CONSTELLIS HOLDINGS FINANCIALS FY15 Q3
Constellis Holdings, LLC and Subsidiaries Consolidated Financial Statements as of and for the nine months ended September 30, 2015
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of September 30, 2015 and 2014
1
Consolidated Statements of Income for the Quarters Ended September 30, 2015 and 2014
2
Consolidated Statements of Income for the Nine Months Ended September 30, 2015 and 2014
3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
4
Notes to Consolidated Financial Statements
5–11
Constellis Holdings, LLC and subsidiaries CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) September 30, 2015 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents Accounts receivable, net Inventory Deferred income tax asset, current Prepaid expenses and other current assets Total current assets LONG-TERM ASSETS: Property and equipment, net Intangible assets, net Goodwill Deposits and other long-term assets Total long-term assets TOTAL ASSETS
$
$
LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses Accrued compensation and employee benefits Deferred revenue Accrued penalties Current portion of long-term debt Total current liabilities LONG-TERM LIABILITIES: Long-term debt, net of current portion Deferred income tax liability, noncurrent Other long-term liabilities Total long-term liabilities TOTAL LIABILITIES
$
69,251 224,417 9,500 4,036 59,754 366,958 111,148 181,025 245,613 13,151 550,937 917,895
161,760 29,394 1,601 1,500 284 194,539
December 31, 2014 (Audited)
$
$
$
7,085 207,104 5,914 4,036 35,162 259,301 74,250 95,689 176,791 12,828 359,558 618,859
108,546 34,825 1,251 1,500 17,823 163,945
618,558 6,610 10,625 635,793 830,332
282,535 12,738 12,406 307,679 471,624
103,858 (16,421) 87,437 126 87,563 917,895
102,860 43,968 146,828 407 147,235 618,859
COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY: Membership units, no par value, 65,023 units authorized, issued and outstanding Members' capital Retained earnings / (accumulated deficit) Total Constellis Holdings, LLC's members' equity Noncontrolling interest in joint ventures Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY
$
See the notes to the consolidated financial statements.
1
$
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS) Three Months Ended September 30 2015 REVENUES
$
COST OF REVENUE
2014
255,665
$
171,337
212,297
141,743
43,368
29,594
24,782 11,213
21,772 5,148
7,373
2,675
(100) (13,353) (421) 153 (13,721)
77 (1,764)
NET INCOME (LOSS) BEFORE TAXES
(6,348)
998
INCOME TAX PROVISION
4,162
2,716
GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION OPERATING INCOME (LOSS) OTHER INCOME (EXPENSE): Interest income Interest expense Loss on extinguishment of debt Other income, net Total other income (expense)
NET INCOME (LOSS)
$
NET INCOME ATTRIBUTED TO NONCONTROLLING INTEREST NET INCOME (LOSS) ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC
(10,510)
10 (1,676)
$
17 $
(10,527)
(1,718) 48
$
(1,766)
See the notes to the consolidated financial statements.
_________________________________________________________ For the three months ended September 30, 2014, the Consolidated Statement of Income is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full three month period. In addition, the Consolidated Statement of Income presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
2
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS) Nine Months Ended September 30 2015 REVENUES
$
COST OF REVENUE GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION OPERATING INCOME OTHER INCOME (EXPENSE): Interest income Interest expense Loss on extinguishment of debt Other income, net Total other income (expense) NET INCOME BEFORE TAXES INCOME TAX PROVISION NET INCOME (LOSS)
2014
684,381
$
366,482
560,288
299,619
124,093
66,863
59,586 25,894
45,292 10,669
38,613
10,902
59 (28,575) (7,473) 615 (35,374)
85 (3,487)
3,239
7,733
11,587
2,718
$
(8,348)
NET INCOME (LOSS) ATTRIBUTED TO NONCONTROLLING INTEREST
(60)
NET INCOME (LOSS) ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC $
(8,288)
232 (3,170)
$
5,015 48
$
4,967
See the notes to the consolidated financial statements.
