ENGILITY HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
TABLE OF CONTENTS
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| |
| | Page |
| Unaudited Pro Forma Combined Balance Sheets as of September 27, 2013 | 2 |
| Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 2012 | 4 |
| Unaudited Pro Forma Combined Statements of Operations for the nine months ended September 27, 2013 | 5 |
| Notes to Unaudited Pro Forma Combined Financial Information | 6 |
ENGILITY HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 27, 2013
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Historical | | Historical | | Pro Forma | | Pro Forma |
| | ENGILITY | | DRC | | Adjustments | | Combined |
| Assets: | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 24,323 |
| | $ | 924 |
| | $ | (20,000 | ) | (a) | $ | 4,141 |
|
| | | | | | (1,106 | ) | (d) | |
| Receivables, net | 316,488 |
| | 46,723 |
| | | | 363,211 |
|
| Other current assets | 28,216 |
| | 3,173 |
| | | | 31,389 |
|
| Total current assets | 369,027 |
| | 50,820 |
| | (21,106 | ) | | 398,741 |
|
| Property, plant and equipment, net | 10,898 |
| | 12,402 |
| | (1,347 | ) | (c) | 21,953 |
|
| Goodwill | 477,604 |
| | 163,205 |
| | (163,205 | ) | (b) | 651,866 |
|
| | | | | | 174,262 |
| (e) | |
| Identifiable intangible assets, net | 94,386 |
| | 11,825 |
| | (11,825 | ) | (b) | 140,586 |
|
| | | | | | 46,200 |
| (e) | |
| Other assets | 7,352 |
| | 14,715 |
| | (1,563 | ) | (c) | 21,610 |
|
| | | | | | 1,106 |
| (d) | |
| Total assets | $ | 959,267 |
| | $ | 252,967 |
| | $ | 22,522 |
| | $ | 1,234,756 |
|
| Liabilities and Equity: | | | | | | | |
| Current liabilities: | | | | | | | |
| Current portion of long-term debt | $ | 7,500 |
| | $ | 16,500 |
| | $ | 6,250 |
| (a) | $ | 13,750 |
|
| | | | | | $ | (16,500 | ) | (b) | |
| Accounts payable, trade | 23,492 |
| | 21,538 |
| | (4,060 | ) | (f) | 40,970 |
|
| Accrued employment costs | 62,602 |
| | 15,931 |
| | | | 78,533 |
|
| Accrued expenses | 59,275 |
| | 3,936 |
| | 4,060 |
| (f) | 67,271 |
|
| Advance payments and billings in excess of costs incurred | 26,238 |
| | — |
| | — |
| | 26,238 |
|
| Deferred income taxes, current and income taxes payable | 8,089 |
| | 2,817 |
| | | | 10,906 |
|
| Other current liabilities | 17,055 |
| | — |
| | (1,566 | ) | (c) | 16,489 |
|
| | | | | | 1,000 |
| (g) | |
| Total current liabilities | 204,251 |
| | 60,722 |
| | (10,816 | ) | | 254,157 |
|
| Long-term debt | 222,500 |
| | 66,633 |
| | 181,000 |
| (a) | 403,500 |
|
| | | | | | (66,633 | ) | (b) | |
| Income tax payable | 80,093 |
| | — |
| | — |
| | 80,093 |
|
| Other liabilities | 17,473 |
| | 33,094 |
| | (5,298 | ) | (c) | 63,056 |
|
| | | | | | 17,787 |
| (e) | |
| Total liabilities | 524,317 |
| | 160,449 |
| | 116,040 |
| | 800,806 |
|
| Equity: | | | | | | | |
| Common stock | 172 |
| | 1,051 |
| | (1,051 | ) | (b) | 172 |
|
| Additional paid-in capital | 762,256 |
| | 57,900 |
| | (57,900 | ) | (b) | 762,256 |
|
| Accumulated other comprehensive income | — |
| | (31,159 | ) | | 31,159 |
| (b) | — |
|
| Accumulated (deficit) / retained earnings | (341,590 | ) | | 64,726 |
| | (64,726 | ) | (b) | (342,590 | ) |
ENGILITY HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AS OF SEPTEMBER 27, 2013
(in thousands)
|
| | | | | | | | | | | | | | | |
| | | | | | (1,000 | ) | (g) | |
| Noncontrolling interest | 14,112 |
| | — |
| | — |
| | 14,112 |
|
| Total equity | 434,950 |
| | 92,518 |
| | (93,518 | ) | | 433,950 |
|
| Total liabilities and equity | $ | 959,267 |
| | $ | 252,967 |
| | $ | 22,522 |
| | $ | 1,234,756 |
|
The accompanying notes are an integral part of the unaudited pro forma combined financial information.
