnings 2018-09-28

Balance SheetIncome StatementCash Flow
2.72.21.61.10.50.02013201520172019
Assets, Equity
0.60.40.20.0-0.2-0.42013201520172019
Rev, G Profit, Net Income
0.20.10.0-0.1-0.2-0.32013201520172019
Ops, Inv, Fin

10-Q 1 egl-10q_20180928.htm 10-Q egl-10q_20180928.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission file number: 001-35487

 

 

ENGILITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1748527

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4803 Stonecroft Blvd., Chantilly, VA

 

20151

(Address of principal executive offices)

 

(Zip Code)

 

(703) 633-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  

Accelerated filer 

Non-accelerated filer

Smaller reporting company    

Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

There were 36,968,909 shares of Engility Holdings, Inc. common stock with a par value of $0.01 per share outstanding as of the close of business on October 29, 2018.

 

 

 

 

 


 

ENGILITY HOLDINGS, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

PART I – FINANCIAL INFORMATION

1

ITEM 1.

 

FINANCIAL STATEMENTS

1

 

 

Unaudited Consolidated Balance Sheets as of September 28, 2018 and December 31, 2017

1

 

 

Unaudited Consolidated Statements of Operations for the three and nine months ended September 28, 2018 and September 29, 2017

2

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 28, 2018 and September 29, 2017

3

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 28, 2018 and September 29, 2017

4

 

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

41

ITEM 4.

 

CONTROLS AND PROCEDURES

42

 

 

PART II – OTHER INFORMATION

43

ITEM 1.

 

LEGAL PROCEEDINGS

43

ITEM 1A.

 

RISK FACTORS

45

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

45

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

45

ITEM 4.

 

MINE SAFETY DISCLOSURES

45

ITEM 5.

 

OTHER INFORMATION

45

ITEM 6.

 

EXHIBITS

46

SIGNATURES

47

 

 

 

 

 

i


fINANCIAL STATEMENTS

 

 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

September 28,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,699

 

 

$

41,890

 

Accounts receivables, net

 

 

75,905

 

 

 

108,100

 

Unbilled receivables

 

 

255,459

 

 

 

222,994

 

Other current assets

 

 

18,590

 

 

 

19,681

 

Total current assets

 

 

391,653

 

 

 

392,665

 

Property, plant and equipment, net

 

 

49,492

 

 

 

44,006

 

Goodwill

 

 

1,071,371

 

 

 

1,071,371

 

Identifiable intangible assets, net

 

 

337,047

 

 

 

361,410

 

Deferred tax assets

 

 

109,464

 

 

 

150,535

 

Other assets

 

 

5,786

 

 

 

6,021

 

Total assets

 

$

1,964,813

 

 

$

2,026,008

 

Liabilities and Equity:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

25,260

 

 

$

26,947

 

Accounts payable, trade

 

 

44,900

 

 

 

52,954

 

Accrued employment costs

 

 

99,304

 

 

 

77,545

 

Accrued expenses

 

 

79,766

 

 

 

74,856

 

Advance payments and billings in excess of costs incurred

 

 

26,261

 

 

 

30,380

 

Income tax liabilities

 

 

352

 

 

 

548

 

Other current liabilities

 

 

16,257

 

 

 

26,688

 

Total current liabilities

 

 

292,100

 

 

 

289,918

 

Long-term debt

 

 

871,857

 

 

 

938,687

 

Income tax liabilities

 

 

33,080

 

 

 

62,219

 

Other liabilities

 

 

59,987

 

 

 

59,079

 

Total liabilities

 

 

1,257,024

 

 

 

1,349,903

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 25,000 shares authorized,

   none issued or outstanding as of September 28, 2018 or December 31, 2017

 

 

 

 

 

 

Common stock, par value $0.01 per share, 175,000 shares authorized,

   36,969 and 36,822 shares issued and outstanding as of

   September 28, 2018 and December 31, 2017, respectively

 

 

370

 

 

 

368

 

Additional paid-in capital

 

 

1,252,006

 

 

 

1,244,940

 

Accumulated deficit

 

 

(552,151

)

 

 

(576,019

)

Accumulated other comprehensive loss

 