______________________________________________________ For the nine months ended September 30, 2014, the Consolidated Statement of Income is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full nine month period. In addition, the Consolidated Statement of Income presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
3
Constellis Holdings, LLC and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS ) Nine Months Ended September 30 2015 2014 OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Deferred income taxes Loss on disposal of property and equipment Provision for losses on accounts receivable Provision for obselete inventory Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other current assets Deposits and other long-term assets Accounts payable and accrued expenses Accrued compensation and employee benefits Current portion of accrued penalties Other long-term liabilities Deferred revenue Cash provided by operating activities
$
INVESTING ACTIVITIES: Capital expenditures Acquisitions, net of cash acquired Cash used in investing activities FINANCING ACTIVITIES: Return of equity Proceeds on issuance of equity Payment of dividends Proceeds from Senior Secured Notes Proceeds on Asset Based Lending ("ABL") credit facility Payments on ABL credit facility Principal payments on Term Loans A & B Proceeds from Term Loans A & B Proceeds from Revolver Payments on Revolver Payment of earnout payment Payment of loan origination costs Cash provided by financing activities
(8,348)
$
25,894
10,669 2,887 191 4,507 78
25,578 (706) (18,444) 921 14,212 (5,877)
(16,866) (366) 9,937
(1,675) (702) 30,853
(14,446) 12,244 (6,000) (4,216) (985) 156
(7,502) (224,276) (231,778)
(4,135) (185,781) (189,916)
(67,671) 50,000 (24,372) 447,809 170,500 (45,000) (216,250)
(8,750) 225,000 97,000 (41,625)
78,200 (116,700) (2,625) (10,800) 263,091
NET INCREASE IN CASH AND CASH EQUIVALENTS
62,166
CASH AND CASH EQUIVALENTS — Beginning of the year CASH AND CASH EQUIVALENTS — End of period
7,085 69,251
$
5,014
(7,201) 196,949 7,189 $
2,487 9,676
_____________________________________________________ For the nine months ended September 30, 2014, the Consolidated Statement of Cash Flows is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full nine month period. In addition, the Consolidated Statement of Cash Flows presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
4
CONSTELLIS HOLDINGS, LLC and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 and provides analytical services 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 is headquartered in Reston, Virginia.
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”) 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 and the accompanying notes to the financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) 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 quarters ended September 30, 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 September 30, 2015 and for the periods ended September 30, 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 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 Statements of Income in net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company.
5
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 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
6
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 three to seven years.
Years Land and land improvements 5-15 Buildings and building improvements 40 Leasehold improvements 4-10 Equipment, furniture and firearms 3-15 Vehicles 1-8 Computer hardware and software 3-7 Range target systems 3-15 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: 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. As of September 30, 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
7
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 tax-planning strategies. The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 – Income Taxes, 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. 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.
8
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 ACQUISITIONS 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. 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 $290,000 senior credit facility, which was subsequently repaid on May 11, 2015 in conjunction with the issuance of the $450,000 senior secured notes.
4.
ACCOUNTS RECEIVABLE
September 30, 2015 Billed Unbilled Other
$
Total accounts receivable
234,657
Less allowance for doubtful accounts
(10,240)
Total receivables - net 5.
89,718 136,934 8,005
$
224,417
PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, 2015 Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
24,524 15,569 19,662
Total prepaid expenses and other current assets
$
59,754
9
6.
PROPERTY AND EQUIPMENT
September 30, 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
$
16,537 43,502 14,595 58,500 85,190 10,447 3,262 943
Total property and equipment
232,975
Less accumulated depreciation
(121,827)
Total property and equipment - net 7.
$
111,148
INTANGIBLE ASSETS September 30, 2015
8.
Useful Life
Gross Carrying Amount
Customer relationships/contract backlog Tradename and trademarks Database
8 to 15 years 4 to 8 years 5 years
$ 213,800 32,000 2,400
$
62,424 4,183 568
$
151,376 27,817 1,832
Total intangible assets
4 to 15 years
$ 248,200
$
67,175
$
181,025
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, 2015 Accounts payable Accrued taxes payable DCAA reserve Other accrued expenses
$
84,564 20,165 28,766 28,265
Accounts payable and accrued expenses
$
161,760
10
Net Carrying Amount
Accumulated Amortization
9.
DEBT 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 Asset Based Lending (“ABL”) credit facility and $450,000 Senior Secured Notes. Prior to the acquisition of Olive Group Holdings Ltd., the Company’s debt consisted of a $100,000 revolving credit facility, a $175,000 term loan and a $50,000 second lien term loan, all of which were repaid in full on May 11, 2015. On August 10, 2015, in accordance with its existing debt agreements the Company amended its ABL credit facility by increasing the size of the facility from $125,000 to $137,500. All other terms of the ABL credit facility were unchanged.
