Engility Reports Fourth Quarter and Full Year 2014 Results

CHANTILLY, Va.--(BUSINESS WIRE)--

Engility Holdings, Inc. EGL today announced financial results for the fourth quarter and full year ended December 31, 2014.

Fourth Quarter 2014 Results

Total revenue for the fourth quarter of 2014 was $320 million and operating income was $13 million. Adjusted operating income for the fourth quarter was $24 million. Operating margin for the fourth quarter of 2014 was 4.2% and adjusted operating margin for the same period was 7.5%. Net income attributable to Engility was $2 million, or $0.14 per diluted share. Adjusted net income attributable to Engility was $12 million, or $0.67 per diluted share. Our adjusted net income and adjusted operating margin exclude $9 million of TASC and Dynamics Research Corporation (DRC) acquisition and integration costs, and $2 million of additional amortization of intangible asset expenses associated with our acquisition of DRC. Information about our use of non-GAAP financial information is provided below under "Non-GAAP Measures".

"From a bookings perspective, we had a strong second-half of 2014," said Tony Smeraglinolo, President and CEO of Engility. "During the third quarter and fourth quarter of 2014, we achieved a book-to-bill ratio that exceeded 1.0x. We also were able to deliver strong cash flow results for the year and achieved top and bottom line results that were within our fiscal year 2014 guidance ranges. Although contract awards have increased and our market appears to be more stable, we still are experiencing delayed contract award and start dates, which is reflected in our fourth quarter revenue performance."

"Last week, we announced the closing of our TASC acquisition, which truly is a significant milestone in our young history as a public company. The combination of our two complementary businesses is transformational and represents an opportunity to create a top-tier government services company. This acquisition is expected to substantially increase our free cash flow, be significantly accretive to 2016 adjusted EPS and nearly double our revenue which will enhance our cost competitiveness. It also is consistent with our growth strategy to further balance and diversify our customer base and capabilities, add substantial scale to our business and increase our addressable market. We look forward to bringing our highly efficient business model to TASC's customers," said Smeraglinolo.

Key Performance Indicators

• Contract funded orders in the fourth quarter of 2014 were $334 million, compared to $357 million in the fourth quarter of 2013. The book-to-bill ratio for the fourth quarter of 2014 was 1.0x, compared to 1.1x in the fourth quarter of 2013.
• Funded backlog was $602 million in both the fourth quarter of 2014 and the fourth quarter of 2013.
• Days sales outstanding (DSO) at the end of 2014, net of advanced payments, was 74 days, compared to 73 days at the end of 2013.
• Cash flow from operations was $22 million for the fourth quarter of 2014 and $102 million for fiscal year 2014.

Significant Fourth Quarter 2014 Awards and Recognition

• Awarded a prime position on a contract valued at $66 million to provide technical, management, and analysis support to the John A. Volpe Transportation Systems Center. Specifically, we will support the ongoing development, evaluation, and management of the Federal Aviation Administration's (FAA) Automatic Dependent Surveillance - Broadcast (ADS-B) program. ADS-B will provide the linchpin technology for the FAA's Next-Generation Air Transportation System (NextGen).
• Awarded a prime position on a $61 million single award indefinite-delivery/indefinite-quantity (IDIQ) contract to provide Engineering Services and related research, development, test and evaluation efforts to Naval Air Warfare Center, Weapons Division (NAWCWD). This work also will include the full spectrum of test engineering services, as well as transition engineering and related efforts to transfer new technology from concept to Fleet support. Work will be performed at China Lake, California, Point Mugu, California and Patuxent River, Maryland.
• Awarded a prime position on a $51 million contract to provide technical, management and analysis support to John A. Volpe Transportation Center. Under this contract, Engility will support the on-going development, evaluation, and management of programs within the Air Traffic Systems Directorate of the FAA's Air Traffic Operations (ATO) Program Management Office.
• Awarded a prime position on a $38 million contract by the Defense Threat Reduction Agency (DTRA) to provide support for the cloud-based Constellation Combating Weapons of Mass Destruction (WMD) Situational Awareness system. Under this contract, Engility will provide systems integration and engineering services.
• Awarded a $27.6 million contract to provide product and technical support for the development and testing of the Naval Avionics Platform Integration Emulator systems for U.S. Navy platforms. Under this contract, Engility will provide program management, engineering services, system architecture, guidance quality analysis, test planning, flight test data analysis, and field support to the Air Traffic Control (ATC) Systems Division, NAWCAD.
• Awarded a $27.5 million contract to provide a broad range of technical services support to the ATC Systems Division of NAWCAD. Under this contract, Engility will assist the Navy in developing technologies for performing automated aerial refueling with commercial and military tankers and manned and unmanned air systems.
• Engility ranked 12th among the top 100 Military Friendly Employers by Victory Media, publisher of G.I. Jobs and Military Spouse magazines. This designation was based upon a data-driven survey of more than 5,000 companies and assesses a company's long-term commitment to hiring former military personnel, as well as having the presence of special military recruitment programs, among other items.