 

(1,693

)

 

 

(3,805

)

Total equity attributable to Engility

 

 

698,532

 

 

 

665,484

 

Non-controlling interest

 

 

9,257

 

 

 

10,621

 

Total equity

 

 

707,789

 

 

 

676,105

 

Total liabilities and equity

 

$

1,964,813

 

 

$

2,026,008

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

1


fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28, 2018

 

 

September 29, 2017

 

 

September 28, 2018

 

 

September 29, 2017

 

Revenue

 

$

471,207

 

 

$

487,144

 

 

$

1,436,281

 

 

$

1,467,030

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

400,474

 

 

 

417,581

 

 

 

1,225,662

 

 

 

1,255,603

 

Selling, general and administrative expenses

 

 

43,925

 

 

 

33,419

 

 

 

120,811

 

 

 

107,636

 

Total costs and expenses

 

 

444,399

 

 

 

451,000

 

 

 

1,346,473

 

 

 

1,363,239

 

Operating income

 

 

26,808

 

 

 

36,144

 

 

 

89,808

 

 

 

103,791

 

Interest expense, net

 

 

16,981

 

 

 

19,739

 

 

 

53,520

 

 

 

59,189

 

Other income, net

 

 

(191

)

 

 

(62

)

 

 

(441

)

 

 

(121

)

Income before provision for income taxes

 

 

10,018

 

 

 

16,467

 

 

 

36,729

 

 

 

44,723

 

Provision for income taxes

 

 

4,601

 

 

 

5,611

 

 

 

10,968

 

 

 

16,671

 

Net income

 

 

5,417

 

 

 

10,856

 

 

 

25,761

 

 

 

28,052

 

Less: Net income attributable to non-controlling interest

 

 

1,135

 

 

 

1,051

 

 

 

3,063

 

 

 

3,683

 

Net income attributable to Engility

 

$

4,282

 

 

$

9,805

 

 

$

22,698

 

 

$

24,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Engility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.27

 

 

$

0.61

 

 

$

0.66

 

Diluted

 

$

0.11

 

 

$

0.26

 

 

$

0.60

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,968

 

 

 

36,809

 

 

 

36,928

 

 

 

36,831

 

Diluted

 

 

37,782

 

 

 

37,348

 

 

 

37,737

 

 

 

37,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

2


fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28, 2018

 

 

September 29, 2017

 

 

September 28, 2018

 

 

September 29, 2017

 

Net income

 

$

5,417

 

 

$

10,856

 

 

$

25,761

 

 

$

28,052

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability adjustment, net of tax benefit of $23

   and $38 for the three and nine months ended

   September 28, 2018, respectively, and $7 and $84 for

   for the three and nine months ended

   September 29, 2017, respectively

 

 

(64

)

 

 

(11

)

 

 

(108

)

 

 

(103

)

Unrealized gain (loss) on derivative instruments, net of

   tax expense of $220 and $1,076 for the three and nine

   months ended September 28, 2018, respectively, and

   net of tax benefit of $28 and $343 for the three and

   nine months ended September 29, 2017, respectively

 

 

625

 

 

 

(44

)

 

 

3,056

 

 

 

(536

)

Other comprehensive income (loss), net of tax

 

 

561

 

 

 

(55

)

 

 

2,948

 

 

 

(639

)

Comprehensive income

 

 

5,978

 

 

 

10,801

 

 

 

28,709

 

 

 

27,413

 

Less: Net income attributable to non-controlling interest

 

 

1,135

 

 

 

1,051

 

 

 

3,063

 

 

 

3,683

 

Comprehensive income attributable to Engility

 

$

4,843

 

 

$

9,750

 

 

$

25,646

 

 

$

23,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

3


fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 28, 2018

 

 

September 29, 2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

25,761

 

 

$

28,052

 

Share-based compensation

 

 

9,111

 

 

 

6,052

 

Depreciation and amortization

 

 

32,460

 

 

 

33,172

 

Loss (gain) on sale of property, plant and equipment

 

 

69

 

 

 

(306

)

Loss on extinguishment of debt

 

 

253

 

 

 

432

 

Amortization of bank debt fees

 

 