September 30, 2015 Credit facilities: ABL credit facility Senior Secured Notes
$
Notes: Minority shareholder notes Replacement notes Subremainder notes
125,500 450,000
892 9,501 34,670
Capital lease
306
Total debt
620,869
Less: original issue discount
2,027 618,842
Less: current portion Total long-term debt
$ ******
11
284 618,558
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of September 30, 2015 and 2014
1
Consolidated Statements of Income for the Quarters Ended September 30, 2015 and 2014
2
Consolidated Statements of Income for the Nine Months Ended September 30, 2015 and 2014
3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
4
Notes to Consolidated Financial Statements
5–11
Constellis Holdings, LLC and subsidiaries CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA) September 30, 2015 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents Accounts receivable, net Inventory Deferred income tax asset, current Prepaid expenses and other current assets Total current assets LONG-TERM ASSETS: Property and equipment, net Intangible assets, net Goodwill Deposits and other long-term assets Total long-term assets TOTAL ASSETS
$
$
LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses Accrued compensation and employee benefits Deferred revenue Accrued penalties Current portion of long-term debt Total current liabilities LONG-TERM LIABILITIES: Long-term debt, net of current portion Deferred income tax liability, noncurrent Other long-term liabilities Total long-term liabilities TOTAL LIABILITIES
$
69,251 224,417 9,500 4,036 59,754 366,958 111,148 181,025 245,613 13,151 550,937 917,895
161,760 29,394 1,601 1,500 284 194,539
December 31, 2014 (Audited)
$
$
$
7,085 207,104 5,914 4,036 35,162 259,301 74,250 95,689 176,791 12,828 359,558 618,859
108,546 34,825 1,251 1,500 17,823 163,945
618,558 6,610 10,625 635,793 830,332
282,535 12,738 12,406 307,679 471,624
103,858 (16,421) 87,437 126 87,563 917,895
102,860 43,968 146,828 407 147,235 618,859
COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY: Membership units, no par value, 65,023 units authorized, issued and outstanding Members' capital Retained earnings / (accumulated deficit) Total Constellis Holdings, LLC's members' equity Noncontrolling interest in joint ventures Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY
$
See the notes to the consolidated financial statements.
1
$
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS) Three Months Ended September 30 2015 REVENUES
$
COST OF REVENUE
2014
255,665
$
171,337
212,297
141,743
43,368
29,594
24,782 11,213
21,772 5,148
7,373
2,675
(100) (13,353) (421) 153 (13,721)
77 (1,764)
NET INCOME (LOSS) BEFORE TAXES
(6,348)
998
INCOME TAX PROVISION
4,162
2,716
GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION OPERATING INCOME (LOSS) OTHER INCOME (EXPENSE): Interest income Interest expense Loss on extinguishment of debt Other income, net Total other income (expense)
NET INCOME (LOSS)
$
NET INCOME ATTRIBUTED TO NONCONTROLLING INTEREST NET INCOME (LOSS) ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC
(10,510)
10 (1,676)
$
17 $
(10,527)
(1,718) 48
$
(1,766)
See the notes to the consolidated financial statements.
_________________________________________________________ For the three months ended September 30, 2014, the Consolidated Statement of Income is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full three month period. In addition, the Consolidated Statement of Income presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
2
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS) Nine Months Ended September 30 2015 REVENUES
$
COST OF REVENUE GROSS PROFIT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DEPRECIATION AND AMORTIZATION OPERATING INCOME OTHER INCOME (EXPENSE): Interest income Interest expense Loss on extinguishment of debt Other income, net Total other income (expense) NET INCOME BEFORE TAXES INCOME TAX PROVISION NET INCOME (LOSS)
2014
684,381
$
366,482
560,288
299,619
124,093
66,863
59,586 25,894
45,292 10,669
38,613
10,902
59 (28,575) (7,473) 615 (35,374)
85 (3,487)
3,239
7,733
11,587
2,718
$
(8,348)
NET INCOME (LOSS) ATTRIBUTED TO NONCONTROLLING INTEREST
(60)
NET INCOME (LOSS) ATTRIBUTED TO CONSTELLIS HOLDINGS, LLC $
(8,288)
232 (3,170)
$
5,015 48
$
4,967
See the notes to the consolidated financial statements.
