EX-99.1 2 d319514dex991.htm INFORMATION STATEMENT Information Statement
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Exhibit 99.1

LOGO

                    , 2012

Dear L-3 Communications Holdings, Inc. Shareholder:

As part of our strategic plan as announced on July 28, 2011, I am pleased to provide you with the enclosed Information Statement relating to the spin-off to L-3 Communications Holdings, Inc. (“L-3”) shareholders of 100% of the common stock of Engility Holdings, Inc. (“Engility”), an independent, publicly traded government services company. Engility will include the Systems Engineering and Technical Assistance (SETA) and training and operational support services businesses that are currently part of L-3’s Government Services segment.

L-3 will retain its leading positions as a prime contractor in C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems and Aircraft Modernization and Maintenance. L-3 will also continue to be a leading provider of a broad range of electronic systems used on military and commercial platforms, and will retain its cyber security, intelligence, enterprise information technology and security solutions businesses, currently part of L-3’s Government Services segment. L-3’s Government Services segment will be renamed National Security Solutions upon completion of the spin-off. Immediately following the completion of the spin-off, L-3 shareholders will own all of the outstanding shares of common stock of Engility. We believe that the spin-off is in the best interests of our company and its shareholders, as the separation of Engility will enable it to pursue new business opportunities unconstrained by organizational conflict of interest regulations that existed by virtue of its status as a business unit within L-3 and in a more cost competitive manner, while at the same time enabling L-3 to increase its focus on value-added programs and products.

The spin-off will be completed by way of a pro rata distribution of Engility common stock to our shareholders of record as of July 16, 2012, the spin-off record date. Each L-3 shareholder will receive one share of Engility common stock for every six shares of L-3 common stock held by such shareholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. Following the spin-off, shareholders may request that their shares of Engility common stock be transferred to a brokerage or other account at any time. No fractional shares of Engility common stock will be issued. If you would otherwise have been entitled to a fractional common share in the distribution, you will receive the net cash proceeds of such fractional share instead.

The spin-off is subject to certain customary conditions. Shareholder approval of the distribution is not required, nor are you required to take any action to receive your shares of Engility common stock.

Immediately following the spin-off, you will own common stock in L-3 and Engility. L-3’s common stock will continue to trade on the New York Stock Exchange under the symbol “LLL”. Engility intends to have its common stock listed on the New York Stock Exchange under the symbol “EGL”.

We expect the spin-off to be tax-free to the shareholders of L-3, except to the extent of cash received in lieu of fractional shares. The spin-off is conditioned on, among other things, the receipt of a ruling from the Internal Revenue Service, and that such ruling shall remain in effect as of the distribution date, and an opinion of tax counsel confirming that the spin-off will not result in the recognition, for U.S. Federal income tax purposes, of income, gain or loss to L-3 or its shareholders, except to the extent of cash received in lieu of fractional shares.

The enclosed Information Statement, which is being mailed to all L-3 shareholders, describes the spin-off in great detail and contains important information about Engility, including historical combined financial statements. We urge you to read the Information Statement carefully.

I want to thank you for your continued support of L-3. We look forward to your support of both companies in the future.

Yours sincerely,

Michael T. Strianese

Chairman, President and Chief Executive Officer

L-3 Communications Holdings, Inc.


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LOGO

                    , 2012

Dear Engility Holdings, Inc. Shareholder:

It is our pleasure to welcome you as a shareholder of our company, Engility Holdings, Inc. (“Engility”), a leading provider of systems engineering services, training, program management, and operational support for the U.S. Government worldwide.

As an independent, publicly traded company, we believe we can more effectively pursue new and existing market opportunities structured as a cost efficient provider without the constraints of organizational conflicts of interest regulations related to our previous status as a business unit within L-3 Communications Holdings, Inc. (“L-3”). We believe, as a result of this, that we can create greater value for you, the shareholder, than we could as a part of L-3.

We expect to have Engility common stock listed on the New York Stock Exchange under the symbol “EGL” in connection with the distribution of Engility common stock by L-3.

We invite you to learn more about Engility by reviewing the enclosed Information Statement. We look forward to our future as an independent, publicly traded company and to your support as a holder of Engility common stock.

Very truly yours,

Anthony Smeraglinolo

President and Chief Executive Officer

Engility Holdings, Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED JUNE 27, 2012

INFORMATION STATEMENT

ENGILITY HOLDINGS, INC.

3750 Centerview Drive

Chantilly, Virginia 20151

Common Stock

(par value $0.01 per share)

 

 

This Information Statement is being sent to you in connection with the separation of Engility Holdings, Inc. (“Engility”) from L-3 Communications Holdings, Inc. (“L-3”), following which Engility will be an independent, publicly traded company. As part of the separation, L-3 will undergo an internal reorganization, after which it will complete the separation by distributing all of the outstanding shares of Engility common stock on a pro rata basis to the holders of L-3 common stock. We refer to this pro rata distribution as the “distribution” and we refer to the separation, including the internal reorganization and distribution, as the “spin-off.” We expect that the spin-off will be tax-free to L-3 shareholders for U.S. Federal income tax purposes, except to the extent of cash received in lieu of fractional shares. Each L-3 shareholder will receive one share of Engility common stock for every six shares of L-3 common stock held by such shareholder on July 16, 2012, the record date. The distribution of shares will be made in book-entry form. L-3 will not distribute any fractional shares of Engility common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the spin-off. The distribution will be effective as of 5:00 p.m., New York time, on July 17, 2012. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.

No vote or other action of L-3 shareholders is required in connection with the spin-off. We are not asking you for a proxy and you should not send us a proxy. L-3 shareholders will not be required to pay any consideration for the shares of Engility common stock they receive in the spin-off, and they will not be required to surrender or exchange shares of their L-3 common stock or take any other action in connection with the spin-off.

All of the outstanding shares of Engility common stock are currently owned by L-3. Accordingly, there is no current trading market for Engility common stock. We expect, however, that a limited trading market for Engility common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Engility common stock will begin the first trading day after the distribution date. We intend to list Engility common stock on the New York Stock Exchange under the ticker symbol “EGL”.

 

 

In reviewing this Information Statement, you should carefully consider the matters described in “Risk Factors ” beginning on page 16 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                     , 2012.

This Information Statement was first mailed to L-3 shareholders on or about                     , 2012.


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TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     16   

Special Note About Forward-Looking Statements

     30   

The Spin-Off

     31   

Trading Market

     39   

Dividend Policy

     41   

Capitalization

     42   

Selected Historical Condensed Combined Financial and Other Data

     43   

Unaudited Pro Forma Condensed Combined Financial Statements

     45   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     75   

Management

     87   

Executive Compensation

     94   

Certain Relationships and Related Party Transactions

     115   

Description of Material Indebtedness

     119   

Security Ownership of Certain Beneficial Owners and Management

     122   

Description of Capital Stock

     124   

Where You Can Find More Information

     129   

Index to Combined Financial Statements of Engility Holdings, Inc.

     F-1   


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SUMMARY

This summary highlights information contained in this Information Statement and provides an overview of our company, our separation from L-3 and the distribution of Engility common stock by L-3 to its shareholders. For a more complete understanding of our business and the spin-off, you should read this entire Information Statement carefully, particularly the discussion set forth under “Risk Factors” and our audited historical combined financial statements, our unaudited pro forma condensed combined financial statements and the respective notes to those statements appearing elsewhere in this Information Statement.

Except as otherwise indicated or unless the context otherwise requires, “Engility,” “we,” “us” and “our” refer to Engility Holdings, Inc. and its subsidiaries after giving effect to the internal reorganization preceding the distribution described in this Information Statement. Except as otherwise indicated or unless the context otherwise requires, the information included in this Information Statement assumes the completion of the internal reorganization preceding the distribution.

Our Company

We are a leading provider of systems engineering services, training, program management, and operational support for the U.S. Government worldwide. Our business is focused on supporting the mission success of our customers by providing a full range of engineering, technical, analytical, advisory, training, logistics and support services. Our revenues are spread over a diverse mix of activities and services with no single contract accounting for more than 7% of our revenue in 2011. For the year ended December 31, 2011, we had revenues of $2.2 billion, 98% of which was derived from our U.S. Government customers.

We operate in two segments: Professional Support Services and Mission Support Services. The Professional Support Services segment provides Systems Engineering and Technical Assistance (SETA) services, program management support and software engineering lifecycle sustainment and support services. The Professional Support Services segment had 2011 revenues of $1.2 billion. Through our Mission Support Services segment, we provide capabilities such as defense related training, education and support services, law enforcement training, national security infrastructure and institutional development. The Mission Support Services segment had 2011 revenues of $1.0 billion.

Engility, through its predecessor companies, has provided mission critical services to several U.S. Government departments and agencies for over four decades. Our customers include 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), Department of Homeland Security (DHS), and allied foreign governments. We attribute the strength of our customer relationships to our singular focus on services, our industry-leading capabilities in program planning and management, superior past performance, and the experience of our people and their commitment to the mission. As of December 31, 2011, we employed approximately 9,200 individuals globally and operate in over 70 countries led by an experienced executive team, composed of industry and government veterans.

Our Business Strategy

Our customers turn to us to enhance their capabilities and gain specific expertise on a cost effective basis. Therefore, delivering superior value to our customers is critical to our ability to grow our business, drive earnings and cash flow and create value for our shareholders. The key elements of our strategy include:

 

   

Expand Our SETA Business. As a “pure-play” service provider, Engility intends to aggressively pursue new SETA business, unconstrained by organizational conflicts of interest (OCI) regulations related to our status as a business unit within L-3. Under the OCI regulations, when a company has provided

 

 

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SETA services for a particular U.S. Government program, it may be prohibited from selling products to the U.S. Government under the same program. As enforcement of OCI regulations has become more rigorous over the past four years, we estimate that L-3 ceded or otherwise lost a significant amount of its SETA related revenues due to OCI constraints. In addition, the Engility businesses that were part of L-3, did not pursue various SETA opportunities in the U.S. Government market for Professional, Administrative and Management Support Services due to OCI-related constraints. Moving forward, we intend to aggressively pursue these additional SETA contract opportunities to capture and expand our market share.

 

   

Streamline Our Operations. Critical to winning greater share in our addressable markets will be our ability to offer services at competitive and affordable prices. Following the spin-off, we expect to significantly reduce our overhead and operating expenses through a number of actions to develop and maintain a streamlined operating structure. These include consolidating our operating units from seven to four, combining administrative functions currently performed by those operating units and re-engineering our managerial processes. We expect that these actions will enable us to reduce our overhead significantly over the next two years as a percent of revenue. We believe our lean organizational structure and processes will enhance our agility and cost competitiveness to better meet the requirements of our customers.

 

   

Capitalize on our Strengths—Performance, Agility, Expertise. Past performance is a critical factor in sustaining and gaining market share. Our customers look to us as a trusted long-term partner as reflected in our superior re-compete win rates and customer performance evaluations. Our abilities to rapidly and efficiently deploy resources around the world and perform on large-scale, complex programs are also recognized by our customers. In 2011, we achieved 96% of the available performance-based award fees on our cost-plus contracts. We are committed to protecting and enhancing our reputation, developing additional capabilities and investing in our team and customer relationships to create new business opportunities.

 

   

Transition from our Iraq/Afghanistan Related Programs. We anticipate the drawdown of U.S. Forces from Iraq and Afghanistan will result in the wind down of certain of our programs. We intend to use the cash flow resulting from this wind down to reinvest in new business opportunities. Further, we believe we are well placed to pursue and perform U.S.-funded programs to help stabilize and develop both countries.

 

   

Maintain Balance Sheet Strength and Liquidity. We will seek to maintain a capital structure that provides the resources and financial flexibility to support our business. At the time of the spin-off, we anticipate having approximately $50 million in total liquidity, consisting of cash and cash equivalents and available borrowings under our senior secured revolving credit facility. Through disciplined capital spending and working capital management, we intend to maximize our cash flows and maintain our strong balance sheet.

Our Strengths

Our competitive strengths are derived from combining technical expertise and innovative operating efficiency with a sophisticated understanding of our markets and knowledge of our customers’ needs. Our core strengths include:

 

   

Proven Performance and Customer Trust. Long term success in the services business is not possible without the trust and confidence of our customers, which is primarily based on past performance and close interpersonal relationships. For over four decades, our people and ideas have performed important roles in support of and contributed to the success of the U.S. military’s and other government agencies’ missions around the world. The majority of our employees work side-by-side with their government counterparts at customer locations in the United States and around the world, thus developing those critical interpersonal relationships.

 

 

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Leading Market Position. Engility is a leading provider of systems engineering services, training, program management, and operational support to military and civilian government agencies, both in the United States and with allied foreign governments. We believe that our success is based, in part, upon our (1) reputation for integrity, quality and performance with virtually all key current and potential U.S. and foreign customers, (2) world-wide presence in more than 70 countries, which provides a platform for international expansion and growth, and (3) workforce consisting of highly specialized personnel and an employee base of approximately 9,200 professionals across a wide range of skills and expertise.

 

   

Breadth of Service Capabilities. We are one of the largest government service providers offering a wide breadth of capabilities to our customers. Our 9,200 professionals have deep domain expertise in systems engineering and integration, program management support, defense related and law enforcement training, and education and support services. Further, our culture of performance enables us to rapidly respond to our customers’ immediate and unforeseen requirements. We believe our anticipated streamlined organizational structure will allow us to respond more quickly and efficiently to provide customers with experts and resources that meet their needs around the world.

 

   

Significant Recurring Contract Base and Diverse Business Mix. As of December 31, 2011, we had an estimated $2.5 billion of funded and unfunded remaining aggregate contract value. We were the prime contractor on 72% of our revenues for the year ended December 31, 2011. We are qualified to compete as a prime contractor for task orders on a large number of U.S. Government-Wide Acquisition and Indefinite Delivery, Indefinite Quantity contract vehicles. In addition, our business is composed of an increasingly wide range of services, which allows us to capitalize on both demand and funding from diverse sources. For the year ended December 31, 2011, our top ten contracts represented approximately 41% of our revenues and no single contract accounted for more than 7% of our revenues.

 

   

Attractive Business Dynamics. As a leading government services provider, Engility benefits from a favorable mix of cost reimbursable contracts, low capital expenditure requirements and favorable working capital terms to generate strong operating cash flow. Over the past three years, our capital expenditures and working capital as a percentage of total revenues has averaged 0.2% and 9.0%, respectively. Combined with our low fixed cost structure, this provides us with a substantial degree of operating and financial flexibility.

 

   

Experienced Team with Deep Industry and Market Knowledge. Crucial to Engility’s success is the composition, commitment and the experience of its workforce, which possesses a comprehensive understanding of the operating environment of our core customers. Our senior leadership structure is aligned with the perspectives, strategies and priorities of our primary customers. Collectively, our executives have an average of 32 years of industry, military or government experience, often at the most senior levels. In addition, our understanding of our customers’ operating environment, strategic objectives and underpinning tactical requirements facilitates our ability to plot a strategic approach to expand our share of the national security markets and position ourselves for emerging markets.

Other Information

Engility Holdings, Inc. was incorporated in Delaware on November 18, 2011. Our principal executive offices are located at 3750 Centerview Drive, Chantilly, Virginia 20151. Our telephone number is 703-748-1400.

The Spin-Off

Overview

On July 12, 2011, the Board of Directors of L-3 approved a plan to spin-off Engility from L-3, following which Engility will be an independent, publicly traded company.

 

 

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Before our spin-off from L-3, we will enter into a Distribution Agreement and several other agreements with L-3 related to the spin-off. These agreements will govern the relationship between us and L-3 after completion of the spin-off and provide for the allocation between us and L-3 of various assets, liabilities, rights and obligations (including employee benefits, insurance and tax-related assets and liabilities). These agreements will also include arrangements with respect to transitional services to be provided by L-3 to Engility and vice versa. See “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off.”

The distribution of Engility common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not in the best interests of L-3 or its shareholders, that a sale or other alternative is in the best interests of L-3 or its shareholders, or that market conditions or other circumstances are such that it is not advisable at that time to separate Engility from L-3. See “The Spin-Off—Conditions to the Spin-Off.” Additionally, prior to the completion of the spin-off, we will raise indebtedness in an amount estimated at $345 million and distribute $335 million of the proceeds of such indebtedness to L-3. See “Description of Material Indebtedness.”

Questions and Answers About the Spin-Off

The following provides only a summary of the terms of the spin-off. For a more detailed description of the matters described below, see “The Spin-Off.”

 

Q: What is the spin-off?

 

A: The spin-off is the series of transactions by which Engility will separate from L-3. To complete the spin-off, L-3 will distribute to its shareholders all of the outstanding shares of Engility common stock. We refer to this as the distribution. Following the spin-off, Engility will be a separate company from L-3, and L-3 will not retain any ownership interest in Engility.

 

Q: What will I receive in the spin-off?

 

A: As a holder of L-3 common stock, you will retain your L-3 shares of common stock and will receive one share of Engility common stock for every six shares of L-3 common stock you own as of the record date. The number of shares of L-3 common stock you own and your proportionate interest in L-3 will not change as a result of the spin-off. See “The Spin-Off.”

 

Q: What is Engility?

 

A: Engility is a leading provider of systems engineering services, training, program management, and operational support for the U.S. Government worldwide. Engility is currently a subsidiary of L-3 whose shares will be distributed to L-3 shareholders if the spin-off is completed. After the spin-off is completed, Engility will be an independent, publicly traded company.

 

Q: Why is the separation of Engility structured as a spin-off?

 

A: On July 12, 2011, the Board of Directors of L-3 approved a plan to spin-off part of L-3’s Government Services business into a new company named Engility Holdings, Inc. L-3 currently believes a spin-off is the most efficient way to accomplish a separation of our business from L-3 for various reasons, including: (i) a spin-off would be a tax-free distribution of Engility common stock to L-3 shareholders; (ii) a spin-off offers a higher degree of certainty of completion in a timely manner, lessening disruption to current business operations; and (iii) a spin-off provides greater assurance that decisions regarding Engility’s capital structure support future financial stability. After consideration of strategic alternatives, including a sale, L-3 believes that a tax-free spin-off will enhance the long-term value of both L-3 and Engility. See “The Spin-Off—Reasons for the Spin-Off.”

 

 

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Q: Can L-3 decide to cancel the distribution of the Engility common shares even if all the conditions have been met?

 

A: Yes. The distribution of Engility common stock is subject to the satisfaction or waiver of certain conditions. See “The Spin-Off—Conditions to the Spin-Off.” L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not in the best interests of L-3 or its shareholders, that a sale or other alternative is in the best interests of L-3 or its shareholders, or that market conditions or other circumstances are such that it is not advisable at that time to separate Engility from L-3.

 

Q: What is being distributed in the spin-off?

 

A: Approximately 16 million shares of Engility common stock will be distributed in the spin-off, based on the number of shares of L-3 common stock expected to be outstanding as of July 16, 2012, the record date, and assuming a distribution ratio of one-to-six. The exact number of shares of Engility common stock to be distributed will be calculated on the record date. The shares of Engility common stock to be distributed by L-3 will constitute all of the issued and outstanding shares of Engility common stock immediately prior to the distribution. See “Description of Capital Stock—Common Stock.”

 

Q: When is the record date for the distribution?

 

A: The record date is July 16, 2012.

 

Q: When will the distribution occur?

 

A: The distribution date of the spin-off is July 17, 2012. We expect that it will take the distribution agent, acting on behalf of L-3, up to two weeks after the distribution date to fully distribute the shares of Engility common stock to L-3 shareholders. The ability to trade Engility shares will not be affected during that time.

 

Q: What do I have to do to participate in the spin-off?

 

A: Nothing. You are not required to take any action, although you are urged to read this entire document carefully. No shareholder approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part to receive your shares of Engility common stock. You will neither be required to pay anything for the new shares nor be required to surrender any shares of L-3 common stock to participate in the spin-off.

 

Q: How will fractional shares be treated in the spin-off?

 

A: Fractional shares of Engility common stock will not be distributed. Fractional shares of Engility common stock to which L-3 shareholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent at prevailing market prices. The aggregate net cash proceeds of the sales will be distributed ratably to those shareholders who would otherwise have received fractional shares of Engility common stock. See “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation. Receipt of the proceeds from these sales will generally result in a taxable gain or loss to those shareholders. Each shareholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to such shareholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Q: What are L-3’s reasons for the spin-off?

 

A: L-3’s Board of Directors has determined that the spin-off is in the best interests of L-3 and its shareholders because the spin-off will provide the following key benefits:

 

   

Reduce Regulatory Constraints in the Pursuit of Business Opportunities. Under the organizational conflicts of interest (“OCI”) regulations, when a company has provided SETA services for a particular

 

 

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U.S. Government program, it may be prohibited from selling products to the U.S. Government under the same program. The spin-off will allow Engility to expand the addressable market for its Professional Support Services businesses that were previously constrained by OCI regulations.

 

   

Align Cost Structure with Business Objectives. Critical to winning share in our addressable markets will be our ability to develop and maintain a streamlined operating structure. As a pure SETA and support services business, Engility will be able to reduce overhead and better direct its selling, general and administrative expenses structure and capital investments to position it to capture market share.

 

   

Improved Management Incentive Tools. As an independent company, Engility will be able to better structure and incentivize its current and future employees through direct participation in the performance of the company through new equity compensation plans.

 

Q: What are the U.S. Federal income tax consequences of the spin-off?

 

A: The spin-off is conditioned on the receipt by L-3 of a ruling (“IRS Ruling”) from the Internal Revenue Service (“IRS”) that, for U.S. Federal income tax purposes, the distribution, together with certain related transactions, will be tax-free to L-3 and L-3’s shareholders under Section 355 of the Internal Revenue Code of 1986 (the “Code”), except for cash payments made to shareholders in lieu of fractional shares such shareholders would otherwise receive in the distribution, and that the IRS Ruling shall remain in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to receive tax-free treatment under Section 355 of the Code upon which the IRS will not rule. L-3 has received the IRS Ruling and expects to receive such opinion at or prior to the time of the consummation of the spin-off. Although L-3 has no current intention to do so, such conditions are solely for the benefit of L-3 and its shareholders and may be waived by L-3 in its sole discretion. The tax consequences of the distribution are described in more detail under “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Q: Will the Engility common stock be listed on a stock exchange?

 

A: Yes. Although there is not currently a public market for Engility common stock, before completion of the spin-off, Engility will apply to list its common stock on the New York Stock Exchange (“NYSE”) under the symbol “EGL”. It is anticipated that trading of Engility common stock will commence on a “when-issued” basis at least two trading days prior to the record date. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. “When-issued” trades generally settle within four trading days after the distribution date. On the first trading day following the distribution date, any “when-issued” trading with respect to Engility common stock will end and “regular-way” trading will begin. “Regular-way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full trading day following the date of the transaction. See “Trading Market.”

 

Q: Will my shares of L-3 common stock continue to trade?

 

A: Yes. L-3 common stock will continue to be listed and trade on the NYSE under the symbol “LLL”.

 

Q: If I sell, on or before the distribution date, shares of L-3 common stock that I held on the record date, am I still entitled to receive shares of Engility common stock distributable with respect to the shares of L-3 common stock I sold?

 

A:

Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, L-3’s common stock will begin to trade in two markets on the NYSE: a “regular-way” market and an “ex-distribution” market. If you hold shares of L-3 common stock as of the record date for the distribution

 

 

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  and choose to sell those shares in the “regular-way” market after the record date for the distribution and on or before the distribution date, you also will be selling the right to receive the shares of Engility common stock in connection with the spin-off. However, if you hold shares of L-3 common stock as of the record date for the distribution and choose to sell those shares in the “ex-distribution” market after the record date for the distribution and on or before the distribution date, you will still receive the shares of Engility common stock in the spin-off.

 

Q: Will the spin-off affect the trading price of my L-3 stock?

 

A: Yes, the trading price of shares of L-3 common stock immediately following the distribution is expected to be lower than immediately prior to the distribution because its trading price will no longer reflect the value of the Engility business. However, we cannot provide you with any guarantees as to the price at which the L-3 shares will trade following the spin-off.

 

Q: What indebtedness will Engility have following the spin-off?

 

A: It is anticipated that, prior to the completion of the spin-off, we will raise indebtedness in an amount estimated at $345 million and distribute $335 million of the proceeds of such indebtedness to L-3. See “Description of Material Indebtedness.”

 

Q: What will be the relationship between L-3 and Engility after the spin-off?