6,389

 

 

 

6,484

 

Deferred income taxes

 

 

39,810

 

 

 

17,096

 

Excess tax deduction on share-based compensation

 

 

106

 

 

 

(191

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

5,213

 

 

 

(7,465

)

Other assets

 

 

31

 

 

 

7,894

 

Accounts payable, trade

 

 

(9,310

)

 

 

5,332

 

Accrued employment costs

 

 

21,759

 

 

 

(2,133

)

Accrued expenses

 

 

4,023

 

 

 

5,093

 

Advance payments and billings in excess of costs incurred

 

 

(4,119

)

 

 

(1,354

)

Other liabilities

 

 

(36,811

)

 

 

(19,403

)

Net cash provided by operating activities

 

 

94,745

 

 

 

78,755

 

Investing activities:

 

 

 

 

 

 

 

 

Proceeds (payments) from sale of business, net of amount placed in escrow

 

 

(1,900

)

 

 

22,349

 

Proceeds from sale of property, plant and equipment

 

 

 

 

 

2,902

 

Capital expenditures

 

 

(11,404

)

 

 

(5,810

)

Net cash provided by (used in) investing activities

 

 

(13,304

)

 

 

19,441

 

Financing activities:

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(75,115

)

 

 

(86,410

)

Gross borrowings from revolving credit facility

 

 

167,000

 

 

 

270,000

 

Gross repayments of revolving credit facility

 

 

(167,000

)

 

 

(270,000

)

Debt issuance costs

 

 

(45

)

 

 

 

Payment of employee withholding taxes on share-based compensation

 

 

(2,045

)

 

 

(1,501

)

Dividends paid

 

 

 

 

 

(407

)

Distributions to non-controlling interest member

 

 

(4,427

)

 

 

(6,136

)

Net cash used in financing activities

 

 

(81,632

)

 

 

(94,454

)

Net change in cash and cash equivalents

 

 

(191

)

 

 

3,742

 

Cash and cash equivalents, beginning of period

 

 

41,890

 

 

 

48,236

 

Cash and cash equivalents, end of period

 

$

41,699

 

 

$

51,978

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

4


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

 

1.

Basis of Presentation

Description of Business: Engility Holdings, Inc. (Engility) has provided mission critical services to the U.S. government for over six decades. Engility has a diversified portfolio that serves the U.S. Department of Defense (DoD), U.S. Department of Justice (DoJ), U.S. Department of State (DoS), Federal Aviation Administration (FAA), Department of Homeland Security (DHS), and space-related and intelligence community agencies, including the National Geospatial-Intelligence Agency (NGA), Defense Intelligence Agency (DIA), the National Reconnaissance Office (NRO), and National Aeronautical and Space Administration (NASA).

As used herein, the terms “Engility,” the “Company,” “we,” “us” or “our” refers to (i) Engility and its subsidiaries, for all periods prior to the closing of the TASC, Inc. (TASC) acquisition, and (ii) New Engility and its subsidiaries, for all periods following the TASC acquisition. The TASC acquisition was effected through a new holding company named New East Holdings, Inc. (New Engility). As a result of the business combination, New Engility succeeded to and continues to operate, directly or indirectly, the existing business of Engility and, indirectly, acquired the existing business of TASC.

We offer a broad range of services, including specialized technical consulting, program and business support, engineering and technology lifecycle support, information technology modernization and sustainment, supply chain services and logistics management and training and education to the U.S. government worldwide.

Engility has no operations other than owning 100% of the capital stock of Engility Corporation (formerly TASC, Inc.), a Massachusetts corporation, and the consolidated financial statements of Engility and its consolidated subsidiaries are identical in all respects to the consolidated financial statements of Engility Corporation and its consolidated subsidiaries.

On September 9, 2018, the Company entered into a definitive agreement (the Merger Agreement) whereby Science Applications International Corporation (SAIC) will acquire all of the outstanding shares of Engility in a stock-for-stock transaction with each share of Engility common stock exchanged for 0.450 shares of SAIC common stock (the Merger). The transaction is subject to the approval by shareholders of both companies and other customary closing conditions.  Transaction costs associated with the pending Merger for legal, financial and other professional advisors totaled $5 million in the three and nine months ended September 28, 2018 and were recorded to selling, general and administrative expenses.  

