CONSTELLIS HOLDINGS FINANCIALS FY 15 Q1
Constellis Holdings, LLC and Subsidiaries Consolidated Financial Statements as of March 31, 2015
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheet as of March 31, 2015
1
Consolidated Statement of Income for the Quarter Ended March 31, 2015
2
Consolidated Statement of Cash Flows for the Quarter Ended March 31, 2015
3
Notes to Consolidated Financial Statements as of and for the quarter ended March 31, 2015
4–11
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) Constellis Holdings, LLC & Subsidiaries Constellis Holdings, Period Ending LLC & Subsidiaries March 31, December 31, 2015 Period Ending 2014 March 31, December 31, 2015 2014
ASSETS CURRENT ASSETS: ASSETS Cash and cash equivalents CURRENT ASSETS: net Accounts receivable, Cash and cash equivalents Inventory Accounts receivable, net current Deferred income tax asset, Inventory Prepaid expenses and other current assets Deferred income taxassets asset, current Total current Prepaid expenses and LONG-TERM ASSETS:other current assets Total assetsnet Property andcurrent equipment, LONG-TERM ASSETS: Intangible assets, net Property and equipment, net Goodwill Intangibleand assets, Deposits othernet long-term assets Goodwill Total long-term assets Deposits and other long-term assets TOTAL ASSETS Total long-term assets TOTAL ASSETS LIABILITIES AND MEMBERS' EQUITY
$
$
$
$
CURRENT LIABILITIES: LIABILITIES AND MEMBERS' EQUITY Accounts payable and accrued expenses CURRENT LIABILITIES: Accrued compensation and employee benefits Accounts revenue payable and accrued expenses Deferred Accrued compensation and employee benefits Accrued penalties Deferred revenue Current portion of long-term debt Accrued penalties Total current liabilities Current portion of long-term debt LONG-TERM LIABILITIES: Total current Long-term debt, netliabilities of current portion LONG-TERM LIABILITIES: Deferred income tax liability, noncurrent Long-term debt, liabilities net of current portion Other long-term Deferred income tax liability, Total long-term liabilitiesnoncurrent Other long-term liabilities TOTAL LIABILITIES Total long-term liabilities TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES (Note 11)
$
$
COMMITMENTS AND CONTINGENCIES (Note 11) MEMBERS' EQUITY: Membership units, no par value, 65,023 units authorized, issued MEMBERS' EQUITY: and outstanding Membership units, no par value, 65,023 units authorized, issued Members' capital and outstanding Retained earnings Members' capital Holdings, LLC's members' equity Total Constellis Retained earnings Noncontrolling interest in joint ventures Total Constellis Holdings, Total members' equity LLC's members' equity Noncontrolling interest joint venturesEQUITY TOTAL LIABILITIES ANDinMEMBERS' Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY
$
$
1
11,051 202,982 11,051 6,086 202,982 4,036 6,086 41,192 4,036 265,347 41,192 265,347 72,104 91,768 72,104 176,791 91,768 11,119 176,791 351,782 11,119 617,129 351,782 617,129 97,005 37,254 97,005 4,524 37,254 1,500 4,524 17,823 1,500 158,106 17,823 158,106 282,151
$
$
$
$ $
$
7,085 207,104 7,085 5,914 207,104 4,036 5,914 35,162 4,036 259,301 35,162 259,301 74,250 95,689 74,250 176,791 95,689 12,828 176,791 359,558 12,828 618,859 359,558 618,859 108,546 34,825 108,546 1,251 34,825 1,500 1,251 17,823 1,500 163,945 17,823 163,945 282,535
12,738 282,151 9,129 12,738 304,019 9,129 462,124 304,019 462,124
12,738 282,535 12,406 12,738 307,679 12,406 471,624 307,679 471,624
102,860 51,814 102,860 154,674 51,814 331 154,674 155,005 331 617,129 155,005 617,129
102,860 43,968 102,860 146,828 43,968 407 146,828 147,235 407 618,859 147,235 618,859
$
$
CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS) Constellis Holdings, Academi LLC LLC & Subsidiaries & Subsidiaries Three Months Ended March 31, March 31, 2015 2014 REVENUES
$
COST OF REVENUE
195,236
$
92,744
156,431
76,581
38,805
16,163
15,954 6,412
10,554 2,702
OPERATING INCOME
16,439
2,907
OTHER INCOME (EXPENSE): Interest income Interest expense Other income, net Total other income (expense)
120 (5,337) 181 (5,036)
4 (752) 122 (626)
NET INCOME BEFORE TAXES
11,403
2,281
3,557
2
GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION
INCOME TAX PROVISION NET INCOME
$
NET INCOME ATTRIBUTED TO NONCONTROLLING INTEREST NET INCOME ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC
7,846
$
-
(77) $
7,923
2,279
$
2,279
_________________________________________________________ For the three months ended March 31, 2014, the Consolidated Income Statement is that of Academi LLC and its subsidiaries, through which all historical operations were conducted.