 

A: Following the spin-off, Engility will be an independent, publicly traded company and L-3 will have no continuing stock ownership interest in Engility. Engility will have entered into a Distribution Agreement with L-3 and will enter into several other agreements for the purpose of allocating between Engility and L-3 various assets, liabilities, rights and obligations (including employee benefits, insurance and tax-related assets and liabilities). These agreements will also govern Engility’s relationship with L-3 following the spin-off and will provide arrangements for employee matters, tax matters, intellectual property matters, insurance matters and other specified liabilities, rights and obligations attributable to periods before and, in some cases, after the spin-off. These agreements will also include arrangements with respect to transitional services to be provided by L-3 or Engility to the other. The Distribution Agreement will provide, in general, that Engility will indemnify L-3 against any and all liabilities arising out of Engility’s business as constituted in connection with the spin-off and any other liabilities and obligations assumed by Engility, and that L-3 will indemnify Engility against any and all liabilities arising out of the businesses of L-3 as constituted in connection with the spin-off and any other liabilities and obligations assumed by L-3.

 

Q: What will Engility’s dividend policy be after the spin-off?

 

A: We do not currently plan to pay a regular dividend on our common stock following the spin-off. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant. See “Dividend Policy.”

 

Q: What are the anti-takeover effects of the spin-off?

 

A:

Some provisions of our certificate of incorporation and our bylaws, Delaware law and possibly the agreements governing our new debt, as each will be in effect immediately following the spin-off, may have the effect of making more difficult an acquisition of control of Engility in a transaction not approved by our

 

 

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  Board of Directors. See “Description of Capital Stock—Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws Could Delay or Prevent a Change in Control” and “Description of Capital Stock—Section 203 of the Delaware General Corporation Law.” In addition, under the Tax Matters Agreement, we will agree not to enter into any transaction involving an acquisition (including issuance) of Engility common stock or any other transaction (or, to the extent we have the right to prohibit it, to permit any such transaction) that could cause the distribution to be taxable to L-3. See “Risk Factors—Anti-takeover provisions in our organizational documents and Delaware law could delay or prevent a change in control.”

 

Q: What are the risks associated with the spin-off?

 

A: There are a number of risks associated with the spin-off and ownership of Engility common stock. These risks are discussed under “Risk Factors.”

 

Q: How will the spin-off affect Engility’s relationship with its customers?

 

A: We believe we have well-established relationships with our principal customers. We believe the spin-off will enable us to better focus on those customers and to align our resources with their priorities. As we seek to enter into new contracts with our customers, we expect to continue to provide information to enable them to have ongoing confidence in our management, our workforce and our ability to perform, including our financial stability.

 

Q: Where can I get more information?

 

A. If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent at:

Computershare

Toll Free Number: 877-282-1168

Toll Number: 781-575-2879

Before the spin-off, if you have any questions relating to the spin-off, you should contact L-3 at:

L-3 Communications Holdings, Inc.

Corporate Communications

Phone: 212-697-1111

www.L-3com.com

 

 

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Summary of the Spin-Off

 

Distributing Company

L-3 Communications Holdings, Inc., a Delaware corporation. After the distribution, L-3 will not own any shares of Engility common stock.

 

Distributed Company

Engility Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of L-3. After the spin-off, Engility will be an independent, publicly traded company.

 

Distributed Securities

All of the outstanding shares of Engility common stock owned by L-3, which will be 100% of Engility common stock issued and outstanding immediately prior to the distribution.

 

Record Date

The record date for the distribution is July 16, 2012.

 

Distribution Date

The distribution date is July 17, 2012.

 

Internal Reorganization

As part of the spin-off, L-3 will undergo an internal reorganization, which we refer to as the “internal reorganization,” that will, among other things and subject to limited exceptions:

 

   

allocate and transfer to each of Engility and its respective subsidiaries, as applicable, those assets, and to allocate and assign responsibility for those liabilities, in respect of the activities of the applicable businesses of such entities; and

 

   

allocate, transfer and assign, as applicable, those assets and liabilities in respect of other current and former businesses and activities of L-3 and its current and former subsidiaries.

 

  After completion of the spin-off:

 

   

Engility will own and operate the Systems Engineering and Technical Assistance (SETA) and training and operational support services businesses that are currently part of L-3’s Government Services segment; and

 

   

L-3 will own and operate its C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems; Aircraft Modernization and Maintenance; Electronic Systems; and National Security Solutions businesses.

 

  See “The Spin-Off—Manner of Effecting the Spin-Off—Internal Reorganization.”

 

Distribution Ratio

Each holder of L-3 common stock will receive one share of Engility common stock for every six shares of L-3 common stock held on July 16, 2012.

 

The Distribution

On the distribution date, L-3 will release the shares of Engility common stock to the distribution agent to distribute to L-3 shareholders. The distribution of shares will be made in book-entry

 

 

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form, which means that no physical share certificates will be issued. It is expected that it will take the distribution agent up to two weeks to issue shares of Engility common stock to you or to your bank or brokerage firm electronically on your behalf by way of direct registration in book-entry form. Trading of our shares will not be affected during that time. Following the spin-off, shareholders whose shares are held in book-entry form may request that their shares of Engility common stock be transferred to a brokerage or other account at any time. You will not be required to make any payment, surrender or exchange your shares of L-3 common stock or take any other action to receive your shares of Engility common stock.

 

Fractional Shares

The distribution agent will not distribute any fractional shares of Engility common stock to L-3 shareholders. Fractional shares of Engility common stock to which L-3 shareholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of the sales will be distributed ratably to those shareholders who would otherwise have received fractional shares of Engility common stock. Receipt of the proceeds from these sales will generally result in a taxable gain or loss to those shareholders. Each shareholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to such shareholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Conditions to the Spin-Off

Completion of the spin-off is subject to the satisfaction or waiver by L-3 of the following conditions:

 

   

our Registration Statement on Form 10, of which this Information Statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this Information Statement shall have been mailed to the L-3 shareholders;

 

   

Engility common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;

 

   

L-3 shall have obtained an opinion from its tax counsel, in form and substance satisfactory to L-3, as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to qualify as a reorganization under Section 355 of the Code upon which the IRS will not rule;

 

   

L-3 shall have obtained a private letter ruling from the Internal Revenue Service, in form and substance satisfactory to L-3, and such ruling shall remain in effect as of the distribution date, to the effect, among other things, that the distribution, together with certain related transactions, will qualify as a reorganization under Section 355 of the Code;

 

 

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Prior to the distribution date, L-3’s Board of Directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to L-3, with respect to the capital adequacy and solvency of Engility;

 

   

all regulatory approvals and other consents necessary to consummate the distribution shall have been received;

 

   

no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the distribution shall be pending, threatened, issued or in effect, and no other event outside the control of L-3 shall have occurred or failed to occur that prevents the consummation of all or any portion of the distribution;

 

   

no other events or developments shall have occurred or failed to occur that, in the judgment of the Board of Directors of L-3, would result in the distribution having a material adverse effect on L-3 or its shareholders;

 

   

the financing transactions described in “Description of Material Indebtedness” and elsewhere in this Information Statement as having occurred prior to the distribution shall have been consummated on or prior to the distribution;

 

   

the internal reorganization shall have been completed, except for such steps as L-3 in its sole discretion shall have determined may be completed after the distribution date;

 

   

L-3 shall have taken all necessary action, in the judgment of the Board of Directors of L-3, to cause the Board of Directors of Engility to consist of the individuals identified in this Information Statement as directors of Engility;

 

   

all necessary actions shall have been taken to adopt the form of amended and restated certificate of incorporation and amended and restated bylaws filed by Engility with the SEC as exhibits to the Registration Statement on Form 10, of which this Information Statement forms a part;

 

   

the Board of Directors of L-3 shall have approved the distribution, which approval may be given or withheld at its absolute and sole discretion; and

 

   

each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreements and the other ancillary agreements shall have been executed by each party.

 

 

The fulfillment of the foregoing conditions will not create any obligation on L-3’s part to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, the

 

 

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receipt of a private letter ruling from the Internal Revenue Service, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10, of which this Information Statement forms a part, by the SEC, in connection with the distribution. L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not then in the best interests of L-3 or its shareholders or other constituents, that a sale or other alternative is in the best interests of L-3 or its shareholders or other constituents or that it is not advisable for Engility to separate from L-3 at that time. For more information, see “The Spin-Off—Conditions to the Spin-Off.”

 

Trading Market and Symbol

We intend to file an application to list Engility common stock on the NYSE under the ticker symbol “EGL”. We anticipate that, at least two trading days prior to the record date, trading of shares of Engility common stock will begin on a “when-issued” basis and will continue up to and including the distribution date, and we expect “regular-way” trading of Engility common stock will begin the first trading day after the distribution date. We also anticipate that, at least two trading days prior to the record date, there will be two markets in L-3 common stock: a “regular-way” market on which shares of L-3 common stock will trade with an entitlement for the purchaser of L-3 common stock to shares of Engility common stock to be distributed pursuant to the distribution, and an “ex-distribution” market on which shares of L-3 common stock will trade without an entitlement for the purchaser of L-3 common stock to shares of Engility common stock. For more information, see “Trading Market.”

 

Tax Consequences

L-3 received the IRS Ruling stating that L-3 and L-3’s shareholders will not recognize any taxable income, gain or loss for U.S. Federal income tax purposes as a result of the spin-off, except to the extent of cash received in lieu of fractional shares. As a condition to the spin-off, such IRS Ruling must remain in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the spin-off to receive tax-free treatment upon which the IRS will not rule. See “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.”

 

  Each shareholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the spin-off to such shareholder, including the effect of any state, local or non-U.S. tax laws and of changes in applicable tax laws.

 

Relationship with L-3 after the Spin-Off

We will enter into a Distribution Agreement and other agreements with L-3 related to the spin-off. These agreements will govern the relationship between us and L-3 after completion of the spin-off and provide for the allocation between us and L-3 of various assets, liabilities, rights and obligations (including employee benefits,

 

 

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insurance and tax-related assets and liabilities). We intend to enter into one or more Transition Services Agreements with L-3 pursuant to which certain services will be provided on an interim basis following the distribution. We also intend to enter into an Employee Matters Agreement that will set forth the agreements between us and L-3 concerning certain employee compensation and benefit matters. Further, we intend to enter into a Tax Matters Agreement with L-3 regarding the sharing of taxes incurred before and after completion of the spin-off, certain indemnification rights with respect to tax matters and certain restrictions to preserve the tax-free status of the spin-off. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off,” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Spin-Off.”

 

Dividend Policy

We do not currently plan to pay a regular dividend on our common stock following the spin-off. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant. See “Dividend Policy.”

 

Transfer Agent

Computershare Trust Company, N.A.

 

Risk Factors

We face both general and specific risks and uncertainties relating to our business, our relationship with L-3 and our being an independent, publicly traded company. We also are subject to risks relating to the spin-off. You should carefully read the risk factors set forth in the section entitled “Risk Factors” in this Information Statement.

 

 

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Summary Historical and Unaudited Pro Forma Condensed Combined Financial Data

The following table presents the summary historical condensed combined financial data for Engility. The condensed combined statement of operations data for each of the years in the three-year period ended December 31, 2011 and the condensed combined balance sheet data as of December 31, 2011 and 2010 set forth below are derived from Engility’s audited combined financial statements included elsewhere in this Information Statement. The condensed combined statement of operations data for the three months ended March 30, 2012 and April 1, 2011 and the condensed combined balance sheet data as of March 30, 2012 are derived from Engility’s unaudited condensed combined financial statements included elsewhere in this Information Statement. The condensed combined balance sheet data as of December 31, 2009 are derived from Engility’s audited combined financial statements that are not included in this Information Statement. The condensed combined balance sheet data as of April 1, 2011 are derived from Engility’s unaudited condensed combined financial statements that are not included in this Information Statement.

The summary unaudited pro forma condensed combined financial data as of and for the three months ended March 30, 2012 and the year ended December 31, 2011 have been prepared to reflect the spin-off, including: (i) the distribution of approximately 16 million shares of Engility common stock by L-3 to its shareholders; (ii) the incurrence of indebtedness of $345 million; (iii) a $335 million distribution to L-3; (iv) the transfer of the global security solutions business unit to L-3; and (v) the transactions contemplated by the Distribution Agreement and related separation agreements. The unaudited pro forma condensed combined statement of operations presented for the three months ended March 30, 2012 and the year ended December 31, 2011 assumes the spin-off and related transactions occurred on January 1, 2011. The unaudited pro forma condensed combined balance sheet presented as of March 30, 2012 assumes the spin-off and related transactions occurred on March 30, 2012. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and such assumptions are reasonable under the circumstances.

The unaudited pro forma condensed combined financial statements are not necessarily indicative of our results of operations or financial condition had the distribution and our anticipated post-spin-off capital structure been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operations or financial condition.

 

 

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You should read this summary financial data together with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Capitalization,” “Selected Historical Condensed Combined Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed combined financial statements and accompanying notes included in this Information Statement.

 

     As of and for the quarter ended     As of and for the
year ended December 31,
 
(in millions)    Pro Forma      Historical(1)     Pro Forma     Historical(1)  
   March 30,
2012
     March 30,
2012
    April 1,
2011
    2011     2011     2010     2009  

Statement of Operations Data

               

Revenues

   $ 431       $ 449      $ 591      $ 2,071      $ 2,180      $ 2,521      $ 2,658   

Cost of revenues, including selling, general, and administrative expenses

     398         423 (2)      544        1,889        2,005 (2)      2,280        2,403   

Goodwill impairment

     —           —          —          77        77 (3)      172 (4)      —     

Operating income

     33         26        47        105        98        69        255   

Interest expense

     6         —          —          22        —          —          —     

Income before income taxes

     27         26        47        83        98        68        255   

Provision for income taxes .

     11         11        18        62        69        75        102   

Net income (loss) .

     16         15        29        21        29        (7     153   

Net income (loss) attributable to Engility

     15         14        28        18        26        (9     152   

Balance Sheet Data

               

Working capital .

   $ 188       $ 208      $ 228        —        $ 187      $ 220      $ 259   

Goodwill .

     851         904        981        —          904        981        1,153   

Total assets .

     1,417         1,511        1,668        —          1,503        1,666        1,858   

Long-term debt

     345         —          —          —          —          —          —     

Total equity

     701         1,110        1,228        —          1,093        1,227        1,422   

Cash Flow Data

               

Net cash (used in) from operating activities

   $ —         $ (5   $ 32        —        $ 165      $ 197      $ 248   

Net cash used in investing activities

     —           —          (1     —          (4     (1     (10

Net cash from (used in) financing activities(5)

     —           2        (27     —          (163     (186     (239

 

(1) Our results of operations presented within this Information Statement and within this table include the global security solutions business, which has been historically managed by us but will be transferred to L-3 in connection with the spin-off. The following table presents select statement of operations data for the global security solutions business.

 

     For the quarter ended      For the year ended December 31,  
(in millions)    March 30,
2012
    April 1,
2011
     2011      2010     2009  

Revenues

   $ 18      $ 28       $ 109       $ 147      $ 96   

Operating (loss) income

     (1     —           2         (2     (9

 

(2) Cost of revenues include $6 million and $9 million of transaction expenses recorded in connection with the spin-off for the quarter ended March 30, 2012 and the year ended December 31, 2011, respectively.

 

(3) The year ended December 31, 2011 includes a non-cash goodwill impairment charge of $77 million ($77 million after income taxes) due to a decline in the estimated fair value of our Linguist Operations & Technical Support (LOTS) reporting unit.

 

(4) The year ended December 31, 2010 includes non-cash goodwill impairment charges amounting to $172 million ($154 million after income taxes) due to a decline in the estimated fair values of our Global Security & Engineering Solutions and LOTS reporting units.

 

(5) Net cash from (used in) financing activities includes net transfers from L-3 of $2 million for the quarterly period ended March 30, 2012 and to L-3 of $27 million, $161 million, $188 million and $238 million for the quarterly period ended April 1, 2011 and the years ended December 31, 2011, 2010 and 2009, respectively.

 

 

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RISK FACTORS

You should carefully consider each of the following risks, which we believe are the principal risks that we face and of which we are currently aware, and all of the other information in this Information Statement. Some of the risks described below relate to our business, while others relate to the spin-off. Other risks relate principally to the securities markets and ownership of our common stock.

Should any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially and adversely affected, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Relating to Our Business

We face the following risks in connection with the general conditions and trends of the industry in which we operate:

We rely predominantly on contracts with U.S. Government entities, and the loss or delay of a significant number of our contracts would have a material adverse effect on our results of operations and cash flows.

Our revenues are predominantly derived from providing services under contracts (revenue arrangements) with agencies of, and prime contractors to, the U.S. Government. Although these various agencies and prime contractors are subject to common budgetary pressures and other factors, our customers exercise independent purchasing decisions. The loss or delay of all or a substantial portion of our revenues to the U.S. Government would have a material adverse effect on our results of operations and cash flows. Approximately 98%, or $2.1 billion, of our revenues for the year ended December 31, 2011 were made directly or indirectly to U.S. Government agencies. Aggregate revenues from our five largest contracts amounted to approximately $572 million, or 26%, of our revenues for the year ended December 31, 2011.

In addition to contract cancellations and declines in agency budgets, our backlog and future financial results may be adversely affected by:

 

   

curtailment of the U.S. Government’s use of services providers, including curtailment due to government budget reductions and related fiscal matters; and

 

   

developments in Iraq or Afghanistan, or other geopolitical developments that affect demand for our services.

Finally, the government services marketplace is characterized by contracts of shorter duration as compared to large productions and systems integration programs. Services contracts may, including options, extend to ten or fifteen years, but most usually last five years or less.

A decline in or a redirection of the U.S. defense budget could result in a material decrease in our revenues, results of operations and cash flows.

Our government contracts and revenues are primarily correlated and dependent upon the U.S. defense budget which is subject to the congressional budget authorization and appropriations process. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress in future fiscal years. DoD budgets are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, changing national security and defense requirements, geo-political developments and actual fiscal year congressional appropriations for defense budgets. Any of these factors could result in a significant decline in, or redirection of, current and future DoD budgets and impact our future results of operations and cash flows.

 

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In August 2011, Congress enacted the Budget Control Act of 2011 (the “BCA”). The BCA immediately imposes spending caps that contain approximately $487 billion in reductions to the DoD base budgets over the next ten years (FY 2012 to FY 2021), compared to previously proposed DoD base budgets for the same fiscal years. An automatic sequestration process was also triggered by the BCA and becomes effective on January 3, 2013, unless modified by the enactment of new law. The sequestration process imposes additional cuts of approximately $50 billion per year to the currently proposed DoD budgets for each fiscal year beginning with FY 2013 through FY 2021.

On February 13, 2012, President Obama submitted his FY 2013 proposed budget (FY 2013 DoD Plan) to Congress. The FY 2013 DoD Plan complies with the first phase of the BCA imposed spending cuts. The FY 2013 DoD Plan reduces proposed DoD base budgets by $259 billion for FY 2013 to FY 2017, compared to the previously proposed DoD base budgets. The enacted DoD budget (base and Overseas Contingency Operations (OCO) for FY 2012 is 6% lower than the FY 2011 enacted budget. In addition, the FY 2013 DoD Plan projects a decline in the total DoD budget of 5% in FY 2013 and 6% in FY 2014, and a 2% increase in each year beginning in FY 2015 through FY 2017. The FY 2013 DoD Plan does not address or provide for the automatic sequestration process.

The declining DoD budgets will reduce funding for some of our revenue arrangements and generally will have a negative impact on our revenues, results of operations and cash flows. Additionally, the planned withdrawal of U.S. military forces from Afghanistan by the end of 2014 is expected to negatively impact our revenues related to supporting U.S. military operations in Afghanistan.

The DoD’s wide-ranging efficiencies initiative, which targets affordability and cost growth, could have a material effect on the procurement process and may adversely affect our existing contracts and the awards of new contracts.

The U.S. Government has issued guidance regarding changes to the procurement process that is intended to control cost growth throughout the acquisition cycle by developing a competitive strategy for each program. As a result, we expect to engage in more frequent negotiations and re-competitions on a cost or price analysis basis with every competitive bid in which we participate. This initiative is organized into five major areas: affordability and cost growth; productivity and innovation; competition; services acquisition; and processes and bureaucracy. Because this initiative has significantly changed the way the U.S. Government solicits, negotiates and manages its contracts, this initiative has resulted in a reduction in expenditures for services we provide to the U.S. Government. In addition, the FY 2013 DoD Plan seeks reductions in contractor support services and consolidation of enterprise IT systems as part of an effort to achieve another $60 billion of efficiency savings over the five fiscal years FY 2013 through FY 2017. These initiatives may adversely affect our existing contracts and awards of new contracts and our results of operations and cash flow.

There is intense competition for contracts in our industry and awards are frequently protested by unsuccessful bidders. Thus, we may not be able to win competitively awarded contracts and, when we win, such awards may still be delayed or cancelled, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may not be able to continue to win competitively awarded contracts. The markets in which our businesses operate are highly competitive and our government contracts are usually subject to competitive bidding. We expect increased competition because of the uncertainty of future U.S. defense budgets. Furthermore, the current competitive environment has resulted in an increase of bid protests from unsuccessful bidders, which typically extends the time until work on a contract can begin and, in some cases, can result in cancellation of the protested contract award. Additionally, some of our competitors are larger than we are and have more financial and other resources than we have. In addition, awarded contracts may not generate revenues sufficient to result in our overall profitability. We are also subject to risks associated with the substantial time, effort and experience required to prepare bids and proposals for competitively awarded contracts that may not be awarded to us.

 

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We believe the principal points of competition in our markets are price, performance, reliability and responsiveness, domain knowledge, and reputation. Maintaining and improving our competitive position will require continued investment by us in marketing, customer service and support. We may not be successful in maintaining our competitive position. Our competitors may develop more efficient or effective methods of providing services or may adapt more quickly than we do to evolving customer requirements. Additionally, increased competition could increase pricing pressures resulting in margin decline to stay competitive. Failure to continue competing successfully could adversely affect our business, financial condition, results of operations and cash flow.

Our indefinite delivery, indefinite quantity (IDIQ) contracts are not firm orders for services, and we may generate limited or no revenue from these contracts which could adversely affect our operating performance.

Revenues from IDIQ contracts were 81%, 80% and 78% of our revenues in 2011, 2010 and 2009, respectively. IDIQ contracts are typically awarded to multiple contractors and the award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under a multi-award IDIQ program, the customer develops requirements for task orders that are competitively bid against all of the contract awardees. However, many contracts also permit the government customer to direct work to a specific contractor. We may not win new task orders under these contracts for various reasons, including price, past performance and responsiveness, among others, which would have an adverse effect on our operating performance and may result in additional expenses and loss of revenue. There can be no assurance that our existing IDIQ contracts will result in actual revenue during any particular period or at all.

Our government contracts contain unfavorable termination provisions and are subject to audit and modification. If a termination right is exercised by the government, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Companies engaged primarily in supplying defense-related services to U.S. Government agencies are subject to certain industry specific risks including the ability of the U.S. Government to unilaterally:

 

   

terminate existing contracts;

 

   

reduce the value of existing contracts;

 

   

audit our contract-related costs and fees, including allocated indirect costs;

 

   

control and potentially prohibit the export of our services and associated products; and

 

   

suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations.

All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to perform under the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit on the work completed prior to termination. Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source and could damage our reputation, and impair our ability to compete for future contracts. Our contracts with foreign governments generally contain similar provisions relating to termination at the convenience of the customer.

U.S. Government agencies, including the Defense Contract Audit Agency (DCAA) and various agency Inspectors General, routinely audit and investigate our costs and performance on contracts, as well as our accounting and general business practices. Based on the results of such audits, the U.S. Government may reduce our contract related costs and fees, including allocated indirect costs. In addition, under U.S. Government purchasing regulations, some of our costs, including certain business acquisition costs, certain legal costs, most financing costs, and certain marketing expenses may not be reimbursable under U.S. Government contracts.

 

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Our results of operations and cash flows are substantially affected by our mix of cost-plus, time-and-material and fixed-price type contracts.

Our revenues are transacted using written revenue arrangements, or contracts, which are generally cost-plus, time-and-material, or fixed-price. For a description of our revenue recognition policies, see Note 2 to our audited combined financial statements included in this Information Statement.

The table below presents the percentage of our total revenues generated from each contract-type.