Principles of Consolidation and Basis of Presentation: The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC), and reflect the financial position, results of operations and cash flows of our businesses. Accordingly, they do not include all of the disclosures required by U.S. GAAP for a complete set of annual audited financial statements. All significant intercompany accounts and transactions are eliminated in consolidation.

The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K filed with the SEC on March 2, 2018 for the year ended December 31, 2017 (the 2017 Form 10-K). In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included.

Non-controlling Interest: Engility holds a 50.1% majority interest in Forfeiture Support Associates, LLC (FSA). The results of operations of FSA are included in Engility’s Unaudited Consolidated Financial Statements. The non-controlling interest reported on the Unaudited Consolidated Balance Sheets represents the portion of FSA’s equity that is attributable to the non-controlling interest.

 


5


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

Accounting Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates using assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant of these estimates include revenue and profit recognition for performance obligations satisfied over time, the recoverability, useful lives and valuation of identifiable intangible assets and goodwill, income taxes and contingencies. Actual results experienced by the Company may differ materially from management's estimates.

Reporting Periods: Our fiscal year begins on January 1 and ends on December 31.  Our 2018 fiscal quarters end on March 30, June 29, September 28 and December 31.  Our 2017 fiscal quarters ended on March 31, June 30, September 29 and December 31.

Revenue Recognition: On January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method.  We recognized the cumulative effect of adopting ASC 606 as a decrease to the opening balance of accumulated deficit as of January 1, 2018 of $0.3 million.  Revenue for reporting periods beginning after January 1, 2018 are accounted for and presented in accordance with ASC 606, while prior periods were accounted for and continue to be presented in accordance with ASC 605. For further information on the impact of adoption and additional revenue disclosures refer to Notes 2 and 3, respectively.

We account for a contract when both we and our customer have approved the contract and are committed to perform our respective obligations, our and our customer’s rights are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.  At contract inception, we identify the distinct goods or services promised in the contract, which are referred to as performance obligations.  Then we determine the transaction price for the contract, which is the consideration that we expect to be entitled in exchange for the promised goods or services.  The transaction price can be a fixed or variable amount.  It is common for our contracts to contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price.  These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.  We estimate variable consideration as the most likely amount to which we expect to be entitled.  We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and historical, current and forecasted information that is reasonably available to us.  The transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service promised in the contract.  The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service promised.  Revenue is recognized when, or as, the performance obligation is satisfied.  

Determining a measure of progress and transfer of control requires us to make judgments that affect the timing of revenue recognized. We recognize revenue over time when there is a transfer over time of control to our customer.  For our U.S. government contracts, this transfer of control to the customer over time is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.  When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.  Based on the nature of the products and services provided in the contract, we use our judgment to determine if an input measure or output measure best depicts the transfer of control over time.  For services contracts, we typically satisfy our performance obligations as services are rendered and use a contract cost-based input method to measure progress.  Contract costs include labor, material, other direct costs, and allocated indirect costs.  Revenue is recognized proportionally as contract costs are incurred plus estimated profit. For time-and-material, time-and-material level of effort, cost plus fixed fee, cost plus fixed fee level of effort, and cost reimbursable (no fee applied) contracts, under which we bill the customer per labor hour and per material/cost, revenue is recognized in the amount the Company has a right to invoice using the right to invoice method since the amount invoiced corresponds directly to the value transferred to the customer.  For stand-ready service

6


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

contracts, a straight-line, time-elapsed output method is used to measure progress and recognize revenue over the term of the contract.  If a contract does not meet the criteria for recognizing revenue over time, we recognize revenue at a point in time.  Revenue is recognized at the point in time when control of the good or service is transferred to our customer.  We consider control to be transferred based on a variety of factors, including when we have a present right to payment, our customer has legal title, we have transferred physical possession, our customer has significant risks and rewards of ownership or when our customer has accepted the good or service.  