2
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS ) Constellis Holdings, Academi LLC LLC & Subsidiaries & Subsidiaries Three Months Ended March 31, March 31, 2015 2014 OPERATING ACTIVITIES: Net income $ 7,846 $ 2,279 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 6,412 2,702 Provision for losses on accounts receivable (1) Provision for obselete inventory 4 Changes in operating assets and liabilities: Accounts receivable 4,122 (18,325) Inventory (172) (117) Prepaid expenses and other current assets (4,321) 2,466 Accounts payable and accrued expenses (11,541) 10,091 Accrued compensation and employee benefits 2,429 (427) Other long-term liabilities 3,277 Deferred revenue (3,357) 333 Cash provided by operating activities 4,695 (995) INVESTING ACTIVITIES: Capital expenditures Cash used in investing activities FINANCING ACTIVITIES: Proceeds on line of credit Payments on line of credit Proceeds from Revolver Principal payments on Term Loan A Cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS — Beginning of quarter CASH AND CASH EQUIVALENTS — End of quarter
$
(345) (344)
(718) (718)
3,991 (4,375) (384)
17,000 (17,000) -
3,966
(1,714)
7,085 11,051
$
2,487 773
_________________________________________________________ For the three months ended March 31, 2014, the Consolidated Statement of Cash Flows is that of Academi LLC and its subsidiaries, through which all historical operations were conducted.
3
CONSTELLIS HOLDINGS, LLC and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 2015 (AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND NATURE OF BUSINESS Constellis Holdings, LLC and subsidiaries (the “Company”) (previously Academi Holdings, LLC and subsidiaries) provide complex program management solutions to governments and private corporations worldwide. Its primary services include integrated security and technical operations, domestic and international training (to law enforcement, military, and civilian customers), security assessment and analysis, risk mitigation, and technology solutions. By integrating analysis, planning, program management and training with fundamentals such as security, logistics, information, medical and life support services, the Company creates and sustains a secure operational environment for its customers. Primary customers include the U.S. Department of State, U.S. Department of Defense and other U.S. governmental agencies. The Company has its headquarters in Reston, Virginia. On July 25, 2014, pursuant to the Stock Purchase Agreement, dated as of June 6, 2014, among Constellis Employee Stock Ownership Trust together with Majority, Minority and Other Noteholders (“the Seller”), Constellis Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Holdings, Inc.” or the “Buyer”) acquired Constellis Group, Inc. (also referred herein as the “Acquisition”). As a result of the Acquisition, Constellis Group, Inc. and subsidiaries became wholly owned subsidiaries of the Company. In conjunction with the Acquisition, the Company changed its name to Constellis Holdings, LLC. See Note 3 for more information regarding the Acquisition. 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation — The consolidated financial statements of the Company include the accounts of Academi LLC and its wholly owned subsidiaries, Holdings, Inc., and its wholly owned subsidiaries and variable interest entities (“VIE’s”) for which Constellis Group Inc. is deemed to be the primary beneficiary. References to “the Company”, “us”, or “we” include all of the consolidated companies. Noncontrolling interest is recognized for the portion of the VIE’s not owned by us. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and present our financial position, results of operations and cash flows. All intercompany balances and transactions have been eliminated. The consolidated financial statements of the Company reflect the financial position, results of operations, and changes in financial position of the Company as of and for the quarter ended March 31, 2015 and 2014. As a result of the Acquisition, the consolidated financial statements of the Company include the financial position, results of operations, and changes in financial position of Constellis Group, Inc. and subsidiaries of the Buyer as of March 31, 2015 and for the quarter ended March 31, 2015. The Company consolidates all investments when management has determined that the investment is a VIE and when management has determined that the Company is the primary beneficiary. This determination is made at the inception of the Company’s involvement with the investment and is evaluated continuously as facts and circumstances change. The Company considered both qualitative and quantitative factors to form a conclusion as to whether the Company, or another interest holder, has the power to direct the activities of a VIE that most significantly impact the
4
VIE’s economic performance. The Company also considers qualitative and quantitative factors to determine if the
Company, or another interest holder, has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE which could be significant to the VIE. The Company also consolidates ventures that are not VIEs when the Company has a controlling interest. When the Company consolidates an entity that is not wholly owned, it reports the minority interests in the entity as noncontrolling interests in the equity section of the consolidated balance sheets. The Company has included the minority interest in earnings of the entities within its consolidated net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company. Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Due to their prospective nature, actual results could differ from those estimates. Revenue Recognition and Costs — The Company generates revenue on long-term contracts under cost reimbursement, time and material and fixed price arrangements. Revenue from cost reimbursement contracts is recognized to the extent of costs incurred, plus a proportionate amount of fee earned. Revenue from time and material contracts is based on contractually defined billing rates applied to services performed and material delivered. Revenue from fixed price contracts is recognized ratably over the period of contractual performance based on a ratio of costs incurred to date and total costs at completion. Anticipated losses on contracts are recognized in the period they become evident. Unpriced change orders may arise in the normal course of business due to delays or changes in contract requirements. When realization is probable and can be readily estimated, revenues are recorded at the lesser of their estimated net realizable value or actual. Disputes may also arise in the normal course of business and revenue is recognized if it’s probable of recovery and can be readily estimated, only to the extent