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
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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-10.3 egl-ex103_275.htm
EX-31.1 egl-ex311_6.htm
EX-31.2 egl-ex312_8.htm
EX-32.1 egl-ex321_7.htm

Engility Earnings 2016-07-01

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_20160701.htm 10-Q egl-10q_20160701.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended July 1, 2016

o

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

 

45-3854852

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3750 Centerview Drive, Chantilly, VA

 

20151

(Address of principal executive offices)

 

(Zip Code)

 

(703) 708-1400

(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  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  o

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

 

Large accelerated filer

o

 

Accelerated filer

x

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

 

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

There were 36,773,254 shares of Engility Holdings, Inc. common stock with a par value of $0.01 per share outstanding as of the close of business on July 28, 2016.

 

 

 

 

 


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 July 1, 2016 and December 31, 2015

 

 

 

Unaudited Consolidated Statements of Operations for the three and six months ended July 1, 2016 and
June 30, 2015

2

 

 

Unaudited Consolidated Statements of Comprehensive Loss for the three and six months ended
July 1, 2016 and June 30, 2015

3

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended July 1, 2016 and
June 30, 2015

4

 

 

Notes to Unaudited Consolidated Financial Statements

5

ITEM 2.

 

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

15

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

ITEM 4.

 

CONTROLS AND PROCEDURES

23

 

 

PART II – OTHER INFORMATION

25

ITEM 1.

 

LEGAL PROCEEDINGS

25

ITEM 1A.

 

RISK FACTORS

25

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

25

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

25

ITEM 4.

 

MINE SAFETY DISCLOSURES

25

ITEM 5.

 

OTHER INFORMATION

25

ITEM 6.

 

EXHIBITS

25

SIGNATURES

 

 

26

 

 

 

i


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

July 1, 2016

 

 

December 31, 2015

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,311

 

 

$

30,022

 

Receivables, net

 

 

367,750

 

 

 

381,760

 

Prepaid income taxes

 

 

4,868

 

 

 

5,003

 

Other current assets

 

 

27,789

 

 

 

24,655

 

Total current assets

 

 

433,718

 

 

 

441,440

 

Property, plant and equipment, net

 

 

51,334

 

 

 

44,120

 

Goodwill

 

 

1,093,178

 

 

 

1,093,178

 

Identifiable intangible assets, net

 

 

416,820

 

 

 

436,627

 

Deferred tax assets

 

 

231,859

 

 

 

235,397

 

Other assets

 

 

3,484

 

 

 

3,211

 

Total assets

 

$

2,230,393

 

 

$

2,253,973

 

Liabilities and Equity:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

8,447

 

 

$

8,447

 

Accounts payable, trade

 

 

62,251

 

 

 

54,345

 

Accrued employment costs

 

 

85,904

 

 

 

81,711

 

Accrued expenses

 

 

81,792

 

 

 

82,765

 

Advance payments and billings in excess of costs incurred

 

 

38,059

 

 

 

49,205

 

Deferred income taxes, current and income tax liabilities

 

 

486

 

 

 

695

 

Other current liabilities

 

 

36,224

 

 

 

36,293

 

Total current liabilities

 

 

313,163

 

 

 

313,461

 

Long-term debt

 

 

1,065,486

 

 

 

1,094,029

 

Income tax liabilities

 

 

66,802

 

 

 

68,000

 

Other liabilities

 

 

75,173

 

 

 

72,350

 

Total liabilities

 

$

1,520,624

 

 

$

1,547,840

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 25,000 shares authorized, none issued or

   outstanding as of July 1, 2016 or December 31, 2015

 

 

 

 

 

 

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

   36,773 and 36,735 shares issued and outstanding as of July 1, 2016 and

   December 31, 2015, respectively

 

 

368

 

 

 

368

 

Additional paid-in capital

 

 

1,234,351

 

 

 

1,231,584

 

Accumulated deficit

 

 

(531,631

)

 

 

(530,895

)

Accumulated other comprehensive loss

 

 

(5,421

)

 

 

(7,229

)

Non-controlling interest

 

 

12,102

 

 

 

12,305

 

Total equity

 

 

709,769

 

 

 

706,133

 

Total liabilities and equity

 

$

2,230,393

 

 

$

2,253,973

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

1


ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

 

July 1, 2016

 

 

June 30, 2015

 

Revenue

 

$

535,432

 

 

$

575,495

 

 

$

1,058,211

 

 

$

978,142

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

456,902

 

 

 

486,635

 

 

 

906,232

 

 