Contracts are often modified to account for changes in contract specifications and requirements.  We consider contract modifications to exist when the modification changes the scope and / or price of a contract that has been agreed by the parties. Most of Engility’s contract modifications are for goods or services that are not distinct in the context of the contract and are therefore accounted for as part of the original performance obligations and recognized as an adjustment to revenue under the cumulative catch-up method at the date of the modification.  Furthermore, a change in one or more of our estimates of cost or variable consideration could affect the profitability of our contracts.  We recognize the impact of such changes using the cumulative catch-up method in the period the change is identified.  If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total estimated loss in the quarter it is identified.

Results for periods prior to adoption were accounted for and continue to be presented in accordance with ASC 605, Revenue Recognition.  Revenue for cost-reimbursable contracts were recorded as reimbursable costs were incurred, including an estimated share of the applicable contractual fees earned.  For performance-based fees under cost-reimbursable contracts, we recognized the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding performance, or upon approval by the customer.  For time-and-materials contracts, revenue was recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred.  Revenue from long-term fixed-price contracts was recognized ratably over the contract period or by other appropriate methods to measure services provided.  For these type of contracts, specifically described in the scope section of ASC 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, we applied the percentage of completion method.  Under the percentage of completion method, income was recognized at a consistent profit margin over the period of performance based on estimated profit margins at completion of the contract.  This method of accounting required estimating the total revenue and total contract cost at completion of the contract.  These estimates were periodically reviewed and revisions were made as required using the cumulative catch-up method.  The impact on revenue and contract profit as a result of these revisions were included in the periods in which the revisions were made.  Estimated losses on contracts at completion were recognized when identified.  

Billed receivables: Amounts billed and due from our customers are classified as accounts receivables, net on the unaudited consolidated balance sheet.  The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer in the event we do not perform on our obligations under the contract.  

Contract assets: Represents unbilled receivables, as classified on the unaudited consolidated balance sheet, resulting from sales under contracts when revenue is recognized over time and revenue recognized exceeds the amounts billed. Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.  Cost of fulfilling a contract that meet the capitalization criteria result in contract assets. Our contract assets are presented on a contract-by-contract net basis at the end of each reporting period.  

Included in unbilled receivables are certain restructuring costs related to the performance of our U.S. government contracts which are required to be recorded under GAAP but are not currently allocable to contracts. Such costs are expensed outside of our indirect rates and recognized as revenue for the portion we expect to be recoverable in our rates. At September 28, 2018 and December 31, 2017, these receivables were approximately $6 million and $9 million, respectively, and are allocated to contracts when they are paid or otherwise agreed. We regularly assess the probability of recovery of these costs. This assessment requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. If the level of backlog in the future does not support the continued expensing of these costs, the profitability of our remaining contracts could be adversely affected.

7


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

Contract liabilities: Represents advance payments and billings in excess of costs incurred as classified on the unaudited consolidated balance sheet.  Under certain contracts we receive advances and milestone payments from our customers that exceed revenue earned to date, resulting in contract liabilities.  Advances typically are not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the customer failing to adequately complete some or all of its obligations under the contract. Our contract liabilities are presented on a contract-by-contract net basis at the end of each reporting period.

Income Taxes: As of September 28, 2018, management has determined it is more likely than not a portion of state deferred tax assets, charitable donations, and foreign tax credits will not be realized and has recorded a valuation allowance against them.  A change in the ability of our operations to continue to generate future taxable income could affect our ability to realize the future tax deductions underlying our deferred tax assets, and require us to provide a valuation allowance against our deferred tax assets. The recognition of a valuation allowance would result in a reduction to net income and, if significant, could have a material impact on our effective tax rate, results of operations and financial position in any given period.

Earnings per Share: Basic earnings per share (EPS) is computed by dividing net income (loss) attributable to Engility by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the weighted average effect of all potentially dilutive securities outstanding during the periods. Diluted EPS includes the incremental effect of the employee stock purchase plan, restricted stock units (RSUs), performance shares, performance retention awards and performance units calculated using the treasury stock method.  For the three months ended September 28, 2018 and September 29, 2017, no shares were excluded from diluted EPS due to their anti-dilutive effects.  For the nine months ended September 28, 2018 and September 29, 2017, 71 shares and 10,949 shares, respectively, were excluded from diluted EPS due to their anti-dilutive effects.