______________________________________________________ For the nine months ended September 30, 2014, the Consolidated Statement of Income is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full nine month period. In addition, the Consolidated Statement of Income presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
3
Constellis Holdings, LLC and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS ) Nine Months Ended September 30 2015 2014 OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Deferred income taxes Loss on disposal of property and equipment Provision for losses on accounts receivable Provision for obselete inventory Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other current assets Deposits and other long-term assets Accounts payable and accrued expenses Accrued compensation and employee benefits Current portion of accrued penalties Other long-term liabilities Deferred revenue Cash provided by operating activities
$
INVESTING ACTIVITIES: Capital expenditures Acquisitions, net of cash acquired Cash used in investing activities FINANCING ACTIVITIES: Return of equity Proceeds on issuance of equity Payment of dividends Proceeds from Senior Secured Notes Proceeds on Asset Based Lending ("ABL") credit facility Payments on ABL credit facility Principal payments on Term Loans A & B Proceeds from Term Loans A & B Proceeds from Revolver Payments on Revolver Payment of earnout payment Payment of loan origination costs Cash provided by financing activities
(8,348)
$
25,894
10,669 2,887 191 4,507 78
25,578 (706) (18,444) 921 14,212 (5,877)
(16,866) (366) 9,937
(1,675) (702) 30,853
(14,446) 12,244 (6,000) (4,216) (985) 156
(7,502) (224,276) (231,778)
(4,135) (185,781) (189,916)
(67,671) 50,000 (24,372) 447,809 170,500 (45,000) (216,250)
(8,750) 225,000 97,000 (41,625)
78,200 (116,700) (2,625) (10,800) 263,091
NET INCREASE IN CASH AND CASH EQUIVALENTS
62,166
CASH AND CASH EQUIVALENTS — Beginning of the year CASH AND CASH EQUIVALENTS — End of period
7,085 69,251
$
5,014
(7,201) 196,949 7,189 $
2,487 9,676
_____________________________________________________ For the nine months ended September 30, 2014, the Consolidated Statement of Cash Flows is that of Academi LLC and its subsidiaries, through which all historical operations were conducted for the full nine month period. In addition, the Consolidated Statement of Cash Flows presented above contains those amounts combined with the period of July 25, 2014 through September 30, 2014 of Constellis Holdings, Inc. which included Triple Canopy and its subsidiaries.
4
CONSTELLIS HOLDINGS, LLC and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 and provides analytical services 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 is headquartered in Reston, Virginia.
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”) 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 and the accompanying notes to the financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) 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 quarters ended September 30, 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 September 30, 2015 and for the periods ended September 30, 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 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 Statements of Income in net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company.
5
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 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
6
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 three to seven years.
Years Land and land improvements 5-15 Buildings and building improvements 40 Leasehold improvements 4-10 Equipment, furniture and firearms 3-15 Vehicles 1-8 Computer hardware and software 3-7 Range target systems 3-15 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: 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. As of September 30, 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
7
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 tax-planning strategies. The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 – Income Taxes, 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. 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.
8
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 ACQUISITIONS 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. 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 $290,000 senior credit facility, which was subsequently repaid on May 11, 2015 in conjunction with the issuance of the $450,000 senior secured notes.
4.
ACCOUNTS RECEIVABLE
September 30, 2015 Billed Unbilled Other
$
Total accounts receivable
234,657
Less allowance for doubtful accounts
(10,240)
Total receivables - net 5.
89,718 136,934 8,005
$
224,417
PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, 2015 Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
24,524 15,569 19,662
Total prepaid expenses and other current assets
$
59,754
9
6.
PROPERTY AND EQUIPMENT
September 30, 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
$
16,537 43,502 14,595 58,500 85,190 10,447 3,262 943
Total property and equipment
232,975
Less accumulated depreciation
(121,827)
Total property and equipment - net 7.
$
111,148
INTANGIBLE ASSETS September 30, 2015
8.
Useful Life
Gross Carrying Amount
Customer relationships/contract backlog Tradename and trademarks Database
8 to 15 years 4 to 8 years 5 years
$ 213,800 32,000 2,400
$
62,424 4,183 568
$
151,376 27,817 1,832
Total intangible assets
4 to 15 years
$ 248,200
$
67,175
$
181,025
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, 2015 Accounts payable Accrued taxes payable DCAA reserve Other accrued expenses
$
84,564 20,165 28,766 28,265
Accounts payable and accrued expenses
$
161,760
10
Net Carrying Amount
Accumulated Amortization
9.
DEBT 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 Asset Based Lending (“ABL”) credit facility and $450,000 Senior Secured Notes. Prior to the acquisition of Olive Group Holdings Ltd., the Company’s debt consisted of a $100,000 revolving credit facility, a $175,000 term loan and a $50,000 second lien term loan, all of which were repaid in full on May 11, 2015. On August 10, 2015, in accordance with its existing debt agreements the Company amended its ABL credit facility by increasing the size of the facility from $125,000 to $137,500. All other terms of the ABL credit facility were unchanged.
September 30, 2015 Credit facilities: ABL credit facility Senior Secured Notes
$
Notes: Minority shareholder notes Replacement notes Subremainder notes
125,500 450,000
892 9,501 34,670
Capital lease
306
Total debt
620,869
Less: original issue discount
2,027 618,842
Less: current portion Total long-term debt
$ ******
11
284 618,558