 

     Year Ended December 31,  
     2011     2010     2009  

Contract-Type

      

Cost-plus

     48     39     34

Time-and-material

     28     36     39

Fixed-price

     24     25     27
  

 

 

   

 

 

   

 

 

 

Total sales

     100     100     100
  

 

 

   

 

 

   

 

 

 

On a cost-plus type contract (revenue arrangement), we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by our customers. Cost-plus type contracts with award fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. The table below presents our revenues from cost-plus type contracts with award fees and the percentage of available performance-based award fees we achieved for the years ended December 31, 2011, 2010 and 2009.

 

     Year Ended December 31,  
     2011     2010     2009  
     (in millions)  

Revenue from cost-plus contracts with award fees

   $ 170      $ 267      $ 365   

Percentage of available performance-based award fees achieved

     96     89     95

On a time-and-material type contract (revenue arrangement), we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. Therefore, on cost-plus type and time-and-material type contracts we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts.

On a fixed-price type service contract (revenue arrangement), we agree to perform the contractual statement of work for a predetermined sales price. Although a fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased costs may reduce our profit or cause us to sustain losses on the contract.

If we are unable to attract and retain key management and personnel, we may become unable to operate our business effectively.

Our future success depends to a significant degree upon the continued contributions of our management, and our ability to attract and retain highly qualified management and technical personnel, including employees who have U.S. Government security clearances, particularly clearances of top-secret and above. We do not maintain any key person life insurance policies for members of our management. We face competition for management and technical personnel from other companies and organizations. Failure to attract and retain such personnel would damage our future prospects.

 

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Goodwill represents a significant asset on our balance sheet and may become impaired.

Goodwill represents the largest asset on our balance sheet, with an aggregate balance of $904 million at December 31, 2011. We review goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the accounting standards for goodwill. The annual impairment test requires us to determine the fair value of our reporting units in comparison to their carrying values. A decline in the estimated fair value of a reporting unit could result in a goodwill impairment, and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. As a result of a decline in their projected future cash flows, we recorded non-cash goodwill impairment charges of $77 million for the Linguist Operations & Technical Support (LOTS) reporting unit for the year ended December 31, 2011 and $172 million for LOTS and the Global Security & Engineering Solutions (GS&ES) reporting unit for the year ended December 31, 2010. The LOTS reporting unit is part of the Mission Support Services segment and the GS&ES reporting unit is part of the Professional Support Services segment. A decline in the estimated fair value of one or more of our reporting units could result in a material adverse affect on our financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

As a U.S. Government contractor, we are subject to a number of procurement regulations and could be adversely affected by changes in regulations or any negative findings from a U.S. Government audit or investigation.

U.S. Government contractors must comply with many significant procurement regulations and other requirements. These regulations and requirements, although customary in government contracts, increase our costs of compliance and, commensurately, the cost of performance. If any such regulations or procurement requirements change, our costs of complying with them could increase and reduce our margins.

We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and its agencies such as the DCAA and Defense Contract Management Agency. These agencies review our performance under our contracts, our cost structure, our incurred costs and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, billing systems, property management and control systems, cost estimating systems, compensation systems and management information systems. Any costs found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, or prohibition from doing business with the U.S. Government. Whether or not illegal activities are alleged, the U.S. Government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate or if it believes it is in the government’s best interests during the pendency of a dispute. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

We are also, from time to time, subject to U.S. Government investigations relating to our operations, and we are subject to or expected to perform in compliance with a vast array of federal laws and regulations, including but not limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, Cost Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the Foreign Corrupt Practices Act. An indictment of the Company 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 us being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. In addition, a conviction, or an administrative finding against us that rises to the requisite level of seriousness, could result in

 

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debarment from contracting with the U.S. Government for a specific term and could result in civil and/or criminal sanctions, as well as reductions of the value of contracts, contract modifications or termination and the assessment of penalties and fines, compensatory or treble damages, which could have a material adverse effect on our financial position, results of operations, or cash flows. We are also limited in our ability to provide information about our classified programs, their risks or any disputes or claims relating to these programs. Classified programs are subject to security restrictions and preclude the dissemination of information that is classified for national security purposes. As a result, investors have less insight into our classified programs than our other businesses and therefore less ability to fully evaluate the risks related to our classified business.

We are subject to the risks of current and future legal and regulatory proceedings, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects.

We are subject to potential liability relating to claims, complaints and proceedings as well as various laws, ordinances, regulations and other requirements of government authorities in foreign countries and in the United States, any violations of which could potentially create a substantial liability for us, and also could cause harm to our reputation. Changes in laws, ordinances, regulations or other government policies, the nature, timing, and effect of which are uncertain, may significantly increase our expenses and liabilities.

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. We may become subject to significant claims of which we are currently unaware, or the claims of which we are aware may result in our incurring a significantly greater liability than we anticipate or can estimate. Additionally, we may receive fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our business.

Misconduct, fraud or other improper activities by our employees, subcontractors, agents or business partners could also have a significant adverse impact on our business and reputation. Such misconduct could include the failure to comply with federal, state or local government procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to bribery of foreign government officials, import-export control, lobbying or similar activities, and any other applicable laws or regulations. Misconduct involving data security lapses resulting in the compromise of personal information or the improper use of our customer’s sensitive or classified information could result in remediation costs, regulatory sanctions against us and serious harm to our reputation. Other examples of potential misconduct include falsifying time or other records and violations of the Anti-Kickback Act. Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct and as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could subject us to fines and penalties, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely affect our business, our reputation and our future results.

Although we maintain insurance policies, these policies may not be adequate to protect us from all material judgments and expenses related to current or future claims and may not cover the conduct that is the subject of the litigation. Desired levels of insurance may not be available in the future at economical prices or at all. In addition, we believe that while we have valid defenses with respect to legal matters pending against us, the results of litigation can be difficult to predict, including those involving jury trials. Accordingly, our current judgment as to the likelihood of our loss (or our current estimate as to the potential range of loss, if applicable) with respect to any particular litigation matter may turn out to be wrong. A significant judgment against us, arising out of any of our current or future legal proceedings and litigation, could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects.

 

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We are subject to risks associated with operating internationally.

Our business operations are subject to a variety of risks associated with conducting business internationally, including:

   

Changes in or interpretations of foreign laws or policies that may adversely affect the performance of our services;

 

   

Political instability in foreign countries;

 

   

Imposition of inconsistent laws or regulations;

 

   

Conducting business in places where laws, business practices and customs are unfamiliar or unknown;

 

   

Imposition of limitations on or increase of withholding and other taxes on payments by foreign subsidiaries or joint ventures; and

 

   

Compliance with a variety of U.S. laws, including the U.S. Foreign Corrupt Practices Act and U.S. export control regulations, by us or subcontractors.

Any violation related to the foregoing could result in substantial fines, disgorgement, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management. Although such risks have not significantly impacted our business to date, we do not know the impact that these regulatory, geopolitical and other factors could have on our business in the future.

Our business could be negatively impacted by security threats and other disruptions.

As a U.S. defense contractor, we face various security threats, including cyber security attacks to our information technology infrastructure, attempts to gain access to our proprietary or classified information as well as threats to the physical security of our facilities and employees. Although we utilize various procedures and controls to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficient to prevent disruptions in mission critical systems, the unauthorized release of confidential information and corruption of data. Accordingly, any significant operational delays, or any destruction, manipulation or improper use of our data, information systems or networks could adversely affect our financial results and damage the reputation for our services.

Risks Relating to the Spin-Off

We face the following risks in connection with the spin-off:

We may be responsible for U.S. federal income tax liabilities that relate to the distribution.

L-3 received the IRS Ruling stating that L-3 and its shareholders will not recognize any taxable income, gain or loss for U.S. federal income tax purposes as a result of the spin-off, except to the extent of cash received in lieu of fractional shares. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the spin-off to receive tax-free treatment upon which the IRS will not rule. Receipt of the IRS Ruling and opinion of tax counsel will satisfy a condition to completion of the spin-off. The IRS Ruling, while generally binding upon the IRS, is based on certain factual statements and representations. If any such factual statements or representations are incomplete or untrue in any material respect, or if the facts on which the IRS Ruling is based are materially different from the facts at the time of the spin-off, the IRS could modify or revoke the IRS Ruling retroactively.

 

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As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling will be addressed in the opinion of tax counsel. An opinion of tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. Like the IRS Ruling, the opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter tax counsel’s conclusions.

L-3 is not aware of any facts or circumstances that would cause any such factual statements or representations in the IRS Ruling or the opinion of tax counsel to be incomplete or untrue or cause the facts on which the IRS Ruling is based, or the opinion will be based, to be materially different from the facts at the time of the spin-off. If, notwithstanding the receipt of the IRS ruling and the opinion of tax counsel, the IRS were to determine the spin-off to be taxable, L-3 would recognize a substantial tax liability.

Even if the spin-off otherwise qualifies as a tax-free transaction for U.S. Federal income tax purposes, the distribution will be taxable to L-3 (but not to L-3 shareholders) pursuant to Section 355(e) of the Code if there are one or more acquisitions (including issuances) of the stock of either us or L-3, representing 50% or more, measured by vote or value, of the then-outstanding stock of either corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any acquisition of our common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The resulting tax liability may have a material adverse effect on both our and L-3’s business, financial condition, results of operations or cash flows.

We will agree not to enter into any transaction that could cause any portion of the spin-off to be taxable to L-3, including under Section 355(e). Pursuant to the Tax Matters Agreement, we will also agree to indemnify L-3 for any tax liabilities resulting from such transactions, and L-3 will agree to indemnify us for any tax liabilities resulting from such transactions entered into by L-3. In addition, under U.S. Treasury regulations, each member of the L-3 consolidated group at the time of the spin-off (including us and our subsidiaries) would be severally liable for the resulting U.S. Federal income tax liability if all or a portion of the spin does not qualify as a tax-free transaction. These obligations may discourage, delay or prevent a change of control of our company. See “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.”

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution.

Our financial results previously were included within the consolidated results of L-3, and we believe that our financial reporting and internal controls were appropriate for those of subsidiaries of a public company. However, we were not directly subject to the reporting and other requirements of the Exchange Act. As a result of the distribution, we will be directly subject to reporting and other obligations under the Exchange Act. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2013, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm as to whether we maintained, in all material respects, effective internal control over financial reporting as of the last day of the year. These reporting and other obligations may place significant demands on our management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade

 

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our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our financial condition, results of operations or cash flows.

We do not have a recent operating history as an independent company and our historical financial information may not be a reliable indicator of our future results.

The historical financial information we have included in this Information Statement has been derived from L-3’s consolidated financial statements and does not necessarily reflect what our financial position, results of operations and cash flows would have been as a separate, stand-alone entity during the periods presented. L-3 did not account for us, and we were not operated, as a single stand-alone entity for the periods presented even if we represented an important business in L-3’s historical consolidated financial statements. In addition, the historical information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. For example, following the spin-off, changes will occur in our cost structure, funding and operations, including changes in our tax structure, increased costs associated with reduced economies of scale and increased costs associated with becoming a public, stand-alone company. While we have been profitable as part of L-3, we cannot assure you that as a stand-alone company our profits will continue at a similar level.

We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.

As an independent, publicly traded company, we believe that our business will benefit from, among other things, reduced regulatory constraints in the pursuit of business opportunities, the alignment of our cost structure with our business objectives and improved management incentive tools. However, by separating from L-3, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of L-3. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.

Our customers, prospective customers and suppliers will need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.

Some of our customers, prospective customers and suppliers will need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. If our customers, prospective customers or suppliers are not satisfied with our financial stability, it could have a material adverse effect on our ability to bid for and obtain or retain projects, our business, financial condition, results of operations and cash flows.

We expect to incur new indebtedness at or prior to consummation of the spin-off, and the degree to which we will be leveraged following completion of the spin-off may have a material adverse effect on our business, financial condition or results of operations.

We have historically relied upon L-3 for working capital requirements on a short-term basis and for other financial support functions. After the spin-off, we will not be able to rely on the earnings, assets or cash flow of L-3, and we will be responsible for servicing our own debt, and obtaining and maintaining sufficient working capital. In connection with the spin-off, we expect to incur borrowings of $345 million and distribute $335 million of the proceeds of such indebtedness to L-3. We expect to incur higher debt servicing costs on the new indebtedness than we would have incurred otherwise as a subsidiary of L-3 and/or not have access to other less expensive sources of capital from short-term debt markets.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred pursuant to the spin-off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are not able to repay or

 

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refinance our debt as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future for working capital, capital expenditures and general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired. The lenders who hold such debt could also accelerate amounts due, which could potentially trigger a default or acceleration of any of our other debt.

In addition, we may increase our debt or raise additional capital following the spin-off, subject to restrictions in our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms acceptable to us, if at all. If we incur additional debt or raise equity through the issuance of preferred stock, the terms of the debt or preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional equity, your percentage ownership in us would decline. If we are unable to raise additional capital when needed, it could affect our financial health, which could negatively affect your investment in us. Also, regardless of the terms of our debt or equity financing, the amount of our stock that we can issue may be limited because the issuance of our stock may cause the distribution to be a taxable event for L-3 under Section 355(e) of the Code, and under the Tax Matters Agreement, we could be required to indemnify L-3 for that tax. See “—We may be responsible for U.S. Federal income tax liabilities that relate to the distribution.”

We expect that the debt agreements that will be entered into in connection with the spin-off could impair our ability to finance our future operations and, if we are unable to meet any financial ratios therein, could cause our expected debt to be accelerated.

We expect that our debt agreements will contain a number of significant covenants that, among other things, will restrict our ability to:

 

   

sell assets;

 

   

incur more indebtedness;

 

   

repay certain indebtedness;

 

   

make certain investments or business acquisitions;

 

   

make certain capital expenditures;

 

   

engage in business mergers or consolidations; and

 

   

engage in certain transactions with subsidiaries and affiliates.

These restrictions could impair our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. In addition, certain of those debt agreements could also require us to maintain compliance with certain financial ratios, including those relating to earnings before interest, taxes, depreciation and amortization and consolidated indebtedness. Our ability to comply with these ratios and covenants may be affected by events beyond our control. A breach of any of those expected debt agreements or our inability to comply with the required financial ratios or covenants included therein could result in a default under those debt agreements. In the event of any such default, the lenders under those debt agreements could elect to:

 

   

declare all outstanding debt, accrued interest and fees to be due and immediately payable; and

 

   

require us to apply all of our available cash to repay our outstanding senior debt.

 

 

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The spin-off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.

The spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that the spin-off left L-3 insolvent or with unreasonably small capital or that L-3 intended or believed it would incur debts beyond its ability to pay such debts as they mature and that L-3 did not receive fair consideration or reasonably equivalent value in the spin-off. If a court were to agree with such a plaintiff, then such court could void the spin-off as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning our assets or your shares in our company to L-3, voiding our liens and claims against L-3, or providing L-3 with a claim for money damages against us in an amount equal to the difference between the consideration received by L-3 and the fair market value of our company at the time of the spin-off.

The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if either the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), or it is unlikely to be able to pay its liabilities as they become due. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that L-3 was solvent at the time of or after giving effect to the spin-off, including the distribution of our common stock.

Under the Distribution Agreement, from and after the spin-off, we will be responsible for the debts, liabilities and other obligations related to the business or businesses which we own and operate following the consummation of the spin-off. Although we do not expect to be liable for any of these or other obligations not expressly assumed by us pursuant to the Distribution Agreement, it is possible that we could be required to assume responsibility for certain obligations retained by L-3 should L-3 fail to pay or perform its retained obligations. See “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off—Distribution Agreement.”

We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off.

We expect that the agreements related to the spin-off, including the Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Transition Services Agreements and any other agreements, will be negotiated in the context of our separation from L-3 while we are still part of L-3. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements being negotiated in the context of our separation are related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among L-3 and us. We may have received better terms under the agreements related to the spin-off from third parties because third parties may have competed with each other to win our business. See “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off.”

We may incur greater costs as an independent company than we did when we were part of L-3.

As part of L-3, we could take advantage of L-3’s size and purchasing power in procuring certain goods and services such as insurance and health care benefits, and technology such as computer software licenses. We also rely on L-3 to provide various corporate functions. After the spin-off, as a separate, independent entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable to us as those we obtained prior to the distribution. We may also incur costs for functions previously performed by L-3 that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease.

 

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Risks Relating to Our Common Stock

You face the following risks in connection with ownership of our common stock:

There is no existing market for our common stock and we cannot be certain that an active trading market will develop or be sustained after the spin-off, and following the spin-off, our stock price may fluctuate significantly.

There currently is no public market for our common stock. We intend to list our common stock on the NYSE. See “Trading Market.” It is anticipated that before the distribution date for the spin-off, trading of shares of our common stock will begin on a “when-issued” basis and such trading will continue up to and including the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the spin-off or be sustained in the future. The lack of an active market may make it more difficult for you to sell our common stock and could lead to the price of our common stock being depressed or more volatile. We cannot predict the prices at which our common stock may trade after the spin-off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

   

the sale of our shares by some L-3 shareholders after the distribution because our business profile and market capitalization may not fit their investment objectives;

 

   

changes in DoD budget levels and procurement priorities;

 

   

actual or anticipated fluctuations in our operating results due to factors related to our business;

 

   

wins and losses on contract re-competitions and new business pursuits;

 

   

success or failure of our business strategy;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

our ability to obtain financing as needed;

 

   

announcements by us or our competitors of significant acquisitions or dispositions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the failure of securities analysts to cover our common stock after the spin-off;

 

   

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

   

the operating and stock price performance of other comparable companies;

 

   

investor perception of our company and the defense industry, including changing priorities or reductions in the U.S. Government defense budget;

 

   

the availability of government funding and changes in customer requirements for our products and services;

 

   

natural or environmental disasters that investors believe may affect us;

 

   

overall market fluctuations;

 

   

fluctuations in the budget of federal, state and local governmental entities around the world;

 

   

results from any material litigation or government investigation;

 

   

changes in laws and regulations affecting our business; and

 

   

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

 

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Substantial sales of our common stock may occur in connection with the spin-off, which could cause the price of our common stock to decline.

The shares of our common stock that L-3 distributes to its shareholders generally may be sold immediately in the public market. It is possible that some L-3 shareholders, which could include some of our larger shareholders, will sell our common stock received in the distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or—in the case of index funds—we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock or the perception in the market that this will occur may reduce the market price of our common stock.

We do not plan to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock in the future.

We do not currently plan to pay a regular dividend on our common stock following the spin-off. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences applicable law and such other factors as our Board of Directors may deem relevant. See “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. There can also be no assurance that the combined annual dividends on L-3 common stock and our common stock after the spin-off, if any, will be equal to the annual dividends on L-3 common stock prior to the spin-off.

Additionally, indebtedness that we expect to incur in connection with the spin-off could have important consequences for holders of our common stock. If we cannot generate sufficient cash flow from operations to meet our debt-payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to attempt to restructure or refinance our debt, raise additional capital or take other actions such as selling assets, reducing or delaying capital expenditures or reducing our dividend. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our new debt or our other credit and contractual arrangements. In addition, the terms of the agreements governing new debt that we expect to incur at or prior to the spin-off or that we may incur in the future may limit the payment of dividends.

Anti-takeover provisions in our organizational documents and Delaware law could delay or prevent a change in control.

Prior to completion of the spin-off, we will adopt the amended and restated certificate of incorporation and the amended and restated bylaws. Certain provisions of the amended and restated certificate of incorporation and the amended and restated bylaws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example, the amended and restated certificate of incorporation and the amended and restated bylaws, among other things, provide for a classified board and require advance notice for shareholder proposals and nominations. In addition, the amended and restated certificate of incorporation authorizes our Board of Directors to issue one or more series of preferred stock. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Delaware law also imposes some restrictions on mergers and sales or other dispositions of 10% or more of the assets of the corporation with or to an interested shareholder. See “Description of Capital Stock.”

 

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Under the Tax Matters Agreement, we will agree not to enter into any transaction involving an acquisition (including issuance) of Engility common stock or any other transaction (or, to the extent we have the right to prohibit it, to permit any such transaction) that could cause the distribution to be taxable to L-3. We will also agree to indemnify L-3 for any tax resulting from any such transactions. Generally, L-3 will recognize taxable gain on the distribution if there are one or more acquisitions (including issuances) of our capital stock, directly or indirectly, representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and the acquisitions or issuances are deemed to be part of a plan or series of related transactions that include the distribution. Any such shares of our common stock acquired, directly or indirectly, within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) will generally be presumed to be part of such a plan unless that presumption is rebutted. As a result, our obligations may discourage, delay or prevent a change of control of our company.

 

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this Information Statement, including in the sections entitled “Summary,” “Risk Factors,” “Questions and Answers About the Spin-Off,” “The Spin-Off,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, benefits resulting from our separation from L-3, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “might,” “should,” “could” or the negative of these terms or similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this Information Statement. We do not have any intention or obligation to update forward-looking statements after we distribute this Information Statement.

The risk factors discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.

 

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THE SPIN-OFF

Background

On July 12, 2011, the Board of Directors of L-3 approved a plan to spin-off Engility from L-3, following which Engility will be an independent, publicly traded company. As part of the spin-off, L-3 will effect an internal reorganization in order to properly align the appropriate businesses within Engility, which we refer to as the “internal reorganization.”

To complete the spin-off, L-3 will, following the internal reorganization, distribute to its shareholders all of the outstanding shares of our common stock. The distribution will occur on the distribution date, which is expected to be July 17, 2012. Each holder of L-3 common stock will receive one share of our common stock for every six shares of L-3 common stock held on July 16, 2012, the record date. After completion of the spin-off:

 

   

we will be an independent, publicly traded company (NYSE: EGL), and will own and operate the Systems Engineering and Technical Assistance (SETA) and training and operational support services businesses that are currently part of L-3’s Government Services segment; and

 

   

L-3 will continue to be an independent, publicly traded company (NYSE: LLL) and continue to own and operate its C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems; Aircraft Modernization and Maintenance; Electronic Systems; and National Security Solutions businesses.

Each holder of L-3 common stock will continue to hold his, her or its shares in L-3. No vote of L-3’s shareholders is required or is being sought in connection with the spin-off, and L-3’s shareholders will not have any appraisal rights in connection with the spin-off, including the internal reorganization.

The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not then in the best interests of L-3 or its shareholders, that a sale or other alternative is in the best interests of L-3 or its shareholders or that it is not advisable for us to separate from L-3 at that time. See “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

L-3’s Board of Directors has determined that the spin-off is in the best interests of L-3 and its shareholders because the spin-off will provide the following key benefits:

 

   

Reduce Regulatory Constraints in the Pursuit of Business Opportunities. Under the organizational conflicts of interest (“OCI”) regulations, when a company has provided SETA services for a particular U.S. Government program, it may be prohibited from selling products to the U.S. Government under the same program. The spin-off will allow Engility to expand the addressable market for its Professional Support Services businesses that were previously constrained by OCI regulations.

 

   

Align Cost Structure with Business Objectives. Critical to winning share in our addressable markets will be our ability to develop and maintain a streamlined operating structure. As a pure SETA and support services business, Engility will be able to reduce overhead and better direct its selling, general and administrative expenses structure and capital investments to position it to capture market share.

 

   

Improved Management Incentive Tools. As an independent company, Engility will be able to better structure and incentivize its current and future employees through direct participation in the performance of the company through new equity compensation plans.

Manner of Effecting the Spin-Off

The general terms and conditions relating to the spin-off will be set forth in a Distribution Agreement among us and L-3.

 

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Internal Reorganization

As part of the spin-off, L-3 will undergo an internal reorganization that will, among other things and subject to limited exceptions: (i) allocate and transfer to Engility and its subsidiaries those assets, and allocate and assign responsibility for those liabilities, in respect of the activities of the applicable businesses of such entities and (ii) allocate, transfer and assign, as applicable, those assets and liabilities in respect of other current and former businesses and activities of L-3 and its current and former subsidiaries.