 

830,100

 

Selling, general and administrative expenses

 

 

43,467

 

 

 

51,036

 

 

 

90,443

 

 

 

109,915

 

Total costs and expenses

 

 

500,369

 

 

 

537,671

 

 

 

996,675

 

 

 

940,015

 

Operating income

 

 

35,063

 

 

 

37,824

 

 

 

61,536

 

 

 

38,127

 

Interest expense, net

 

 

29,064

 

 

 

30,734

 

 

 

58,503

 

 

 

49,328

 

Other income (expenses), net

 

 

(21

)

 

 

56

 

 

 

(82

)

 

 

29

 

Income (loss) before income taxes

 

 

5,978

 

 

 

7,146

 

 

 

2,951

 

 

 

(11,172

)

Provision (benefit) for income taxes

 

 

1,924

 

 

 

(8,324

)

 

 

1,022

 

 

 

(14,001

)

Net income

 

 

4,054

 

 

 

15,470

 

 

 

1,929

 

 

 

2,829

 

Less: Net income attributable to non-controlling interest

 

 

1,560

 

 

 

2,374

 

 

 

2,665

 

 

 

3,100

 

Net income (loss) attributable to Engility

 

$

2,494

 

 

$

13,096

 

 

$

(736

)

 

$

(271

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to Engility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

0.36

 

 

$

(0.02

)

 

$

(0.01

)

Diluted

 

$

0.07

 

 

$

0.35

 

 

$

(0.02

)

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,727

 

 

 

36,577

 

 

 

36,721

 

 

 

30,478

 

Diluted

 

 

37,350

 

 

 

37,009

 

 

 

36,721

 

 

 

30,478

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

2


ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

 

July 1, 2016

 

 

June 30, 2015

 

Net income

 

$

4,054

 

 

$

15,470

 

 

$

1,929

 

 

$

2,829

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability adjustment, net of tax expense of $253 for both

   the three and six months ended July 1, 2016 and net of tax

   benefit of $350 and $327 for the three and six months ended

   June 30, 2015, respectively

 

 

632

 

 

 

(548

)

 

 

632

 

 

 

(511

)

Unrealized gain on derivative instruments, net of tax expense

   of $385 and $310 for the three months ended July 1, 2016

   and June 30, 2015, respectively, and $750 and $383 for the

   six months ended July 1, 2016 and June 30, 2015,

   respectively

 

 

605

 

 

 

484

 

 

 

1,176

 

 

 

600

 

Other comprehensive income (loss), net of tax

 

 

1,237

 

 

 

(64

)

 

 

1,808

 

 

 

89

 

Comprehensive income

 

 

5,291

 

 

 

15,406

 

 

 

3,737

 

 

 

2,918

 

Less: Net income attributable to non-controlling interest

 

 

1,560

 

 

 

2,374

 

 

 

2,665

 

 

 

3,100

 

Comprehensive income (loss) attributable to Engility

 

$

3,731

 

 

$

13,032

 

 

$

1,072

 

 

$

(182

)

 

See Notes to Unaudited Consolidated Financial Statements

 

3


ENGILITY HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,929

 

 

$

2,829

 

Share-based compensation

 

 

4,828

 

 

 

7,679

 

Depreciation and amortization

 

 

24,642

 

 

 

25,493

 

Amortization of bank debt fees

 

 

4,865

 

 

 

8,136

 

Deferred income taxes

 

 

2,035

 

 

 

13,965

 

Changes in operating assets and liabilities, excluding acquired amounts:

 

 

 

 

 

 

 

 

Receivables

 

 

14,010

 

 

 

13,241

 

Other assets

 

 

(3,251

)

 

 

(3,977

)

Accounts payable, trade

 

 

5,597

 

 

 

(19,964

)

Accrued employment costs

 

 

4,192

 

 

 

(31,373

)

Accrued expenses

 

 

(903

)

 

 

(12,350

)

Advance payments and billings in excess of costs incurred

 

 

(11,146

)

 

 

(687

)

Other liabilities

 

 

5,863

 

 

 

(33,219

)

Net cash provided by (used in) operating activities

 

 

52,661

 

 

 

(30,227

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 

 

 

25,478

 

Capital expenditures

 

 

(9,832

)

 

 

(2,550

)

Net cash (used in) provided by investing activities

 

 

(9,832

)

 

 

22,928

 

Financing activities:

 

 

 

 

 

 

 

 

Gross borrowings from issuance of long-term debt

 

 

 

 

 

585,000

 

Repayment of long-term debt

 