ENGILITY HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| | Historical | | Historical | | Pro Forma | | Pro Forma |
| | ENGILITY | | DRC | | Adjustments | | Combined |
| Revenue | $ | 1,555,310 |
| | $ | 316,974 |
| | $ | — |
| | $ | 1,872,284 |
|
| Revenue from affiliated entities | 100,034 |
| | — |
| | — |
| | 100,034 |
|
| Total revenue | 1,655,344 |
| | 316,974 |
| | — |
| | 1,972,318 |
|
| Costs and expenses | | | | | | | |
| Cost of revenue | 1,315,352 |
| | 267,097 |
| | — |
| | 1,582,449 |
|
| Cost of revenue from affiliated entities | 100,034 |
| | — |
| | — |
| | 100,034 |
|
| Selling, general and administrative expenses | 142,440 |
| | 28,978 |
| | (4,124 | ) | (h) | 173,499 |
|
| | | | | | 6,205 |
| (i) | |
| Goodwill impairment charge | 426,436 |
| | 48,600 |
| | — |
| | 475,036 |
|
| Total costs and expenses | 1,984,262 |
| | 344,675 |
| | 2,081 |
| | 2,331,018 |
|
| Operating loss | (328,918 | ) | | (27,701 | ) | | (2,081 | ) | | (358,700 | ) |
| Interest expense, net | 10,857 |
| | 12,655 |
| | (12,655 | ) | (h) | 16,624 |
|
| | | | | | 5,767 |
| (i) | |
| Other income, net | 136 |
| | 2,609 |
| | — |
| | 2,745 |
|
| Loss from continuing operations before income taxes | (339,639 | ) | | (37,747 | ) | | 4,807 |
| | (372,579 | ) |
| Provision (benefit) for income taxes | 5,156 |
| | (13,512 | ) | | 1,860 |
| (j) | (6,496 | ) |
| Loss from continuing operations | $ | (344,795 | ) | | $ | (24,235 | ) | | $ | 2,947 |
| | $ | (366,083 | ) |
| | | | | | | | |
| Loss per share allocable to Engility Holdings, Inc. common shareholders, basic and diluted | | | | | | | |
| Net loss per share from continuing operations | $ | 21.18 |
| | $ | 2.34 |
| | | | $ | 22.49 |
|
| | | | | | | | |
| Weighted average number of shares outstanding basic and diluted | 16,281 |
| | 10,369 |
| | | | 16,281 |
|
The accompanying notes are an integral part of the unaudited pro forma combined financial information.
ENGILITY HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2013
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| | Historical | | Historical | | Pro Forma | | Pro Forma |
| | ENGILITY | | DRC | | Adjustments | | Combined |
| Revenue | $ | 1,078,309 |
| | $ | 213,201 |
| | $ | — |
| | $ | 1,291,510 |
|
| Costs and expenses | | | | | | | |
| Cost of revenue | 932,874 |
| | 181,846 |
| | — |
| | 1,114,720 |
|
| Selling, general and administrative expenses | 56,134 |
| | 18,981 |
| | (2,792 | ) | (k) | 76,977 |
|
| | | | | | 4,654 |
| (l) | |
| Total costs and expenses | 989,008 |
| | 200,827 |
| | 1,862 |
| | 1,191,697 |
|
| Operating income | 89,301 |
| | 12,374 |
| | (1,862 | ) | | 99,813 |
|
| Interest expense, net | 19,099 |
| | 6,201 |
| | (6,201 | ) | (k) | 23,424 |
|
| | | | | | 4,325 |
| (l) | |
| Other income, net | 266 |
| | 215 |
| | — |
| | 481 |
|
| Income from continuing operations before income taxes | 70,468 |
| | 6,388 |
| | 14 |
| | 76,870 |
|
| Provision (benefit) for income taxes | 27,344 |
| | 2,618 |
| | 5 |
| (m) | 29,967 |
|
| Net income | $ | 43,124 |
| | $ | 3,770 |
| | $ | 9 |
| | $ | 46,903 |
|
| | | | | | | | |
| Earnings per share allocable to Engility Holdings, Inc. common shareholders - Basic | $ | 2.56 |
| | $ | 0.36 |
| | | | $ | 2.78 |
|
| Earnings per share allocable to Engility Holdings, Inc. common shareholders - Diluted | $ | 2.45 |
| | $ | 0.36 |
| | | | $ | 2.67 |
|
| | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | |
| Basic | 16,855 |
| | 10,504 |
| | | | 16,855 |
|
| Diluted | 17,592 |
| | 10,522 |
| | | | 17,592 |
|
The accompanying notes are an integral part of the unaudited pro forma combined financial information.