The diagram below shows the structure of L-3’s government services businesses, simplified for illustrative purposes only, prior to the internal reorganization and distribution:

 

LOGO

The internal reorganization will be effected by a series of actions, including the following:

 

   

Engility Corporation, a wholly-owned indirect subsidiary of L-3, will raise approximately $345 million of indebtedness and distribute $335 million of the proceeds of such indebtedness to L-3 Communications Corporation, a wholly-owned subsidiary of L-3. See “Description of Material Indebtedness”;

 

   

Engility Corporation will distribute all of the issued and outstanding shares of L-3 Domestic Holdings, Inc. to L-3 Communications Corporation;

 

   

L-3 Communications Corporation will contribute all of the issued and outstanding shares of Engility Corporation and International Resources Group Ltd., an indirect wholly-owned subsidiary of L-3, to Engility Holdings, Inc.;

 

   

Engility Holdings, Inc. will contribute all of the issued and outstanding shares of International Resources Group Ltd., to Engility Corporation;

 

   

L-3 Communications Corporation will distribute all of the issued and outstanding shares of Engility Holdings, Inc. to L-3.

 

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To complete the spin-off, L-3 will, following the internal reorganization, distribute to its shareholders all of the outstanding shares of Engility common stock. On the distribution date, Engility Services Inc., a wholly-owned indirect subsidiary of Engility, will merge with Engility Corporation, with Engility Corporation being the surviving corporation.

Distribution of Shares of Our Common Stock

Under the Distribution Agreement, the distribution will be effective as of 5:00 p.m., New York time, on July 17, 2012, the distribution date. As a result of the spin-off, on the distribution date, each holder of L-3 common stock will receive one share of our common stock for every six shares of L-3 common stock that he, she or it owns as of July 16, 2012, the record date.

The diagram below shows the structure of Engility, simplified for illustrative purposes only, after completion of the spin-off:

LOGO

On the distribution date, L-3 will release the shares of our common stock to our distribution agent to distribute to L-3 shareholders. For most of these L-3 shareholders, our distribution agent will credit their shares of our common stock to book-entry accounts established to hold their shares of our common stock. Our distribution agent will send these shareholders, including any L-3 shareholder that holds physical share certificates of L-3 common stock and is the registered holder of such shares of L-3 common stock represented by those certificates on the record date, a statement reflecting their ownership of our common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are used. For shareholders who own L-3 common stock through a broker or other nominee, their shares of our common stock will be credited to these shareholders’ accounts by the broker or other nominee. It may take the distribution agent up to two weeks to issue shares of our common stock to L-3 shareholders or their bank or brokerage firm electronically by way of direct registration in book-entry form. Trading of our stock will not be affected by this delay in issuance by the distribution agent. As further discussed below, we will not issue fractional shares of our common stock in the distribution. Following the spin-off, shareholders whose shares are held in book-entry form may request that their shares of our common stock be transferred to a brokerage or other account at any time.

 

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L-3 shareholders will not be required to make any payment or surrender or exchange their shares of L-3 common stock or take any other action to receive their shares of our common stock. No vote of L-3 shareholders is required or sought in connection with the spin-off, including the internal reorganization, and L-3 shareholders have no appraisal rights in connection with the spin-off.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to L-3 shareholders. Instead, as soon as practicable on or after the distribution date, the distribution agent will aggregate fractional shares of our common stock to which L-3 shareholders of record would otherwise be entitled into whole shares, sell them in the open market at the prevailing market prices and then distribute the aggregate sale proceeds ratably to L-3 shareholders who would otherwise have been entitled to receive fractional shares of our common stock. The amount of this payment will depend on the prices at which the distribution agent sells the aggregated fractional shares of our common stock in the open market shortly after the distribution date. We will be responsible for any payment of brokerage fees. The amount of these brokerage fees is not expected to be material to us. The receipt of cash in lieu of fractional shares of our common stock will generally result in a taxable gain or loss to the recipient shareholder. Each shareholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to the shareholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “—U.S. Federal Income Tax Consequences of the Spin-Off.”

U.S. Federal Income Tax Consequences of the Spin-Off

The following is a summary of certain U.S. Federal income tax consequences of the spin-off. This summary is based on the Code, the U.S. Treasury regulations promulgated thereunder, and interpretations of the Code and the U.S. Treasury regulations by the courts and the IRS, in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary does not address the consequences to L-3 shareholders subject to special treatment under the U.S. Federal income tax laws (including, for example, non-U.S. persons, insurance companies, dealers or brokers in securities or currencies, tax-exempt organizations, financial institutions, pass-through entities and investors in such entities, holders who have a functional currency other than the U.S. dollar, holders who hold their shares as a hedge or as part of a hedging, straddle, conversion, synthetic security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation).

L-3 SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE SPIN-OFF TO THEM, INCLUDING THE EFFECT OF ANY STATE, LOCAL OR NON-U.S. TAX LAWS OR U.S. TAX LAWS OTHER THAN THOSE RELATING TO INCOME TAXES AND OF CHANGES IN APPLICABLE TAX LAWS.

As a condition to the spin-off, L-3 received the IRS Ruling substantially to the effect that, among other things, the distribution of our common stock, together with certain related transactions, will qualify under Section 355 of the Code as a tax-free spin-off to the holders of L-3 common stock, except to the extent of cash received in lieu of fractional shares and will be tax-free to L-3. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to receive tax-free treatment under Section 355 of the Code upon which the IRS will not rule. Assuming the distribution qualifies under Section 355 of the Code as tax-free:

 

   

no gain or loss will be recognized by, and no amount will be included in the income of, holders of L-3 common stock upon their receipt of shares of our common stock in the distribution;

 

   

the basis of L-3 common stock immediately before the distribution will be allocated between the L-3 common stock and our common stock received in the distribution, in proportion with relative fair market values at the time of the distribution;

 

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the holding period of our common stock received by each L-3 shareholder will include the period during which the shareholder held the L-3 common stock on which the distribution is made, provided that the L-3 common stock is held as a capital asset on the distribution date; 

 

   

any cash received in lieu of fractional share interests in our common stock will give rise to taxable gain or loss equal to the difference between the amount of cash received and the tax basis allocable to the fractional share interests, determined as described above, and such gain will be capital gain or loss if the L-3 common stock on which the distribution is made is held as a capital asset on the distribution date; and

 

   

no gain or loss will be recognized by L-3 upon the distribution of our common stock.

U.S. Treasury regulations require certain shareholders that receive stock in a spin-off to attach to their respective U.S. Federal income tax returns, for the year in which the spin-off occurs, a detailed statement setting forth certain information relating to the spin-off. Shortly after the distribution, L-3 will provide shareholders who receive our common stock in the distribution with the information necessary to comply with that requirement, as well as information to help shareholders allocate their stock basis between their L-3 common stock and the Engility common stock.

The IRS Ruling is, and the opinion of tax counsel will be, conditioned on the truthfulness and completeness of certain factual statements and representations provided by L-3 and us. If those factual statements and representations are incomplete or untrue in any material respect, the IRS Ruling could become inoperative and tax counsel’s conclusions may be altered. L-3 and we have reviewed the statements of fact and representations on which the IRS Ruling is, and the opinion of tax counsel will be, based, and neither L-3 nor we are aware of any facts or circumstances that would cause any of the statements of fact or representations to be incomplete or untrue. Each of L-3 and us have agreed to some restrictions on our future actions to provide further assurance that the distribution will qualify as a tax-free distribution under Section 355 of the Code.

As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling will be addressed in the opinion of tax counsel. An opinion of tax counsel is not binding on the IRS. Accordingly, on audit the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion.

If the distribution does not qualify under Section 355 of the Code, each holder of L-3 common stock receiving our common stock in the distribution would be treated as receiving a taxable distribution in an amount equal to the fair market value of our common stock received, which would result in:

 

   

a taxable dividend to the extent of the shareholder’s pro rata share of L-3’s current and accumulated earnings and profits;

 

   

a reduction in the shareholder’s basis in L-3 common stock to the extent the amount received exceeds such shareholder’s share of earnings and profits;

 

   

taxable gain from the exchange of L-3 common stock to the extent the amount received exceeds both the shareholder’s share of earnings and profits and the shareholder’s basis in L-3 common stock; and

 

   

basis in our stock equal to its fair market value on the date of the distribution.

Under certain circumstances L-3 would recognize taxable gain on the distribution. These circumstances would include the following:

 

   

the distribution does not qualify as tax-free under Section 355 of the Code; and

 

   

there are one or more acquisitions (including issuances) of either our stock or the stock of L-3, representing 50% or more, measured by vote or value, of the then-outstanding stock of that corporation, and the acquisition or acquisitions are deemed to be part of a plan or series of related

 

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transactions that include the distribution. Any such acquisition of our stock or the stock of L-3 within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted.

The amount of such gain would result in a significant federal income tax liability to L-3.

We will agree to indemnify L-3 for any tax liabilities of L-3 resulting from the distribution under certain circumstances. Our obligation to indemnify L-3 may discourage, delay or prevent a change of control of our company. In addition, under U.S. Treasury regulations, each member of the L-3 consolidated tax return group at the time of the spin-off (including us and our subsidiaries) would be severally liable to the IRS for such tax liability. The resulting tax liability may have a material adverse effect on both our and L-3’s business, financial condition, results of operations or cash flows.

The preceding summary of certain anticipated U.S. Federal income tax consequences of the spin-off is for general informational purposes only. L-3 shareholders should consult their own tax advisors as to the specific tax consequences of the spin-off to them, including the application and effect of state, local or non-U.S. tax laws and of changes in applicable tax laws.

Results of the Spin-Off

After the spin-off, we will be an independent, publicly traded company. Immediately following the spin-off, we expect to have approximately 355 record holders of shares of our common stock and approximately 16 million shares of our common stock outstanding, based on the number of shareholders and outstanding shares of L-3 common stock on June 1, 2012. The figures exclude shares of L-3 common stock held directly or indirectly by L-3, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any exercise of outstanding options, repurchases of shares of L-3 common stock, and issuances of shares of L-3 common stock in respect of employer or employee contributions under L-3’s benefit plans between the date the L-3 Board of Directors declares the dividend for the distribution and the record date for the distribution.

For information regarding options to purchase shares of our common stock that will be outstanding after the distribution, see “Capitalization,” “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off—Employee Matters Agreement” and “Management.”

Before the spin-off, we will enter into several agreements with L-3 to effect the spin-off and provide a framework for our relationship with L-3 after the spin-off. These agreements will govern the relationship between us and L-3 after completion of the spin-off and provide for the allocation between us and L-3 of L-3’s assets, liabilities, rights and obligations. See “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off.”

Trading Prior to the Distribution Date

It is anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be a “when-issued” market in our common stock. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for shares of our common stock that will be distributed to L-3 shareholders on the distribution date. Any L-3 shareholder who owns shares of L-3 common stock at the close of business on the record date will be entitled to shares of our common stock distributed in the spin-off. L-3 shareholders may trade this entitlement to shares of our common stock, without the shares of L-3 common stock they own, on the when-issued market. On the first trading day following the distribution date, we expect when-issued trading with respect to our common stock will end and “regular-way” trading will begin. See “Trading Market.”

Following the distribution date, we expect shares of our common stock to be listed on the NYSE under the ticker symbol “EGL”. We will announce the when-issued ticker symbol when and if it becomes available.

 

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It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in L-3 common stock: a “regular-way” market and an “ex-distribution” market. Shares of L-3 common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if shares of L-3 common stock are sold in the regular-way market up to and including the distribution date, the selling shareholder’s right to receive shares of our common stock in the distribution will be sold as well. However, if L-3 shareholders own shares of L-3 common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including the distribution date, the selling shareholders will still receive the shares of our common stock that they would otherwise receive pursuant to the distribution. See “Trading Market.”

Incurrence of Debt

It is anticipated that, prior to the completion of the spin-off, we will incur indebtedness in an amount estimated at $345 million and distribute $335 million of the proceeds of such indebtedness to L-3. The distribution to L-3 will provide L-3 with funds to partially offset the loss of future cash flows it would have realized from us if not for the spin-off transaction. The amount of pre-spin debt to be incurred by us will be based on our judgment as to the proper capital structure and leverage for us as a stand-alone entity. See “Description of Material Indebtedness.”

Conditions to the Spin-Off

We expect that the spin-off will be effective as of 5:00 p.m., New York time, on July 17, 2012, the distribution date, provided that the following conditions shall have been satisfied or waived by L-3:

 

   

our Registration Statement on Form 10, of which this Information Statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this Information Statement shall have been mailed to the L-3 shareholders;

 

   

Engility common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;

 

   

L-3 shall have obtained an opinion from its tax counsel, in form and substance satisfactory to L-3, as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to qualify as a reorganization under Section 355 of the Code upon which the IRS will not rule;

 

   

L-3 shall have obtained a private letter ruling from the Internal Revenue Service, in form and substance satisfactory to L-3, and such ruling shall remain in effect as of the distribution date, to the effect, among other things, that the distribution, together with certain related transactions, will qualify as a reorganization under Section 355 of the Code;

 

   

Prior to the distribution date, L-3’s Board of Directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to L-3, with respect to the capital adequacy and solvency of Engility;

 

   

all regulatory approvals and other consents necessary to consummate the distribution shall have been received;

 

   

no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the distribution shall be pending, threatened, issued or in effect, and no other event outside the control of L-3 shall have occurred or failed to occur that prevents the consummation of all or any portion of the distribution;

 

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no other events or developments shall have occurred or failed to occur that, in the judgment of the Board of Directors of L-3, would result in the distribution having a material adverse effect on L-3 or its shareholders;

 

   

the financing transactions described in this Information Statement as having occurred prior to the distribution shall have been consummated on or prior to the distribution;

 

   

the internal reorganization shall have been completed, except for such steps as L-3 in its sole discretion shall have determined may be completed after the distribution date;

 

   

L-3 shall have taken all necessary action, in the judgment of the Board of Directors of L-3, to cause the Board of Directors of Engility to consist of the individuals identified in this Information Statement as directors of Engility;

 

   

all necessary actions shall have been taken to adopt the form of amended and restated certificate of incorporation and amended and restated bylaws filed by Engility with the SEC as exhibits to the Registration Statement on Form 10, of which this Information Statement forms a part;

 

   

the Board of Directors of L-3 shall have approved the distribution, which approval may be given or withheld at its absolute and sole discretion; and

 

   

each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreements and the other ancillary agreements shall have been executed by each party.

The fulfillment of the foregoing conditions will not create any obligation on L-3’s part to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, the receipt of a private letter ruling from the Internal Revenue Service, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10 by the SEC, in connection with the distribution. L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not then in the best interests of L-3 or its shareholders or other constituents, that a sale or other alternative is in the best interests of L-3 or its shareholders or other constituents or that it is not advisable for Engility to separate from L-3 at that time.

Reason for Furnishing this Information Statement

This Information Statement is being furnished solely to provide information to L-3’s shareholders that are entitled to receive shares of our common stock in the spin-off. This Information Statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe that the information in this Information Statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither L-3 nor we undertake any obligation to update the information except in the normal course of our respective public disclosure obligations.

 

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TRADING MARKET

Market for Our Common Stock

There has been no public market for our common stock. An active trading market may not develop or may not be sustained. We anticipate that trading of our common stock will commence on a “when-issued” basis at least two trading days prior to the record date and continue through the distribution date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within four trading days after the distribution date. If you own shares of L-3 common stock at the close of business on the record date, you will be entitled to shares of our common stock distributed pursuant to the spin-off. You may trade this entitlement to shares of our common stock, without the shares of L-3 common stock you own, on the when-issued market. On the first trading day following the distribution date, any when-issued trading with respect to our common stock will end and “regular-way” trading will begin. We intend to list our common stock on the NYSE under the ticker symbol “EGL”. We will announce our when-issued trading symbol when and if it becomes available.

It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in L-3 common stock: a “regular-way” market and an “ex-distribution” market. Shares of L-3 common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of L-3 common stock in the regular-way market up to and including the distribution date, you will be selling your right to receive shares of our common stock in the distribution. However, if you own shares of L-3 common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including the distribution date, you will still receive the shares of our common stock that you would otherwise receive pursuant to the distribution.

We cannot predict the prices at which our common stock may trade before the spin-off on a “when-issued” basis or after the spin-off. Those prices will be determined by the marketplace. Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be influenced by many factors, including anticipated or actual fluctuations in our operating results or those of other companies in our industry, investor perception of our company and the water technology industry, market fluctuations and general economic conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock. See “Risk Factors—Risks Relating to Our Common Stock.”

Transferability of Shares of Our Common Stock

On March 30, 2012, L-3 had 98,190,977 shares of its common stock issued and outstanding. Based on this number, we expect that upon completion of the spin-off, we will have approximately 16 million shares of common stock issued and outstanding. The shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us, and may include certain of our officers and directors. As of the distribution date, we estimate that our directors and officers will beneficially own less than one percent of our shares. In addition, individuals who are affiliates of L-3 on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:

 

   

under a registration statement that the SEC has declared effective under the Securities Act; or

 

   

under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

 

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In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 90 days after the date that the registration statement of which this Information Statement is a part is declared effective, a number of shares of our common stock that does not exceed the greater of:

 

   

1.0% of our common stock then outstanding; or

 

   

the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.

In the future, we may adopt new stock option and other equity-based compensation plans and issue options to purchase shares of our common stock and other stock-based awards. We currently expect to file a registration statement under the Securities Act to register shares to be issued under these stock plans. Shares issued pursuant to awards after the effective date of the registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.

Except for our common stock distributed in the distribution and employee-based equity awards, none of our equity securities will be outstanding immediately after the spin-off and there are no registration rights agreements existing with respect to our common stock.

 

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DIVIDEND POLICY

We do not currently plan to pay a regular dividend on our common stock following the spin-off. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences applicable law and such other factors as our Board of Directors may deem relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit the payments of dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. There can also be no assurance that the combined annual dividends on L-3 common stock and our common stock after the spin-off, if any, will be equal to the annual dividends on L-3 common stock prior to the spin-off.

 

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CAPITALIZATION

The following table presents Engility’s historical capitalization at March 30, 2012 and our pro forma capitalization at that date reflecting the spin-off and the related transactions and events described in the notes to our unaudited pro forma condensed combined balance sheet as if the spin-off and the related transactions and events, including our financing transaction, had occurred on March 30, 2012. The capitalization table below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Engility’s historical combined financial statements, our unaudited pro forma condensed combined financial statements and the notes to those financial statements included elsewhere in this Information Statement.

We are providing the capitalization table below for informational purposes only. It should not be construed to be indicative of our capitalization or financial condition had the spin-off and the related transactions and events been completed on the date assumed. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operated as a separate, independent entity at that date and is not necessarily indicative of our future capitalization or financial condition.

 

     As of March 30, 2012  
     Historical      Pro Forma  
(in millions)              

Cash and cash equivalents(1)

   $ 11         11   
  

 

 

    

 

 

 

Capitalization:

     

Liabilities

     

Revolving credit facility

   $ —         $ 10   

Term loan facility

     —           335   
  

 

 

    

 

 

 

Total debt

   $ —         $ 345   
  

 

 

    

 

 

 

Equity

     

Common stock ($0.01 par value)

   $ —         $ —     

Additional paid in capital

     —           690   

Parent company investment(1)

     1,099         —     

Noncontrolling interest

     11         11   
  

 

 

    

 

 

 

Total equity

   $ 1,110       $ 701   
  

 

 

    

 

 

 

Total capitalization

   $ 1,110       $ 1,046   
  

 

 

    

 

 

 

 

(1) Historically, cash received by us has been transferred to L-3, and L-3 has funded our disbursement accounts on an as-needed basis. The net effect of transfers of cash to and from the L-3 cash management accounts are reflected in parent company investment in the combined balance sheets.

 

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SELECTED HISTORICAL CONDENSED COMBINED FINANCIAL AND OTHER DATA

The following table presents the selected historical condensed combined financial data for Engility. The condensed combined statement of operations data for each of the years in the three-year period ended December 31, 2011 and the condensed combined balance sheet data as of December 31, 2011 and 2010 set forth below are derived from Engility’s audited combined financial statements included in this Information Statement. The condensed combined statement of operations data for the quarterly periods ended March 30, 2012 and April 1, 2011 and the condensed combined balance sheet data as of March 30, 2012 are derived from Engility’s unaudited condensed combined financial statements included elsewhere in this Information Statement. The condensed combined balance sheet data as of December 31, 2009 is derived from Engility’s audited combined financial statements and the condensed combined balance sheet data as of April 1, 2011 are derived from Engility’s unaudited condensed combined financial statements that are not included in this Information Statement. The condensed combined statement of operations data for the years ended December 31, 2008 and 2007 and the condensed combined balance sheet data as of December 31, 2008 and 2007 are derived from Engility’s unaudited combined financial statements that are not included in this Information Statement. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and in the opinion of our management, include all adjustments necessary for a fair presentation of the information set forth herein.

The selected historical condensed combined financial data presented below should be read in conjunction with Engility’s combined financial statements and accompanying notes and “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information Statement. Engility’s condensed combined financial data may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off. See “Unaudited Pro Forma Condensed Combined Financial Statements” for a further description of the anticipated changes.

 

     As of and for the
quarter ended
     As of and for the year ended December 31,  
(in millions)    March  30,
2012(1)
    April  1,
2011(1)
     2011(1)     2010(1)     2009(1)      2008(1)      2007(1)  

Statement of Operations Data

                 

Revenues

   $ 449      $ 591       $ 2,180      $ 2,521      $ 2,658       $ 2,882       $ 2,958   

Cost of revenues, including selling, general and administrative expenses

     423 (2)      544         2,005 (2)      2,280        2,403         2,608         2,692   

Goodwill impairment

     —          —           77 (3)      172 (4)      —           —           —     

Operating income

     26        47         98        69        255         274         266   

Income before income taxes

     26        47         98        68        255         276         270   

Provision for income taxes

     11        18         69        75        102         108         104   

Net income (loss)

     15        29         29        (7     153         168         166   

Net income (loss) attributable to Engility

     14        28         26        (9     152         168         166   

Balance Sheet Data

                 

Working capital

   $ 208      $ 228       $ 187      $ 220      $ 259       $ 259       $ 270   

Goodwill

     904        981         904        981        1,153         1,148         1,109   

Total assets

     1,511        1,668         1,503        1,666        1,858         1,979         1,995   

Long-term debt

     —          —           —          —          —           —           —     

Total equity

     1,110        1,228         1,093        1,227        1,422         1,501         1,508   

 

(1) Our results of operations presented within this Information Statement and within this table include the global security solutions business, which has been historically managed by us but will be transferred to L-3 in connection with the spin-off. The following table presents select statement of operations data for the global security solutions business.

 

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     For the quarter ended      For the year ended December 31,  
(in millions)    March 30,
2012
     April 1,
2011
     2011      2010      2009      2008      2007  

Revenues

   $ 18       $ 28       $ 109       $ 147       $ 96       $ 137       $ 93   

Operating (loss) income

     (1      —           2         (2      (9      —           (4

 

(2) Cost of revenues include $6 million and $9 million of transaction expenses recorded in connection with the spin-off for the quarter ended March 30, 2012 and the year ended December 31, 2011, respectively.

 

(3) The year ended December 31, 2011 includes a non-cash goodwill impairment charge of $77 million ($77 million after income taxes) due to a decline in the estimated fair value of our LOTS reporting unit.

 

(4) The year ended December 31, 2010 includes non-cash goodwill impairment charges amounting to $172 million ($154 million after income taxes) due to a decline in the estimated fair values of our GS&ES and LOTS reporting units.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements consist of the unaudited pro forma condensed combined statement of operations for the quarter ended March 30, 2012 and the year ended December 31, 2011, and an unaudited pro forma condensed combined balance sheet as of March 30, 2012, which have been derived from our historical combined financial statements which are included in this Information Statement.

The following unaudited pro forma condensed combined financial statements give effect to the spin-off of our businesses from L-3, including: (1) the distribution of approximately 16 million shares of Engility common stock by L-3 to its shareholders, (2) the incurrence of indebtedness of $345 million, (3) a $335 million distribution to L-3, (4) the transfer of the global security solutions business unit to L-3, (5) the transactions contemplated by the Distribution Agreement and related separation agreements, and (6) an estimated tax rate of 38.3% based on the blended federal and state statutory income tax rates. The unaudited pro forma condensed combined statement of operations data presented for the quarter ended March 30, 2012 and year ended December 31, 2011 assumes the spin-off and related transactions occurred on January 1, 2011. The unaudited pro forma condensed combined balance sheet assumes the spin-off and related transactions occurred on March 30, 2012. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to our separation from L-3, and for purposes of the statements of operations, are expected to have a continuing impact on us.