contract costs related to the dispute have been incurred. The Company earns a majority of its revenue from the federal government, directly as a prime contractor or indirectly as a subcontractor including several significant contracts with the U.S. Department of Defense. A portion of the Company’s costs on certain cost reimbursable contracts is subject to audit by the U.S. Defense Contract Audit Agency (DCAA) and other related U.S. government agencies. Revenue on time-and-materials contracts is recognized based on the hours and/or days of services provided at the negotiated contract billing rates, plus the cost of any allowable material and equipment costs. Cost of revenue includes all direct costs consisting of labor, travel, materials, equipment, subcontract, and other costs related to contract performance. Additionally, cost of revenue includes fringe benefit and overhead costs, exclusive of depreciation and amortization, allocable to contracts. All costs, both direct and indirect, are charged to expense as incurred. Fair Value of Financial Instruments — The carrying value of the Company’s cash, cash equivalents, accounts receivables, contract receivables, and accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. Concentration of Credit Risk — The Company’s assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Accounts receivable consist
5
primarily of amounts due from various agencies of the federal government or prime contractors doing business with the federal government. Historically, the Company has not experienced significant losses related
to accounts receivable and, therefore, believes that the credit risk related to accounts receivable is minimal. The Company maintains cash balances that may at times exceed federally insured limits. Cash balances are maintained at high-quality financial institutions and the Company believes the credit risk related to these cash balances is minimal. Cash and Cash Equivalents — The Company considers all short-term interest-bearing investments with original maturities of three months or less to be cash equivalents. Receivables — Generally, contract receivables are considered past due after 30 days. The Company considers the aging of certain billed receivables, the nature of the work performed, and collection history to determine the need for an allowance for doubtful accounts. Accounts receivable balances are written off when the balance is deemed uncollectible after exhausting all reasonable means of collection. The Company does not charge interest on contract receivables; however, U.S. governmental agencies may pay interest on invoices outstanding more than 30 days. The Company records interest income from U.S. governmental agencies when received. Inventory — Inventory consisting of primarily of gear, firearms and ammunition is stated at the lower of their weighted average cost or market. Inventories consisting of advance purchases of supplies and equipment that will be assigned to contracts as needed and are stated based on average cost. Internal-Use Computer Software — The Company capitalizes costs incurred to license and implement software for internal use and subsequently amortizes the costs over the estimated economic useful life of the software. Such costs are amortized over five to seven years. Property and Equipment — Property is stated at either cost or the estimated fair value as of the acquisition date when acquired through a business combination. Depreciation of property and equipment is computed on the straight-line method over useful lives. Leasehold improvements are amortized over the lesser of the lease term or the useful lives of the leasehold improvements using the straight-line method. Estimated useful lives for financial reporting purposes are as follows:
Land and land improvements Buildings and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems
Years 5-15 40 4-10 3-15 1-8 3-5 3-15
Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated and the gain or loss is included in operations.
6
Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. As of March 31, 2015 there are no assets held for sale. Intangible Assets — Intangible assets consist of acquired customer relationships and contract backlog, trade names and trademarks and database. The intangible assets were recorded at the
purchase date at their estimated fair value. Intangible assets that are deemed to have a definite life are amortized, primarily on a straight-line basis, over their estimated remaining useful lives (see Note 7). The Company reviews long-lived assets and certain intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived assets is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Goodwill — Goodwill is the amount by which the purchase price of acquired net assets in a business acquisition exceeds the fair value of net identifiable assets on the date of purchase. The Company assesses goodwill for impairment on December 31 of each year and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The Company, with the assistance of a third party valuation specialist, used discounted cash flow models and market comparable companies to determine its fair value. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use. Income Taxes — The Company is a partnership which is not a tax paying entity for U.S. tax purposes. As such, the partnership portion of the structure is not taxable at the entity level for U.S. tax purposes and has no U.S. tax provision. However, the Company does have a tax paying corporate consolidated group within its structure. The Company has calculated a tax provision for the corporate portion of the structure using the asset and liability method. Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been, or will be, reported in different years for financial statement purposes than for tax purposes. Deferred tax assets and liabilities are computed based on the difference between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates and laws for the years in which these items are expected to reverse. Deferred tax assets may be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. If management determines that a deferred tax asset is not “more likely than not” to be realized, a valuation allowance is recorded to reduce the deferred tax asset to an appropriate level in that period. In determining the need for a valuation allowance, management considers all positive and negative evidence, including historical earnings, projected future taxable income, future reversals of existing taxable temporary differences, carryback potential, and prudent, feasible taxplanning strategies. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained based on technical merits of the position and (2) those tax positions that meet the more likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.