 

(33,408

)

 

 

(339,445

)

Gross borrowings from revolving credit facility

 

 

53,000

 

 

 

138,000

 

Repayments of revolving credit facility

 

 

(53,000

)

 

 

(96,000

)

Debt issuance costs

 

 

 

 

 

(42,425

)

Equity issuance costs

 

 

 

 

 

(2,430

)

Proceeds from share-based payment arrangements

 

 

214

 

 

 

279

 

Payment of employee withholding taxes on share-based compensation

 

 

(1,776

)

 

 

(6,861

)

Excess tax deduction on share-based compensation

 

 

 

 

 

5,103

 

Dividends paid

 

 

(1,702

)

 

 

(203,101

)

Distributions to non-controlling interest member

 

 

(2,868

)

 

 

(1,258

)

Net cash (used in) provided by financing activities

 

 

(39,540

)

 

 

36,862

 

Net change in cash and cash equivalents

 

 

3,289

 

 

 

29,563

 

Cash and cash equivalents, beginning of period

 

 

30,022

 

 

 

7,123

 

Cash and cash equivalents, end of period

 

$

33,311

 

 

$

36,686

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

4


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 five decades. Engility serves among other federal agencies, the U.S. Department of Defense (DoD), U.S. Department of Justice (DoJ), U.S. Agency for International Development (USAID), U.S. Department of State (DoS), Federal Aviation Administration (FAA) and Department of Homeland Security (DHS). With Engility's acquisition of TASC, Inc. (TASC) on February 26, 2015, Engility further diversified its portfolio to add leading positions with U.S. national security, public safety and space-related agencies.  These agencies include the National Geospatial-Intelligence Agency (NGA), Defense Intelligence Agency (DIA), National Reconnaissance Office (NRO), National Aeronautical and Space Administration (NASA), and U.S. Air Force.  The acquisition of TASC also enhanced Engility's market position with DHS, Defense Threat Reduction Agency (DTRA), FAA, and Missile Defense Agency (MDA).

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. 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 acquisition, and (ii) New Engility and its subsidiaries, for all periods following the TASC acquisition.

Engility has no operations other than owning 100% of the membership interest of TASC Parent LLC, a Delaware limited liability company (“Holdings”), and the consolidated financial statements of Engility and its consolidated subsidiaries are identical in all respects to the consolidated financial statements of Holdings and its consolidated subsidiaries.

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 8, 2016 for the year ended December 31, 2015 (2015 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.

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 contracts accounted on a percentage-of-completion basis, 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 2016 fiscal quarters end on April 1, July 1, September 30 and December 31.  Our 2015 fiscal quarters ended on March 31, June 30, September 30 and December 31.

Revenue Recognition: Substantially all of the Company’s revenue is derived from services provided to the U.S. government and its agencies, primarily by the Company’s consulting staff and, to a lesser extent, subcontractors. The Company generates its revenue from the following types of contractual arrangements: cost-reimbursable-plus-fee contracts, time-and-materials contracts, and fixed-price contracts.

 

 

 

5


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Revenue on cost-reimbursable-plus-fee contracts is recognized as services are performed, generally based on allowable costs plus any recognizable earned fee. The Company considers fixed fees under cost-reimbursable-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For cost-reimbursable-plus-fee contracts that include performance-based fee incentives, which are principally award fee arrangements, the Company recognizes income when such fees are probable and estimable. Estimates of the total fee to be earned are made based on contract provisions, prior experience with similar contracts or clients, and management’s evaluation of the performance on such contracts.

Revenue for time-and-materials contracts is recognized as services are performed, generally on the basis of contract allowable labor hours worked multiplied by the contract-defined billing rates, plus allowable direct costs and indirect cost allocations associated with materials used and other direct expenses incurred in connection with the performance of the contract.

Revenue on fixed-price contracts is recognized using a percentage-of-completion method based on actual costs incurred relative to total estimated costs for the contract. These estimated costs are updated during the term of the contract, and may result in revision by the Company of recognized revenue and estimated costs in the period in which they are identified. Profits on fixed-price contracts result from the difference between incurred costs and revenue earned.