ENGILITY HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
On January 31, 2014, Dynamics Research Corporation (“DRC”), a Massachusetts corporation, was acquired by an indirect subsidiary of Engility Holdings, Inc. (“Engility Holdings”) pursuant to an Agreement and Plan of Merger dated December 20, 2013 (the “Acquisition”). Engility Holdings, through a subsidiary, paid $11.50 per share for 100% of DRC's outstanding shares and paid off approximately $87 million in indebtedness of DRC for an aggregate purchase price of approximately $207 million in cash, of which $187 million was borrowed to fund the transaction. DRC is a leading provider of innovative management consulting, engineering, technical, information technology services and solutions to federal and state governments. Founded in 1955 and headquartered in Andover, Massachusetts, DRC had approximately 1,100 employees located throughout the United States as of December 31, 2013.
The unaudited pro forma combined balance sheet at September 27, 2013 gives effect to the Acquisition as if it had occurred on September 27, 2013. The unaudited pro forma combined statements of operations for the year ended December 31, 2012 and the nine months ended September 27, 2013 are presented as if the Acquisition occurred on January 1, 2012. The unaudited pro forma combined statements of operations were prepared to illustrate the estimated effects of the acquisition of DRC by Engility Holdings.
The preliminary allocation of purchase price is as follows:
|
| | | |
| Cash consideration | $ | 207,250 |
|
| | |
| DRC fair value adjustments, net | $ | 4,575 |
|
| Intangible assets, net of deferred tax | 28,413 |
|
| Goodwill | 174,262 |
|
| | $ | 207,250 |
|
The unaudited pro forma combined financial information is derived from the historical financial statements of Engility Holdings and DRC, adjusted to give effect to the acquisition and the financing transaction entered into in order to fund the acquisition. The unaudited pro forma combined financial information, including the notes thereto, should be read in conjunction with the historical financial statements of: Engility Holdings, which are included in its Annual Report on Form 10-K for the year ended December 31, 2012 and its Quarterly Report on Form 10-Q for the quarter ended September 27, 2013; and DRC, which are included in the Consolidated Financial Statements for the year ended December 31, 2012 and the nine months ended September 30, 2013, include as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K/A.
The acquisition is accounted for using the purchase method of accounting whereby the assets acquired and liabilities assumed as of the Effective Date, including identifiable intangible assets, are recorded at their estimated fair value. The excess of the consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed is recognized as goodwill.
The pro forma adjustments are preliminary and have been made solely for informational purposes. The actual results reported by the combined company in periods following the acquisition may differ significantly from that reflected in these unaudited pro forma combined financial statements for a number of reasons, including but not limited to cost savings from operating efficiencies, synergies and the impact of the incremental costs incurred in integrating the two companies. As a result, the pro forma combined financial information is not intended to represent and does not purport to be indicative of what the combined company’s financial condition or results of operations would have been had the acquisition and related financing transactions been completed on the applicable dates of this pro forma combined financial information. In addition, the pro forma combined financial information does not purport to project the future financial condition and results of operations of the combined company.
The accompanying Unaudited Pro Forma Combined Information have been prepared based on preliminary assessments of the fair values of the assets to be acquired and the liabilities to be assumed. The final allocation of the consideration will be determined after the fair values of DRC’s intangible assets, identifiable intangible assets
ENGILITY HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
and liabilities are determined. The finalization of the purchase accounting assessment may result in changes in the valuation of assets and liabilities acquired, particularly in regards to the customer relationships intangible assets, which could be materially different from those reflected in the pro forma combined company’s consolidated financial statements subsequent to the acquisition.
