A hefty charge related to declines in its stock price this year and declines in its defense business caused Engility [EGL] to record a nearly $300 million non-cash goodwill charge in its fourth quarter, leading to a loss in the quarter and for all of 2015, the company reported on Thursday.

The $292 million impairment charge was higher than originally expected and stems from a disparity between the initial fair value estimate and subsequent market capitalization related a bigger than expected drop in the company’s share price following the release of its 2016 guidance in January. Engility in January warned of a potential $125 million to $250 million non-cash goodwill impairment charge related to declines in its legacy defense business.

John Hynes, president and chief operating officer of Engility. Photo: Engility
John Hynes, president and chief operating officer of Engility. Photo: Engility

Despite the charge, company officials said on Thursday’s earnings call that there is no change in the business operating environment, plan or outlook for this year.

The net loss in the quarter was $238.9 million, $6.53 earnings per share, versus net income of $2.5 million (14 cents EPS) a year ago. Adjusting for the charge and costs related to Engility’s acquisition of TASC one year ago, earnings were $25 million, 66 cents EPS, topping consensus estimates by 8 cents per share.

Sales in the quarter were $537 million, a 40 percent increases from $319.5 million a year ago, driven entirely by the acquisition of TASC. Organic revenue declined nearly 9 percent.

Engility acquired TASC last February for $1.3 billion, lessening the company’s dependence on the Defense Department and increasing its presence in the intelligence community and federal civilian government.  

Growth drivers for the business are intelligence, space, and the federal civilian government, John Hynes, Engility’s president and chief operating officer, said on the earnings call.

“We believe these markets are better funded and will benefit from our competitive contract bid rates,” Hynes said. He also said the company expects to benefit from improving market conditions.

The company maintained its guidance for this year with sales forecast to be between $2 billion and nearly $2.2 billion with per share earnings between 3 and 18 cents. In 2015 sales were $2.1 billion and the company lost $235.4 million ($7.02 EPS).

Engility sees a return to growth, all of it organic, in 2017 and again in 2018. The company didn’t provide out-year guidance but Wayne Rehberger, chief financial officer, said the objective is low to mid-single digit sales growth in 2017 and 2018.

Hynes said that given the company’s new scale following the TASC deal, Engility can now pursue larger contracts and is in the process of submitting bids on a “handful” of opportunities worth nearly $1.5 billion. He declined to discuss on the call what programs the company is bidding on but said they are the largest it has ever pursued since it was spun out of L-3 Communications [LLL] in July 2012.

On Monday Engility announced it was changing its leadership, letting go of former CEO Anthony Smeraglinolo and replacing him with Lynn Dugle, the former president of Raytheon’s [RTN] Intelligence, Information and Services segment. Hynes said Dugle’s appointment has been well received by the company’s customers.

Dugle begins her new duties on March 21. She has been a member of Engility’s board since last February and was on the board of TASC for a year before the acquisition. She left Raytheon a year ago.

Engility’s funded backlog at the end of December stood at $784 million, up 23 percent from $602 million at the end of 2014. Operating cash flow for the year was $48 million.