Percentage-of-completion contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, developing total revenue and cost at completion estimates require the use of significant judgment.  Contract costs include direct labor and billable expenses, an allocation of allowable indirect costs, and warranty obligations. Billable expenses are comprised of subcontracting costs and other direct costs that often include, but are not limited to, travel-related costs and telecommunications charges. We recognize revenue and billable expenses from these transactions on a gross basis. Assumptions regarding the length of time to complete the contract also include expected increases in wages and prices for materials. Estimates of total contract revenue and costs are monitored during the term of the contract and are subject to revision as the contract progresses. Anticipated losses on contracts are recognized in the period they are deemed probable and can be reasonably estimated.  Anticipated contract losses recorded for the six months ended June 30, 2015 were $2 million and were immaterial for the six months ended July 1, 2016.  

For the six months ended July 1, 2016, the recognized amounts related to changes in estimates at completion represented a net increase to revenue and profit of $8 million, of which $2 million was directly related to favorable performance on contracts with award fee.  Amounts related to changes in estimates at completion for the six months ended June 30, 2015 represented a net increase to revenue of $6 million, of which $3 million was directly related to favorable performance on contracts with award fee.

 

The Company’s contracts may include the delivery of a combination of one or more of the Company’s service offerings. In these situations, the Company determines whether such arrangements with multiple service offerings should be treated as separate units of accounting based on how the elements are bid or negotiated, whether the customer can accept separate elements of the arrangement, and the relationship between the pricing on the elements individually and combined.

Included in unbilled receivables, a component of receivables, net, 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 both July 1, 2016 and December 31, 2015, these receivables were approximately $11 million 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.

Revenue and profit in connection with contracts to provide services to the U.S. government that contain collection risk because the contracts are incrementally funded and subject to the availability of funds appropriated are deferred until a contract modification is obtained, indicating that adequate funds are available to the contract or task order.

Income Taxes: As of July 1, 2016, management has determined it is more likely than not a portion of state deferred tax assets, capital loss carryforwards, 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

6


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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) 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), stock options, performance shares, performance retention awards and performance units calculated using the treasury stock method. For the six months ended July 1, 2016 and June 30, 2015, 626,182 shares and 551,547 shares, respectively, were excluded from diluted EPS due to their anti-dilutive effects.  No shares were excluded from diluted EPS for both the three months ended July 1, 2016 and June 30, 2015.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

 

July 1, 2016

 

 

June 30, 2015

 

Net income (loss) attributable to Engility

 

$

2,494

 

 

$

13,096

 

 

$

(736

)

 

$

(271

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding –

   Basic

 

 

36,727

 

 

 

36,577

 

 

 

36,721

 

 

 

30,478

 

Dilutive effect of share-based compensation

   outstanding after application of the treasury

   stock method

 

 

623

 

 

 

432

 

 

 

 

 

 

 

Weighted average number of shares – Diluted

 

 

37,350

 

 

 

37,009

 

 

 

36,721

 

 

 

30,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to Engility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

0.36

 

 

$

(0.02

)

 

$

(0.01

)

Diluted

 

$

0.07

 

 

$

0.35

 

 

$

(0.02

)

 

$

(0.01

)

 

 

2.

New Accounting Pronouncements

In May 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of the amendment is for fiscal years beginning after December 31, 2016 and interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This update amends the principal-versus-agent implementation guidance and illustrations in the FASB’s new revenue standard (ASC 606). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.

7


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which revises the accounting related to lessee accounting. 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 provisions of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest:  Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses line-of-credit arrangements that were omitted from ASU 2015-03.  This update states that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing those costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance was effective for the annual period ending after December 15, 2015, and for annual and interim periods thereafter. The Company adopted the standard as of January 1, 2016.  The adoption did not have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest, which changes the presentation of debt issuance costs in financial statements. The amendments in this standard require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this standard. The guidance is effective for the annual period ending after December 15, 2015, and for annual and interim periods thereafter.  The Company adopted the standard as of January 1, 2016 and reclassed $19 million and $21 million of debt issuance costs from other assets to long-term debt as of July 1, 2016 and December 31, 2015, respectively.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718) - Accounting for Share-based Payments when Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 was effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance did not have a material impact on our financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use when accounting for revenue arising from contracts with customers and supersedes all current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB deferred the effective date of the updated by one year. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. We are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.

 

 

3.

Business Acquisition

On February 26, 2015, we completed the acquisition of TASC, a leading professional services provider to the national security and public safety markets, in an all-stock transaction. In connection with the acquisition, we issued 18,937,765 shares of Engility common stock on February 26, 2015 valued at approximately $663 million, and we assumed debt with an estimated fair value of $623 million.