Balance Sheets
September 27, 2013 |
| | | | |
| (a) | To record cash paid and borrowings related to the purchase of DRC | |
| | Cash | $ | (20,000 | ) |
| | Current portion of long-term debt | 6,250 |
|
| | Long-term debt | 181,000 |
|
| | | |
| (b) | To eliminate DRC’s historical balances | |
| | Goodwill | $ | (163,205 | ) |
| | Intangible assets | (11,825 | ) |
| | Current portion of long-term debt | (16,500 | ) |
| | Long-term debt | (66,633 | ) |
| | Common stock | (1,051 | ) |
| | Additional paid in capital | (57,900 | ) |
| | Accumulated other comprehensive income | 31,159 |
|
| | Retained earnings | (64,726 | ) |
| | | |
| (c) | To record DRC’s fair value adjustments | |
| | Property, plant and equipment, net | $ | (1,347 | ) |
| | Other assets | (1,563 | ) |
| | Other current liabilities | (1,566 | ) |
| | Other liabilities | (5,298 | ) |
| | | |
| (d) | To record Engility deferred financing costs | |
| | Cash and cash equivalents | $ | (1,106 | ) |
| | Deferred financing costs associated with the amended credit agreement | 1,106 |
|
| | | |
| (e) | To record assets related to the acquisition | |
| | Goodwill | $ | 174,262 |
|
| | Intangibles | 46,200 |
|
| | Deferred tax liability arising from the intangible assets recorded | 17,787 |
|
| | | |
| (f) | To reclassify DRC accounts to Engility presentation | |
| | Accounts payable | $ | (4,060 | ) |
| | Accrued expenses | 4,060 |
|
| | | |
| (g) | To record acquisition related costs | |
| | Other current liabilities | $ | 1,000 |
|
| | Accumulated (deficit) / retained earnings | 1,000 |
|
ENGILITY HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
Statements of Operations
For the Year Ended December 31, 2012
|
| | | | |
| (h) | To eliminate historical DRC costs | |
| | Selling, general and administrative expenses - intangible amortization | $ | (4,124 | ) |
| | Interest expense | (12,655 | ) |
| | | |
| (i) | To record items related to purchase of DRC | |
| | To record amortization expense on the identifiable intangible assets arising from the acquisition. A portion of the excess purchase price over the fair value of net assets acquired was allocated on a preliminary basis to customer relationships and backlog which is estimated to be $46 million. Based on a preliminary independent appraisal, customer relationship and backlog are estimated to have useful lives of 20 years and 1 year, respectively. Accordingly, these intangible assets are amortized using the straight-line method over their respective periods. | $ | 6,205 |
|
| | To record interest expense ($5,543) and additional deferred financing fees ($224) on the debt incurred for the DRC acquisition. | 5,767 |
|
| | The interest rates on debt incurred for the acquisition are affected by changes in market interest rates. With every one-eighth of one percent (0.125%) fluctuation in the applicable interest rate of 2.96%, interest expense on our variable rate debt for the period would have fluctuated by $0.2 million. | |
| | | |
| (j) | To record income tax expense on pro forma adjustments. The effective tax rate used was 38.7%. | $ | 1,860 |
|
Statements of Operations
For the Nine Months Ended September 27, 2013
|
| | | | |
| (k) | To eliminate historical DRC costs | |
| | Selling, general and administrative expenses - intangible amortization | $ | (2,792 | ) |
| | Interest expense | (6,201 | ) |
| | | |
| (l) | To record items related to purchase of DRC | |
| | To record amortization expense on the identifiable intangible assets arising from the acquisition. A portion of the excess purchase price over the fair value of net assets acquired was allocated on a preliminary basis to customer relationships and backlog which is estimated to be $46 million. Based on a preliminary independent appraisal, customer relationship and backlog are estimated to have useful lives of 20 years and 1 year, respectively. Accordingly, these intangible assets are amortized using the straight-line method over their respective periods. | $ | 4,654 |
|
| | Interest expense ($4,157) and additional deferred financing fees ($168) on the debt incurred for the DRC acquisition. | 4,325 |
|
| | The interest rates on debt incurred for the acquisition are affected by changes in market interest rates. With every one-eighth of one percent (0.125%) fluctuation in the applicable interest rate of 2.96%, interest expense on our variable rate debt for the period would have fluctuated by $0.2 million. | |
| | | |
| (m) | To record income tax expense on pro forma adjustments. The effective tax rate used was 38.8%. | $ | 5 |
|