7
Commitments and Contingencies — Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business.
Postretirement Benefits — National Strategic Protective Services (“NSPS”), a majority owned subsidiary of the Company, sponsors a defined benefit pension plan for some its employees and provides certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans) pursuant to a contract between NSPS and Department of Energy (“DOE”). The DOE reimburses all allowable direct costs incurred by NSPS in connection with the postretirement benefits plans, including all required contributions and all claims paid. These direct costs (and the related revenue) are recognized in the period incurred. The Company does not recognize the postretirement benefit obligation of these plans in the consolidated balance sheets due to the contractual arrangement with the DOE. The DOE contract gives DOE the right to approve or disapprove all plan provisions and benefit changes, thus placing DOE effectively in control of these plans and their administration, similar to a plan sponsor. The DOE contract also provides that upon contract completion and award of a followon contract to another contractor for the services NSPS provides, any assets associated with the plans and all plan obligations and liabilities must be transferred to new plans sponsored by any successor contractor. In that case, NSPS will be relieved of its obligations under the postretirement benefit plans. Even where no new contractor is named and no new sponsor assumes the plans, NSPS is contractually entitled by DOE to continued reimbursement of all allowable pension and benefit costs despite completion of the contract in all other respects. Recent Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers which supersedes the current revenue guidance followed by the Company. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the effects of this standard on its consolidated financial statements. 3.
BUSINESS ACQUISITION On July 25, 2014, Constellis Holdings, Inc. acquired all of the outstanding shares of Constellis Group, Inc. in exchange for $196,491 in cash, plus membership interests of $11,930 and assumed seller notes of $45,063 for a total purchase price of $253,484. The purchase price was funded through the net proceeds from a new $290,000 Senior Credit Facility. Constellis Group, Inc. is a leading provider of mission support and integrated security services worldwide. The Acquisition provides geographic and customer diversification for the Company while offering significant cost savings by eliminating duplicative overhead costs, vertically integrating training services, and sharing of best operating practices.
8
4.
ACCOUNTS RECEIVABLE
March 31, 2015 Billed Unbilled Other
$
Total accounts receivable
208,233
Less allowance for doubtful accounts
(5,252)
Total receivables - net
5.
98,914 107,918 1,401
$
202,982
PREPAID EXPENSES AND OTHER CURRENT ASSETS
March 31, 2015
6.
Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
15,483 17,230 8,479
Total prepaid expenses and other current assets
$
41,192
PROPERTY AND EQUIPMENT
March 31, 2015 Land and land improvements Building and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems Construction in process
$
Total property and equipment
97,510
Less accumulated depreciation Total property and equipment - net
9
16,045 41,332 10,844 15,755 2,231 5,170 3,262 2,873
(25,406) $
72,104
7.
INTANGIBLE ASSETS AND GOODWILL March 31, 2015 Gross Carrying Amount Intangible assets: Customer relationships/Contract Backlog (Useful life of 8-10 years) Tradename and Trademarks (Useful life of 4-8 years) Database (Useful life of 5 years)
8.
Accumulated Amortization
$
103,100 9,100 2,400
$
20,153 2,350 328
$
82,947 6,750 2,072
$
114,600
$
22,832
$
91,768
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
March 31, 2015
9.