The following pro forma results of operations have been prepared as though the acquisition of TASC had occurred on January 1, 2014. These pro forma results include adjustments for (1) amortization expense for the estimated identifiable intangible assets in the preliminary allocation of purchase price, (2) the removal of historical TASC amortization expense, (3) adjustments to conform TASC policies to Engility's policies related to the timing and recognition of certain contract revenue and costs, (4) the alignment of TASC’s financial calendar to that of Engility and (5) the removal of  acquisition-related expenses incurred and recorded in each of TASC’s and Engility’s results of operations in the six months ended June 30, 2015.

8


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

This pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisition been made as of January 1, 2014 or of results of operations that may occur in the future.

The pro forma information for the three and six months ended June 30, 2015 was as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2015

 

 

June 30, 2015

 

Revenue

 

$

574,368

 

 

$

1,136,303

 

Operating income

 

$

45,018

 

 

$

71,819

 

 

 

4.

Receivables

Our receivables principally relate to contracts with the U.S. government and prime contractors or subcontractors of the U.S. government. The components of contract receivables are presented in the table below.

 

 

 

July 1, 2016

 

 

December 31, 2015

 

Billed receivables

 

$

115,892

 

 

$

229,358

 

Unbilled receivables

 

 

263,250

 

 

 

163,882

 

Allowance for doubtful accounts

 

 

(11,392

)

 

 

(11,480

)

Total receivables, net

 

$

367,750

 

 

$

381,760

 

 

The billed receivables at December 31, 2015 reflect a one week acceleration of our billing cycle to invoice contractually billable work in anticipation of the consolidation of our financial systems in early January 2016. This resulted in an increase in our billed receivables, with a corresponding decrease in our unbilled receivables, of approximately $110 million.  The balances as of July 1, 2016 reflect a return to our normal billing cycles.

 

 

5.

Goodwill and Identifiable Intangible Assets

Goodwill: In accordance with the accounting standards for business combinations, we record the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition (commonly referred to as the purchase price allocation). The balance of goodwill was $1,093 million at July 1, 2016 and December 31, 2015.

Identifiable Intangible Assets: Information on our identifiable intangible assets that are subject to amortization is presented in the table below.

 

 

 

 

 

July 1, 2016

 

 

December 31, 2015

 

 

 

Weighted

Average

Amortization

Period

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

 

(in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer contractual relationships

 

17

 

$

554,330

 

 

$

143,888

 

 

$

410,442

 

 

$

554,330

 

 

$

127,264

 

 

$

427,066

 

Contractual Backlog

 

1

 

 

21,800

 

 

 

21,800

 

 

$

 

 

 

21,800

 

 

 

18,850

 

 

 

2,950

 

Technology

 

15

 

 

7,000

 

 

 

622

 

 

$

6,378

 

 

 

7,000

 

 

 

389

 

 

 

6,611

 

Total

 

 

 

$

583,130

 

 

$

166,310

 

 

$

416,820

 

 

$

583,130

 

 

$

146,503

 

 

$

436,627

 

Our amortization expense recorded for our identifiable intangible assets is presented in the table below.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

 

July 1, 2016

 

 

June 30, 2015

 

Amortization expense

 

$

8,428

 

 

$

12,962

 

 

$

19,807

 

 

$

19,508

 

 

 

9


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.

Share-Based Compensation 

For the Six Months Ended July 1, 2016

Performance Units: During the six months ended July 1, 2016, we granted a total of 411,178 performance units at target level of 100% (with the potential for the delivery of up to 822,356 shares of our common stock at the maximum performance level) to certain of our employees with a grant date fair value of $19.33 per unit.  Included in the total, 81,803 performance units were granted at target level of 100% (with the potential for the delivery of up to 163,606 shares of our common stock at the maximum performance level) to Lynn A. Dugle, our new Chief Executive Officer, with a grant date fair value of $17.97 per unit. Performance units cliff vest after three years based on our performance at the end of a three-year period beginning January 1, 2016. The number of shares of our common stock that are ultimately vested and delivered in respect of these performance units will range from 0% to 200% of the target grant amount.  The vesting of performance units depends initially on the Company's performance, as approved by the Compensation Committee of our Board of Directors (the Compensation Committee), based on two metrics: revenue and operating cash flow.  The performance units may be settled in cash or stock at the sole discretion of the Compensation Committee.