Fiscal Year 2014 Results

For fiscal year 2014, total revenue was $1.4 billion and operating income was $83 million. Adjusted operating income for fiscal year 2014 was $107 million. Operating margin for the 2014 full year was 6.1% and adjusted operating margin for the same period was 7.8%. Net income attributable to Engility was $35 million, or $1.97 per diluted share. Adjusted net income was $53 million, or $2.96 per diluted share. Our adjusted net income and adjusted operating margin excludes $1 million of restructuring and legal and settlement costs, $6 million of additional amortization of intangible asset expenses associated with our DRC acquisition and $17 million of acquisition and integration-related expenses associated with our DRC and TASC acquisitions.

Information about our use of non-GAAP financial information is provided below under "Non-GAAP Measures".

2015 Guidance

Since the TASC acquisition closed three business days ago, ahead of our original schedule, we will provide 2015 financial guidance shortly after we present the consolidated plan to the new Engility board in mid-March. When we issue guidance, it will include ten months of TASC's performance.

Non-GAAP Measures

The tables under "Engility Holdings, Inc. Reconciliation of Non-GAAP Measures" present Adjusted Operating Income, Adjusted Operating Margin, Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA), Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Diluted EPS, reconciled to their most directly comparable GAAP measure. These financial measures are calculated and presented on the basis of methodologies other than in accordance with U.S. generally accepted accounting principles ("Non-GAAP Measures"). Engility has provided these Non-GAAP Measures to adjust for, among other things, the impact of transaction and integration costs and amortization expenses related to our acquisitions of TASC and DRC, as well as restructuring and legal and settlement costs. These items have been adjusted because they are not considered core to the Company's business or otherwise not considered operational or because these charges are non-cash or non-recurring. The Company presents these Non-GAAP Measures because management believes that they are meaningful to understanding Engility's performance during the periods presented and the Company's ongoing business. Non-GAAP Measures are not prepared in accordance with GAAP and therefore are not necessarily comparable to similarly titled metrics or the financial results of other companies. These Non-GAAP Measures should be considered a supplement to, not a substitute for, or superior to, the corresponding financial measures calculated in accordance with GAAP.

CONFERENCE CALL INFORMATION

Engility will host a conference call at 5 P.M. ET on March 3, 2015, to discuss the financial results for our fourth quarter and full year 2014.

Listeners may access a webcast of the live conference call from the Investor Relations section of the company's website at http://www.EngilityCorp.com. Listeners also may access a slide presentation on the website which summarizes our 2014 fourth quarter results. Listeners should go to the website at least 15 minutes before the live event to download and install any necessary audio software.

Listeners also may participate in the conference call by dialing (877) 474-9503 (U.S. dial-in) or (857) 244-7556 (international dial-in) and the pass code is 69731195.

A replay will be available on the company's website approximately two hours after the conference call and continuing for one year. A telephonic replay also will be available through March 10, 2015 at (888) 286-8010 (domestic) or (617) 801-6888 (international) and entering pass code 78273585.

ABOUT ENGILITY

Engility is a pure-play government services provider that delivers highly skilled personnel wherever, whenever they are needed in a cost-efficient manner. The company proudly serves customers that span the federal services market including the Department of Defense, the Intelligence community, Space and Federal Civilian agencies. Headquartered in Chantilly, Virginia, Engility is a leading provider of specialized technical consulting, program and business support services, engineering and technology lifecycle support, information technology, modernization and sustainment, supply chain services and logistics management, and training and education for the U.S. Government. To learn more about Engility, please visit www.engilitycorp.com.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding Engility's future prospects, projected financial results, estimated integration costs and acquisition related amortization expenses, business plans, as well as the TASC transaction and its expected benefits. Words such as "may," "will," "should," "likely," "anticipates," "expects," "intends," "plans," "projects," "believes," "estimates" and similar expressions are also used to identify these forward-looking statements. These statements are based on the current beliefs and expectations of Engility's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that could cause Engility's actual results to differ materially from those described in the forward-looking statements can be found under the heading "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2014, and more recent documents that have been filed with the Securities and Exchange Commission (SEC) and are available on the investor relations section of Engility's website (http://www.engilitycorp.com) and on the SEC's website (www.sec.gov). Forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, historical information should not be considered as an indicator of future performance.

ENGILITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
		Three Months Ended												Twelve Months Ended
		December 31, 2014				December 31, 2013				Change				December 31, 2014				December 31, 2013				Change
Revenue		$	319,516			$	329,063			$	(9,547	)		$	1,367,091			$	1,407,372			$	(40,281	)
Costs and expenses
Cost of revenue		272,167				281,707				(9,540		)		1,169,281				1,214,581				(45,300		)
Selling, general and administrative expenses		33,993				28,501				5,492				114,890				84,635				30,255
Total costs and expenses		306,160				310,208				(4,048		)		1,284,171				1,299,216				(15,045		)
Operating income		13,356				18,855				(5,499		)		82,920				108,156				(25,236		)
Interest expense, net		3,261				2,549				712				12,799				21,648				(8,849		)
Other income (expense), net		546				527				19				526				793				(267		)
Income before income taxes		10,641				16,833				(6,192		)		70,647				87,301				(16,654		)
Provision for income taxes		7,183				5,240				1,943				30,637				32,584				(1,947		)
Net income		3,458				11,593				(8,135		)		40,010				54,717				(14,707		)
Less: Net income attributable to non-controlling interest		972				914				58				4,587				5,190				(603		)
Net income attributable to Engility		$	2,486			$	10,679			$	(8,193	)		$	35,423			$	49,527			$	(14,104	)
Net income per share attributable to Engility
Basic		$	0.14			$	0.63			$	(0.49	)		$	2.07			$	2.94			$	(0.87	)
Diluted		$	0.14			$	0.60			$	(0.46	)		$	1.97			$	2.81			$	(0.84	)
Weighted average number of shares outstanding
Basic		17,163				16,928								17,100				16,873
Diluted		18,090				17,835								18,018				17,653

ENGILITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
		As of
		December 31, 2014				December 31, 2013
Assets:
Current assets:
Cash and cash equivalents		$	7,123			$	29,003
Receivables, net		286,403				286,272
Other current assets		27,784				25,892
Total current assets		321,310				341,167
Property, plant and equipment, net		19,839				11,895
Goodwill		644,554				477,604
Identifiable intangible assets, net		123,549				92,205
Other assets		13,384				7,183
Total assets		$	1,122,636			$	930,054
Liabilities and Equity:
Current liabilities:
Current portion of long-term debt		$	13,750			$	10,000
Accounts payable, trade		49,121				28,286
Accrued employment costs		47,824				49,582
Accrued expenses		71,582				63,843
Advance payments and billings in excess of costs incurred		22,300				19,087
Deferred income taxes, current and income taxes payable		9,810				10,693
Other current liabilities		21,098				17,928
Total current liabilities		235,485				199,419
Long-term debt		279,500				187,500
Income tax payable		79,713				77,494
Other liabilities		51,185				22,487
Total liabilities		645,883				486,900
Equity:
Preferred stock, par value $0.01 per share, 25,000 shares authorized, none issued or outstanding as of December 31, 2014 and 2013		—				—
Common stock, par value $0.01 per share, 175,000 shares authorized, 17,592 and 17,238 shares issued and outstanding as of December 31, 2014 and 2013, respectively		176				172
Additional paid in capital		770,764				761,119
Accumulated deficit		(295,543		)		(330,911		)
Accumulated other comprehensive income		(9,018		)		—
Non-controlling interest		10,374				12,774
Total equity		476,753				443,154
Total liabilities and equity		$	1,122,636			$	930,054

ENGILITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
		Twelve Months Ended
		December 31, 2014				December 31, 2013
Operating activities:
Net income		$	40,010			$	54,717
Share-based compensation		8,830				8,691
Depreciation and amortization		20,953				12,106
Amortization of bank debt fees		1,634				6,264
Deferred income taxes		(1,355		)		(1,377		)
Changes in operating assets and liabilities, excluding acquired amounts:
Receivables		43,115				79,964
Other assets		4,611				7,590
Accounts payable, trade		5,399				11,425
Accrued employment costs		(18,603		)		(13,696		)
Accrued expenses		3,004				(13,614		)
Advance payments and billings in excess of costs incurred		2,904				(8,443		)
Other liabilities		(8,143		)		7,213
Net cash provided by operating activities		102,359				150,840
Investing activities:
Acquisition, net of cash		(207,250		)		—
Capital expenditures		(5,436		)		(3,336		)
Net cash used in investing activities		(212,686		)		(3,336		)
Financing activities:
Gross borrowings from issuance of long-term debt		75,000				200,000
Repayment of long-term debt		(13,750		)		(337,500		)
Gross borrowings from revolving credit facility		482,500				196,000
Repayments of revolving credit facility		(448,000		)		(196,000		)
Debt issuance costs		(1,131		)		(2,493		)
Proceeds from share-based payment arrangements		1,479				936
Payment of employee withholding taxes on share-based compensation		(2,371		)		(1,106		)
Excess tax deduction on share-based compensation		1,707				—
Distributions to non-controlling interest member		(6,987		)		(5,359		)
Net cash provided by (used in) financing activities		88,447				(145,522		)
Net change in cash and cash equivalents		(21,880		)		1,982
Cash and cash equivalents, beginning of period		29,003				27,021
Cash and cash equivalents, end of period		$	7,123			$	29,003

ENGILITY HOLDINGS, INC.