Accounts payable Accrued taxes payable DCAA Reserve Other accrued expenses
$
34,972 16,896 28,766 16,370
Accounts payable and accrued expenses
$
97,005
DEBT
March 31 2015 Credit facilities: Revolver Term Loan A Term Loan B Notes: Minority shareholder notes Replacement notes Subremainder notes
$
42,500 161,875 50,000 892 9,501 34,670
Capital lease
536
Total debt
299,974
Less: current portion Long-term debt
$
10
Net Carrying Amount
17,823 282,151
10. SUBSEQUENT EVENT On May 11, 2015, the Company acquired all of the outstanding shares of Olive Group Holdings Ltd. for a total purchase price of $236,500. The purchase price was funded through the net proceeds received from the issuance of a new ABL credit facility and $450,000 senior secured notes. ******
11
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheet as of March 31, 2015
1
Consolidated Statement of Income for the Quarter Ended March 31, 2015
2
Consolidated Statement of Cash Flows for the Quarter Ended March 31, 2015
3
Notes to Consolidated Financial Statements as of and for the quarter ended March 31, 2015
4–11
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) Constellis Holdings, LLC & Subsidiaries Constellis Holdings, Period Ending LLC & Subsidiaries March 31, December 31, 2015 Period Ending 2014 March 31, December 31, 2015 2014
ASSETS CURRENT ASSETS: ASSETS Cash and cash equivalents CURRENT ASSETS: net Accounts receivable, Cash and cash equivalents Inventory Accounts receivable, net current Deferred income tax asset, Inventory Prepaid expenses and other current assets Deferred income taxassets asset, current Total current Prepaid expenses and LONG-TERM ASSETS:other current assets Total assetsnet Property andcurrent equipment, LONG-TERM ASSETS: Intangible assets, net Property and equipment, net Goodwill Intangibleand assets, Deposits othernet long-term assets Goodwill Total long-term assets Deposits and other long-term assets TOTAL ASSETS Total long-term assets TOTAL ASSETS LIABILITIES AND MEMBERS' EQUITY
$
$
$
$
CURRENT LIABILITIES: LIABILITIES AND MEMBERS' EQUITY Accounts payable and accrued expenses CURRENT LIABILITIES: Accrued compensation and employee benefits Accounts revenue payable and accrued expenses Deferred Accrued compensation and employee benefits Accrued penalties Deferred revenue Current portion of long-term debt Accrued penalties Total current liabilities Current portion of long-term debt LONG-TERM LIABILITIES: Total current Long-term debt, netliabilities of current portion LONG-TERM LIABILITIES: Deferred income tax liability, noncurrent Long-term debt, liabilities net of current portion Other long-term Deferred income tax liability, Total long-term liabilitiesnoncurrent Other long-term liabilities TOTAL LIABILITIES Total long-term liabilities TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES (Note 11)
$
$
COMMITMENTS AND CONTINGENCIES (Note 11) MEMBERS' EQUITY: Membership units, no par value, 65,023 units authorized, issued MEMBERS' EQUITY: and outstanding Membership units, no par value, 65,023 units authorized, issued Members' capital and outstanding Retained earnings Members' capital Holdings, LLC's members' equity Total Constellis Retained earnings Noncontrolling interest in joint ventures Total Constellis Holdings, Total members' equity LLC's members' equity Noncontrolling interest joint venturesEQUITY TOTAL LIABILITIES ANDinMEMBERS' Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY
$
$
1
11,051 202,982 11,051 6,086 202,982 4,036 6,086 41,192 4,036 265,347 41,192 265,347 72,104 91,768 72,104 176,791 91,768 11,119 176,791 351,782 11,119 617,129 351,782 617,129 97,005 37,254 97,005 4,524 37,254 1,500 4,524 17,823 1,500 158,106 17,823 158,106 282,151
$
$
$
$ $
$
7,085 207,104 7,085 5,914 207,104 4,036 5,914 35,162 4,036 259,301 35,162 259,301 74,250 95,689 74,250 176,791 95,689 12,828 176,791 359,558 12,828 618,859 359,558 618,859 108,546 34,825 108,546 1,251 34,825 1,500 1,251 17,823 1,500 163,945 17,823 163,945 282,535
12,738 282,151 9,129 12,738 304,019 9,129 462,124 304,019 462,124
12,738 282,535 12,406 12,738 307,679 12,406 471,624 307,679 471,624
102,860 51,814 102,860 154,674 51,814 331 154,674 155,005 331 617,129 155,005 617,129
102,860 43,968 102,860 146,828 43,968 407 146,828 147,235 407 618,859 147,235 618,859
$
$
CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS) Constellis Holdings, Academi LLC LLC & Subsidiaries & Subsidiaries Three Months Ended March 31, March 31, 2015 2014 REVENUES
$
COST OF REVENUE
195,236
$
92,744
156,431
76,581
38,805
16,163
15,954 6,412
10,554 2,702
OPERATING INCOME
16,439
2,907
OTHER INCOME (EXPENSE): Interest income Interest expense Other income, net Total other income (expense)
120 (5,337) 181 (5,036)
4 (752) 122 (626)
NET INCOME BEFORE TAXES
11,403
2,281
3,557
2
GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION
INCOME TAX PROVISION NET INCOME
$
NET INCOME ATTRIBUTED TO NONCONTROLLING INTEREST NET INCOME ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC
7,846
$
-
(77) $
7,923
2,279
$
2,279
_________________________________________________________ For the three months ended March 31, 2014, the Consolidated Income Statement is that of Academi LLC and its subsidiaries, through which all historical operations were conducted.