Restricted Stock Units: During the six months ended July 1, 2016, we granted a total of 499,993 RSUs to certain employees with a grant date fair value of $18.55 per unit, of which 55,024 RSUs cliff vest on the second anniversary of the grant date, 170,852 RSUs cliff vest on the third anniversary of the grant date and 274,117 RSUs vest over a term of three years from the grant date, 25% on the first anniversary of the grant date, 25% on the second anniversary of the grant date and 50% on the third anniversary of the grant date. Included in the total, 104,619 RSUs were granted to Ms. Dugle with a grant date fair value of $17.97 per unit, of which 50,083 RSUs cliff vest on the second anniversary of the grant date and 54,536 RSUs vest over a term of three years from the grant date. During the six months ended July 1, 2016, we granted 25,704 RSUs to certain of the non-management members of our Board of Directors with a grant date fair value of $23.34 per unit, which vest after one year from the grant date. The employee and director RSUs may be settled in cash or stock upon vesting at the sole discretion of the Compensation Committee.

For the Six Months Ended June 30, 2015

Performance Retention Awards: During the six months ended June 30, 2015, we granted 212,963 performance units at a target level of 100% (with the potential for the delivery of up to 425,926 shares at the maximum performance level) to certain of our executives with a grant date fair value of $32.82 per unit. The performance retention awards cliff vest after three years based on our performance at the end of a three-year period beginning January 1, 2015. The number of shares of our common stock that are ultimately vested and delivered in respect of these performance retention awards will range from 50% to 200% of the target grant amount depending on the Company’s performance against a metric of net debt to adjusted EBITDA, measured as of December 31, 2017. The performance retention awards may be settled in cash or stock at the sole discretion of the Compensation Committee.

Performance Units: During the six months ended June 30, 2015, we granted 191,848 performance units at target level of 100% (with the potential for the delivery of up to 431,658 shares at the maximum performance level) to certain of our employees with a grant date fair value of $32.29 per unit. Performance units cliff vest after three years based on our performance at the end of a three-year period beginning January 1, 2015. The number of shares of our common stock that are ultimately vested and delivered in respect of these performance units will range from 0% to 225% of the target grant amount.  The vesting of performance units depends initially on the Company’s performance, as approved by the Compensation Committee of our Board of Directors, based on two metrics: Revenue and Operating Cash Flow. At the end of the three-year period beginning on January 1, 2015, the vested performance units will be subject to further adjustment based on our total stockholder return (TSR) measured against the TSR of a peer group of companies previously approved by the Compensation Committee. If Engility is in the bottom quartile of TSR relative to its peer group, the ultimate number of shares of stock delivered with respect to the performance units will be reduced by 25% of their target number. If Engility is in the top quartile of TSR relative to its peer group, the ultimate number of shares of stock delivered with respect to the performance units will be increased by 25% of their target number. If Engility’s TSR falls within the middle two quartiles relative to its peer group, there will be no adjustment to the number of shares delivered. The performance units may be settled in cash or stock at the sole discretion of the Compensation Committee.

Restricted Stock Units: During the six months ended June 30, 2015, we granted 127,899 RSUs to certain of our employees with a grant date fair value of $32.82 per unit, which vest over a term of three years from the grant date, 25% on the first anniversary of the grant date, 25% on the second anniversary of the grant date and 50% on the third anniversary of the grant date. During the six months ended June 30, 2015, we granted 24,703 RSUs to certain of the non-management members of our Board of Directors with a grant date fair value of $28.34 per unit, which vest after one year from the grant date. The employee and director RSUs may be settled in cash or stock upon vesting at the sole discretion of the Compensation Committee.

 

10


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

7.

Defined Benefit Plans

Dynamics Research Corporation (DRC) Pension Plan

DRC's defined benefit pension plan (the DRC Plan) is non-contributory covering substantially all employees of DRC who had completed a year of service prior to July 1, 2002. Membership in the DRC Plan was frozen effective July 1, 2002 and participants’ calculated pension benefit was frozen effective December 31, 2006.

Our funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Additional amounts are contributed to assure that plan assets will be adequate to provide retirement benefits. We do not expect to make any contributions during the remainder of 2016 to fund the DRC Plan.

TASC Benefit Plan

Upon the closing of the TASC acquisition, we assumed TASC's defined benefit plan in which certain employees are eligible to participate based upon service with TASC's prior parent. This plan offered two retirement programs, a Retiree Health Reimbursement Account Plan and a Cash Bonus Plan, which provide a restoration of certain pension benefits that would have been forfeited as a result of years of service and final average pay being frozen by TASC's prior parent. In December 2015, the Cash Bonus Plan was terminated.