Our historical combined statements of operations include costs allocated to us by L-3 for corporate functions performed on our behalf such as treasury, tax, accounting, legal, internal audit, human resources, investor relations, procurement and corporate governance activities. We may incur certain incremental costs as a stand-alone public company as compared to the costs historically allocated to us by L-3, but we expect that the costs required for us to operate Engility as a stand-alone public company will approximate the amount allocated to us by L-3. In addition, L-3 has incurred approximately $6 million ($4 million after income taxes) and $9 million ($7 million after income taxes) of non-recurring transaction and separation costs for the quarter ended March 30, 2012 and the year ended December 31, 2011, respectively, primarily for audit, accounting, tax, investment banking and legal services. We have adjusted the accompanying unaudited pro forma condensed combined statement of operations to remove these costs because they are not expected to have a continuing impact on our operating results. L-3 expects to incur approximately an additional $23 million ($16 million after income taxes) of these non-recurring separation costs through the date of separation of which we expect to pay $15 million. We also expect to spend approximately $30 million to $40 million on separation costs, of which, approximately $22 million ($16 million after taxes) is expected to be included in our statement of operations within 12 months after we separate from L-3. These costs primarily relate to:

 

   

Streamlining our information technology environment;

 

   

Setting up our shared services center;

 

   

Severance costs;

 

   

Outside legal, accounting, consulting and similar costs;

 

   

Recruiting and relocation costs associated with hiring new key senior management personnel; and

 

   

Establishing our new brand in the marketplace.

We have not recorded pro forma adjustments to the accompanying unaudited pro forma condensed combined statement of operations for these additional non-recurring separation costs because they are not expected to have a continuing impact on our operating results. Furthermore, due to the scope and complexity of these activities, the amount we ultimately spend could increase or decrease materially and the timing of these expenditures could change.

 

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The unaudited pro forma condensed combined financial statements should be read in conjunction with our audited combined financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information Statement. The unaudited pro forma condensed combined financial statements are provided for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the spin-off and related transactions been completed on the dates assumed. The unaudited pro forma condensed combined financial statements also may not be indicative of our future results of operations or financial position as an independent, publicly-traded company.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

QUARTER ENDED MARCH 30, 2012

 

     Historical      Financing
Adjustments
    Transfer
Global
Security
Solutions
Business
to L-3(1)
    Other
Pro forma
Adjustments(3)
    Pro forma  
     (In millions, except per share amounts)  

Revenues

   $ 449       $      $ (18   $      $ 431   

Costs and expenses, including selling, general and administrative expenses

     423                (19     (6     398   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     26                1        6        33   

Interest expense

             6 (2)                    6   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     26         (6     1        6        27   

Provision for income taxes

     11         (2 )(2)             2        11   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15       $ (4   $ 1      $ 4      $ 16   

Less: Net income attributable to noncontrolling interest

     1                              1   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Engility

   $ 14       $ (4   $ 1      $ 4      $ 15   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

            $ 0.91   

Diluted earnings per share:

            $ 0.90   

Weighted average number of shares outstanding:

           

Basic

              16.5 (4) 

Diluted

              16.7 (4) 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

 

     Historical      Financing
Adjustments
    Transfer
Global
Security
Solutions
Business
to L-3(1)
    Other
Pro forma
Adjustments(3)
    Pro forma  
     (In millions, except per share amounts)  

Revenues

   $ 2,180       $ —        $ (109   $ —        $ 2,071   

Costs and expenses, including selling, general and administrative expenses:

           

Cost of revenues

     2,005         —          (107     (9     1,889   

Goodwill impairment

     77         —          —          —          77   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     2,082         —          (107     (9     1,966   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     98         —          (2     9        105   

Interest expense

     —           22 (2)      —          —          22   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     98         (22     (2     9        83   

Provision for income taxes

     69         (8 )(2)      (1     2        62   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29       $ (14   $ (1   $ 7      $ 21   

Less: Net income attributable to noncontrolling interest

     3         —          —          —          3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Engility.

   $ 26       $ (14   $ (1   $ 7      $ 18   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

            $ 1.03   

Diluted earnings per share:

            $ 1.02   

Weighted average number of shares outstanding:

           

Basic

              17.4 (4) 

Diluted

              17.6 (4) 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 30, 2012

 

     Historical      Financing
Adjustments
    Transfer
Global
Security
Solutions
Business
to L-3(1)
    Other
pro forma
adjustments
    Pro forma  
     (In millions)  

ASSETS

  

Current assets:

           

Cash and cash equivalents

   $ 11       $ 335 (5)    $      $ (335 )(6)    $ 11   

Receivables, net

     431         —          (26     —          405   

Other current assets

     36         —          (14     —          22   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     478         335        (40     (335     438   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     12         —                 —          12   

Goodwill

     904         —          (53     —          851   

Identifiable intangible assets, net

     111         —          (11     —          100   

Other assets

     6         10 (5)      —          —          16   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,511       $ 345      $ (104   $ (335   $ 1,417   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

           

Current liabilities:

           

Accounts payable, trade

   $ 55       $ —        $ (8   $ —        $ 47   

Accrued employment costs

     78         —          (2     —          76   

Accrued expenses

     65         —          (2     —          63   

Advance payments and billings in excess of costs incurred

     31         —          —          —          31   

Deferred income taxes

     21         —          (7     —          14   

Other current liabilities

     20         —          (1     —          19   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     270         —          (20     —          250   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

     42         —            —          42   

Income taxes payable

     59         —          —          —          59   

Other liabilities

     30         —          (10     —          20   

Revolving credit facility

     —           10 (5)      —          —          10   

Term loan facility

     —           335 (5)      —          —          335   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     401         345        (30     —          716   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

           

Equity:

           

Common stock (par value $0.01)

     —           —          —          —   (7)      —     

Additional paid-in-capital

     —           —          —          1,025 (7)      690   
            (335 )(6)   

Parent company investment

     1,099         —          (74     (1,025 )(7)      —     

Noncontrolling interest

     11         —          —            11   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     1,110         —          (74 )     (335     701   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,511       $ 345      $ (104   $ (335   $ 1,417   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

(1) These adjustments reflect the transfer of the results of operations and financial position of the global security solutions business to L-3. The global security solutions business had been historically managed by us, but will be transferred to L-3 as part of its National Security Solutions business in connection with the spin-off. The pro forma adjustments related to the global security solutions business were tax effected using an estimated tax rate of 38.3% based on the blended federal and state statutory income tax rates.

 

(2) The adjustment to our historical interest expense for the quarter ended March 30, 2012 and the year ended December 31, 2011 to give effect to $335 million of borrowings under the term loan facility and $10 million of borrowings under the revolving credit facility in connection with the spin-off is presented below.

 

     Quarter ended
March 30, 2012
     Year ended
December 31, 2011
 

Interest on $345 million of borrowings

   $ 5       $ 20   

Amortization of deferred issue costs

     1         2   
  

 

 

    

 

 

 

Total pro forma adjustments to interest expense

   $ 6       $ 22   
  

 

 

    

 

 

 

The adjustments for borrowings are based on an interest rate of 5.75%, which reflects the initial variable interest rate on the term loan facility and the revolving credit facility, and were tax effected using an estimated tax rate of 38.3% based on the blended federal and state statutory income tax rates. For each  1/8% change in the applicable interest rate in excess of the LIBOR floor (which is approximately 80 basis points higher than current LIBOR), pro forma interest expense would change by approximately $0.4 million on an annual basis.

 

(3) The adjustment to cost of revenues removes separation costs incurred by L-3 during the quarter ended March 30, 2012 and the year ended December 31, 2011 that are directly related to the spin-off. These costs were allocated to us from L-3 and are included in our historical results of operations. The pro forma adjustment related to the separation costs was tax effected using an estimated tax rate of 38.3%, based on the blended federal and state statutory income tax rates, after excluding approximately $2 million and $3 million for the quarter ended March 30, 2012 and the year ended December 31, 2011, respectively, of non-deductible costs in accordance with U.S. Federal income tax rules regarding transaction costs incurred to facilitate a spin-off.

The summary of transaction costs allocated to us from L-3 is presented in the table below.

 

     Quarter Ended
March 30, 2012
     Year Ended
December 31, 2011
 

Audit fees

   $ 1       $ 6  

Investment banking fees

     2         —     

Legal fees

     1         2   

Tax related fees

     2         1   
  

 

 

    

 

 

 

Total spin-off transaction costs

   $ 6       $ 9   
  

 

 

    

 

 

 

 

(4) The pro forma basic and diluted weighted average shares outstanding were based on the weighted average number of L-3 common shares outstanding for the quarter ended March 30, 2012 and the year ended December 31, 2011, respectively, adjusted for an assumed distribution ratio of one share of Engility common stock for every six L-3 common shares. Pro forma weighted average diluted shares outstanding reflect potential common shares from L-3 equity plans, which our employees participate in, based on the assumed one-to-six distribution ratio. While the actual impact on a go-forward basis will depend on various factors, including employees who may change employment between us and L-3, we believe the estimate provides a reasonable approximation of the future dilutive impact of Engility equity plans.

 

(5) The adjustment to cash and cash equivalents reflects borrowings of $325 million under the term loan facility, net of debt issuance costs of $10 million, and $10 million of borrowings under the revolving credit facility. The debt issuance costs are capitalized as other assets and are amortized over five years, the term of the term loan facility.

 

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The target outstanding balance of borrowings at the time of separation will be determined by senior management based on a review of a number of factors including credit ratings consideration, forecasted liquidity and capital requirements, expected operating results, and general economic conditions. Cash on hand following the spin-off is expected to be used for general corporate purposes.

 

(6) The adjustment to cash and cash equivalents reflects the distribution to L-3 of $335 million based upon the anticipated post-separation capital structure.

 

(7) The adjustment to common stock, additional-paid-in capital and parent company investment represents: (1) elimination of $1,025 million of parent company investment, (2) $335 million distribution to L-3, and (3) establishment of our capital structure. For purposes of these unaudited pro forma condensed combined financial statements, we used approximately 16 million shares of our common stock at a par value of $0.01 per share determined using the one-to-six distribution ratio to L-3’s 98,190,977 common shares outstanding at March 30, 2012.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with the audited historical combined financial statements, the unaudited condensed combined financial statements and the notes thereto included in this Information Statement as well as the discussion in the section of this Information Statement entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Information Statement entitled “Risk Factors” and “Special Note About Forward-Looking Statements.” The financial information discussed below and included in this Information Statement may not necessarily reflect what our financial condition, results of operations or cash flow would have been had we been a stand-alone company during the periods presented or what our financial condition, results of operations and cash flows may be in the future.

Except as otherwise indicated or unless the context otherwise requires, the information included in this discussion and analysis assumes the completion of all the transactions referred to in this Information Statement in connection with the separation and distribution. Unless the context otherwise requires, references in this Information Statement to “Engility Holdings, Inc.,” “Engility,” “we,” “us,” “our” and “our company” refer to L-3’s systems engineering and technical assistance (SETA), training and operational support services businesses. References in this Information Statement to “L-3” or “parent” refer to L-3 Communications Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise requires.

Financial Section Roadmap

Management’s discussion and analysis (MD&A) can be found on pages 52 to 74 and the financial statements and related notes can be found on beginning on page F-1 of this Information Statement. The following table is designed to assist in your review of MD&A.

 

Topic

   Location  

Separation from L-3

     Page 53   

Overview and Outlook:

  

Engility’s Business

     Page 53   

Industry Considerations

     Page 54   

Key Performance Measures

     Page 55   

Results of Operations, including business segments

    
Page 58
  

Liquidity and Capital Resources:

  

Current Liquidity

     Page 67   

Future Liquidity

     Page 67   

Statement of Cash Flows

     Page 68   

Contractual Obligations

     Page 69   

Off Balance Sheet Arrangements

     Page 70   

Quantitative and Qualitative Disclosures About Market Risk

     Page 70   

Legal Proceedings and Contingencies

     Page 70   

Critical Accounting Policies:

  

Goodwill and Identifiable Intangible Assets

     Page 71   

Valuation of Deferred Income Tax Assets and Liabilities

     Page 74   

Liabilities for Pending and Threatened Litigation

     Page 74   

New Accounting Standards Implemented

     Page 74   

 

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Separation from L-3

On July 12, 2011, the Board of Directors of L-3 approved a plan to spin-off part of L-3’s Government Services segment into a new company named Engility Holdings, Inc., following which Engility will be an independent, publicly traded company. Before our spin-off from L-3, we will enter into a Distribution Agreement and several other agreements with L-3 related to the spin-off. These agreements will govern the relationship between us and L-3 after completion of the spin-off and provide for the allocation between us and L-3 of various assets, liabilities, rights and obligations (including employee benefits, insurance and tax-related assets and liabilities). These agreements will also include arrangements for transition services to be provided by L-3 to Engility and vice versa. See “Certain Relationships and Related Party Transactions—Agreements with L-3 Related to the Spin-Off”. To complete the spin-off, L-3 will distribute to its shareholders all of the outstanding shares of Engility common stock. After completion of the spin-off, Engility will own and operate the SETA, training and operational support services businesses, of L-3’s Government Services segment, with L-3 retaining the cyber security, intelligence, enterprise information technology, and security solutions businesses of its Government Services segment.

The distribution of Engility common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, L-3 has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of L-3 determines, in its sole discretion, that the spin-off is not in the best interests of L-3 or its shareholders, that a sale or other alternative is in the best interest of L-3 or its shareholders, or that market conditions or other circumstances are such that it is not advisable at the time to separate Engility from L-3. See “The Spin-Off—Conditions to the Spin-Off”.

The combined financial statements presented herein, and discussed below, are derived from the accounting records of L-3 as if we operated on a stand-alone basis. The combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and reflect the financial position, results of operations and cash flows of our SETA, training and operational support services businesses.

The combined statements of operations include expense allocations for corporate functions provided to us by L-3. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue or headcount. While we believe these allocations have been made on a consistent basis and are reasonable, such expenses may not be indicative of the actual expenses that would have been incurred had Engility been operating as a separate and independent business.

Overview and Outlook

Engility’s Business

We are a leading provider of systems engineering services, training, program management, and operational support for the U.S. Government worldwide. Our business is focused on supporting the mission success of our customers by providing a full range of engineering, technical, analytical, advisory, training, logistics and support services. Our revenues are spread over a diverse mix of activities and services with no single contract accounting for more than 7% of our revenue in 2011. For the year ended December 31, 2011, we had revenues of $2.2 billion, 98% of which was derived from our U.S. Government customers.

We operate in two segments: Professional Support Services and Mission Support Services. The Professional Support Services segment provides Systems Engineering and Technical Assistance (SETA) services, program management support and software engineering lifecycle sustainment and support services. The Professional Support Services segment had 2011 revenues of $1.2 billion. Through our Mission Support Services segment, we provide capabilities such as defense related training, education and support services, law enforcement training, national security infrastructure and institutional development. The Mission Support Services segment had 2011 revenues of $1.0 billion.

 

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Engility, through its predecessor companies, has provided mission critical services to several U.S. Government departments and agencies for over four decades. Our customers include 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), Department of Homeland Security (DHS), and allied foreign governments.

Industry Considerations

The U.S. Government is the largest consumer of services in the United States and is Engility’s largest customer. Revenues from the U.S. Government represented 98% of our total revenues for the year ended December 31, 2011. The demand for outsourced private sector services by the U.S. Government has been driven by a variety of factors, including government initiatives aimed at improving efficiency, increased demand requirements in response to recent global events, ever increasing complexity of combat and non-combat missions conducted by the U.S. military and the DoS, enhanced focus on war-fighting by the U.S. military and the loss of personnel and competencies within the government caused by manpower reductions and retirements. We believe that as the U.S. Government continues to rely on services dependent upon specialized capabilities and that have an international nature, these services will continue to be outsourced.

The U.S. Government has issued guidance regarding changes to the procurement process that is intended to control cost growth throughout the acquisition cycle by developing a competitive strategy for each program. As a result, we expect to engage in more frequent negotiations and re-competitions on a cost or price analysis basis with every competitive bid in which we participate. This initiative is organized into five major areas: affordability and cost growth; productivity and innovation; competition; services acquisition; and processes and bureaucracy. Because this initiative significantly changes the way the U.S. Government solicits, negotiates and manages its contracts, this initiative could result in a reduction in expenditures for services we provide to the U.S. Government and could have a material negative impact on our future revenues, earnings and cash flows.

The DoD is the largest purchaser of services in the U.S. Government. Revenues from the DoD represented approximately 79% of our total revenues for the year ended December 31, 2011. The U.S. Government fiscal year ends on September 30. From fiscal year (FY) 2000 to FY 2010, the DoD budget, including wartime funding for Overseas Contingency Operations (OCO), grew at a compound annual rate of approximately 9%. The total DoD budget (base and OCO) for FY 2011 was approximately flat compared to FY 2010. During the year ended December 31, 2011, the U.S. Government completed its draw down of U.S. military troops from Iraq, and began to drawdown troops from Afghanistan, in accordance with the Obama Administration plan to complete the drawdown from Afghanistan by the end of 2014. While the United States is expected to maintain a presence in the Middle East to deter aggression and prevent the emergence of new threats, there will be a rebalance toward other regions of the world such as the Asia-Pacific theatre. In addition, the U.S. Government has been under increasing pressure to reduce the U.S. fiscal budget deficit and national spending.

In August 2011, Congress enacted the Budget Control Act of 2011 (the “BCA”). The BCA immediately imposes spending caps that contain approximately $487 billion in reductions to the DoD base budgets over the next ten years (FY 2012 to FY 2021), compared to previously proposed DoD base budgets for the same fiscal years. An automatic sequestration process was also triggered and becomes effective on January 3, 2013, unless modified by the enactment of new law. The sequestration process imposes additional cuts of approximately $50 billion per year to the currently proposed DoD budgets for each fiscal year beginning with FY 2013 through FY 2021, for which FY 2013 to FY 2017 proposed DoD budgets are presented below.

On February 13, 2012, President Obama submitted his FY 2013 proposed budget (FY 2013 DoD Plan) to Congress. The FY 2013 DoD Plan complies with the first phase of the BCA imposed spending cuts. The FY 2013 DoD Plan reduces proposed DoD base budgets by $259 billion for FY 2013 to FY 2017, compared to the previously proposed DoD base budgets. The FY 2013 DoD Plan does not address or provision for the automatic sequestration process. The FY 2013 DoD Plan reflects a revised national security strategy that includes a more

 

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disciplined use of resources from: (1) various efficiency initiatives, (2) military force structure reductions, (3) equipment modernization savings, including program terminations, restructuring and deferrals, and (4) military personnel compensation changes. The table below presents the enacted DoD budget (base and OCO) for FY 2012 and the proposed DoD budgets for FY 2013 to FY 2017, as provided in the FY 2013 DoD Plan.

 

Fiscal Year

   Base      OCO      Total      Annual
Total
Budget
Change
 
     (in billions)  

2012

   $ 530.6       $ 115.1       $ 645.7         -6

2013

   $ 525.4       $ 88.5       $ 613.9         -5

2014

   $ 533.6       $ 44.2       $ 577.8         -6

2015

   $ 545.9       $ 44.2       $ 590.1         2

2016

   $ 555.9       $ 44.2       $ 600.1         2

2017

   $ 567.3       $ 44.2       $ 611.5         2

In addition, the FY 2013 DoD Plan seeks reductions in contractor support services and consolidation of enterprise IT systems as part of an effort to achieve another $60 billion of efficiency savings over the next five fiscal years (FY 2013 through FY 2017). The declining DoD budgets will reduce funding for some of our revenue arrangements and generally will have a negative impact on our revenues, results of operations and cash flows. Additionally, the planned withdrawal of U.S. military forces from Afghanistan by the end of 2014 is expected to negatively impact our revenues related to supporting U.S. military operations in Afghanistan.

The SETA services that we provide are generally categorized under the U.S. Government Professional, Administrative and Management Support Services spending, which in 2011 had a government-wide budget of approximately $77 billion, which had declined from an approximate $79 billion budget in 2010. Engility’s SETA services are a specialized subset of the abovementioned federal spending.

In addition, the DoS is another large consumer of services. Revenues from the DoS represented 6% of our total revenues for the year ended December 31, 2011. For FY 2012, the DoS Function 150/International Affairs budget, which represents the portion of the DoS budget that is contractor addressable, has been proposed to Congress at $15 billion and is expected to grow by 2.8% compared to 2011.

Key Performance Measures

The primary financial performance measures Engility uses to manage its businesses and monitor results of operations are revenue trends and operating income trends. Management believes that these financial performance measures are the primary drivers for Engility’s earnings and net cash from operating activities. Engility’s primary business objectives include: (1) expanding SETA services unconstrained by organizational conflicts of interest (“OCI”) regulations related to our previous status as a business unit within L-3, (2) developing and maintaining a streamlined operating structure to enhance our agility and cost competitiveness to better meet the requirements of our customers, (3) capitalizing on our strengths, including performance, agility and expertise, developing additional capabilities and investing in our team and customer relationships to create new business opportunities, and (4) reinvesting our capital in new business opportunities as we transition from our Iraq/Afghanistan related programs with the drawdown of U.S. Forces.

Operating income represents revenues less both cost of revenues and selling, general and administrative expenses. We define operating margin as operating income as a percentage of revenues. Cost of revenues consists of labor, subcontracting costs, materials, and an allocation of indirect costs (overhead and general and administrative expenses). Selling, general and administrative expenses consists of indirect labor costs, including wages and salaries for executives and administrative personnel, bid and proposal expenses, independent research and development expenses, and other general and administrative expenses not allocated to cost of revenues.

 

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For each of our contracts, we manage the nature and amount of costs at the contract level, which forms the basis for estimating our total costs and profitability for a specific contract. Management evaluates its contracts and business performance by focusing on revenues, operating income and operating margin, and not by type or amount of operating expense. As a result, our discussion of results of operations focuses on revenues, operating income and operating margin. This is consistent with our approach for managing our business, which begins with management’s approach for assessing the bidding opportunity for each contract and then managing contract profitability throughout the performance period.

Revenue Trends. During the five years ended December 31, 2011, total revenues declined $778 million, or 26%, from $2,958 million for the year ended December 31, 2007. The decline largely relates to $592 million of lower sales on our major contracts supporting U.S. military operations in Iraq and Afghanistan and $192 million of lower revenue on our task orders for the Systems and Software Engineering and Sustainment Services (SSES) contract with the U.S. Army.

The revenue decline of $592 million on our major contracts supporting U.S. military operations in Iraq and Afghanistan during the five years ended December 31, 2011 was primarily due to $790 million of declines resulting from: (1) contract re-competition losses, mainly for the loss in 2008 of our prime contract to provide linguist services in Iraq for the U.S. Army, and the loss in 2010 of our contract to support the Afghanistan Ministry of Defense (MoD), and, to a lesser extent, (2) the U.S. military drawdown from Iraq which was completed in 2011. These declines were partially offset by revenue increases of $198 million from 2007 to 2011 on our law enforcement personnel (LEP) contract with the U.S. Army, under which we provide law enforcement personnel to advise, assist, mentor and train U.S. and coalition forces to execute their law enforcement related responsibilities, and our Warfighter Focus (WFF) subcontract, under which we provide training and logistics support services to the U.S. Army. By the end of 2011, most of our effort on the LEP and WFF contracts was related to supporting U.S. military operations in Afghanistan. Furthermore, in 2007, 34% of our revenues were generated from our major contracts supporting U.S. military operations in Iraq and Afghanistan, compared to 19% for the same contracts in 2011.

The SSES revenue decline of $192 million was primarily due to reduced subcontractor pass-through volume on our SSES prime contract task orders because the U.S. Army SSES contract vehicle approached its ceiling contract value in 2008 and as a consequence the U.S. Army began to shift SSES task order renewals to its Strategy, Sourcing and Services (S3) contract vehicle. We did not have a prime contractor position on the S3 contract vehicle. Therefore, in order for us to compete for our former SSES task orders we were required to team with prime contractors on the S3 contract vehicle. To the extent such S3 prime contractors won the S3 task orders, we retained our former SSES task orders, but as a subcontractor with the loss of pass-through volume from our previous subcontractors under our former SSES task orders.

Our results of operations presented within this Information Statement also include revenues from the global security solutions business of $93 million in 2007 and $109 million in 2011. The global security solutions business has been historically managed by us, but will be transferred to L-3 in connection with the spin-off.

 

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The table below presents our revenue trends for the five years ended December 31, 2011 in the following categories: (1) major contracts supporting U.S. military operations in Iraq and Afghanistan, (2) SSES services, (3) the global security solutions business, and (4) other business.