The calculation of basic and diluted EPS are presented in the table below (shares in thousands).

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28, 2018

 

 

September 29, 2017

 

 

September 28, 2018

 

 

September 29, 2017

 

Net income attributable to Engility

 

$

4,282

 

 

$

9,805

 

 

$

22,698

 

 

$

24,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding – Basic

 

 

36,968

 

 

 

36,809

 

 

 

36,928

 

 

 

36,831

 

Dilutive effect of share-based compensation outstanding

   after application of the treasury stock method

 

 

814

 

 

 

539

 

 

 

809

 

 

 

523

 

Weighted average number of shares outstanding – Diluted

 

 

37,782

 

 

 

37,348

 

 

 

37,737

 

 

 

37,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Engility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.27

 

 

$

0.61

 

 

$

0.66

 

Diluted

 

$

0.11

 

 

$

0.26

 

 

$

0.60

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dispositions: On January 6, 2017, the Company completed the sale of its international development services business, International Resources Group Ltd. (IRG), for an initial purchase price of $25 million in cash, subject to a cash on hand adjustment of $1 million, finalized in the third quarter of 2017, and working capital adjustments, finalized in January 2018, that resulted in a payment of approximately $2 million. The sale was the result of the Company’s strategic review of its businesses and determination that the USAID portion of the Company’s international business no longer closely aligned with the Company’s future strategic direction. The Company received the proceeds from this sale, less an indemnity escrow of approximately $2 million, in the first quarter of 2017, which was used to pay down existing debt. The Company expects to receive the indemnity escrow on or about the second anniversary of the sale assuming no claims are made against the escrow funds.


8


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

During the first quarter of 2017, the Company completed its sale of long-term assets with carrying value totaling $2 million (net of accumulated depreciation of $1 million).  The Company recorded a gain on sale of approximately $1 million which was recorded in selling, general and administrative expenses in the accompanying unaudited consolidated statement of operations.

 

2.

New Accounting Pronouncements

New Accounting Pronouncements Adopted

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The ASU adds various Securities and Exchange Commission (SEC) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the 2017 Tax Cuts and Jobs Act (the Tax Act) in the period of enactment. SAB 118 allows disclosure indicating that timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax Act under the guidance of SAB 118, on a provisional basis. During the nine months ended September 28, 2018, we did not recognize any changes to the provisional amounts recorded in our 2017 Form 10-K.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address a specific consequence of the Tax Act by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Act’s reduction of the U.S. federal corporate income tax rate. The standard is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized.  The Company early adopted this ASU on January 1, 2018 and as a result recorded a net decrease to the opening balance of accumulated deficit and increase to accumulated other comprehensive loss of approximately $1 million to reclassify the income tax effects of the Tax Act on the Company’s pension plan and interest rate swap contracts. The ASU also requires the Company to disclose its policy on accounting for income tax effects in accumulated other comprehensive income (loss). In general, the Company applies the portfolio approach with respect to pension and interest rate swap matters.

In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). This update clarifies the definition of a public business entity for the application of the new revenue recognition and leasing standards. The revenue standard was adopted on January 1, 2018 as further described below, and the leasing standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. This update did not have an impact on our assessment of these standards or implementation strategies.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. The Company adopted ASU 2017-09 on January 1, 2018, and the standard did not have an impact on our consolidated financial statements and will be applied upon a modification of an award after the adoption date.  

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be

9


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. The Company adopted ASU 2017-07 on January 1, 2018, and the adoption of this accounting standard did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash—a consensus of the FASB Emerging Issues Task Force, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of the new standard did not impact our consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU requires changes in the presentation of certain items including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method.  The adoption of the new standard did not impact our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606).  ASU 2014-09 outlines a single comprehensive model for entities to use when accounting for revenue arising from contracts with customers, and it supersedes all current revenue recognition guidance, including industry-specific guidance. Additional new ASUs have been issued amending or clarifying certain aspects of the new standard, including: ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross Versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients; and ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements, ASU No 2017-13 and ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606).  See Note 3 for new and expanded disclosures regarding revenue recognition.  