Net Periodic Benefit Costs

The components of net periodic benefit costs for both plans are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2016

 

 

June 30, 2015

 

 

July 1, 2016

 

 

June 30, 2015

 

Service cost

 

$

403

 

 

$

 

 

$

403

 

 

$

 

Interest cost on projected benefit obligation

 

 

559

 

 

 

1,149

 

 

 

1,505

 

 

 

2,187

 

Expected return on plan assets

 

 

(954

)

 

 

(1,451

)

 

 

(1,907

)

 

 

(2,917

)

Net loss amortization

 

 

64

 

 

 

67

 

 

 

146

 

 

 

116

 

Net periodic benefit expense (income)

 

$

72

 

 

$

(235

)

 

$

147

 

 

$

(614

)

 

Beginning in 2016, we refined the method used to measure interest costs for pension and postretirement benefits. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the refined method, known as the spot rate approach, we will use individual spot rates along the yield curve that correspond with the timing of each benefit payment. We believe this change provides a more precise measurement of interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve.  Compared to the previous method, the spot rate approach will decrease the interest components of our benefit costs slightly in 2016. There is no impact on the total benefit obligation. We will account for this change prospectively as a change in accounting estimate.

 

 

8.

Debt

As of July 1, 2016 our total outstanding principal balance under the 2015 Credit Facility (as defined in Note 11 to the Consolidated Financial Statements in our 2015 Form 10-K) was $1,126 million. Our availability under the revolving portion of the 2015 Credit Facility was $113 million as of July 1, 2016, with $2 million outstanding under letters of credit.

During the first half of 2016, we repaid a total of $34 million of our term loan debt, of which $10 million of second lien term loan debt was purchased in the first quarter of 2016 and $20 million of term loan debt was prepaid during the second quarter of 2016.

Our weighted average outstanding loan balance for the three months ended July 1, 2016 was $1,143 million which accrued interest at a weighted average borrowing rate of approximately 9.12%. Our weighted average outstanding loan balance for the six months ended July 1, 2016 was $1,151 million which accrued interest at a weighted average borrowing rate of approximately 9.13%.

11


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Our weighted average outstanding loan balance for the three months ended June 30, 2015 was $1,238 million which accrued interest at a weighted average borrowing rate of approximately 8.98%. Our weighted average outstanding loan balance for the six months ended June 30, 2015 was $952 million which accrued interest at a weighted average borrowing rate of approximately 7.34%.

We believe our most restrictive covenant is the maximum consolidated total net leverage ratio, which as of July 1, 2016 was 4.77:1.00. The consolidated total net leverage ratio is the ratio of (a) (i) funded debt as of such date minus (ii) the unrestricted cash as of such date to (b) consolidated bank EBITDA for the period of the four fiscal quarters most recently ended. As of July 1, 2016, we were in compliance with all covenants under the 2015 Credit Facility.

The carrying value of the term loan excluding original issue discount approximated fair value at July 1, 2016. The fair value of the term loan is based on quotes from a nationally recognized fixed income trading platform and is considered to be a Level 2 input, measured under U.S. GAAP hierarchy.

 

 

9.

Fair Value Measurements

The Company has entered into multiple interest rate swap contracts which reduce the exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt payments.  These interest rate contracts are designated as cash flow hedges.  The effective portion of the derivative’s gain or loss is initially reported in stockholders’ equity (as a component of accumulated other comprehensive income (loss)) and would be subsequently reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.  The ineffective portion of the gain or loss of a cash flow hedge would be reported in earnings.  The Company does not have any derivatives outstanding that are not designated as hedges.

The Company’s interest rate swap liabilities are measured at fair value on a recurring basis and are aggregated by the level in the fair value hierarchy within which those measurements fall.  All instruments are classified as Level 2 and there were no transfers of financial instruments between the three levels of fair value hierarchy during the period ended July 1, 2016 and December 31, 2015.

At July 1, 2016, the balance of the interest rate swap liability consisted of $2 million included in other current liabilities in the accompanying Unaudited Consolidated Balance Sheet. The notional amounts of derivative instruments in the Unaudited Consolidated Balance Sheet as of July 1, 2016 were $200 million. The notional amount represents the gross contract notional amount of the derivatives outstanding. The derivative instruments are comprised of $200 million of contracts effective December 31, 2015 which expire December 31, 2016.  The other terms of these instruments are as follows:

 

Contract received:

 

Floating interest rate

 

LIBOR (subject to minimum of 1.25%)

Contract pay:

 

Fixed interest rates

 

3.09% - 3.18%

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. If the Company had breached any of these provisions at July 1, 2016, it could have been required to settle its obligations under the agreements at their termination value. As of July 1, 2016, the termination value related to these agreements is a net liability position of $2 million.  As of July 1, 2016, the Company has not posted any collateral related to these agreements.