 

     Year Ended December 31,  
     2011      2010      2009      2008      2007  
     (in millions)  

Major Iraq and Afghanistan contracts

   $ 412       $ 621       $ 672       $ 911       $ 1,004   

SSES services

     128         203         357         413         320   

Global security solutions

     109         147         96         137         93   

Other business(1)

     1,531         1,550         1,533         1,421         1,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,180       $ 2,521       $ 2,658       $ 2,882       $ 2,958   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The revenue trend composition for the five years ended December 31, 2011 of our other business is presented in the table below:

 

     Year Ended December 31,  
     2011      2010      2009      2008      2007  
     (in millions)  

Engineering and program management support

   $ 968       $ 954       $ 973       $ 960       $ 1,213   

Training and U.S. Government mission support

     311         357         390         440         280   

Asset forfeiture support

     123         115         76                   

International development

     122         108         79         5           

Linguist services (excluding Iraq and Afghanistan)

     7         16         15         16         48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,531       $ 1,550       $ 1,533       $ 1,421       $ 1,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See “Results of Operations” below for additional discussion and analysis of our revenues for the year ended December 31, 2011 compared to December 31, 2010 and the year ended December 31, 2010 compared to December 31, 2009.

For the year ended December 31, 2011, our largest contract (revenue arrangement) in terms of annual revenues was our LEP contract with the U.S. Army, which is included in our Mission Support Services segment. This contract generated $142 million or 7% of our 2011 revenues. Our current contract ends on December 10, 2012 and has a one-year option that could be exercised by the customer to extend our contract to December 10, 2013. The customer issued a draft request for proposal (RFP) to re-compete the contract on May 21, 2012 and we cannot provide any assurance that either our option to extend the LEP contract will be exercised or that we will be successful if the draft RFP results in the customer re-competing the contract.

For the years ended December 31, 2010 and 2009, our largest contract (revenue arrangement) in terms of annual revenues was our contract to provide SSES services for the U.S. Army, which is included in our Professional Support Services segment. Revenues related to this contract are presented in the table above. Recently, the DoD decided to re-compete the current SSES contract vehicle and we submitted our prime contractor proposal in February 2012 for the re-competition, which will be a multiple award arrangement and we anticipate the awards will be made in late 2012. We cannot provide any assurance that we will win a prime contractor position on the re-competition of the SSES contract vehicle.

Operating Income Trends. During the five years ended December 31, 2011, segment operating income declined $82 million, or 31%, from $266 million for the year ended December 31, 2007. The decline largely relates to lower revenues as discussed above, and lower contract profit rates on select new business and re-competitions of existing business due to competitive price pressures. For the year ended December 31, 2011, our total operating income was $98 million, an increase of 42% from $69 million for the year ended December 31, 2010. Our total operating margin was 4.5% for the year ended December 31, 2011, an increase of 170 basis points from 2.8% for the year ended December 31, 2010. Our total operating income and operating margin for the years ended December 31, 2011 and 2010 were impacted by non-cash goodwill impairment charges of $77 million and

 

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$172 million, respectively, as further discussed below. In addition, our total operating income and operating margin for the year ended December 31, 2011 includes $9 million for transaction expenses incurred relating to the spin-off. The goodwill impairment charges and spin-off transaction expenses are excluded from segment operating income because such items were excluded by management for purposes of assessing segment operating performance. Our segment operating income was $184 million for the year ended December 31, 2011, a decrease of 24% from $241 million for the year ended December 31, 2010. Our segment operating margin was 8.4% for the year ended December 31, 2011, a decrease of 120 basis points from 9.6% for the year ended December 31, 2010. See “Results of Operations”, including segment results below for a discussion of operating margin.

2012 Outlook. After considering the transfer of the global security solutions business to L-3 in connection with the spin-off, we expect our revenues to decline by approximately $450 million to $1.6 billion in 2012, compared to $2.1 billion in 2011. Our 2012 revenue estimate assumes a reduction of approximately $200 million on our major Iraq and Afghanistan contracts due to the drawdown of U.S. military forces from Iraq that was completed in 2011, and the currently in process drawdown from Afghanistan that is planned to be completed by the end of 2014. Our 2012 revenue estimate also assumes a reduction of approximately $250 million for our other contracts primarily due to: (1) the DoD’s efficiency and better buying initiatives, resulting in a faster than expected transition to: (i) cost-reimbursable type contracts from time-and-material type contract, (ii) multiple award contracts from single-award contracts, where several contractors compete for individual task orders, and (iii) more frequent contract re-competitions, and (2) declining DoD budgets for FY 2012 and FY 2013. We also expect our segment operating margins to decline to approximately 7.3% in 2012 due to lower sales, continued low contract profit rates on re-competitions of existing business from competitive price pressures, the DoD’s efficiency and better buying initiatives and a reduction in higher margin revenues related to our major Iraq and Afghanistan contracts.

Results of Operations — First Quarter ended March 30, 2012 and April 1, 2011

The following information should be read in conjunction with our unaudited condensed combined financial statements included herein.

Combined Results of Operations

The table below provides selected financial data for Engility for the quarter ended March 30, 2012 and the quarter ended April 1, 2011.

 

     First Quarter Ended     Increase/
(decrease)
 
     March 30,
2012
    April 1,
2011
   
     (in millions)  

Total revenues

   $ 449      $ 591      $ (142

Cost and expenses:

      

Total cost of revenues

     390        510        (120

Selling, general and administrative expenses

     33        34        (1
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     423        544        (121
  

 

 

   

 

 

   

 

 

 

Operating income

     26        47        (21

Spin-off transaction expenses

     6        —          6   
  

 

 

   

 

 

   

 

 

 

Segment operating income

   $ 32      $ 47      $ (15
  

 

 

   

 

 

   

 

 

 

Operating margin

     5.8     8.0     (220 )bpts 

Spin-off transaction expenses

     1.3     —         130 bpts 
  

 

 

   

 

 

   

 

 

 

Segment operating margin

     7.1     8.0     (90 )bpts 
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     42.3     38.3     400 bpts 

Net income (loss) attributable to Engility

   $ 14      $ 28      $ (14
  

 

 

   

 

 

   

 

 

 

 

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Revenues: For the quarter ended March 30, 2012 (2012 First Quarter), total revenues of $449 million decreased by 24% compared to the quarter ended April 1, 2011 (2011 First Quarter). Revenues declined in both of our segments. The decrease in total revenues was due to: (1) $62 million in lower linguist and logistics support services for the U.S. Army due to the drawdown of military forces from Iraq, (2) $48 million for contract losses primarily for staff support services and the Program Executive Office (PEO) for the U.S. Army and U.S. Coast Guard (USCG) training, (3) $39 million in lower revenues due to completed contracts, primarily for safety and security systems, and reduced funding and in-sourcing for various U.S. military and government contracts, and (4) $9 million of lower revenues primarily for a support services contract to the U.S. Air Force in Europe due to the realignment of this contract by L-3 to its National Security Solutions business in 2011. These decreases were partially offset by $16 million in revenues for a U.S. Army training contract competitively won in 2011. See the segment results below for additional discussion of our revenues.

Cost of revenues: Cost of revenues as a percentage of revenue increased to 86.9% for the 2012 First Quarter compared to 86.3% for the 2011 First Quarter. Total cost of revenues declined by 24% in the 2012 First Quarter, which was consistent with the 24% decline in our revenues.

Direct and indirect labor costs, including fringe benefits, of approximately $213 million for the 2012 First Quarter decreased by 25% compared to the 2011 First Quarter due to the decline in 2012 First Quarter revenues. Other direct and indirect costs of approximately $177 million for the 2012 First Quarter, of which subcontractor and material costs represented approximately $142 million, decreased by 22% compared to the 2011 First Quarter due primarily to the decline in 2012 First Quarter revenues.

Selling, general, and administrative expenses: For the 2012 First Quarter, selling, general and administrative expenses of $33 million decreased by 3% compared to the 2011 First Quarter. The decline in selling, general and administrative expenses was primarily due to cost reduction efforts due to lower revenues, partially offset by $6 million of transaction expenses for the spin-off. Selling, general and administrative expenses as a percentage of revenues increased to 7.3% for the 2012 First Quarter as compared to 5.8% for the 2011 First Quarter. Excluding the transaction expenses for the spin-off, selling, general and administrative expenses as a percentage of revenues was 6.0% for the 2012 First Quarter. The increase in selling, general and administrative expenses as a percentage of revenues, after excluding the spin-off transaction expenses, was due primarily to selling, general and administrative expenses declining at a lower rate than revenues.

Operating income and operating margin: Total operating income for the 2012 First Quarter of $26 million decreased by $21 million, or 45%, compared to the 2011 First Quarter. Segment operating income for the 2012 First Quarter decreased by $15 million, or 32%, compared to the 2011 First Quarter. Segment operating margin decreased by 90 basis points to 7.1% for the 2012 First Quarter compared to 8.0% for the 2011 First Quarter. Operating margin declined in both of our segments. The decrease in segment operating margin was primarily due to: (1) a reduction in award fees for linguist services within our Mission Support Services Segment due to the drawdown of U.S. military forces from Iraq, and (2) lower contract profit rates on select re-competitions of existing business and lower revenues within our Professional Support Services segment. See the reportable segment results below for additional discussion of operating margin.

Effective income tax rate: The effective tax rate for the 2012 First Quarter increased to 42.3% from 38.3% for the 2011 First Quarter. The increase was primarily due to the impact of approximately $2 million of spin-off transaction expenses incurred in the 2012 First Quarter that are not deductible for income tax purposes.

Net income attributable to Engility: Net income attributable to Engility decreased by $14 million to $14 million for the 2012 First Quarter, compared to $28 million for the 2011 First Quarter, primarily due to lower operating income and the $6 million of spin-off transaction expenses discussed above.

 

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Reportable Segment Results of Operations

The table below presents selected data by reportable segment reconciled to the combined totals. See Note 9 to the unaudited condensed combined financial statements included herein for additional reportable segment data.

 

     First Quarter Ended  
     March 30,
2012
    April 1,
2011
 
     (dollars in millions)  

Revenues:(1)

    

Professional Support Services

   $ 251.4      $ 296.8   

Mission Support Services

     198.0        294.3   
  

 

 

   

 

 

 

Total revenues

   $ 449.4      $ 591.1   
  

 

 

   

 

 

 

Operating income:

    

Professional Support Services

   $ 16.0      $ 20.5   

Mission Support Services

     15.7        26.5   
  

 

 

   

 

 

 

Total segment operating income

   $ 31.7      $ 47.0   

Spin-off transaction expenses

     (6.0     —    
  

 

 

   

 

 

 

Total operating income

   $ 25.7      $ 47.0   
  

 

 

   

 

 

 

Operating margin:

    

Professional Support Services

     6.4     6.9

Mission Support Services

     7.9     9.0

Total segment operating margin

     7.1     8.0

Spin-off transaction expenses

     (1.3 )%      —    
  

 

 

   

 

 

 

Total operating margin

     5.8     8.0
  

 

 

   

 

 

 

 

(1) Revenues are after intercompany eliminations.

Professional Support Services

The table below presents selected data with respect to the Professional Support Services segment.

 

     First Quarter Ended     Decrease  
     March 30,
2012
    April 1,
2011 
   
     (dollars in millions)        

Revenues

   $ 251.4      $ 296.8      $ (45.4

Operating income

   $ 16.0      $ 20.5      $ (4.5

Operating margin

     6.4     6.9     (50 )bpts 

Professional Support Services revenues for the 2012 First Quarter decreased by $45 million, or 15%, compared to the 2011 First Quarter. The decrease was due to: (1) $21 million in lower revenues primarily due to the loss of contract re-competitions for a PEO of the U.S. Army contract and a USCG training contract, (2) $11 million in lower revenues due to reduced funding and in-sourcing on certain U.S. Government contracts, (3) $8 million in lower revenues primarily due to completed contracts for safety and security systems, and (4) $5 million in reduced SSES services due to the drawdown of U.S. military forces from Iraq.

Professional Support Services operating income for the 2012 First Quarter decreased by $5 million, or 22%, compared to the 2011 First Quarter. Operating margin decreased by 50 basis points. The decrease was primarily due to lower contract profit rates on re-competitions due to competitive price pressures and lower revenues,

 

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which reduced operating margins by 110 basis points. These decreases were partially offset by lower indirect costs due to cost reduction efforts, which increased operating margins by 60 basis points.

Mission Support Services

The table below presents selected data with respect to the Mission Support Services segment.

 

     First Quarter Ended     Decrease  
     March 30,
2012
    April 1,
2011 
   
     (dollars in millions)        

Revenues

   $ 198.0      $ 294.3      $ (96.3

Operating income

   $ 15.7      $ 26.5      $ (10.8

Operating margin

     7.9     9.0     (110 )bpts 

Mission Support Services revenues for the 2012 First Quarter decreased by $96 million, or 33%, compared to the 2011 First Quarter. The decrease was due to: (1) $58 million primarily for lower linguist and logistics support services for the U.S. Army due to the drawdown of U.S. military forces from Iraq, (2) $26 million for contract losses, primarily for staff support services for the U.S. Army, (3) $14 million in lower revenues primarily due to the completion of various U.S. military contracts, (4) $9 million of lower revenue primarily for a support services contract to the U.S. Air Force in Europe due to the realignment of this contract by L-3 to its National Security Solutions business in 2011, and (5) $5 million of lower revenues related to an international maritime security enhancement program. These declines were partially offset by $16 million of higher revenues primarily due to a U.S Army training contract competitively won in 2011.

Mission Support Services operating income for the 2012 First Quarter decreased by $11 million, or 41%, compared to the 2011 First Quarter. Operating margin decreased by 110 basis points primarily due to a reduction in award fees for linguist services.

Results of Operations — Years ended December 31, 2011, 2010, and 2009

The following information should be read in conjunction with our audited combined financial statements included herein.

Combined Results of Operations

The table below provides selected financial data for Engility for the years ended December 31, 2011 compared with 2010 and 2010 compared with 2009.

 

     Year ended December 31,     Increase/
(decrease)
    Year ended December 31,     Increase/
(decrease)
 
         2011             2010               2010             2009        
     (in millions)  

Total revenues

   $ 2,180      $ 2,521      $ (341   $ 2,521      $ 2,658      $ (137

Cost and expenses:

            

Total cost of revenues

     1,860        2,119        (259     2,119        2,244        (125

Selling, general and administrative expenses

     145        161        (16     161        159        2   

Goodwill impairment

     77        172        (95     172        —          172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     2,082        2,452        (370     2,452        2,403        49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     98        69        29        69        255        (186

Goodwill impairment

     77        172        (95     172        —          172   

Spin-off transaction expenses

     9        —          9        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

   $ 184      $ 241      $ (57   $ 241      $ 255      $ (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     4.5     2.8     170 bpts      2.8     9.6     (680 )bpts 

Goodwill impairment

     3.5     6.8     (330 )bpts      6.8     —          680 bpts 

Spin-off transaction expenses

     0.4     —          40 bpts      —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating margin

     8.4     9.6     (120 )bpts      9.6     9.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     70.4     110.3     NM (1)      110.3     40.0     NM   

Net income (loss) attributable to Engility

   $ 26      $ (9   $ 35      $ (9   $ 152      $ (161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

NM - Not meaningful

 

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2011 Compared with 2010

Revenues: For the year ended December 31, 2011, total revenues of $2,180 million decreased by 14% compared to the year ended December 31, 2010. Revenues declined in both of our segments. The decrease in total revenues was primarily due to: (1) $90 million related to the loss of an Afghanistan MoD support contract in October 2010, (2) $90 million in lower linguist, training and logistics support services for the U.S. Army due to the drawdown of military forces from Iraq, (3) $75 million in reduced SSES services and (4) $48 million of lower revenues related to the SBInet program for the U.S. Department of Homeland Security and an international maritime security enhancement program. See the segment results below for additional discussion of our revenues.

Cost of revenues: Cost of revenues as a percentage of revenue increased to 85.3% for the year ended December 31, 2011 compared to 84.1% for the year ended December 31, 2010. Total costs of revenues declined by 12% in 2011, which was consistent with the 14% decline in our revenues.

Direct and indirect labor costs, including fringe benefits, of approximately $990 million for the year ended December 31, 2011 decreased by 16% compared to the year ended December 31, 2010 due to the decline in 2011 revenues. Other direct and indirect costs of approximately $870 million for the year ended December 31, 2011, of which subcontractor and material costs represented approximately $676 million, decreased by 8% compared to the year ended December 31, 2010 primarily due to the decline in 2011 revenues.

Selling, general, and administrative expenses: For the year ended December 31, 2011, selling, general and administrative expenses of $145 million decreased by 10% compared to the year ended December 31, 2010. The decline in selling, general and administrative expenses was primarily due to lower corporate expense allocations and cost reduction efforts due to lower revenues, partially offset by $9 million of transaction expenses for the spin-off and $3 million of severance charges recorded in 2011. Selling, general and administrative expenses as a percentage of revenues increased to 6.6% for the year ended December 31, 2011 as compared to 6.4% for the year ended December 31, 2010. Excluding the transaction expenses for the spin-off and severance charges, selling, general and administrative expenses as a percentage of revenues was 6.2% for the year ended December 31, 2011. The decrease in selling, general and administrative expenses as a percentage of revenues, after excluding the spin-off transaction expenses and severance charges, was due primarily to selling, general and administrative expenses declining at a greater rate than revenues.

Goodwill impairment: We recorded non-cash charges of $77 million ($77 million after income taxes) and $172 million ($154 million after income taxes) for the years ended December 31, 2011 and 2010, respectively, for the impairment of goodwill. The goodwill impairment charges were due to a decline in the estimated fair value of the Linguist Operations & Technical Support (LOTS) reporting unit in 2011 and 2010 and the Global Security & Engineering Solutions (GS&ES) reporting unit in 2010, which are part of the Mission Support Services and Professional Support Services segments, respectively, as a result of a decline in their projected future cash flows. The 2010 goodwill impairment charges were comprised of $161 million for the GS&ES reporting unit and $11 million for the LOTS reporting unit. For additional information on these goodwill impairments, see “—Critical Accounting Policies—Goodwill and Identifiable Intangible Assets” and Note 5 to our audited combined financial statements included herein.

Operating income and operating margin: Total operating income for the year ended December 31, 2011, increased by $29 million, or 42%, compared to the year ended December 31, 2010. Segment operating income for the year ended December 31, 2011 decreased by $57 million, or 24%, compared to the year ended December 31, 2010. Segment operating margin decreased by 120 basis points to 8.4% for the year ended December 31, 2011 compared to 9.6% for the year ended December 31, 2010. Operating margin declined in both of our segments. The decrease in segment operating margin was primarily due to: (1) lower contract profit rates on select new business and re-competitions of existing business primarily within our Mission Support Services

 

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segment due to competitive price pressures, (2) a reduction in higher margin revenues for an Afghanistan MoD support contract and training and logistics support services for the U.S. Army, also within our Mission Support Services segment and (3) severance charges of $4 million recorded in 2011. See the reportable segment results below for additional discussion of operating margin.

Effective income tax rate: The effective tax rate for the year ended December 31, 2011 decreased to 70.4% from 110.3% for the year ended December 31, 2010. Excluding the goodwill impairment charges of $77 million in 2011, which was not deductible for U.S. federal or state tax purposes, and $172 million in 2010, $125 million of which was not deductible for U.S. federal or state tax purposes, the effective tax rate would have increased to 40.5% for the year ended December 31, 2011 from 40.2% for the year ended December 31, 2010.

Net income (loss) attributable to Engility: Net income (loss) attributable to Engility increased by $35 million to $26 million for the year ended December 31, 2011, compared to a loss of $9 million for the year ended December 31, 2010, primarily due to lower goodwill impairment charges in 2011 compared to 2010, partially offset by a decrease in segment operating income, which is discussed above.

2010 Compared with 2009

Revenues: For the year ended December 31, 2010, total revenues of $2,521 million decreased by 5% compared to the year ended December 31, 2009. The decline in total revenues was mostly from the Professional Support Services segment, primarily due to $154 million in reduced SSES services. See the reportable segment results below for additional discussion of our revenues.

Cost of revenues: Cost of revenues as a percentage of revenue decreased to 84.1% for the year ended December 31, 2010 compared to 84.4% for the year ended December 31, 2009. Total cost of revenues declined by 6% in 2010, which was consistent with the 5% decline in our revenues.

Direct and indirect labor costs, including fringe benefits, of approximately $1,178 million for the year ended December 31, 2010 decreased by 3% compared to the year ended December 31, 2009 due to the decline in 2010 revenues. Other direct and indirect costs of approximately $941 million for the year ended December 31, 2010, of which subcontractor and material costs represented $751 million, decreased by 9% compared to the year ended December 31, 2009 primarily due to the decline in 2010 revenues.

Selling, general, and administrative expenses: For the year ended December 31, 2010, selling, general and administrative expenses of $161 million increased by 1% compared to the year ended December 31, 2009. The increase in selling, general and administrative expenses was primarily due to higher corporate expense allocations and bid and proposal expenses, partially offset by lower legal fees. Selling, general and administrative expenses as a percentage of revenues increased to 6.4% for the year ended December 31, 2010 as compared to 6.0% for the year ended December 31, 2009. The increase in selling, general and administrative expenses as a percentage of revenues was due primarily to lower leveraging of these expenses across a smaller base due to the decline in revenues discussed above.

Goodwill impairment: For the year ended December 31, 2010, we recorded non-cash charges of $172 million for the impairment of goodwill. The 2010 goodwill impairment charges were due to a decline in the estimated fair value of the LOTS and GS&ES reporting units as a result of a decline in their projected future cash flows. For additional information on these goodwill impairments, see “—Critical Accounting Policies—Goodwill and Identifiable Intangible Assets” and Note 5 to the audited combined financial statements included herein.

Operating income and operating margin: Total operating income for the year ended December 31, 2010, decreased by $186 million, or 73%, compared to the year ended December 31, 2009. Segment operating income for the year ended December 31, 2010 decreased by $14 million, or 5%, compared to the year ended December 31, 2009. Segment operating margin remained at 9.6% for the year ended December 31, 2010

 

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compared to the year ended December 31, 2009. The increase in operating margin at our Professional Support Services segment was offset by a decrease in operating margin at our Mission Support Services segment. See the reportable segment results below for additional discussion of operating margin.

Effective income tax rate: The effective tax rate for the year ended December 31, 2010 increased to 110.3% from 40.0% for the year ended December 31, 2009. Excluding the goodwill impairment charges of $172 million in 2010, $125 million of which was not deductible for U.S. federal or state tax purposes, the effective tax rate would have increased to 40.2% for the year ended December 31, 2010 from 40.0% for the year ended December 31, 2009.

Net income (loss) attributable to Engility: Net income (loss) attributable to Engility decreased by $161 million to a net loss of $9 million for the year ended December 31, 2010, compared to net income of $152 million for the year ended December 31, 2009, primarily due to the goodwill impairment charges recorded in 2010, which are discussed above.

Reportable Segment Results of Operations

The table below presents selected data by reportable segment reconciled to the combined totals. See Note 12 to the audited combined financial statements included herein for additional reportable segment data.

 

    Year Ended December 31,  
    2011     2010     2009  
    (dollars in millions)  

Revenues:(1)

     

Professional Support Services

  $ 1,205.3      $ 1,303.8      $ 1,425.6   

Mission Support Services

    974.5        1,217.1        1,232.1   
 

 

 

   

 

 

   

 

 

 

Total revenues

  $ 2,179.8      $ 2,520.9      $ 2,657.7   
 

 

 

   

 

 

   

 

 

 

Operating income:

     

Professional Support Services

  $ 95.8      $ 110.8      $ 109.1   

Mission Support Services

    88.0        130.6        146.0   
 

 

 

   

 

 

   

 

 

 

Total segment operating income

  $ 183.8      $ 241.4      $ 255.1   

Goodwill impairment charge

    (76.6     (172.0     —     

Spin-off transaction expenses

    (9.1     —          —     
 

 

 

   

 

 

   

 

 

 

Total operating income

  $ 98.1      $ 69.4      $ 255.1   
 

 

 

   

 

 

   

 

 

 

Operating margin:

     

Professional Support Services

    7.9     8.5     7.7

Mission Support Services

    9.0     10.7     11.8

Total segment operating margin

    8.4     9.6     9.6

Goodwill impairment charge

    (3.5 )%      (6.8 )%      —     

Spin-off transaction expenses

    (0.4 )%      —          —     
 

 

 

   

 

 

   

 

 

 

Total operating margin

    4.5     2.8     9.6
 

 

 

   

 

 

   

 

 

 

 

(1) Revenues are after intercompany eliminations.