On January 1, 2018, we adopted ASC 606 using the modified retrospective method.  ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied.  ASC 606 also requires new, expanded disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers.  We recognized the cumulative effect of adopting ASC 606 as a decrease to the opening balance of accumulated deficit as of January 1, 2018 of $0.3 million.  Revenue for reporting periods beginning after January 1, 2018 are accounted for and presented in accordance with ASC 606, while prior periods were accounted for and continue to be presented in accordance with ASC 605.

As the new standard impacts several of our business processes, systems and controls, the Company developed and implemented a comprehensive project plan to guide through the process of adopting the new standard.  To assess the impact of adopting ASC 606, Engility reviewed its contract population by selecting samples upon which to perform detailed contract analyses. These contract analyses entailed reviewing each selected contract to determine the appropriate accounting treatment under ASC 606.  These contract reviews were performed in a phased approach, enabling the Company to identify specific ASC 606-related risk areas for subsequent, more focused analyses.  

We will continue to recognize revenue and profit for the majority of our performance obligations over time as work is performed. For these performance obligations the customer simultaneously receives and consumes the benefits provided by our performance, and there is continuous transfer of control to the customer as costs are incurred. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow

10


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.

Engility management identified two primary areas that resulted in ASC 606-related impact:

 

 

Unfunded Performance Obligations – Engility may perform work under a contract that has not been fully funded if the Company has received an Authorization to Proceed from the customer. Under ASC 605 the Company only recognized revenue to the extent of funding received, deferring revenue, cost and profit on unfunded work until receiving a modification indicating that adequate funds were available. Under ASC 606, the Company evaluates unfunded amounts as variable consideration that are included in its transaction prices, which is generally expected to result in recognition of the revenue, cost and profit earlier as the work is performed.

 

 

Customized Products – Some of Engility’s contracts with customers entail building products to customer specifications. Under ASC 605, revenue for these customized products was recognized at the time of product delivery. The Company changed its revenue recognition methodology from point in time to over time for these products, as they meet at least one of the over-time criteria.

The following tables show the effect adopting ASC 606 had on our unaudited consolidated financial statements using the modified retrospective method.

Unaudited Consolidated Balance Sheets

 

 

 

Balances

 

 

Impact from

 

 

Impact from

 

 

 

 

 

 

 

as of

 

 

Adoption of

 

 

ASC 606

 

 

 

 

 

 

 

September 28, 2018

 

 

ASC 606

 

 

for the Nine

 

 

 

 

 

 

 

Under

 

 

as of

 

 

Months Ended

 

 

As Reported

 

 

 

ASC 605

 

 

January, 1 2018

 

 

September 28, 2018

 

 

September 28, 2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivables, net

 

$

75,905

 

 

$

 

 

$

 

 

$

75,905

 

Unbilled receivables

 

 

230,556

 

 

 

5,483

 

 

 

19,420

 

 

 

255,459

 

Other current assets

 

 

42,144

 

 

 

(5,031

)

 

 

(18,523

)

 

 

18,590

 

Deferred tax assets

 

 

109,816

 

 

 

(118

)

 

 

(234

)

 

 

109,464

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advance payments and billings

   in excess of costs incurred

 

 

26,261

 

 

 

 

 

 

 

 

 

26,261

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(553,148

)

 

 

334

 

 

 

663

 

 

 

(552,151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


11


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

Unaudited Consolidated Statements of Operations

 

For the Three Months Ended September 28, 2018

 

 

 

Balances

 

 

Impact from

 

 

 

 

 

 

 

as of

 

 

ASC 606

 

 

 

 

 

 

 

September 28, 2018

 

 

for the Three

 

 

 

 

 

 

 

Under

 

 

Months Ended

 

 

As Reported

 

 

 

ASC 605

 

 

September 28, 2018

 

 

September 28, 2018

 

Revenue

 

$

467,868

 

 

$

3,339

 

 

$

471,207

 

Cost of revenue

 

 

397,587

 

 

 

2,887

 

 

 

400,474

 

Operating income

 

 

26,356

 

 

 

452

 

 

 

26,808

 

Provision for income taxes

 

 

4,483

 

 

 

118

 

 

 