RECONCILIATION OF NON-GAAP MEASURES

The following tables set forth a reconciliation of each of these Non-GAAP Measures to the most directly comparable GAAP measure for the periods presented.

Adjusted Operating Income and Adjusted Operating Margin
(dollars in thousands)
		Three Months Ended								Twelve Months Ended
		December 31, 2014				December 31, 2013				December 31, 2014				December 31, 2013
Operating income		$	13,356			$	18,855			$	82,920			$	108,156
Adjustments
Acquisition and integration-related expenses excluding amortization		9,014				903				16,730				903
Year-one acquisition-related amortization		1,683				—				6,171				—
Restructuring costs		—				7,939				1,134				7,939
Legal and settlement costs		—				1,065				230				4,293
Non-income tax expense		—				1,769				—				1,769
		10,697				11,676				24,265				14,904
Adjusted operating income		$	24,053			$	30,531			$	107,185			$	123,060
Operating margin		4.2		%		5.7		%		6.1		%		7.7		%
Adjusted operating margin		7.5		%		9.3		%		7.8		%		8.7		%

ENGILITY HOLDINGS, INC.
Adjusted Earnings Per Share
(in thousands, except per share data)
		Three Months Ended								Twelve Months Ended
		December 31, 2014				December 31, 2013				December 31, 2014				December 31, 2013
GAAP net income attributable to Engility		$	2,486			$	10,679			$	35,423			$	49,527
Net income attributable to non-controlling interest		972				914				4,587				5,190
GAAP net income		3,458				11,593				40,010				54,717
Provision for income taxes		7,183				5,240				30,637				32,584
Income tax rate		67.5		%		31.1		%		43.4		%		37.3		%
GAAP Income before taxes		10,641				16,833				70,647				87,301
Adjustments
TASC acquisition and DRC acquisition and integration-related expenses		9,014				903				16,730				903
Year-one acquisition-related amortization		1,683				—				6,171				—
Restructuring costs		—				7,939				1,134				7,939
Legal and settlement costs		—				1,065				230				4,293
Non-income tax expense		—				1,769				—				1,769
Bank fees previously capitalized and included in interest expense		—				—				—				3,648
Total adjustments		10,697				11,676				24,265				18,552
Adjusted income before income tax		21,338				28,509				94,912				105,853
Adjusted provision for income taxes (1)		8,322				9,724				37,043				39,727
Adjusted income tax rate		39.0		%		34.1		%		39.0		%		37.5		%
Adjusted net income		13,016				18,785				57,869				66,126
Net income attributable to non-controlling interest		972				914				4,587				5,190
Adjusted net income attributable to Engility		$	12,044			$	17,871			$	53,282			$	60,936
Adjusted diluted earnings per share attributable to Engility		$	0.67			$	1.00			$	2.96			$	3.45
GAAP diluted earnings per share attributable to Engility		$	0.14			$	0.60			$	1.97			$	2.81
Diluted weighted average number of shares outstanding		18,090				17,835				18,018				17,653

(1) The adjusted tax provision for 2014 is calculated at 39.0%

ENGILITY HOLDINGS, INC.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) and Adjusted EBITDA
(dollars in thousands)
		Three Months Ended								Twelve Months Ended
		December 31, 2014				December 31, 2013				December 31, 2014				December 31, 2013
Net income		$	3,458			$	11,593			$	40,010			$	54,717
Interest, taxes, and depreciation and amortization
Interest expense		3,261				2,549				12,799				21,648
Provision for income taxes		7,183				5,240				30,637				32,584
Depreciation and amortization		5,113				3,051				20,953				12,106
EBITDA		$	19,015			$	22,433			$	104,399			$	121,055
Adjustments to EBITDA
TASC acquisition and DRC acquisition and integration-related expenses		9,014				903				16,730				903
Restructuring costs		—				7,939				1,134				7,939
Legal and settlement costs		—				1,065				230				4,293
Non-income tax expense		—				1,769				—				1,769
		9,014				11,676				18,094				14,904
Adjusted EBITDA		$	28,029			$	34,109			$	122,493			$	135,959
EBITDA Margin		6.0		%		6.8		%		7.6		%		8.6		%
Adjusted EBITDA Margin		8.8		%		10.4		%		9.0		%		9.7		%