 

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Professional Support Services

The table below presents selected data with respect to the Professional Support Services segment.

 

     Year ended December 31,     Decrease     Year ended December 31,     Increase/
(decrease)
 
           2011                 2010                   2010                 2009          
     (dollars in millions)  

Revenues

   $ 1,205.3      $ 1,303.8      $ (98.5   $ 1,303.8      $ 1,425.6      $ (121.8

Operating income

   $ 95.8      $ 110.8      $ (15.0   $ 110.8      $ 109.1      $ 1.7   

Operating margin

     7.9     8.5     (60 )bpts      8.5     7.7     80 bpts 

2011 Compared with 2010

Professional Support Services revenues for the year ended December 31, 2011 decreased by $99 million, or 8%, compared to the year ended December 31, 2010. The decrease was due to: (1) $75 million in reduced SSES services due to contract vehicle changes that resulted in the loss of pass-through volume from our previous subcontractors under our former SSES task orders as previously discussed under “Key Performance Measures”, (2) $26 million of lower revenues related to the completion of the SBInet program for the U.S. Department of Homeland Security in 2010, and (3) $11 million of lower equipment procurement from the U.S. Army resulting from the draw down of U.S. troops from Iraq. In addition, revenues declined by $17 million for acquisition and logistics support for the U.S. Marine Corps (USMC) due to the loss of a task order in 2010 from a change in the acquisition strategy by the USMC Systems Command acquisition authority. Engility’s task order was under the Acquisition and Logistics domain of the Commercial Enterprise Omnibus Support Services Contract. The acquisition authority elected at the time of the re-competition to move the task order under the Engineering Services domain where Engility does not have a contractor position. Since participation in a domain requires a contractor position, Engility was precluded from participating on the re-competition as a prime or subcontractor for this task order.

These decreases were partially offset by $30 million in higher revenues primarily from systems engineering and integration services for new task orders with the U.S. Navy’s Space and Naval Warfare Systems Command (SPAWAR). Our contract with SPAWAR for these systems engineering and integration services will expire in 2012. The follow on work will be re-competed under a multiple award contract, compared to the current single award contract where we are the only contractor, and therefore, revenues for these services will depend on the portion of the work we are able to competitively win in 2012.

Professional Support Services operating income for the year ended December 31, 2011 decreased by $15 million, or 14%, compared to the year ended December 31, 2010. Operating margin decreased by 60 basis points. The decrease was primarily due to lower revenues in 2011 related to a contract where we provide acquisition and logistics support for the USMC and cost improvements experienced in 2010 that did not occur in 2011 on certain completed fixed price tasks orders for the same contract. Severance charges of $2 million recorded in 2011 also reduced operating margin by 20 basis points.

2010 Compared with 2009

Professional Support Services revenues for the year ended December 31, 2010 decreased by $122 million, or 9%, compared to the year ended December 31, 2009. The decrease in revenues was primarily due to $154 million in reduced SSES services and $24 million of reduced revenues from the loss of a task order in 2010 related to acquisition and logistics support for the USMC. These decreases were partially offset by increases of $56 million, primarily due to higher tasking by the PEO of the U.S. Army for acquisition support services.

Professional Support Services operating income for the year ended December 31, 2010 increased by $2 million, or 2%, compared to the year ended December 31, 2009. Operating margin increased by 80 basis points.

 

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The increase was due to a decline in lower margin subcontractor pass-through revenues for SSES services, which increased operating margin by 90 basis points, and cost improvements in 2010 on certain completed fixed price task orders for acquisition and logistics work for the USMC, which increased operating margin by 30 basis points. These increases were partially offset by a 40 basis point decrease in operating margin due to higher costs for the SBInet program and an increase in lower margin subcontractor pass through revenues for acquisition support services provided to the PEO of the U.S. Army.

Mission Support Services

The table below presents selected data with respect to the Mission Support Services segment.

 

     Year ended December 31,     Decrease     Year ended December 31,     Decrease  
           2011                 2010                   2010                 2009          
     (dollars in millions)  

Revenues

   $ 974.5      $ 1,217.1      $ (242.6   $ 1,217.1      $ 1,232.1      $ (15.0

Operating income

   $ 88.0      $ 130.6      $ (42.6   $ 130.6      $ 146.0      $ (15.4

Operating margin

     9.0     10.7     (170 )bpts      10.7     11.8     (110 )bpts 

2011 Compared with 2010

Mission Support Services revenues for the year ended December 31, 2011 decreased by $243 million, or 20%, compared to the year ended December 31, 2010. The decrease was primarily due to: (1) $90 million related to the re-competition loss of an Afghanistan MoD support contract in October 2010, based on customer assessments of pricing and staffing in our proposal that resulted in the selection of a competitor, (2) $50 million in lower linguist services and $40 million in lower training and logistics support services for the U.S. Army due to the drawdown of U.S. military forces from Iraq, (3) $38 million of lower revenues due to the completion in 2010 of a contract for logistics and supply chain management for the U.S. Army, (4) $23 million of lower revenue on a contract for support services to the U.S. Air Force in Europe due to the realignment of this contract by L-3 to its National Security Solutions business in 2011, and (5) $22 million of lower revenues related to an international maritime security enhancement program. These declines were partially offset by $20 million of higher revenues primarily due to higher volume on the LEP contract.

Mission Support Services operating income for the year ended December 31, 2011 decreased by $43 million, or 33%, compared to the year ended December 31, 2010. Operating margin decreased by 170 basis points. The decrease was comprised of (1) 90 basis points due to a reduction in higher margin revenues for an Afghanistan MoD support contract, training and logistics support services for the U.S. Army, and support services to the U.S. Air Force in Europe and (2) 70 basis points primarily due to lower contract profit rates on select new business and re-competitions of existing business due to competitive price pressures, including our contracts for international police training and African contingency operations. Severance charges of $2 million recorded in 2011 also reduced operating margin by 10 basis points.

2010 Compared with 2009

Mission Support Services revenues for the year ended December 31, 2010 decreased by $15 million, or 1%, compared to the year ended December 31, 2009. The decrease in revenues was primarily due to: (1) $46 million from the loss of an Afghanistan MoD support contract in October 2010, (2) $27 million of lower revenues from reduced tasking for Iraq training work, and (3) $26 million of lower revenue due to a change in the contract for support services to the U.S. Air Force in Europe from a single award to a multiple award contract, which resulted in our sharing of the work with other contractors. These decreases were partially offset by increases of $84 million primarily for increased logistics and law enforcement support services for the U.S. Army due to higher volume in Afghanistan.

 

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Mission Support Services operating income for the year ended December 31, 2010 decreased by $15 million, or 11%, compared to the year ended December 31, 2009. Operating margin decreased by 110 basis points. The decrease was primarily due to a reduction in higher margin revenues for certain contracts, including the Afghanistan MoD support contract and a contract to provide support services to the U.S. Air Force in Europe.

Liquidity and Capital Resources

Current liquidity

Historically, we have generated cash flow sufficient to fund our requirements for working capital, capital expenditures, commitments and other discretionary investments. Our largest use of cash flow is for working capital, primarily for billed and unbilled receivables. Our businesses have very low capital intensity because we are primarily a services provider, with most of the services performed at customer facilities. Capital expenditures amounted to $5 million, $3 million and $7 million for the years ended December 31, 2011, 2010 and 2009, respectively. Subsequent to the separation, while our ability to forecast future cash flows is more limited because we do not have a recent operating history as an independent company, we expect to fund our ongoing working capital, capital expenditures, commitments and other discretionary investments through cash flows from operations and access to cash on hand and a revolving credit facility.

The majority of our operations have historically participated in cash management and funding arrangements managed by L-3 where cash is swept from our balance sheet daily and cash to meet our operating and investing needs is provided as needed from L-3. Transfers of cash both to and from these arrangements are reflected as a component of “Parent company investment” in the combined balance sheets. The cash presented on our balance sheet consists primarily of cash from subsidiaries that do not participate in these arrangements.

Future liquidity

Our primary future cash needs will be for working capital, capital expenditures, commitments and strategic investments. Our ability to fund these needs will depend, in part, on our ability to generate or raise cash in the future, which depends on our future financial performance and financial results, which to a certain extent, are subject to general economic, financial, competitive, legislative and regulatory factors beyond our control.

Prior to the completion of the spin-off, we expect to raise indebtedness in the amount of $345 million, $335 million of the proceeds of such indebtedness is expected to be used to fund a cash distribution to L-3 in connection with the spin-off transaction. The actual terms of the debt, including interest rate, principal amount, redemption provisions and maturity, will depend on market conditions at the time of pricing. At the time of the spin-off, we will also have $40 million of additional funds available under the revolving credit facility. See “Description of Material Indebtedness.”

Following our separation from L-3, our capital structure and sources of liquidity will change significantly from our historical capital structure. We will no longer participate in cash management and funding arrangements with L-3. Instead, our ability to fund our capital needs will depend on our ongoing ability to generate cash from operations, and access to bank financing and capital markets. If our cash flows from operations are less than we expect, we may need to incur additional debt or issue additional equity. Although we believe that the arrangements in place at the time of the separation will permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. We cannot assure that such financing will be available to us on acceptable terms or that such financing will be available at all. We believe that our future cash from operations together with our cash on hand, and access to bank financing and capital markets will provide adequate resources to fund our short-term and long-term liquidity and capital needs.

 

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Statement of Cash Flows

The table below provides a summary of our cash flows from operating, investing and financing activities for the periods indicated.

 

     First Quarter Ended     Year Ended December 31,  
     March 30, 2012     April 1, 2011     2011     2010     2009  
     (in millions)  

Net cash (used in) from operating activities

   $ (5   $ 32      $ 165      $ 197      $ 248   

Net cash used in investing activities

     —          (1     (4     (1     (10

Net cash from (used in) financing activities

     2        (27     (163     (186     (239

Operating Activities

2012 First Quarter Compared with 2011 First Quarter. We used $5 million of cash from operating activities during the 2012 First Quarter, a decrease of $37 million compared with $32 million of cash generated during the 2011 First Quarter. This decrease was primarily due to $14 million of lower net income and $21 million of more cash used for changes in operating assets and liabilities. The changes in operating assets and liabilities were primarily for more cash used for accounts payable, receivables and accrued expenses, partially offset by more cash generated from advanced payments and billings in excess of costs. The changes in accounts payable and accrued expenses used $20 million in more cash in the 2012 First Quarter compared to the 2011 First Quarter due to the timing of when invoices for purchases were received and payments were made. The change in receivables used $16 million in more cash due to sales exceeding billings. The change in advanced payments and billings in excess of costs generated $15 million in more cash in the 2012 First Quarter compared to the 2011 First Quarter due to payments received for certain contracts.

2011 Compared with 2010. We generated $165 million of cash from operating activities during the year ended December 31, 2011, a decrease of $32 million compared with $197 million generated during the year ended December 31, 2010. This decrease was primarily due to $103 million of lower net income, adjusted to exclude non-cash goodwill impairment charges and deferred income taxes, partially offset by $73 million of more cash generated from changes in operating assets and liabilities, primarily for receivables and other current assets. The change in receivables generated $38 million of more cash in 2011 compared to 2010 due to the larger decline in revenues in 2011 compared to 2010 and the related impact on receivables. The change in other current assets generated $23 million of more cash in 2011 compared to 2010 primarily due to an increase in at-risk contract costs in 2010 resulting in a use of cash in 2010, which were funded by the U.S. Government in 2011, resulting in a source of cash in 2011.

2010 Compared with 2009. We generated $197 million of cash from operating activities during the year ended December 31, 2010, a decrease of $51 million compared with $248 million generated during the year ended December 31, 2009. This decrease was primarily due to $57 million of more cash used for changes in operating assets and liabilities. The changes in operating assets and liabilities was primarily for more cash used for receivables, other current assets and other liabilities, partially offset by less cash used for accrued employment costs and accounts payable and accrued expenses. The change in receivables generated $49 million of less cash in 2010 compared to 2009 due to the larger decline in revenues during 2009 than in 2010 and the related impact on receivables. The change in other current assets generated $43 million of less cash in 2010 compared to 2009 due to a decrease in at-risk contract costs in 2009 related to funding received from the U.S. Government in 2009, compared to an increase in at-risk contract costs in 2010 as discussed above. The change in other liabilities generated $76 million of less cash in 2010 compared to 2009 primarily due to deferred compensation payments made to certain employees in 2010 and the recognition of non-current income tax liabilities in 2009 related to an Internal Revenue Service tax accounting method change

 

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we elected regarding income recognition of service contracts. The change in accrued employment costs generated $65 million of more cash in 2010 compared to 2009 due to the timing of pay dates for salaries and wages resulting in one less pay date in 2010 compared to 2009. The change in accounts payable and accrued expenses generated $42 million of more cash in 2010 compared to 2009 due to larger a decline in contract costs, during 2009 than in 2010, and the related impact on payables, associated with the larger decline in revenues during 2009 as discussed above.

Investing Activities

During both the 2012 First Quarter and 2011 First Quarter, we used less than $1 million of cash to pay for capital expenditures.

During 2011, we used $4 million of cash primarily to pay $5 million for capital expenditures.

During 2010, we used $1 million of cash primarily to pay $3 million for capital expenditures.

During 2009, we used $10 million of cash primarily to pay $7 million for capital expenditures and $4 million to pay the remaining contractual purchase price for a business acquisition completed in 2008.

Financing Activities

Cash used in financing activities for the 2012 First Quarter, 2011 First Quarter and three years ended December 31, 2011 primarily represents transactions between us and L-3 and are considered to be effectively settled for cash at the time the transaction is recorded. The components of these transactions (or transfers) include: (i) cash transfers from us to L-3, (ii) cash transfers from L-3 used to fund our requirements for working capital, capital expenditures and commitments, (iii) charges (benefits) for income taxes, (iv) allocations of L-3’s corporate expenses described in Note 7 to the audited combined financial statements included herein and (v) revenue and purchases from L-3’s businesses other than those that will be spun-off from L-3.

We anticipate that the debt agreements that we will enter into in connection with the spin-off will contain financial and/or other restrictive covenants. Such covenants will restrict our ability to sell assets, incur more indebtedness, repay certain indebtedness, make certain investments or business acquisitions, make certain capital expenditures, engage in business mergers or consolidations and engage in certain transactions with subsidiaries and affiliates, among other things. In addition, certain of those debt agreements could also require us to maintain compliance with certain financial ratios, including those related to earnings before interest, taxes, depreciation and amortization and consolidated indebtedness.

Contractual Obligations

The table below presents our estimated total contractual obligations at December 31, 2011, including the amounts expected to be paid or settled for each of the periods indicated below.

 

     Payments due by period  
     Total      Less than
1 year
     1 – 3
Years
     3 – 5
years
     More than
5 years
 
     (in millions)  

Contractual Obligations

              

Non-cancelable operating leases(1)

     91         23         33         21         14   

Purchase obligations(2)

     131         124         7         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(3)

   $ 222       $ 147       $ 40       $ 21       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Non-cancelable operating leases are presented net of estimated sublease rental income.
(2) Represents open purchase orders at December 31, 2011 for amounts expected to be paid for goods or services that are legally binding.

 

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(3) Excludes all income tax obligations, a portion of which represents unrecognized tax benefits in connection with uncertain tax positions taken, or expected to be taken on our income tax returns as of December 31, 2011 since we cannot determine the time period of future tax consequences. For additional information regarding income taxes, see Note 8 to our audited combined financial statements included herein.

Off Balance Sheet Arrangements

At December 31, 2011, we had no significant off-balance sheet arrangements other than for $2 million of outstanding letters of credit with financial institutions covering performance and financial guarantees per contractual requirements with certain customers. These letters of credit may be drawn upon in the event of Engility’s nonperformance.

Quantitative and Qualitative Disclosures About Market Risk

Engility has limited exposure to foreign currency exchange risk as the substantial majority of the business is conducted in U.S. dollars. As a business within L-3, Engility has not directly experienced exposure to the impacts of certain market risks, including those related to equity price risk and interest rate risk. In the future, we expect impacts from any changes in market conditions to be minimized through our normal operating and financing activities.

Legal Proceedings and Contingencies

We are engaged in providing services under contracts with the U.S. Government and, to a lesser degree, under foreign government contracts, some of which are funded by the U.S. Government. All such contracts are subject to extensive legal and regulatory requirements, and, periodically, agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. Under U.S. Government procurement regulations, an 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 the 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 that satisfies the requisite level of seriousness, could result in debarment from contracting with the U.S. Government for a specified term.

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. For a description of our legal proceedings and contingencies, see “Business—Legal Proceedings” as well as Note 10 to the audited combined financial statements included herein.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to our audited combined financial statements included herein. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us 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 revenues and cost of revenues during the reporting period. The most significant of these estimates relate to the recoverability, useful lives and valuation of identifiable intangible assets and goodwill, income taxes and contingencies. Actual amounts will differ from these estimates and could differ materially. We believe that our critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are uncertain and inherently judgmental at the time of the estimate; (2) use of reasonably different assumptions could have changed our estimates, particularly with respect to recoverability of assets, and (3) changes in the estimate could have a material effect on our financial condition or results of operations. We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our financial statements.

 

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Goodwill and Identifiable Intangible Assets. We record goodwill in connection with the acquisition of businesses when the purchase price exceeds the fair values of the assets acquired and liabilities assumed. Generally, the largest intangible assets from the businesses that we acquire are the assembled workforces, which includes the human capital of the management, administrative, marketing and business development, engineering and technical employees of the acquired businesses. Since intangible assets for assembled workforces are part of goodwill in accordance with the accounting standards for business combinations, the substantial majority of the intangible assets for our business acquisitions is recognized as goodwill.

As part of the accounting for our business acquisitions, identifiable intangible assets are recognized as assets if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. The most significant identifiable intangible asset that is separately recognized for our business acquisitions is customer contractual relationships. All of our customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of the acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on revenues on contract (revenue arrangement) renewals expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and revenues, less a contributory assets charge, all of which is discounted to present value. Identifiable intangible assets are: (1) tested for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and (2) amortized over their estimated useful lives as the economic benefits are consumed, ranging from 4 to 30 years. We review and update our estimates of the duration of our customer contractual relationships and consistently consider several factors specific to our existing contracts, including DoD budgets and spending priorities. If such estimates indicate that the duration of the our customer contractual relationships have decreased compared to the estimates made as of the date we acquired these intangible assets, then we accelerate the amortization period for our customer contractual relationships over their remaining useful economic life. Depending on the outcome of: (1) declining DoD budgets that will reduce funding for some of our revenue arrangements, (2) increased competition for our services due to the uncertainty of future U.S. defense budgets and (3) the FY 2013 DoD Plan, which seeks reductions in contractor support services and consolidations of enterprise IT systems as part of an effort to achieve an additional $60 billion of efficiency savings over the next five fiscal years (FY 2013 through FY 2017) our existing contracts, the value of our customer contractual relationships and their estimated useful lives could be adversely affected. Furthermore, depending on the outcome of potential additional cuts of $500 billion for FY 2013 through FY 2021 due to the sequestration process, which becomes effective on January 3, 2013, unless Congress enacts new legislation to rescind them, the value and estimated useful lives of our customer relationships could be further adversely affected.

We review goodwill for impairment at least annually as of November 30 and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable using a two-step process for each reporting unit. A reporting unit is an operating segment, as defined by the segment reporting accounting standards, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics.

The first step in the process is to identify any potential impairment by comparing the carrying value of a reporting unit and its fair value. We use a discounted cash flow (DCF) valuation approach to determine the fair value of our reporting units, which is dependent upon estimates for future revenues, operating income, depreciation and amortization, income tax payments, working capital changes, and capital expenditures, as well as, expected long-term growth rates for cash flows. All of these factors are affected by economic conditions related to the U.S. defense industry, as well as, conditions in the U.S. capital markets. If a potential impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit.

 

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We had five reporting units at December 31, 2011 and four reporting units at December 31, 2010. The composition of our reporting units and associated goodwill balances changed in 2011 as compared to 2010 due to a business realignment that created an additional reporting unit with discrete financial information that is regularly reviewed by segment management. The goodwill amount allocated to each of our reporting units by L-3 was based on their relative fair value or L-3’s historical basis, as appropriate. The aggregate balance of goodwill declined by $77 million to $904 million at December 31, 2011 from $981 at December 31, 2010 due to an impairment charge discussed below.

The table below presents our reporting units by segment, the associated goodwill balance and the excess fair value percentage and dollar amount, at December 31, 2011.

 

     Goodwill
Balance
     Excess Fair Value  (1)  
            %           $      

Command and Control Systems & Software

   $ 398       68%   $ 311   

Global Security & Engineering Solutions (GS&ES)

     192       88%     199   

Engility Services Inc.(2)

     75       38%     34   
  

 

 

      

Professional Support Services Segment

   $ 665        
  

 

 

      

Training and Operational Support

   $ 239       180%   $ 536   

Linguist Operations & Technical Support (LOTS)

     —         —       —     
  

 

 

      

Mission Support Services Segment

   $ 239        
  

 

 

      

Total goodwill

   $ 904        
  

 

 

      
       

 

(1) The excess fair value represents the percentage and dollar amount by which the fair value of a reporting unit must decline before a potential impairment is identified and would require the second step of the goodwill impairment assessment to be performed.

(2) Engility Services Inc. is a separate legal entity and operating business within Engility Holdings, Inc.

We recorded non-cash charges of $77 million and $172 million for the years ended December 31, 2011 and 2010, respectively, for the impairment of goodwill. The goodwill impairment charges were due to a decline in the estimated fair value of the LOTS and GS&ES reporting units, which are part of the Mission Support Services and Professional Support Services segments, respectively, as a result of a decline in their projected future cash flows. The decline in projected cash flows in 2011 and 2010 for the LOTS reporting unit was due to lower expected sales volumes resulting from the drawdown of U.S. military forces from Iraq which began in 2010 and was completed in 2011. The decline in projected cash flows in 2010 for the GS&ES reporting unit was primarily due to increased competition putting pressure on operating margins and cash flow. At December 31, 2011, the GS&ES reporting unit had a remaining goodwill balance of $192 million. There is no remaining goodwill balance for the LOTS reporting unit.

The more significant assumptions used in our DCF valuations to determine the fair values of our reporting units in connection with the goodwill valuation assessment at November 30, 2011 were: (1) detailed three-year cash flow projections for each of our reporting units, which are based primarily on our estimates of future revenues, operating income and cash flows, (2) an expected long-term growth rate for each of our reporting units, which approximates the expected long-term growth rate for the U.S. economy and respective areas of the U.S. defense industry in which our reporting units operate and (3) risk adjusted discount rates, which represents the estimated weighted-average cost of capital (WACC) for each reporting unit and includes the estimated risk-free rate of return that is used to discount future cash flow projections to their present values. There were no changes to the underlying methods used in 2011 as compared to the prior year DCF valuations of our reporting units.

Each reporting unit WACC was comprised of: (1) an estimated required rate of return on equity, based on publicly traded companies with business and economic risk characteristics comparable to each of our reporting

 

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units (Market Participants), including a risk free rate of return of 3.06% on the 30-year U.S. Treasury Bond as of November 30, 2011 (4.1% as of November 30, 2010) and an equity risk premium of 6% (5% for 2010) and (2) an after-tax rate of return on Market Participants’ debt, each weighted by the relative market value percentages of Market Participants’ equity and debt. The WACC assumptions for each reporting unit are based on a number of market inputs that are outside of our control and are updated annually to reflect changes to such market inputs as of the date of our annual goodwill impairment assessments, including changes to: (1) the estimated required rate of return on equity based on historical returns on common stock securities of Market Participants and the Standard & Poor’s 500 Index over the prior two-year period, (2) the risk free rate of return based on the prevailing market yield on the 30-year U.S. Treasury bond, (3) the rate of return of Market Participants publically traded debt securities, and (4) the relative market value percentages of Market Participants’ equity and debt.

The table below presents the (1) weighted average risk adjusted discount rate assumptions used in our DCF valuation, (2) estimated average cash flow growth rates in 2012-2014, and (3) weighted average cash flow growth rates for 2015 and 2016 and after 2016 for each of our reportable units.