2
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS ) Constellis Holdings, Academi LLC LLC & Subsidiaries & Subsidiaries Three Months Ended March 31, March 31, 2015 2014 OPERATING ACTIVITIES: Net income $ 7,846 $ 2,279 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 6,412 2,702 Provision for losses on accounts receivable (1) Provision for obselete inventory 4 Changes in operating assets and liabilities: Accounts receivable 4,122 (18,325) Inventory (172) (117) Prepaid expenses and other current assets (4,321) 2,466 Accounts payable and accrued expenses (11,541) 10,091 Accrued compensation and employee benefits 2,429 (427) Other long-term liabilities 3,277 Deferred revenue (3,357) 333 Cash provided by operating activities 4,695 (995) INVESTING ACTIVITIES: Capital expenditures Cash used in investing activities FINANCING ACTIVITIES: Proceeds on line of credit Payments on line of credit Proceeds from Revolver Principal payments on Term Loan A Cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS — Beginning of quarter CASH AND CASH EQUIVALENTS — End of quarter
$
(345) (344)
(718) (718)
3,991 (4,375) (384)
17,000 (17,000) -
3,966
(1,714)
7,085 11,051
$
2,487 773
_________________________________________________________ For the three months ended March 31, 2014, the Consolidated Statement of Cash Flows is that of Academi LLC and its subsidiaries, through which all historical operations were conducted.
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CONSTELLIS HOLDINGS, LLC and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 2015 (AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND NATURE OF BUSINESS Constellis Holdings, LLC and subsidiaries (the “Company”) (previously Academi Holdings, LLC and subsidiaries) provide complex program management solutions to governments and private corporations worldwide. Its primary services include integrated security and technical operations, domestic and international training (to law enforcement, military, and civilian customers), security assessment and analysis, risk mitigation, and technology solutions. By integrating analysis, planning, program management and training with fundamentals such as security, logistics, information, medical and life support services, the Company creates and sustains a secure operational environment for its customers. Primary customers include the U.S. Department of State, U.S. Department of Defense and other U.S. governmental agencies. The Company has its headquarters in Reston, Virginia. On July 25, 2014, pursuant to the Stock Purchase Agreement, dated as of June 6, 2014, among Constellis Employee Stock Ownership Trust together with Majority, Minority and Other Noteholders (“the Seller”), Constellis Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Holdings, Inc.” or the “Buyer”) acquired Constellis Group, Inc. (also referred herein as the “Acquisition”). As a result of the Acquisition, Constellis Group, Inc. and subsidiaries became wholly owned subsidiaries of the Company. In conjunction with the Acquisition, the Company changed its name to Constellis Holdings, LLC. See Note 3 for more information regarding the Acquisition. 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation — The consolidated financial statements of the Company include the accounts of Academi LLC and its wholly owned subsidiaries, Holdings, Inc., and its wholly owned subsidiaries and variable interest entities (“VIE’s”) for which Constellis Group Inc. is deemed to be the primary beneficiary. References to “the Company”, “us”, or “we” include all of the consolidated companies. Noncontrolling interest is recognized for the portion of the VIE’s not owned by us. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and present our financial position, results of operations and cash flows. All intercompany balances and transactions have been eliminated. The consolidated financial statements of the Company reflect the financial position, results of operations, and changes in financial position of the Company as of and for the quarter ended March 31, 2015 and 2014. As a result of the Acquisition, the consolidated financial statements of the Company include the financial position, results of operations, and changes in financial position of Constellis Group, Inc. and subsidiaries of the Buyer as of March 31, 2015 and for the quarter ended March 31, 2015. The Company consolidates all investments when management has determined that the investment is a VIE and when management has determined that the Company is the primary beneficiary. This determination is made at the inception of the Company’s involvement with the investment and is evaluated continuously as facts and circumstances change. The Company considered both qualitative and quantitative factors to form a conclusion as to whether the Company, or another interest holder, has the power to direct the activities of a VIE that most significantly impact the
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VIE’s economic performance. The Company also considers qualitative and quantitative factors to determine if the
Company, or another interest holder, has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE which could be significant to the VIE. The Company also consolidates ventures that are not VIEs when the Company has a controlling interest. When the Company consolidates an entity that is not wholly owned, it reports the minority interests in the entity as noncontrolling interests in the equity section of the consolidated balance sheets. The Company has included the minority interest in earnings of the entities within its consolidated net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company. Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Due to their prospective nature, actual results could differ from those estimates. Revenue Recognition and Costs — The Company generates revenue on long-term contracts under cost reimbursement, time and material and fixed price arrangements. Revenue from cost reimbursement contracts is recognized to the extent of costs incurred, plus a proportionate amount of fee earned. Revenue from time and material contracts is based on contractually defined billing rates applied to services performed and material delivered. Revenue from fixed price contracts is recognized ratably over the period of contractual performance based on a ratio of costs incurred to date and total costs at completion. Anticipated losses on contracts are recognized in the period they become evident. Unpriced change orders may arise in the normal course of business due to delays or changes in contract requirements. When realization is probable and can be readily estimated, revenues are recorded at the lesser of their estimated net realizable value or actual. Disputes may also arise in the normal course of business and revenue is recognized if it’s probable of recovery and can be readily estimated, only to the extent