Engility Holdings [EGL] on Monday reported lower earnings and sales in its second quarter but the company turned in strong bookings that have extended into the third quarter and sees a return to organic growth in 2017.
Net income slid 80 percent to $2.5 million, 7 cents earnings per share (EPS), from $13.1 million (35 cents EPS) a year ago. Excluding $9 million in various costs associated with the acquisitions of TASC and Dynamics Research Corp. more than a year ago, adjusted net income was $13 million (34 cents EPS), which beat consensus estimates by 6 cents EPS.
Sales in the quarter fell 7 percent to $535.4 million from $575.5 million a year ago, beating internal plans. More than 70 percent of the decline was due to three items: completion of a power contract in Pakistan last year, sale of a Defense Threat Reduction Agency contract because of conflict of interest concerns, and a reduction in pass through revenue associated with Engility’s former parent L-3 Communications [LLL], Wayne Rehberger, Engility’s chief financial officer, said on the company’s earnings call.
The rest of the drop in sales was due to work completed or scope reductions, Rehberger said.
Bookings in the quarter were $632 million and in July the company received more than $500 million in new orders, most of which is new business won from incumbents, Lynn Dugle, Engility’s CEO, said on the earnings call. One of the wins is being protested and the others haven’t yet cleared the period when losing bidders can protest, she said.
Dugle said the new wins demonstrate the company’s ability to “selectively target, pursue and win larger contracts.”
In the second quarter Engility also won some key recompete work that it was the incumbent on, including a $248 million support contract for DTRA and a $90 million contract from the Transportation Security Administration to perform operational testing and evaluation on information technology systems and security screening processes and equipment.
Dugle said she still expects sales in the second half of 2016 to be better than the first half with orders exceeding revenue for the year. The strong order flow should position the company for organic growth next year, she said.
Engility is willing to consider small niche acquisitions but isn’t looking for big deals on the order of $1 billion, Dugle said.
Given results so far this year and the outlook for the rest of 2016, Engility raised its earnings guidance and narrowed its sales guidance toward the top of the previous range. Earnings expectations were raised a nickel to between 8 cents and 23 cents EPS due to the improved sales outlook, with revenue now forecast to be between $2.1 billion and $2.2 billion.
The updated guidance doesn’t include any impact from a new plan to refinance existing debt, which will result in lower interest expense and improve financial flexibility, Rehberger said.
Backlog at the end of the quarter stood at $3 billion, up $100 million from the first quarter when Engility first began disclosing its backlog. Funded backlog at the end of the second quarter was $753 million.
Dugle said that based on the company’s orders so far in the third quarter combined with other contracting activity, it’s an “indication that the government procurement process is starting to stabilize and in some areas the pace of procurement appears to be picking up.” Still, she added, award timing will remain “uneven for the foreseeable future.”
Dugle also said Engility is making progress on its three strategic objectives of driving sustainable organic growth, attracting, growing and retaining talent, and strengthening the balance sheet. She said the company continues to invest in its business development, capture and proposal organizations and pointed to a voluntary $20 million debt repayment in the quarter as an indicator of this commitment.