 

           Estimated Average Cash
Flow Growth Rates
 
     WACC     2012-
2014

3 Year
Average
    2015-
2016
    After
2016
 

Reporting Unit

        

Command and Control Systems & Software

     7.1     (14.6 )%      0     1.0

Global Security & Engineering Solutions (GS&ES)

     7.1     (10.1 )%      0     1.0

Engility Services Inc.

     7.1     (20.0 )%      0     1.0

Training and Operational Support

     7.1     (20.3 )%      0     1.0

Linguist Operations & Technical Support (LOTS)

     7.1     (50.0 )%      0     1.0

We consistently consider several factors to determine expected future annual cash flows for our reporting units, including historical multi-year average cash flow trends by reporting unit and the expected future cash flow growth rates for each of our reporting units primarily based on our estimates of future revenues, operating income, and working capital changes. Furthermore, the substantial majority of our reporting units are primarily dependent upon the DoD budget and spending. Historically, approximately 79% of our total 2011 revenues were generated from DoD customers. Accordingly, to determine expected future annual cash flows for our reporting units we also consider: (1) the DoD budget and spending priorities, (2) expansion into new markets, (3) changing conditions in existing markets for our services, (4) possible termination of certain government contracts, (5) expected success in new business competitions and re-competitions on existing business, and (6) anticipated operating margins and working capital requirements. We closely monitor changes in these factors and their impact on the expected cash flow of our reporting units.

In addition to the factors noted in the previous paragraph, our goodwill impairment assessments as of November 30, 2011 assumed a declining DoD budget through 2014 with modest growth beginning in fiscal year 2015, consistent with our 2012 outlook and enacted DoD budget for FY 2012 discussed in industry considerations included herein. However, our current estimates and assumptions may not result in the projected cash flow outcomes due to a number of factors, including:

 

   

the impact on our businesses of the recent DoD base budget cuts, including $22 billion of cuts in the FY 2012 enacted budget compared to the FY 2012 budget request, and $259 billion of cuts to the proposed DoD base budgets for FY 2013 to FY 2017 compared to the previously proposed DoD base budgets, and their impact on our future results of operations and cash flows; and

 

   

the outcome of potential additional cuts of $500 billion for FY 2013 through FY 2021 due to the sequestration process, which becomes effective on January 3, 2013, unless Congress enacts new legislation to rescind them.

 

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Our DCF valuation is dependent upon several assumptions and is subject to uncertainties due to uncontrollable events, including future DoD budgets, U.S. government spending priorities for services, general economic conditions, and future strategic decisions concerning our reporting units. A change in any one or combination of the assumptions used in our DCF valuation could negatively impact the fair value of a reporting unit, resulting in additional goodwill impairments. A hypothetical 10% increase in the discount rate or change in the long term growth assumption to 0% would not have resulted in the potential impairment of the goodwill of any of our other reporting units at November 30, 2011.

Valuation of Deferred Income Tax Assets and Liabilities. At December 31, 2011, we had deferred tax assets of $57 million and deferred tax liabilities of $125 million. Deferred income taxes are determined separately for each of our tax-paying entities in each tax jurisdiction. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including the future reversal of existing temporary timing differences (deferred tax liabilities), taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. Based on our deferred tax liabilities and our estimates of the amounts and timing of future taxable income, we believe that it is more likely than not that we will be able to realize our deferred tax assets. A change in the ability of our operations to continue to generate future taxable income could affect our ability to realize the future tax deductions underlying our deferred tax assets, and require us to provide a valuation allowance against our deferred tax assets. The recognition of a valuation allowance would result in a reduction to net income and, if significant, could have a material impact on our effective tax rate, results of operations and financial position in any given period.

Liabilities for Pending and Threatened Litigation. We are subject to litigation, government investigations, proceedings, claims or assessments and various contingent liabilities incidental to our business or assumed in connection with certain business acquisitions. In accordance with the accounting standards for contingencies, we accrue a charge for a loss contingency when we believe it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. If the loss is within a range of specified amounts, the most likely amount is accrued, and if no amount within the range represents a better estimate we accrue the minimum amount in the range. Generally, we record the loss contingency at the amount we expect to pay to resolve the contingency and the amount is generally not discounted to the present value. Amounts recoverable under insurance contracts are recorded as assets when recovery is deemed probable. Contingencies that might result in a gain are not recognized until realizable. Changes to the amount of the estimated loss, or resolution of one or more contingencies could have a material impact on our results of operations, financial position and cash flows. For a description of our legal proceedings and contingencies, see “Business—Legal Proceedings” as well as Note 10 to the audited combined financial statements included herein.

New Accounting Standards Implemented and Accounting Standards Issued and Not Yet Implemented

For a discussion of new accounting standards implemented, see Note 3, “New Accounting Standards Implemented,” in the audited combined financial statements. For a discussion of accounting standards issued and not yet implemented, see Note 2, “Summary of Significant Accounting Policies,” in the audited combined financial statements included herein.

 

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BUSINESS

Overview

We are a leading provider of systems engineering services, training, program management, and operational support for the U.S. Government worldwide. Our business is focused on supporting the mission success of our customers by providing a full range of engineering, technical, analytical, advisory, training, logistics and support services. Our revenues are spread over a diverse mix of activities and services with no single contract accounting for more than 7% of our revenue in 2011. For the year ended December 31, 2011, we had revenues of $2.2 billion, 98% of which was derived from our U.S. Government customers.

We operate in two segments: Professional Support Services and Mission Support Services. The Professional Support Services segment provides Systems Engineering and Technical Assistance (SETA) services, program management support and software engineering lifecycle sustainment and support services. The Professional Support Services segment had 2011 revenues of $1.2 billion. Through our Mission Support Services segment, we provide capabilities such as defense related training, education and support services, law enforcement training, national security infrastructure and institutional development. The Mission Support Services segment had 2011 revenues of $1.0 billion.

Engility, through its predecessor companies, has provided mission critical services to several U.S. Government departments and agencies for over four decades. Our customers include 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), Department of Homeland Security (DHS), and allied foreign governments. We attribute the strength of our customer relationships to our singular focus on services, our industry-leading capabilities in program planning and management, superior past performance, and the experience of our people and their commitment to the mission. As of December 31, 2011, we employed approximately 9,200 individuals globally and operate in over 70 countries led by an experienced executive team, composed of industry and government veterans.

Our Business Strategy

Our customers turn to us to enhance their capabilities and gain specific expertise on a cost effective basis. Therefore, delivering superior value to our customers is critical to our ability to grow our business, drive earnings and cash flow and create value for our shareholders. The key elements of our strategy include:

 

   

Expand Our SETA Business. As a “pure-play” service provider, Engility intends to aggressively pursue new SETA business, unconstrained by organizational conflicts of interest (OCI) regulations related to our status as a business unit within L-3. Under the OCI regulations, when a company has provided SETA services for a particular Government program, it may be prohibited from selling products to the U.S. Government under the same program. As enforcement of OCI regulations has become more rigorous over the past four years, we estimate that L-3 ceded or otherwise lost a significant amount of its SETA related revenues due to OCI constraints. In addition, the Engility businesses that were part of L-3, did not pursue various SETA opportunities in the U.S. Government market for Professional, Administrative and Management Support Services due to OCI-related constraints. Moving forward, we intend to aggressively pursue these additional SETA contract opportunities to capture and expand our market share.

 

   

Streamline Our Operations. Critical to winning greater share in our addressable markets will be our ability to offer services at competitive and affordable prices. Following the spin-off, we expect to significantly reduce our overhead and operating expenses through a number of actions to develop and maintain a streamlined operating structure. These include consolidating our operating units from seven to four, combining administrative functions currently performed by those operating units and re-engineering our managerial processes. We expect that these actions will enable us to reduce our overhead significantly over the next two years as a percent of revenue. We believe our lean

 

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organizational structure and processes will enhance our agility and cost competitiveness to better meet the requirements of our customers.

 

   

Capitalize on our Strengths—Performance, Agility, Expertise. Past performance is a critical factor in sustaining and gaining market share. Our customers look to us as a trusted long-term partner as reflected in our superior re-compete win rates and customer performance evaluations. Our abilities to rapidly and efficiently deploy resources around the world and perform on large-scale, complex programs are also recognized by our customers. In 2011, we achieved 96% of the available performance-based award fees on our cost-plus contracts. We are committed to protecting and enhancing our reputation, developing additional capabilities and investing in our team and customer relationships to create new business opportunities.

 

   

Transition from our Iraq/Afghanistan Related Programs. We anticipate the drawdown of U.S. Forces from Iraq and Afghanistan will result in the wind down of certain of our programs. We intend to use the cash flow resulting from this wind down to reinvest in new business opportunities. Further, we believe we are well placed to pursue and perform U.S.-funded programs to help stabilize and develop both countries.

 

   

Maintain Balance Sheet Strength and Liquidity. We will seek to maintain a capital structure that provides the resources and financial flexibility to support our business. At the time of the spin-off, we anticipate having approximately $50 million in total liquidity, consisting of cash and cash equivalents and available borrowings under our senior secured revolving credit facility. Through disciplined capital spending and working capital management, we intend to maximize our cash flows and maintain our strong balance sheet.

Our Strengths

Our competitive strengths are derived from combining technical expertise and innovative operating efficiency with a sophisticated understanding of our markets and knowledge of our customers’ needs. Our core strengths include:

 

   

Proven Performance and Customer Trust. Long term success in the services business is not possible without the trust and confidence of our customers, which is primarily based on past performance and close interpersonal relationships. For over four decades, our people and ideas have performed important roles in support of and contributed to the success of the U.S. military’s and other government agencies’ missions around the world. The majority of our employees work side-by-side with their government counterparts at customer locations in the United States and around the world, thus developing those critical interpersonal relationships.

 

   

Leading Market Position. Engility is a leading provider of systems engineering services, training, program management, and operational support to military and civilian government agencies, both in the United States and with allied foreign governments. We believe that our success is based, in part, upon our (1) reputation for integrity, quality and performance with virtually all key current and potential U.S. and foreign customers, (2) world-wide presence in more than 70 countries, which provides a platform for international expansion and growth, and (3) workforce consisting of highly specialized personnel and an employee base of approximately 9,200 professionals across a wide range of skills and expertise.

 

   

Breadth of Service Capabilities. We are one of the largest government service providers offering a wide breadth of capabilities to our customers. Our 9,200 professionals have deep domain expertise in systems engineering and integration, program management support, defense related and law enforcement training, and education and support services. Further, our culture of performance enables us to rapidly respond to our customers’ immediate and unforeseen requirements. We believe our anticipated streamlined organizational structure will allow us to respond more quickly and efficiently to provide customers with experts and resources that meet their needs around the world.

 

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Significant Recurring Contract Base and Diverse Business Mix. As of December 31, 2011, we had an estimated $2.5 billion of funded and unfunded remaining aggregate contract value. We were the prime contractor on 72% of our revenues for the year ended December 31, 2011. We are qualified to compete as a prime contractor for task orders on a large number of U.S. Government-Wide Acquisition and Indefinite Delivery, Indefinite Quantity contract vehicles. In addition, our business is composed of an increasingly wide range of services, which allows us to capitalize on both demand and funding from diverse sources. For the year ended December 31, 2011, our top ten contracts represented approximately 41% of our revenues and no single contract accounted for more than 7% of our revenues.

 

   

Attractive Business Dynamics. As a leading government services provider, Engility benefits from a favorable mix of cost reimbursable contracts, low capital expenditure requirements and favorable working capital terms to generate strong operating cash flow. Over the past three years, our capital expenditures and working capital as a percentage of total revenues has averaged 0.2% and 9.0%, respectively. Combined with our low fixed cost structure, this provides us with a substantial degree of operating and financial flexibility.

 

   

Experienced Team with Deep Industry and Market Knowledge. Crucial to Engility’s success is the composition, commitment and the experience of its workforce, which possesses a comprehensive understanding of the operating environment of our core customers. Our senior leadership structure is aligned with the perspectives, strategies and priorities of our primary customers. Collectively, our executives have an average of 32 years of industry, military or government experience, often at the most senior levels. In addition, our understanding of our customers’ operating environment, strategic objectives and underpinning tactical requirements facilitates our ability to plot a strategic approach to expand our share of the national security markets and position ourselves for emerging markets.

Our Business Segments

Within the context of our core competencies, Engility operates in two customer focused segments: Professional Support Services and Mission Support Services.

Professional Support Services

Our Professional Support segment had revenues of $1,205 million, $1,304 million and $1,426 million for the years ended December 31, 2011, 2010 and 2009, respectively, and accounted for 55%, 52%, and 54%, respectively, of our combined revenues. This segment consists of the following major service and support lines:

Systems Engineering and Technical Assistance Services. For over 40 years, Engility has been providing a broad range of SETA services enabling our customers to enhance their capabilities on a cost effective basis while gaining specific expertise to better design, evaluate and implement their programs. Our professionals assist Customer Program Offices to develop and analyze requirements, perform Analysis of Alternatives, conduct capability assessments, and develop program roadmaps. Our areas of expertise include:

 

   

Systems Engineering and Integration including Requirements Development and Traceability—Our Systems Engineering and Integration business provides qualified staff utilizing a disciplined approach for the definition, implementation, integration and operation of a system. We provide services for a range of systems, including combat systems, health and welfare systems, IT networks and depot-level maintenance, including counter-improvised explosive devices. We emphasize meeting system operational performance requirements over a planned lifecycle within cost and schedule constraints. Our competencies include architecture analysis, planning and research, studies and analyses, modeling and simulation, rapid fielding initiatives, operations management, developing IT networks, databases and software applications.

 

   

Test and Evaluation—Our Test and Evaluation business performs all aspects of testing and analysis by which a system or components are compared against requirements and specifications. The results are evaluated, among other things, to assess the progress of design, performance and supportability.

 

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Developmental test and evaluation (DT&E) is an engineering tool used to reduce risk throughout the defense acquisition cycle. Operational test and evaluation (OT&E) is the actual or simulated employment, of a system under realistic operational conditions. Engility has supported DT&E and OT&E for a variety of DoD, DHS, and FAA customers, performing a variety of tests, including in management, planning, execution, integration, formal systems, interoperability, regression, reporting, end-to-end testing, and combined test force/integrated test team/integrated process team support.

 

   

Field Testing and Data Analysis—Our Field Testing and Data Analysis business provides qualified staff developing research reports, white papers, test plans, test reports, monthly status reports and inputs for technology data calls and presentation materials. Our staff also conducts engineering studies and independent analyses to evaluate and/or validate various system design alternatives relative to effectiveness, cost, schedule, performance, reliability, maintainability, availability, usability, and interoperability.

 

   

Modeling and Simulation—Our Modeling and Simulation (M&S) business supports the DoD, DHS, FAA and National Aeronautics and Space Administration (NASA). Our core capabilities include Weapons Effects modeling, FAA NextGen domain expertise and advanced simulation capabilities that span the entire acquisition management lifecycle as well as advanced M&S techniques in support of various research programs, including NASA. Engility’s M&S personnel possess strong aviation domain expertise and innovative skills that combine to create advanced laboratory and virtual environments necessary for conceptual, operational, technical and investigative assessments.

 

   

Systems Training Solutions Assessment, Development and Delivery—Our Systems Training Solutions Assessment, Development and Delivery business provides systems training solutions assessment, development and delivery support. In addition, Engility provides training solutions across the DoD with regard to training requirements for several acquisition programs as well as Air Operations Centers and Distributed Mission Operations. We have core competencies in technology training solutions for Command and Control, Command, Control and Communications, Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance, Air Traffic Control and Explosive Ordnance Disposal (EOD).

Program Management Support. Our Program Management Support business provides qualified staff to perform all aspects of Program and Project Management, including support for planning, organizing, securing, and managing resources to achieve specific goals. We provide strategic planning and support to program management offices and business operations. Our areas of expertise include:

 

   

Financial/Budget Analysis and Management—Our Financial/Budget Analysis and Management business provides qualified staff to perform financial and budget analysis and management for contracts and subcontracts in support of U.S. Government customers. Support ranges from the preparation of budgets for the Planning, Programming, Budgeting and Execution process through the execution of current year funding for the various appropriations. We support the development of project financial data and cost estimates including work breakdown structure development, resource assignment, fiscal tracking, and resource tracking to enable accurate and timely project management.

 

   

Acquisition Management Support—Our personnel perform all aspects of the acquisition process for our government customers, from pre-procurement planning through contract solicitation, award, administration and closeout. We have provided support for major programs throughout the entire acquisition lifecycle, from concept development through fielding, including acquisition support, financial management and budget administration and in-service logistics support. Our expert services include acquisition program management, cost estimating/earned value management, cost estimating/analysis, contract support (pricing/contract management), configuration/data management, and executive-level administration support. Engility personnel routinely assume positions of leadership on integrated government teams.

 

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Logistics, Supply Chain Management and Lifecycle Support—Our Logistics, Supply Chain Management and Lifecycle business provides qualified staff to support logistics and full lifecycle support for contracts and subcontracts for government customers, including acquisitions logisticians that integrate lifecycle logistics in equipment procurement. We participate in lifecycle management IPTs for various products, create/move logistics staffing actions and coordinate system evaluations for all products to stakeholders worldwide.

Software engineering lifecycle sustainment and management. We provide a comprehensive approach to systems and software engineering and program management services that encompass all aspects of the system engineering and software lifecycle. For example, since 2005, we have provided lifecycle maintenance for the U.S. Army’s premier intelligence, surveillance, and reconnaissance enterprise system—the “Distributed Common Ground System”, which uses the latest Cloud technology to gather, collaborate and share intelligence data to shape combat operations. Similarly, we provide lifecycle sustainment for the “Counterintelligence—Human Intelligence Automated Reporting and Collection System”, an automated tool set for Human Intelligence teams.

Our processes manage programs and projects through all stages of the lifecycle from requirements definition to post-delivery product support. Our software engineering processes comply with the Carnegie Mellon Software Engineering Institute (SEI) Capability Maturity Model Integration Level 3 practices and serve as the foundation for our sustainment capabilities. Through our Organizational Standard Software Process (OSSP), we implement policies, processes, and procedures to satisfy professional and statutory standards, provide reliable schedule and cost estimates, and continuously review our processes to enhance efficacy and bring value to our clients. Through the development, documentation and adherence to policies covering all aspects of the Capability Maturity Model as described by SEI, as well as the incorporation of the DoD Military Standard 499B and INCOSE (International Council on Systems Engineering) Systems Engineering Handbook guidance, our OSSP provides comprehensive guidance for all associated processes including standardized approaches to requirement development and documentation, coding standards, style guides, test plan development, unit testing, and source code and repository management as well as maximizing earned value management. Our systems engineering processes are tightly integrated with, and serve as the basis for, our software engineering lifecycle sustainment and maintenance processes.

We deliver professional services to extend our systems and software engineering activities, ensuring the operational suitability of the products we support for our clients at the end users’ locations. Our field service representatives deliver technical and advisory services, such as system administration; tactical operations center process engineering; on-location web site development and implementation; analysis center operations process engineering; network implementation and operation; database design and implementation; and information assurance procedure development, documentation, and implementation.

Mission Support Services

Our Mission Support segment had revenues of $975 million, $1,217 million and $1,232 million for the years ended December 31, 2011, 2010 and 2009, respectively, and accounted for 45%, 48%, and 46%, respectively, of our combined revenues. This segment consists of the following six major service and support lines:

Military and U. S. Government Mission Support. Engility and its constituent divisions support the U.S. Government and the defense establishment by providing functional competencies and subject matter experts in areas that the Government has not staffed or staffed at less than required levels, such as: (1) providing police personnel to embed with U.S. military formations to advise military leaders of law enforcement/public security considerations during the conduct of military operations; (2) providing logistical mission support to U.S. training facilities overseas; and (3) providing instructors and subject matter experts to the Department of Defense Information School.

 

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Defense related training, education and support services. Training is critical to develop the capacities of our customers’ defense institutions to meet and overcome the challenges of a rapidly changing world. Engility supports military training with a wide range of professional staff and consulting services. Around the world, we train individual soldiers and operational units, and we assist the U.S. Armed Forces in developing and implementing doctrine-based training systems and programs. In addition, Engility is one of the U.S. military’s leading providers of comprehensive leader development programs. These programs provide the military with continuous, sequential and progressive leader development in all three environments: institutional (i.e., a traditional classroom environment), operational (i.e., the practical application of institutional training in mission operations) and self-development (i.e., the process of continual self-assessment and improvement assisted by mentoring). Our training professionals bring years of practical leadership and demonstrated expertise in all facets of the profession of arms.

Engility uses the same rigorous methodology for training foreign militaries that we have helped develop and provided for America’s armed forces. Operating in strict compliance with Government licensing requirements, we have trained defense institutions and militaries in countries ranging from Bosnia, Croatia, Macedonia and Montenegro to Kuwait, Equatorial Guinea, Iraq and Afghanistan. Engility has also been a leader in building effective training systems in foreign countries so that the countries themselves can assume full responsibility for training their militaries. As a result, we are adept at range and training area design and construction, mission-based training management systems development, and the tasks, conditions and standards by which countries can measure the training and readiness of their armed forces. We have also assisted foreign countries in the deployment of increasingly sophisticated simulators and simulations, complementing their live training programs to include programs in non-security sectors.

Law enforcement training, education and support services. We have also applied our defense related training competencies to law enforcement markets. Engility is one of the nation’s leading providers of law enforcement training, support and technical services to international customers, and we hold the two most significant contracts through which the U.S. trains foreign police. Our teams work in partnership with the host countries to customize training programs that will be sustainable. Our areas of focus include: strategic and operational assessments and planning, organizational development, recruitment, administrative policies and procedures, management, criminal investigations, forensics, accountability systems, and training and police academy development.

Capacity Building. Engility provides comprehensive, integrated programs that help organizations, institutions and governments abroad develop the capacity to fulfill their legally-mandated functions without extraordinary external oversight. Beginning with our program in Bosnia, we have developed and applied our capacity building methodology in institutions ranging from peacekeeping capabilities for numerous African nations to public and national security establishments in more than a dozen countries around the world.

Our capacity building expertise is a core strength that provides significant potential for growth, particularly in post-conflict environments where the basic instruments and institutions of government have either been destroyed or never existed in the first place.

International Development and Support to USAID. Through its wholly owned subsidiary, International Resources Group Ltd. (IRG), Engility helps foreign governments, the private sector, communities, and households manage critical resources to build a cleaner, safer, and more prosperous world. Since its formation in 1978, IRG has completed over 850 contracts with USAID in 140 countries, delivering high-quality, cost-effective services that promote positive economic growth, institutional and social change, and intelligent use of resources-human, physical, environmental, and financial.

Linguist Services. Engility’s Translation and Interpretation business provides a full range of language services in support of military, intelligence and law enforcement operations as well as document translation and exploitation services. Since 1999, Engility has been a preeminent provider of language support services for the DoD and the intelligence community, and has recruited and deployed tens of thousands of linguists to support overseas contingency operations.

 

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Counter IED analytical operational support. Improvised Explosive Devices (IEDs) have emerged as one of the primary threats to the lives of soldiers and civilians in both counter-insurgency and counter-terrorism environments. In response to this threat, we provide counter-IED and EOD analytical, operational and exploitation requirements. As a trusted advisor to DoD, we have an extensive and successful track record of working with our customers at overseas deployed locations and in war zones worldwide. Moreover, our IED expertise complements the training that we conduct for U.S. forces at the Kuwait Training Center. Much of this training focuses on counter-IED tactics, techniques and procedures.

Asset Forfeiture Support. We provide staffing and support services to the agencies of the DoJ, including seized assets management and disposition, program management support, and legal and investigative support services.

Growth Initiatives

Because of our established expertise in a wide variety of mission support roles around the world, Engility is well placed to expand into adjacent markets. Many of our programs already contain logistics components, providing a logical growth path by performing base support, maintenance and logistics programs. While such contracts offer typically lower margins on revenues, they also provide a large cost base for the absorption of company costs, helping make us even more competitive for other, higher margin programs. Building upon our strong presence around the world on behalf of USAID and the DoS, we will pursue emerging opportunities in “Smart Power” which fosters stability and peace through a combined approach to address security and development issues in third world countries. Such work includes assisting third world countries to develop clean and efficient energy sources. Finally, our established engineering and program management capabilities enable us to expand into other professional services areas, such as architect and engineering services.

Our History

Engility Holdings, Inc. traces its roots to the ear