contract costs related to the dispute have been incurred. The Company earns a majority of its revenue from the federal government, directly as a prime contractor or indirectly as a subcontractor including several significant contracts with the U.S. Department of Defense. A portion of the Company’s costs on certain cost reimbursable contracts is subject to audit by the U.S. Defense Contract Audit Agency (DCAA) and other related U.S. government agencies. Revenue on time-and-materials contracts is recognized based on the hours and/or days of services provided at the negotiated contract billing rates, plus the cost of any allowable material and equipment costs. Cost of revenue includes all direct costs consisting of labor, travel, materials, equipment, subcontract, and other costs related to contract performance. Additionally, cost of revenue includes fringe benefit and overhead costs, exclusive of depreciation and amortization, allocable to contracts. All costs, both direct and indirect, are charged to expense as incurred. Fair Value of Financial Instruments — The carrying value of the Company’s cash, cash equivalents, accounts receivables, contract receivables, and accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. Concentration of Credit Risk — The Company’s assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Accounts receivable consist
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primarily of amounts due from various agencies of the federal government or prime contractors doing business with the federal government. Historically, the Company has not experienced significant losses related
to accounts receivable and, therefore, believes that the credit risk related to accounts receivable is minimal. The Company maintains cash balances that may at times exceed federally insured limits. Cash balances are maintained at high-quality financial institutions and the Company believes the credit risk related to these cash balances is minimal. Cash and Cash Equivalents — The Company considers all short-term interest-bearing investments with original maturities of three months or less to be cash equivalents. Receivables — Generally, contract receivables are considered past due after 30 days. The Company considers the aging of certain billed receivables, the nature of the work performed, and collection history to determine the need for an allowance for doubtful accounts. Accounts receivable balances are written off when the balance is deemed uncollectible after exhausting all reasonable means of collection. The Company does not charge interest on contract receivables; however, U.S. governmental agencies may pay interest on invoices outstanding more than 30 days. The Company records interest income from U.S. governmental agencies when received. Inventory — Inventory consisting of primarily of gear, firearms and ammunition is stated at the lower of their weighted average cost or market. Inventories consisting of advance purchases of supplies and equipment that will be assigned to contracts as needed and are stated based on average cost. Internal-Use Computer Software — The Company capitalizes costs incurred to license and implement software for internal use and subsequently amortizes the costs over the estimated economic useful life of the software. Such costs are amortized over five to seven years. Property and Equipment — Property is stated at either cost or the estimated fair value as of the acquisition date when acquired through a business combination. Depreciation of property and equipment is computed on the straight-line method over useful lives. Leasehold improvements are amortized over the lesser of the lease term or the useful lives of the leasehold improvements using the straight-line method. Estimated useful lives for financial reporting purposes are as follows:
Land and land improvements Buildings and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems
Years 5-15 40 4-10 3-15 1-8 3-5 3-15
Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated and the gain or loss is included in operations.
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Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. As of March 31, 2015 there are no assets held for sale. Intangible Assets — Intangible assets consist of acquired customer relationships and contract backlog, trade names and trademarks and database. The intangible assets were recorded at the
purchase date at their estimated fair value. Intangible assets that are deemed to have a definite life are amortized, primarily on a straight-line basis, over their estimated remaining useful lives (see Note 7). The Company reviews long-lived assets and certain intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived assets is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Goodwill — Goodwill is the amount by which the purchase price of acquired net assets in a business acquisition exceeds the fair value of net identifiable assets on the date of purchase. The Company assesses goodwill for impairment on December 31 of each year and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The Company, with the assistance of a third party valuation specialist, used discounted cash flow models and market comparable companies to determine its fair value. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use. Income Taxes — The Company is a partnership which is not a tax paying entity for U.S. tax purposes. As such, the partnership portion of the structure is not taxable at the entity level for U.S. tax purposes and has no U.S. tax provision. However, the Company does have a tax paying corporate consolidated group within its structure. The Company has calculated a tax provision for the corporate portion of the structure using the asset and liability method. Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been, or will be, reported in different years for financial statement purposes than for tax purposes. Deferred tax assets and liabilities are computed based on the difference between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates and laws for the years in which these items are expected to reverse. Deferred tax assets may be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. If management determines that a deferred tax asset is not “more likely than not” to be realized, a valuation allowance is recorded to reduce the deferred tax asset to an appropriate level in that period. In determining the need for a valuation allowance, management considers all positive and negative evidence, including historical earnings, projected future taxable income, future reversals of existing taxable temporary differences, carryback potential, and prudent, feasible taxplanning strategies. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained based on technical merits of the position and (2) those tax positions that meet the more likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.