4,601

 

Net income attributable to Engility

 

 

3,948

 

 

 

334

 

 

 

4,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 28, 2018

 

 

 

Balances

 

 

Impact from

 

 

 

 

 

 

 

as of

 

 

ASC 606

 

 

 

 

 

 

 

September 28, 2018

 

 

for the Nine

 

 

 

 

 

 

 

Under

 

 

Months Ended

 

 

As Reported

 

 

 

ASC 605

 

 

September 28, 2018

 

 

September 28, 2018

 

Revenue

 

$

1,416,861

 

 

$

19,420

 

 

$

1,436,281

 

Cost of revenue

 

 

1,207,139

 

 

 

18,523

 

 

 

1,225,662

 

Operating income

 

 

88,911

 

 

 

897

 

 

 

89,808

 

Provision for income taxes

 

 

10,734

 

 

 

234

 

 

 

10,968

 

Net income attributable to Engility

 

 

22,035

 

 

 

663

 

 

 

22,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Accounting Pronouncements Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that are service contracts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. We are currently assessing the effect that this ASU will have on our financial position, results of operations, and disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We are currently assessing the effect that this ASU will have on our financial position, results of operations, and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. We are currently assessing the effect that this ASU will have on our financial position, results of operations, and disclosures.

12


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This ASU makes amendments to multiple codification Topics. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018. We are currently assessing the effect that this ASU will have on our financial position, results of operations, and disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  While the adoption of this new standard may require modifications to our process for determining and recognizing allowances for losses, primarily with respect to our accounts receivables and unbilled receivables, we do not expect the adoption will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which revises the accounting related to lessee accounting. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The company has a cross-functional team in place to evaluate and implement the new guidance. The team continues to review existing lease arrangements and has engaged a third party to assist with the collection of lease data. In July 2018, the FASB provided an optional transition method of adoption, permitting entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as opposed to the beginning of the earliest period presented in the financial statements. The company will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The impact of applying other practical expedients and accounting policy elections has been evaluated and the company is in the process of documenting the related considerations and decisions. The company continues to enhance accounting systems and update business processes and controls related to leases. Collectively, these activities are expected to facilitate the company's ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019. The company is evaluating the impact on its financial statements and anticipates that the adoption of the new standard will result in a material increase in lease related assets and liabilities in the Consolidated Balance Sheets.

 

 

13


Notes to fINANCIAL STATEMENTS

 

 

ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts or where otherwise stated)

 

3.

Revenue from Contracts with Customers

We account for revenue in accordance with ASC 606, which we adopted on January 1, 2018, using the modified retrospective method.  Results for reporting periods beginning after January 1, 2018 are accounted for and presented under ASC 606, while prior periods were accounted for and continue to be reported in accordance with ASC 605.  We recognized the cumulative effect of adopting ASC 606 as a decrease to the opening balance of accumulated deficit as of January 1, 2018 of $0.3 million.  The cumulative impact of adoption was primarily driven by recognizing revenue for unfunded performance obligations, which is further explained in Note 2.  The impact to revenue for the three and nine months ended September 28, 2018 was an increase of $3 million and $19 million, respectively, primarily as a result of changing the revenue recognition for the sale of certain products from a point in time measurement to a measurement over a period of time, which is further explained in Note 2.

We have a quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations.  As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs.  The risks and opportunities include management’s judgment about the ability and cost to achieve the contract milestones and other technical contract requirements.  Management must make estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of our contracts.  

For the three months ended September 28, 2018, the recognized amounts related to changes in estimates at completion represented a net increase to revenue and operating income of $2 million, of which $1 million was directly related to favorable performance on contract award fees.  For the nine months ended September 28, 2018, the net impact of adjustments to contract estimates increased our revenue and operating income by $6 million, of which $2 million was directly related to favorable performance on contract award fees.  Amounts related to changes in estimates at completion for the three months ended September 29, 2017 represented a net increase to revenue and operating income of $4 million, of which $1 million was directly related to favorable performance on contract award fees. Amounts related to changes in estimates at completion for the nine months ended September 29, 2017 represented a net increase to revenue and operating income of $9 million, of which $2 million was directly rel