The following table presents our liabilities that are measured at fair value on a recurring basis:

 

 

 

Fair Value

Hierarchy

 

July 1, 2016

 

 

December 31, 2015

 

Interest rate swap liability

 

Level 2

 

$

1,847

 

 

$

3,590

 

 

 

10.

Restructuring Costs

2016 Costs

During the six months ended July 1, 2016 we incurred $7 million in restructuring costs related to severance which will be paid out by the end of 2016.

12


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2015 Costs

During the year ended December 31, 2015 in conjunction with the integration of TASC, we incurred $21 million in restructuring costs, including costs related to workforce reduction which will be paid out over the next 12 months, and other costs to include contract and lease termination fees which will be paid out through fiscal year 2020.

The activity and balance of the restructuring liability account were as follows:

 

 

 

Severance

and Related

Costs

 

 

Other

Restructuring

Costs

 

 

Total

 

Balance as of December 31, 2014

 

$

368

 

 

$

6,036

 

 

$

6,404

 

Additions

 

 

14,614

 

 

 

6,476

 

 

 

21,090

 

Cash payments

 

 

(10,976

)

 

 

(3,041

)

 

 

(14,017

)

Balance as of December 31, 2015

 

$

4,006

 

 

$

9,471

 

 

$

13,477

 

Additions

 

 

6,503

 

 

 

 

 

 

6,503

 

Cash payments

 

 

(4,605

)

 

 

(3,163

)

 

 

(7,768

)

Balance as of July 1, 2016

 

$

5,904

 

 

$

6,308

 

 

$

12,212

 

Amounts recognized in the consolidated balance sheets as of July 1, 2016 and December 31, 2015 consist of:

 

 

 

Severance

and Related

Costs

 

 

Other

Restructuring

Costs

 

 

Total

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

4,006

 

 

$

5,392

 

 

$

9,398

 

Other liabilities

 

 

 

 

 

4,079

 

 

 

4,079

 

Amount recognized

 

$

4,006

 

 

$

9,471

 

 

$

13,477

 

July 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

5,904

 

 

$

2,517

 

 

$

8,421

 

Other liabilities

 

 

 

 

 

3,791

 

 

 

3,791

 

Amount recognized

 

$

5,904

 

 

$

6,308

 

 

$

12,212

 

These expenses are contained within the selling, general and administrative expenses line in the accompanying Unaudited Consolidated Statement of Operations for the appropriate period.

 

 

11.

Commitments and Contingencies

Procurement Regulations: Most of our revenue is generated from providing services and products under legally binding agreements or contracts with U.S. government and foreign government customers. U.S. government contracts are subject to extensive legal and regulatory requirements, and from time to time, agencies of the U.S. government investigate whether such contracts were and are being conducted in accordance with these requirements.

We are currently cooperating with the U.S. government on several investigations from which civil or administrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures. We do not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on our consolidated financial position, results of operations or cash flows. However, under U.S. government regulations, our indictment by a federal grand jury, or an administrative finding against us as to our present responsibility to be a U.S. government contractor or subcontractor, could result in our suspension for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against us that satisfies the requisite level of seriousness, could result in debarment from contracting with the U.S. government for a specified term, which would have a materially adverse effect on our consolidated financial position, results of operations and cash flows.

13


ENGILITY HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In addition, all of our U.S. government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. government or for default, and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience and default, as well as other procurement clauses relevant to the foreign government.

Litigation and Other Matters: We are also subject to litigation, proceedings, claims or assessments and various contingent liabilities incidental to our businesses. Furthermore, in connection with certain business acquisitions, we have assumed some or all claims against, and liabilities of, such acquired businesses, including both asserted and unasserted claims and liabilities.

In accordance with the accounting standard for contingencies, we record a liability when management believes that it is both probable that a liability has been incurred and we can reasonably estimate the amount of the loss. Generally, the loss is recorded for the amount we expect to resolve the liability. The estimated amounts of liabilities recorded for pending and threatened litigation are recorded in other current liabilities in our consolidated balance sheets. Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At December 31, 2015 and July 1, 2016, we did not record any amounts for recoveries from insurance contracts or third parties in connection with the amount of liabilities recorded for pending and threatened litigation. Legal defense costs are expensed as incurred. We believe we have recorded adequate provisions for our litigation matters. We review these provisions quarterly and adjust these provisions to reflect the effect of negotiations, settlements, rulings, advice of legal counsel and other infor