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Commitments and Contingencies — Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business.
Postretirement Benefits — National Strategic Protective Services (“NSPS”), a majority owned subsidiary of the Company, sponsors a defined benefit pension plan for some its employees and provides certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans) pursuant to a contract between NSPS and Department of Energy (“DOE”). The DOE reimburses all allowable direct costs incurred by NSPS in connection with the postretirement benefits plans, including all required contributions and all claims paid. These direct costs (and the related revenue) are recognized in the period incurred. The Company does not recognize the postretirement benefit obligation of these plans in the consolidated balance sheets due to the contractual arrangement with the DOE. The DOE contract gives DOE the right to approve or disapprove all plan provisions and benefit changes, thus placing DOE effectively in control of these plans and their administration, similar to a plan sponsor. The DOE contract also provides that upon contract completion and award of a followon contract to another contractor for the services NSPS provides, any assets associated with the plans and all plan obligations and liabilities must be transferred to new plans sponsored by any successor contractor. In that case, NSPS will be relieved of its obligations under the postretirement benefit plans. Even where no new contractor is named and no new sponsor assumes the plans, NSPS is contractually entitled by DOE to continued reimbursement of all allowable pension and benefit costs despite completion of the contract in all other respects. Recent Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers which supersedes the current revenue guidance followed by the Company. The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the effects of this standard on its consolidated financial statements. 3.
BUSINESS ACQUISITION On July 25, 2014, Constellis Holdings, Inc. acquired all of the outstanding shares of Constellis Group, Inc. in exchange for $196,491 in cash, plus membership interests of $11,930 and assumed seller notes of $45,063 for a total purchase price of $253,484. The purchase price was funded through the net proceeds from a new $290,000 Senior Credit Facility. Constellis Group, Inc. is a leading provider of mission support and integrated security services worldwide. The Acquisition provides geographic and customer diversification for the Company while offering significant cost savings by eliminating duplicative overhead costs, vertically integrating training services, and sharing of best operating practices.
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4.
ACCOUNTS RECEIVABLE
March 31, 2015 Billed Unbilled Other
$
Total accounts receivable
208,233
Less allowance for doubtful accounts
(5,252)
Total receivables - net
5.
98,914 107,918 1,401
$
202,982
PREPAID EXPENSES AND OTHER CURRENT ASSETS
March 31, 2015
6.
Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
15,483 17,230 8,479
Total prepaid expenses and other current assets
$
41,192
PROPERTY AND EQUIPMENT
March 31, 2015 Land and land improvements Building and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems Construction in process
$
Total property and equipment
97,510
Less accumulated depreciation Total property and equipment - net
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16,045 41,332 10,844 15,755 2,231 5,170 3,262 2,873
(25,406) $
72,104
7.
INTANGIBLE ASSETS AND GOODWILL March 31, 2015 Gross Carrying Amount Intangible assets: Customer relationships/Contract Backlog (Useful life of 8-10 years) Tradename and Trademarks (Useful life of 4-8 years) Database (Useful life of 5 years)
8.
Accumulated Amortization
$
103,100 9,100 2,400
$
20,153 2,350 328
$
82,947 6,750 2,072
$
114,600
$
22,832
$
91,768
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
March 31, 2015
9.
Accounts payable Accrued taxes payable DCAA Reserve Other accrued expenses
$
34,972 16,896 28,766 16,370
Accounts payable and accrued expenses
$
97,005
DEBT
March 31 2015 Credit facilities: Revolver Term Loan A Term Loan B Notes: Minority shareholder notes Replacement notes Subremainder notes
$
42,500 161,875 50,000 892 9,501 34,670
Capital lease
536
Total debt
299,974
Less: current portion Long-term debt
$
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Net Carrying Amount
17,823 282,151
10. SUBSEQUENT EVENT On May 11, 2015, the Company acquired all of the outstanding shares of Olive Group Holdings Ltd. for a total purchase price of $236,500. The purchase price was funded through the net proceeds received from the issuance of a new ABL credit facility and $450,000 senior secured notes. ******
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